AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (7) TMI 835
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....N number SBIN18012900046712 dated 23.11.2017. 2. The Applicant is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has manufacturing arrangement with contract brewing / bottling units (CBU) who manufacture brands of beer belonging to the applicant and supply such beer to market. CBUs manufacture beer bearing brands owned by the applicant by procuring raw materials, packaging materials, incurring overheads and other manufacturing costs etc. on its own and sell the beer directly to Government corporations / wholesale depending on the state market. 3. The CBUs, upon the sale of the goods, pay the statutory levies and taxes. The CBUs further account for the manufacturing cost and distribution overheads in their books of account as they had procured all the resources for the manufacture of the beer. Further they retain a certain amount of profit. After accounting all these revenues the CBUs transfer the balance amount to the applicant. 4. In this backdrop the applicant has sought advance ruling on the following Questions:- (a) Whether beer bearing brand/s owned by M/s United Breweries Lim....
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....ded and the process undertaken by the CBUs once again came under the purview of Service Tax with effect from 01.06.2015. 5.5 During the alternating periods when this arrangement of manufacturing at the hands of CBUs was taxable the then CBEC issued certain clarificatory Circulars to tide over issues related to valuation and taxability.UBL has extensively discussed and cited the contents of Circular F. No. 332/17/2009-TRU dated 30.10.2009. The contents of this Circular are discussed at the appropriate place in this Ruling. UBL has further added that during the periods from 23.09.2009 to 30.06.2012 and 01.06.2015 to 30.06.2017 the CBUs have discharged Service Tax on the agreed bottling charges (comprising of manufacturing overheads and margin of profit) and the amounts reimbursed by the brand owner towards agreed expenses. This indicates that service tax was being paid by the CBUs in respect of the amount retained with them, excluding the cost of the raw material, packing materials and statutory levies (excise duty/VAT). This fact closely relates to the first question raised by the applicant. 5.6 UBL has further traced the past litigations (pre-GST period) in respect of the mat....
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....e) dated 28.06.2017 to further drive home the assertion that the activity of manufacturing would amount to supply of service only if manufacturing is carried out on physical inputs(goods) owned by others (serial No. 26 of the Notification). The sum and substance of the applicants contention is that since in their case the CBUs manufacture beer out of raw materials physically procured by themselves, the activity of manufacture of beer of their brands does not amount to supply of service by the CBUs to the applicant. Reference is also made to Serial number 27 of the said Notification to emphasise that the manufacturing activity carried out by the CBUs does not fall within the purview of HSN Heading 9989 also. It has thus been summed up by the applicant that the manufacturing activity undertaken by the CBUs does not amount to supply of service to the applicant and therefore GST is not payable in respect of the amount retained in the hands of the CBUs. 6.2 In respect of the second question concerning the applicability of GST on surplus profit earned by them, the applicant has cited several case laws in favour of their arguments. The case laws are decisions by Tribunals in the cases ....
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....erial facts and views put forth by the applicant. BACKGROUND DISCUSSION ON THE QUESTIONS 8. In order to answer the two questions raised by the applicant it is imperative to first study and analyse the business model adopted by the applicant and to examine the fine nuances of the various agreements between the applicant and other parties in business with them. There are two clearly distinguishable arms of the business model. On one hand is the applicant who owns the brands commanding a market for themselves and the second is the CBUs who have the licences to manufacture beer of any specification. The agreements between the applicant and the CBUs seek to synergise these two arms where the applicant would provide the authority to the CBUs to manufacture beer to their specifications and then sell the same after affixing their brand on the product. 8.1 The applicant is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has manufacturing arrangement with contract brewing / bottling units (CBUs) who manufacture beer under brand names belonging to the applicant and supplies such beer to market. Copies ....
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.... upon termination or expiration of the contract Master(India) would dispose of unsold stock of UBL beer in its possession at ex-brewery price and make payment to UBL in terms of the contract. Further they will sell at cost raw materials, labels, packing material etc to UBL. 8.3 The brewing and distribution agreements between UBL as brand owner on one hand and brewers CMJ Breweries Private Ltd., Mount Everest Breweries Ltd and Denzong Albrew Private Ltd on the other hand are identical to the agreement between UBL and Master (India) Brewing Company and have the same salient features as enumerated above in para 8.2(i) to (xi). However the agreement between UBL and Mount Everest Breweries Ltd has a different clause (Clause 7.4) which stipulates that UBL will provide working capital finance for the operations of Mount Everest Breweries Ltd. Further the capital is controlled by UBL through the operation of a 'Collection Account' to be opened by Mount Everest Breweries Ltd. but operated exclusively by the nominees of UBL. Further collections from the sale of beer and all payments under the agreement would be made out of this account. 9. A fine reading of the various agreements cited....
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....) of the Karnataka GST Act, 2017 and Section 5(1) of the IGST Act, 2017 provide for levy of CGST, SGST and IGST respectively on all intra-state and interstate supplies of goods and services or both except on the supply of alcoholic liquor for human consumption. The end product, i.e. beer, whether manufactured by the applicant or the CBUs, is thus not exigible to CGST,SGST or IGST. 10.2 The point to be determined here is 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. 10.3 The CBUs undertake the manufacture of goods for or on behalf of the applicant, apparently in the nature of a job work. 'Job work' is defined under Section 2 (68) of the CGST Act, 2017 and Section 2(68) of the KSGST Act, 2017 as follows: Job work means any treatment or process undertaken by a person on goods belonging to another registered person and the expression" job worker" shall be construed accordingly. 10.4 Further Section 7 of the CGST Act and KSGST Act define the scope of 'supply'. Section (1)(d) o....
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....w 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. This is further demonstrated by several clauses of the agreements. The clause in respect of 'Reimbursement' shows that the CBU shall retain the cost of the raw materials amongst other things. This shows that the material was purchased by the CBUs. Further under the clause related to 'Termination' of the agreement it is provided that in case the agreement stands terminated then the applicant will buy all the raw material at cost. Further any finished goods in stock would also be purchased by the applicant at ex-factory price. All these clauses indicate that 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. As a result the CBUs are not engaged in supply of any serv....
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....case) (X) Less:Variable cost incurred(Raw material, PM & other consumables) (Y) Less: Bottle cost (at prevailing market rates) (Z) Less: Retention for energy & fixed cost by brewer (73) Balance payable to UBL as Brand Fee (5) Remaining as reimbursement to UBL (W) The retention on account of energy and other utilities will be Rs. 18/case and the remainder, on account of fixed cost and ROI on investments. ......... This provision in the agreement indicates that the applicant gets a brand fee in lieu of the permission granted to the CBU to utilize their brand. Further the surplus amount over and above the brand fee is taken as reimbursement or business surplus by the applicant. The question relates to the liability or otherwise of GST on this amount in the hands of the applicant received from the CBU after the deduction of all costs related to CBU. 11.2 The applicant has drawn extensively from the disputes related to the tax liability on the aforesaid amount in their hands during the Service Tax regime. The applicant submits that although the then CBEC had clarified through various circulars that there was no service provi....
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....scribed under sub-section (c) of Section 66E as 'temporary transfer or permitting the use or enjoyment of any intellectual property right'. 11.5 The formations in Service Tax had held that the applicant, and identically placed other beer/alcoholic beverages brand owners, were providing intellectual property services to the CBUs by virtue of permitting them to affix their brands on the products manufactured by the CBUs. The various orders to this effect were agitated before the Tribunals and it was finally held by the Tribunals that the brand owners were not providing any intellectual property right services to the CBUs. The amount accruing into the hands of the brand owners was held as business surplus or profit. The applicant discussed the orders of the Tribunal at length in their application as well as during the hearing. We have gone through all the Orders of the Tribunals and they support the contention of the applicant. 11.6 In the written rejoinder submitted by the applicant it is stressed that the amount in their hands represents the business profit (sale price of UBL beer to State owned corporations minus price payable to CBUs) earned by UBL, out of sale of beer. It i....
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.... rate of central tax for supply of various services has been prescribed. We also take into account the Annexure to the aforesaid Notification where the scheme of classification of the supply of all the services has been given. 13. The averments of the applicant that they are not liable to pay any GST on the amount received from the CBUs have already been discussed in Para 11 above. 14. We now proceed to answer the second question in the light of the above stated facts and legal provisions. 14.1 The applicant enters into a business agreement with the CBUs in the nature of a principal to principal arrangement. This arrangement calls upon the CBUs to manufacture beer/alcoholic beverages with certain peculiar/distinct specifications characterizing and denoting the brands owned by the applicant. The applicant provides the specifications to the manufacturer and also ensures that the CBUs buy raw materials as per their guidance and also manufacture the products under their supervision and to their exact specifications. The applicant then also gives the CBUs the authority to affix their brands on the products and then to sell them to the State Corporations. 14.2 The sale procee....
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....lter the fact that it is a consideration that flows to the applicant. 14.5 The applicant has consistently held that their act of allowing the CBUs to affix their brand names on the products manufactured by them does not amount to supply of service of providing intellectual property rights , as provided in serial number 5 (c) of Schedule II of the CGST Act, 2017. They have cited various case laws which make it evident that since the CBUs are bound to only manufacture and sell beer and are not permitted to commercially exploit the intellectual property related to the brand, the applicant is neither transferring nor permitting the use or enjoyment of any intellectual property right. Thus they are not supplying any service. In essence the applicant draws a conclusion that if their activity is not covered under Schedule II then that activity does not amount to supply of service. This averment of the applicant is misplaced and falls short of the law. Therefore we are not inclined to accept this viewpoint of the applicant. 14.6 The origin of Schedule II and the categorisation of the activities mentioned therein as supply of goods or supply of services lies in Section 7 of the CGST A....