A Division Bench of the Bombay High Court, comprising Justices F.I. Rebello and J.H. Bhatia have on 24 August, in an appeal against the Commissioner of Central Excise, held that the service tax paid on expenditure incurred by the assessee on advertisements, sales promotion and market research can be set-off against excise duty payable.
Coca Cola was represented by Partners from Economic Laws Practice. Pepsi, which intervened in the suit, was represented by PDS Legal.
A Division Bench of the Bombay High Court, comprising Justices F.I. Rebello and J.H. Bhatia have on 24 August, in an appeal against the Commissioner of Central Excise, held that the service tax paid on expenditure incurred by the assessee on advertisements, sales promotion and market research can be set-off against excise duty payable. The Court further held that if the expenditure on service tax is not set-off, \"it will defeat the very basis and genesis of value added tax.\"
The substantial question of law that the Bombay High Court was called upon to decide was whether Coca Cola, as a manufacturer of concentrates, is eligible to avail credit of the service tax paid on advertising services, sales promotion, market research and the like availed by them and utilize such credit towards payment of excise duty on the concentrate. The Counsels for Coca Cola were Vikram Nankani and Madhur Baya of Economic Laws Practice.
Credit had been denied to Coca Cola by the Commissioner of Central Excise on the ground that the advertisements do not relate to concentrates manufactured by them. Pepsi Food Private Limited had also filed an appeal in the Bombay High Court on similar grounds. Pepsi filed an application for intervention, which was allowed by the Bombay High Court thereby drafting them as parties in the appeal filed by Coca Cola in 2007. Pepsi was represented by V. Sridharan and Prakash Shah of PDS Legal.
Coca Cola and Pepsi argued that an advertisement was an \'input service\' and that the advertisement of the brand name has a direct relationship with the manufacture of the concentrate inasmuch as the demand, and consequently the production of concentrate depends on the consumption of the soft drink. There is a direct proportionate relationship between the increase in the demand for soft drink and the demand for concentrate.
The Court, admitting the argument of Coca Cola and Pepsi, held, \"It is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer can thereby avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.\"
Vikram Nankani, Partner at ELP says, \"Although this case is peculiar to the soft drink industry, the implications of this judgement are wide. All the manufacturer has to do is show a broad nexus between the service tax paid on advertising or a market survey to the final product. Once he is able to establish that, the manufacturer can avail credit on the excise duty payable.\" Given that most corporate entities spend a large chunk of their revenue on advertising, sales promotion and market surveys, this judgement comes as a major revenue saver.