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'

In Re : M/s United Breweries Limited

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 ... Levy of GST - Job-work - Sale of 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 - Supply of services or not? Whether the CBUs are supplying any service to the applicant by undertaking to manufacture beer according to their specifications thereby rendering them liable to pay GST on the profit earned by them by virtue of supply of service to the applicant? - Held that:- In the realm of undertaking any manufacturing activity under an agreement, the manufacturer would supply service to the other registered person only in the event of the said registered person supplying goods to the manufacturer to work upon them. In other words the manufacturer would not be purchasing and accounting the goods in their account books - Notification 11/2017 Central Tax (Rate) dated 28.06.2017, at serial number 26, also requires that Heading 9988 is applicable when the physical inputs are owned by person other than the manufacturer. Further Heading 9989 also provides for classification of other manufacturing services apart from those under Heading 9988. There are four groups of services under heading 9989, ranging from group 99891 to 99894. The manufacturing activity undertaken by the CBUs does not appear in any of the services listed in the aforesaid groups from 99891 to 99894 - Therefore it is evident that the manufacturing activity carried out by the CBUs does not fall under the Heading 9989. The agreement between the applicant and the CBUs indicate that the CBUs shall engage in purchase and handling of the raw materials. It is agreed upon between the applicant and the CBUs that the purchase and quality of the raw material shall be supervised by the applicant. Nevertheless the purchase is made and accounted in their books by the applicant - the ownership of the raw material required to manufacture beer rests with the manufacturer and not with the applicant. Therefore the applicant had not supplied any goods used in the manufacturing activity undertaken by the CBUs. Consequently the manufacturing activity undertaken by the CBUs does not qualify classification under Heading 9988 - The CBUs are not engaged in supply of service to the applicant and therefore there does not arise any liability to pay GST on the amount retained by the CBUs as their profit. Whether GST is payable by the Brand owner on the “Surplus Profit” transferred by the CBU to the Brand Owner out of such manufacturing activity? - Held that:- Since it is beyond doubt that the applicant is engaged in supply of service and the service does not find mention at any other entry in the Classification table it has to be placed in the residual entry. The applicable rate of Central Tax is as at serial number 35 of the Notification - we answer the second question in the affirmative that the applicant is engaged in supply of service classified under Service Code (Tariff) 999799 and liable to pay GST at 18% ( CGST-9%, SGST-9%) on the amount received from the CBUs. Ruling:- The CBUs are not engaged in supply of service to the applicant and therefore there does not arise any liability to pay GST on the amount retained by the CBUs as their profit. GST is payable by the Brand owner (UBL) on ‘Surplus Profit” transferred by the CBU to brand owner out of the manufacturing activity and the supply of service to the CBUs is classified under Service Code (Tariff) 999799 and liable to pay GST at 18% ( CGST-9%, SGST-9%) on the amount received from the CBUs. 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.