2018 (7) TMI 835 - AAR - GST

Court rules CBUs not liable for GST on profits to brand owner; brand owner to pay 18% GST on 'Surplus Profit'

The court ruled that the Contract Brewing Units (CBUs) manufacturing beer for the brand owner are not liable to pay GST on the profit earned, as they are ... Supply - Scope of supply - Job work - Treatment or process applied to another person's goods - Temporary transfer or permitting the use or enjoyment of any intellectual property right - Non-taxability of alcoholic liquor for human consumption under GST - Classification of services - residual entry (other services n.e.c.) - Notification No. 11/2017 - classification of manufacturing servicesJob work - Treatment or process applied to another person's goods - Notification No. 11/2017 - classification of manufacturing services - Non-taxability of alcoholic liquor for human consumption under GST - Whether the contract brewing units (CBUs) supply a service to the brand owner by manufacturing beer such that GST is payable by the CBUs on the profit they retain. - HELD THAT: - The Authority analysed the contractual scheme and statutory tests for job work and supply. Schedule II/Serial No.3 treats as service any treatment or process applied to another person's goods; consequently for a manufacturing activity to constitute a service under Heading 9988 the physical inputs must be owned by a person other than the manufacturer. The agreements show that CBUs procure, own and account for the raw materials and retain costs in their books; clauses on reimbursement and termination (purchase of raw materials/unsold stock at cost/ex-factory price) indicate ownership by the CBUs. Therefore the CBUs are not processing goods belonging to the brand owner and the activity does not fall under Heading 9988 or otherwise constitute a supply of service by the CBUs to the brand owner. Separately, the end product (beer) is excluded from GST as alcoholic liquor for human consumption. On these bases the Authority concluded CBUs have no GST liability on the profits they retain arising from manufacture and sale of the beer. [Paras 10]CBUs are not engaged in supply of service to the applicant and therefore there is no liability to pay GST on the amount retained by the CBUs as their profit.Scope of supply - Temporary transfer or permitting the use or enjoyment of any intellectual property right - Supply - residual entry (other services n.e.c.) - Classification of services - residual entry (other services n.e.c.) - Whether the brand owner (UBL) is liable to pay GST on the 'surplus profit' / amounts received from CBUs. - HELD THAT: - Although the brand owner does not supply raw materials, the agreements evidence that UBL provides specifications, technical know how and authorisation to affix its brand, and receives consideration (described as brand fee and surplus). Supply under Section 7 is not limited to Schedule II; activities not explicitly listed may still constitute supply. The applicant's contention that absence of an entry in Schedule II excludes GST was rejected. Having found that UBL supplies a service to the CBUs, and that such service does not fall under any specific heading in the classification, the Authority placed it in the residual category 'other services nowhere else classified' (Service Code/Tariff 999799) under Notification No.11/2017. The applicable rate identified is 18% (CGST 9% + SGST 9%) on the amount received from the CBUs. [Paras 14]Yes; GST is payable by the brand owner on the surplus profit transferred by the CBU, classified under Service Code 999799 and taxable at 18% (CGST 9% + SGST 9%).Final Conclusion: Ruling: (1) CBUs do not supply a service to UBL and owe no GST on profits retained by them; (2) UBL is supplying a service to CBUs (consideration received as brand fee/surplus) and is liable to GST under the residual service classification (Service Code 999799) at 18%. Issues Involved:1. Whether the beer manufactured by Contract Brewing Units (CBUs) for the brand owner constitutes a supply of services and if GST is payable by the CBUs on the profit earned.2. Whether GST is payable by the brand owner on the 'Surplus Profit' transferred by the CBU to the brand owner from the manufacturing activity.Issue-wise Detailed Analysis:Issue 1: GST Liability on CBUs' ProfitQuestion: Whether beer bearing brand/s owned by M/s United Breweries Limited (Brand Owner/UBL) manufactured by Contract Brewing Units (CBUs) out of the raw materials, packaging materials, and other input materials procured by it and accounted by it and thereafter selling such beer to various parties under its invoicing would be considered as supply of services and whether GST is payable by the CBUs on the profit earned out of such manufacturing activityRs.Analysis:- Legal Framework: Section 9(1) of the CGST Act, 2017, and corresponding sections in the Karnataka GST Act, 2017, and IGST Act, 2017, levy GST on intra-state and interstate supplies of goods and services, excluding alcoholic liquor for human consumption.- Job Work Definition: Under Section 2(68) of the CGST Act, job work is defined as any treatment or process undertaken on goods belonging to another registered person.- Supply of Service: As per Schedule II of the CGST Act, any treatment or process applied to another person’s goods is considered a supply of service. However, in this case, the CBUs purchase and account for the raw materials themselves, indicating they are not working on goods supplied by the applicant.- Notification 11/2017: The manufacturing activity falls under Heading 9988 only if the physical inputs are owned by a person other than the manufacturer. Since CBUs procure the raw materials, their activity does not qualify under Heading 9988 and thus does not constitute a supply of service.Conclusion: The CBUs are not engaged in the supply of service to the applicant and therefore, there is no liability to pay GST on the amount retained by the CBUs as their profit.Issue 2: GST on Surplus Profit Transferred to Brand OwnerQuestion: Whether GST is payable by the Brand owner on the 'Surplus Profit' transferred by the CBU to the Brand Owner out of such manufacturing activityRs.Analysis:- Business Model: The brand owner (UBL) provides technical know-how and supervision to CBUs, who manufacture beer according to UBL’s specifications and sell it. The sale proceeds are used to cover costs, and the surplus is transferred to UBL.- Service Tax Regime: Historical disputes during the Service Tax regime indicated that permitting CBUs to use brand names did not constitute a taxable service. However, the applicant contends that the nature of the service has not changed under the GST regime.- Scope of Supply: Section 7 of the CGST Act defines supply, including activities listed in Schedule II. The applicant argues that their activity does not fall under Schedule II, specifically under 'temporary transfer or permitting the use or enjoyment of any intellectual property right.'- Service Definition: As per Section 2(102) of the CGST Act, service includes anything other than goods, money, and securities. Since the applicant receives money from CBUs, it is considered a consideration for a service.- Classification of Service: The service provided by UBL does not fall under any specific heading in the classification of services and thus falls under Group 99979, Service Code 999799, 'other services nowhere else classified.'Conclusion: The applicant (UBL) is engaged in the supply of service to the CBUs, classified under Service Code 999799, and is liable to pay GST at 18% (CGST-9%, SGST-9%) on the amount received from the CBUs.Ruling:1. Question No. 1: The CBUs are not engaged in the supply of service to the applicant, and therefore, there is no liability to pay GST on the amount retained by the CBUs as their profit.2. Question No. 2: GST is payable by the Brand owner (UBL) on the 'Surplus Profit' transferred by the CBU to the brand owner out of the manufacturing activity. The supply of service to the CBUs is classified under Service Code 999799 and is liable to pay GST at 18% (CGST-9%, SGST-9%) on the amount received from the CBUs.