TaxTMI 
TaxTMI 
2018 (11) TMI 283
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....MI 835 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA pronounced by the Karnataka Authority for Advance Ruling. Brief facts of the case:- 1. The appellant is registered under GST with GSTIN No. 29AAACU6053CIZH and is engaged in manufacture and supply of beer under various -brand names. The appellant, apart from manufacturing beer on its own, also has an arrangement with contract brewing/bottling units (hereinafter referred to as the 'CBU') who make the brands of beer belonging to the appellant and Supply such beer to market. CBUs in making the beer brands owned by the Appellant, procure the raw materials, packaging materials, incur Overheads and other manufacturing costs etc, on their own; and the beer they make is sold by them directly to Government Corporations/ in wholesale depending on the state market regulation. 2. The CBUs, upon the sale of such goods, pay the statutory levies and taxes. The CBUs further account for all the manufacturing cost and distribution overheads in their books of account since it is they who procured all resources for the manufacture -of the beer. Further, CBUs retain a certain amount of profit. After accounting all these revenues and deduc....
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.... of production/process of alcoholic liquor for or on behalf of the brand owners like the Appellant commenced on 01.09.2009 under Business Auxiliary Service and continued up to 30.06.2012, They further state that thereafter, w.e.f 01.07.2012 the activity of production of or process amounting to manufacture was covered under Section 66D (Negative List), implying that the activity undertaken by the CBU went out of the purview of Service Tax. The statute was yet again amended and the process undertaken by the CBUs once again came under the purview of Service Tax w.e.f. 01.06.2015. 8. During the alternating periods when this arrangement of manufacturing at the hands of CBUs was taxable, the then CBEC issued clarificatory Circular F.No.332/17/2009-TRU dated 30.10.2009 to tide over issues related to valuation and taxability which reads as follows: 1. Service Tax would be payable on the bottling/job charges, distribution costs and other re-imbursables. 2. Service Tax on the value of raw materials and packaging materials would be exempt only when such charges are specifically mentioned in the invoice raised/documents maintained by the CBU. 3. Statutory levies, namely Excise Duty....
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....goods as per Schedule II to the CGST Act, 2017. They further submitted that since the CBUs procure the materials on their own account and are not applying any treatment or process on the goods belonging to the Appellant, GST would not be applicable on the activity. In respect of the income earned by the brand owner, they submitted that the CBEC had already clarified that there is no service from the brand owner. 13. Before the Authority, the Appellant also drew attention to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 to drive home the point that the activity of manufacture would amount to supply of service only if manufacturing is carried out on physical inputs(goods) owned by others (Sl.No.26 of the Notf). In their case, since the CBUs manufacture beer out of raw materials physically procured by them, the activity of manufacture of beer of Appellant's brand does not amount to supply of service by the CBUs to the Appellant and therefore GST is not payable in respect of the amount retained in the hands of the CBUs. 14. Further, in respect of question-2, Appellant has argued its case by citing several case laws in favour of their arguments before the Authority,....
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....rred in holding that the classification of 'other miscellaneous service' under Service Code (Tariff) 999799 would apply to the amount of Surplus Profit transferred by the CBUs to the Appellant when there is no rendition of service by the Appellant to the CBC's in the first place. iii. The appellant submitted that the activity of supply of alcoholic liquor for human consumption is outside the purview of GST and the sale proceeds from the supply of alcoholic liquor for human consumption or any part thereof would not become exigible to GST for the reason that it is shared between CBUs and the Appellant as per agreement. iv. The appellant submitted that the Authority erred in holding that GST is leviable on surplus profit without following the already settled principles in the Appellant's own case under the erstwhile Service Tax regime wherein it was held that Appellant's share of surplus profit is not liable to Service Tax. v. The Authority erred in holding that there was a supply of service under Central/State Goods and Service Tax Act,2017, whereas there is only a monetary transaction between the Appellant and the CBU by way of transfer of apportioned profit from supply of ....
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....een a supply of goods or services, there must be a consideration for such supply and the supply should be in the course of or furtherance of business. They submitted that in the present arrangement, the Appellant has no occasion to supply any goods or services to the CBUs as the arrangement merely requires the CBUs to undertake the activity of manufacturing beer using their already established, functional distilleries for which the CBUs hold a licence. Further, as the beer manufactured by the CBU is the Appellants branded beer, it is in the Appellant's own interest to ensure that the quality standards of the raw material procured by the CBUs and the manufacturing process followed by the CBUs are within standards commensurate with the brand image of the Appellant. For this purpose, the Appellant deputes a process executive, commercial executive and other key personnel as may be required by it to the CBU's brewery to guide the procurement of raw material, supervise the manufacturing process and packaging of finished goods; that the true intent of such supervision is only in the interest of the Appellant's own business and not an activity for the CBUs; that therefore, the question of ....
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....uring the personal hearing, the Appellant made additional written submissions vide letter dated 28.09.2018 wherein they inter alia stated that the following activities are performed by the Company in terms of the agreement with the CBUs, viz: a) Allow the CBUs the representational right for manufacture and supply of beer under labels specified in the Agreement. b) Prescribe process parameters and specifications through process executive appointed by the Company, c) Depute a Process Executive for inspection of the brewery, laboratory and advise on processing and quality control of beer produced for and on behalf of the Company. d) Depute a Commercial Executive for procurement of raw materials, packaging materials and such other materials. They submitted that the above activities are undertaken in the interest of its own business and not for the CBUs; in other words, these supervisory activities are undertaken by the Company to ensure that the manufacturing undertaken by the CBUs is of the desired quality of beer so as to ensure the business of the Company and its brand image is not compromised; that the cost incurred in appointing these executives is borne by the Comp....
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....tailed arguments made by their Advocate during the personal hearing. 24. To frame the matters that lie for a decision before us, the facts are briefly summarized hereunder: The Appellant, M/s. United Breweries Ltd has held itself out as being engaged in the manufacture and supply of beer under various brand names. Apart from manufacturing beer on its own, and for different commercial and economic considerations, the Appellant enters into agreements with other brewing units (called Contract Brewing Units, CBUs), who have their own bottling plants and the necessary licences to manufacture and supply beer. In terms of the agreement with the CBUs, the Appellant permits its brands to be used by Contract Brewing Units who manufacture and sell beer under the Appellant's brands directly to Government corporations/or in wholesale depending on State market regulations. 25. Under the agreement, CBUs manufacture beer by procuring raw materials, packaging materials, incurring overheads and other manufacturing costs. The CBUs undertake the activity of making the beer using their already established functional distilleries for Which the CBUs also hold a licence to operate. As the beer....
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....ement to UBL (W) 27. In the background of the above facts, two questions were raised before the Karnataka Authority for Advance Ruling (AAR) viz: a) Whether manufacture of beer (bearing brand owned by the Appellant) by the CBUs under its invoicing would be considered as a supply of service and whether GST is payable by the CBUs on the profit earned out of such manufacturing and supply of beer? b) 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? 28. On the first question, the Authority ruled that the activity undertaken by the CBUs is not in the nature of job-work, and hence no GST is payable. The ruling on this aspect has been accepted by the Appellant and is not challenged in this appeal. On the second question. the Authority ruled that GST is payable by the Brand Owner (UBL) on what has been termed as the 'surplus profit' transferred by the CBU to the brand owner out of the manufacturing activity since the said amount is received as a Consideration for rendering a service. The Authority has classified the service rendered by the Appellant under S A Code 999799 as "Othe....
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....upply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. (2) Notwithstanding anything contained in sub-section (1),-- (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services. (3) Subject to the provisions of sub-sections (1), and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as- ....
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....ing, when the above circumstances are accomplished by (at least) the two persons involved in the transactions, then it can be inferred that the activity is a 'supply' under GST law and thereby chargeable to GST. There are however, certain exceptions to the above principles viz. (i) Certain activities have been termed as a 'Supply' even when they are made Without a consideration. Such supplies have been listed in Schedule I to the CGST Act; and (ii) Certain activities, even when made for a Consideration, have been termed as not a supply of either goods or services and thus kept outside the scope of levy of GST. These activities have been listed in Schedule III of the CGST Act. The CGST Act 2017 in CHAPTER III dealing with LEVY AND COLLECFION OF TAX lays down in Section 9: 9. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Co....
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.... And First Amendment) Act, 2016 that received the assent of the President on the 8th September, 2016, and was published for general information On the same day. 14. In article 366 of the Constitution,- (i) after clause (12), the following clause shall be inserted, namely:- '(12A) "goods and services tax" means any tax oh supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;'; (ii) after clause (26), the following clauses shall be inserted, namely:- '(26A) "Services" means anything other than goods, (26B) "Stare With reference to articles 246A, 268, 269, 269A and article 279A includes a Union territory with Legislature;'; 32. We also take note of the decision in Gursahai Saigal vs. CIT 48 ITR (SC) 1 =1962 (8) TMI 66 - SUPREME COURT, wherein it has been held that those sections which impose the charge or levy should be strictly construed; but those which deal merely with the machinery of assessment and collection should not be subjected to a rigorous construction but should be construed in a way that makes the machinery workable. In proceeding to apply the above principles to the instant c....
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.... processing and quality control of beer produced for and on behalf of UBL 3.2 UBL Shall depute other key personnel, as may be required by UBL to the brewery for supervising the production, processing and quality control of the beer manufactured. UBL may also depute a Commercial Executive who shall guide the procurement of raw materials, packaging and such other materials used in the manufacture of beer. 4. Confidentiality 4.6 All know-how acquired by Brewer under the terms of this Agreement and any improvement in the specifications made by Brewer relating to the production and packaging of UBL's beer shall remain the sole property of UBL and shall be used by Brewer only in accordance with the provisions of this agreement. 5. Production 5.1 Brewer shall brew, bottle, package and Store UBL beer. 5.1.1 In conformity with the brew specifications provided by the Process Executive of UBL from time to time, including usage if all ingredients, raw materials, brew specifications, methods and quality parameters laid down by the Process Executive under the supervision of UBI„ UBL will provide it's own yeast, if necessary, and the brewer will propagate and store t....
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....pply of Beer and for no other' purpose. Any steps taken by Brewer or UBL for recordal under the relevant provisions of the Trade Marks Act shall be to the benefit of UBL alone. 33. The terms of the Agreement as mentioned above make it is evident that the parties to the Agreement have clearly defined roles. The Brewer shall make beer bearing the brand of UBL and shall dispose off the beer under the concerned States' Excise laws, to those who are authorised to purchase ideal in beer in terms of the relevant regulations. The brewer will make the beer in strict conformity to the brew specifications and quality parameters laid down by the Appellant. In order to make the UBL beer, the brewer procurers the raw material, packaging material and other materials, at their own cost. The UBL beer is made by the brewer in his own distillery using his own equipment. The proceeds from the sale of the UBL beer are used by the brewer to cover his Operational costs like purchase of raw materials, packaging materials, consumables, bottle cost, cost on account of energy consumption and his profit. The CBUs clearly make and supply alcoholic liquor (beer, in this case) for human consumption, and the s....
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.... tests and advise changes in the brew from time to time and advise the brewer on the brewing, fermentation and lagering time of the UBL beer. 36. For providing the brewer the representational right to make and supply beer under their brand, the Appellant receives from the brewer a Brand fee of Rs. 5 per case. In addition, the Appellant also receives an amount which in terms of clause 8 of the Agreement, is termed as "reimbursement of expenses incurred by the brand owner". This amount is not fixed but is variable depending on the sales in a particular month, the adjustment from the sale proceeds towards the variable costs incurred by the brewer, the brewer's profit and the brand fee paid by the Brewer to the Appellant. The surplus remaining after this, if any (denoted as W in the Agreement), is transferred to the Appellant's account. Therefore. it is evident that the Appellant receives two kinds of amount from the Brewer in terms of the Agreement. a) One is the Brand Fee which is fixed at Rs. 5 per case, and b) The other is the variable component 'W' which is the surplus amount remaining in balance after the sale proceeds have been apportioned towards the brewer's operation....
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....he following month." A plain reading of this clause makes it evident that the Brand Fee paid by the Brewer to the Appellant is in return for the grant of right to manufacture and supply branded beer of UBL The Agreement itself recognises that this payment of Brand Fee is a consideration for the act of granting the right to manufacture and sell branded beer. We proceed to examine whether the act of granting the representational right to manufacture and sell branded beer is ä 'supply' by the Appellant, in terms of Section 7 of the CGST Act. As already stated in Para 31 above, for an activity to qualify as "supply", following conditions are to be fulfilled: (i) The activity has to involve 'goods' or 'services' or both; (ii) The activity should be undertaken for a consideration; (iii) The activity should be in course or furtherance of business 39. The term 'Goods' has been defined in Section 2 (52) of the CGST Act, to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply". The ter....
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....eement. The purpose of entering into such an arrangement with other breweries is purely for economic and commercial reasons taking into consideration the restrictions in availability of Excise licences in other States and the huge investment in setting up its own manufacturing facility in other States. Therefore, it is evident that, the Appellant has provided a service to the Brewer by way of granting him the know-how to manufacture the beer according to their specified standards and has also provided the Brewer with adequate personnel to supervise its manufacture, packing and sale. This service has been rendered by the Appellant in the course of his business. As per the terms of the Agreement, the Brewer pays a consideration to the Appellant in return for the latter granting the representational right to use its Trademarks and labels in the manufacture and supply of beer by the Brewer. Hence, the activity rendered by the Appellant to the Brewer is a service which has been undertaken by the Appellant in the course of his business under an agreement and for which, in terms of the agreement, he gets a consideration. As such, the activity performed by the Appellant in terms of the agr....
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....ing to the production and packaging of UBL's beer, which is the sole property of UBL and has permitted the Brewer to use the Labels for branding of beer for sale by the Brewer. All these amount to permitting the Brewer to use intellectual property rights. Therefore, by virtue of clause 5(c) of Schedule II of the CGST Act, the said activity amounts to a supply of service. To this extent we differ with the findings of the Authority, wherein, in Para 14.6 of the Order dated 28.06.2018, they stated that, "it becomes evident that the applicant is engaged in supply of service which is not covered under Schedule ll." We hold that the activity of the Appellant undertaken with contracting units in terms of the Agreements are in the nature of permitting the use of intellectual property right and hence is squarely covered under clause 5(c) of Schedule II of the Act. 42. In return for rendering the service of providing the right to manufacture and supply branded beer to the Brewer along with the right to use the Trademarks and Labels, the Appellant gets a consideration which comprises of a Brand Fee of Rs. 5 per case as well as a reimbursement of expenses, The quantum of reimbursement (deno....
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.... his transactions with the CBUs. When we look at clause 3.1 of the Agreement, it states that 'UBL...'. shall, at its own cost throughout the duration of this Agreement, arrange for its Process Executives to be deputed to the Brewery." Further, clause 6.3 of the Agreement states that 'Registration of labels and payment of fees thereof shall be the responsibility of UBL..', This indicates that the Appellant has on its part incurred some expenditure to enable the Brewer to manufacture and sell its branded beer. This expenditure incurred is in connection with according the representational rights for the manufacture and sale of branded beer to the CBUs. We have already held in the preceeding paras, that the Appellants have rendered a service to the Brewer which is categorised as a 'supply' taxable to GST. In connection with rendering the taxable service, the Appellants have incurred expenditure which is being reimbursed by the Brewer out of his surplus profit. In other words, the reimbursement of expenses by the Brewer to the Appellant is a form of payment made in connection with a service of permitting the CBUs to use the intellectual property rights as well as providing other service....
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....r of C.Ex & ST, Aurangabad reported in 2014 (35) STR 570 (Tri-Mumbai) = 2014 (4) TMI 1040 - CESTAT MUMBAI : In this case, the facts are patently different in as much as the CBU (FIPL) is only responsible for bottling, packing and dispatch as per the specification, terms, formula, etc laid down by the appellant (Skol); as per the impugned agreement. the risk of manufacture and sales lies with the appellant in respect of Foster brand Beer got manufactured by it from FIPL; FIPL is bound to charge the price from the notified Indenter of the appellant as fixed by the appellant. Taking these facts into consideration, the Tribunal held that no services have been provided by the appellant to FIPL. The facts in the instant case are not identical and hence this case cannot be relied upon. b) BDA Pvt Ltd vs Commissioner of C.Ex, Meerut reported in 2015 (40) STR 352 (Tri-Dei) = 2015 (6) TMI 586 - CESTAT NEW DELHI : The facts in this case are that the appellant (BDA) gets IMFL manufactured by M/s. Pilkhani (CBU) on job work basis; as per the agreement, the cost of raw material and other expenses were either paid by the appellant or reimbursed by the appellant; the State levies such as excise....
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.... the appellants; full sale proceeds are received by the appellants and the CBUs are paid amount as per the pre-fixed rates; that the CBUs are paying the service tax under Business Auxiliary Service and hence the appellant is not required to pay any service tax. These facts are different from the terms of the agreement in the instant ease and hence cannot be relied upon. e) The Court and the Tribunals in the above mentioned cases relied on the Circulars dated 27.10.2008 and 30.10.2009 issued by the CBEC to hold that no ser-vice tax was to be paid by the brand owner. In the two Circulars mentioned above, the factual matrix was that the CBUs were job workers for the brand owners and rendering service to the brand owners and the CBUs were required to pay service tax on the service rendered by them to the brand owners. These Circulars do not have any relevance to the instant case as the question is whether the brand owner (the Appellant in this case) has rendered any service to the CBU and whether GST is required to be paid by the brand owner. 45. Thus, the different cases cited by the Appellant in support of its contentions may be applicable to the definitions, to what were the o....
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....imes the service supplied assumes the character of permitting the use of intellectual property rights, or of being a franchise service, at other times it takes on the colour and character of being secondment of personnel. The varied nature in the character of the services supplied by the Appellant, makes it difficult to determine the predominancy in terms of characterisation since the consideration for some elements of the supply is being received in terms of a variable amount We do acknowledge and recognise that in each tax period, the manner of determination of 'W' as it has been laid down in the Contract with CBUs would likely make it a variable for each tax period. Since, the activity which the Appellant engages in with respect to contract does not essentially change, but the volume of consideration can change in each tax period, it does pose a challenge in terms of giving one particular nomenclature to the activities of the Appellant that would remain unchanged over all tax periods, However, this aspect is limited the issue of the SAC alone and that too when one proposes to generalise the classification across all tax periods- within one particular tax period, it may still be ....