TaxTMI 
TaxTMI 
2019 (3) TMI 537
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....is paying consideration to the Contract Bottling Unit by way of bottling charges, or, alternatively, whether the Contract Bottling Unit is paying consideration to the Applicant by way of brand owner surplus? At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the "GST Act". 02. FACTS AND CONTENTION - AS PER THE APPLICANT The submissions, as reproduced verbatim, could be seen thus- STATEMENT OF THE RELEVANT FACTS HAVING A BEARING ON THE QUESTIONS AS PROVIDED IN ANNEXURE 1 The following are the relevant facts in the context of the present ruling sought: 1. Allied Blenders and Distillers Pvt. Ltd. ("ABD" / "Applicant") has its GST registered premises at 394/C, Lamington Chambers, Lamington Road, Mumbai - 400 004. The Applicants are ....
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....being manufactured. 5. The terms and conditions of all such arrangements between the Applicant (as the Brand Owner) and the CBU are the same, and for the purposes of this Application, the Applicant draws reference to sample Agreements for Tie-Up Manufacture of IMFL ("Manufacturing Agreement") with various CBUs (S.P.Y. Agro Industries Ltd., Unistil Alcoblends Pvt. Ltd., Devicolam Distilleries Ltd. and Hi-Tech Bottling Pvt. Ltd., United Brothers Distilleries Pvt. Ltd., Chandigarh Distillers & Bottlers Ltd.), which are attached herewith as Exhibit-A. The salient features of the said arrangement are set out below: * The CBU will typically have a Letter of Intent issued in its favour for setting up a bottling unit at the relevant location. * Every CBU is contractually mandated to have adequate capacity to bottle the desired quantity of IMFL, and, have available the necessary facilitation of blending, bottling, and storage facilities, manpower and other infrastructure. * The agreements in question are on a principal-to-principal basis. * The bottling activities are to be undertaken on a non-exclusive basis. * The BO has rights to either directly arrange, or, recommend supplier....
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....financed by the BO (sample copies of signs affixed at the premises of the CBU affirming the hypothecation/ lien in favour of the Applicant are attached herewith as Exhibit-E). * The CBU does not have any lien nor can it create any charge on any of the raw materials, packing materials or products of the BO. If so required by the BO, the CBU is obligated to issue a "no lien certificate" which is to be endorsed to the bankers of the BO (sample copies of the said certificate are attached herewith as Exhibit-F). * Insurance in respect of the manufactured goods are obtained by the Applicant in its own name (sample copies of insurance policy are attached herewith as Exhibit-G); * Any claims arising from the aforesaid insurance on the manufactured goods are also received by the Applicant, and not by the CBUS (sample copy of a claim payment is attached herewith as Exhibit-H); * The entire manufacturing activity by the CBU is carried out under the supervision of the Applicant, and, for this purpose, the Applicant deputes fixed personnel to the premises of the CBU (sample details of personnel deputed to the CBU's manufacturing premises are attached herewith as Exhibit-1); * The ....
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....o GST. The relevant provisions are reproduced below for ease of reference: 9. Levy and collection (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 Council and collected in such manner as may be prescribed and shall be paid by the taxable person. 7. Scope of supply (1) For the purposes of this Act, the expression "supply" includes (a) all forms of supply 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 2. Definitions In this Act, unless the context otherwise requires, - (52) "goods" means 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 seve....
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.... per the directions of the BO and profit or loss on account of manufacturing and sale of alcoholic beverages is entirely on account of BO, who thus holds the property, risk and reward of the products. The CBU receives consideration (i.e. job charges) for undertaking the manufacturing activity on job work basis. There is no doubt that under such an arrangement, CBU is a service provider providing services to BO. Circular F. No. 332/17/2009-TRU dated 30.10.2009 4. For the removal of doubts and with a view to avoid disputes on valuation, it is clarified that - (a) Service tax would be payable on the bottling/job charges, distribution costs and other reimbursables. (d) Similarly, the surplus/profit earned by the BO being in the nature of business profit (which falls within the purview of direct taxes), will not be chargeable to service tax. Copies of the aforesaid Circulars are attached herewith as Exhibit-N. 5. Further, pursuant to a Letter addressed by the Applicant to the jurisdictional Service Tax Department, it was affirmed vide Letter F.No. ST/HQ/PREVIA. 198(2)/2006/5734 dated 14.12.2009 that the surplus/ profit of the BO is not liable to Service Tax, per the previously ....
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....e sources of raw materials, payment the said raw materials, every stage of the process of manufacture, determination price for sale of IMFL and identification of the buyers of the IMFL) rests with the Applicant. Under no circumstances can the CBU source inputs from a vendor who has not been approved by the Applicant, nor manufacture the IMFL contrary to the specifications stipulated by the Applicant, nor sell the manufactured IMFL to a buyer who has not been approved by the Applicant or sell at a price which is lesser or greater than the exact price approved by the Applicant, nor retain any proceeds from the buyer (in excess of the bottling charges and reimbursements) in any manner. Accordingly, the entire basis and rationale for the Applicant entering into a Manufacturing Agreement with the CBUs is to enable the Applicant (as the owner of the brands) to fully commercially exploit his rights in relation to the brands, through the production and distribution of IMFL under those brands. It is for this reason that the Applicant approaches the CBUs and negotiates the terms of the Manufacturing Agreement (and not vice versa), as well as determines the remuneration (in terms of the bottl....
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....ination of the agreement, all finished goods, raw materials, packing materials, etc. financed or paid for by the BO are to be handed over to the BO without receiving any charge or consideration for such handover; Most significantly, instead of being paid the sale price (as would have been expected if the goods were owned by the CBU), there is a payment of a bottling charge which in its true nature is a payment towards the bottling services rendered by the CBU; All aspects of the transaction, extending from sourcing to manufacture to distribution are carried out under the close monitoring, supervision and express approval of the Applicant; All the proceeds of the sale are owing to the Applicant, per the arrangement with the CBU, and are either directly received by the Applicant from the buyer of the IMLF, or if received in the first instance in the account of the CBU, auto-transferred to the account of the Applicant. 11. In essence, the CBU is carrying out the manufacture and bottling of IMFL to meet the requirements of the Applicant (as the Applicant does not hold the requisite licences under the State Excise laws), in return for the consideration of bottling charges along with ce....
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.... and rulings under the erstwhile Service Tax regime, which are referred to hereinabove at paragraphs 6 to 8. It is submitted that there has been no change in the contractual arrangements analysed in the said Circulars and rulings under the erstwhile regime, and the conclusion reached by the Board and the Courts/Tribunals on the true commercial nature of the said arrangements (viz. that the CBU is rendering a service to the BO, and not vice versa) continues to hold good under the GST. Furthermore, it is also submitted that there has been no material change in the provisions between the erstwhile Service Tax regime and the current GST regime which would necessitate a change in the position on issue. In fact, manufacturing services carried out for or on account of another party (whether on the inputs of another or otherwise) continue to be taxable under Heading 9988, and in any event, services nowhere elsewhere classified are also covered under Heading 9997. Additional submissions on 13.12.2018 WRITTEN SUBMISSIONS 1. At the outset, the Applicant would like to thank the Hon'ble AAR for a patient opportunity of hearing on 28.11.2018. Further to the said personal hearing, the Appl....
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....urther, the Brand Owner can terminate the services of the CBU at any point. In this case, the CBU is providing service to the Brand Owner, by manufacturing and bottling the alcoholic beverages for the Brand Owner. * Under the erstwhile Service Tax regime, these two cases are specifically discussed by Circular No. 249/1/2006-C.X.4 dated 27.10.2008. The said Circular clarifies that under the first type of arrangement, the Brand Owner was liable to pay Service Tax on the brand licensing fees. However, under the second type of arrangement (which is the type of arrangement entered into by the present Applicant), it is the CBU who was liable to pay Service Tax on the Bottling Fee. (Refer Pg. 350 of the Compilation Vol. 2, Para 1 and Para 2] * A further clarification in the form of Circular F. No. 332/17/2009-TRU dated 30.10.2009 was subsequently issued, which again clarified that Service Tax was payable on the Bottling Fee earned by the CBU, but not on the surplus/ profit retained by the Brand Owner. (Refer Pg. 352 of the Compilation Vol. 2, Para 2(7) and Para 4(d)/ * In the present case, the Applicant as the Brand Owner approaches the CBU to seek out bottling services, and not vice v....
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....hat no Service Tax was payable on the surplus/ profit retained by the Applicant. [Refer Letter F. No. ST/HQ/PREVlA.198(2)/2006/5734 dated 14.12.2009 at Pg. 354 of the Compilation Vol. 2] * Further, in the Applicant's own case, BDA Pvt. Ltd. vs. CCE, Meerut (2015 (40) STR 352 (Tri-Del)] = 2015 (6) TMI 586 - CESTAT NEW DELHI, the Hon'ble Customs, Excise and Service Tax Appellate Tribunal had held that the surplus/ profit earned by the Applicant was not liable to Service Tax (Refer Paras 8-15 of the said Tribunal judgement at Pg. 355 of the Compilation Vol. 2). In coming to its conclusion, the Tribunal also relied upon similar judgments in Radico Khaitan Ltd. vs. CST, Delhi (2016 (44) STR 133 (Tri-Del)] = 2016 (6) TMI 366 - CESTAT NEW DELHI and Skol Breweries Ltd. vs. CCE&ST, Aurangabad [2014 (35) S T R 570 (Tri-Mum)] = 2014 (4) TMI 1040 - CESTAT MUMBAI [Refer 364 and 367 of the Compilation Vol. 2). Furthermore, the said Tribunal ruling in the Applicant's own case was also upheld by the Hon'ble Supreme Court in Commissioner vs. BDA Pvt. Ltd. [2016 (42) S.T.R. [J143 (S.C.) = 2015 (11) TMI 1585 - SUPREME COURT [Refer Pg. 363 of the Compilation Vol. 2). * No material ....
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....s rendering bottling services to the Applicant, and GST has been duly discharged on the consideration for the services supplied, viz. the Bottling Fee. PRAYER: In view of the foregoing, the Applicant prays that this Hon'ble AAR may be pleased to issue a ruling to the effect that, in terms of the agreements entered into by the Applicant with the CBUs, the aforementioned surplus/ profit of the Applicant, is not liable to GST. 03. CONTENTION - AS PER THE CONCERNED OFFICER The submission, as reproduced verbatim, could be seen Thus- BRIEF FACTS OF THE CASE 1. In the alcoholic beverages industry, the Brand Owners ("BO") such as M/s Allied Blenders and Distillers Pvt. Ltd. hold various registered brands in relation to Indian Made Foreign Liquor ("IMFL"). Such BOs alone have the ability to exploit the brands, including by way of manufacture and sale of IMFL under those brands. 2. At the same time, the State Excise laws mandate that the manufacture and sale of IMFL, as well as the procurement of Extra Neutral Alcohol ("ENA") required for the manufacture of IMFL, can only be undertaken by parties who have been duly licensed by the State Excise authorities. While the BOs do not hol....
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....by the following factors:- (i) At the outset, it is the BO who approaches the CBU to manufacture the IMFL for it. (ii) The IMFL brands belong to the BO and the BO seeks to commercially exploit the same by manufacturing and selling alcoholic beverages under the various brand names. However, the BO does not have the requisite State Excise licences in the various States, and therefore made contracts with the CBUs who will carry out the procurement, manufacture the IMFL and sell the same under the State Excise licences held by them. (iii) The BO accordingly enters into non-exclusive arrangements with various such CBUs to maximise the returns on exploiting the brand. The BO can terminate the arrangement at any time. Upon such termination, the CBU is obligated to immediately cease and desist from using the brands of the BO. (iv) The CBU is only remunerated to the extent of bottling, charges per case of IMFL produced (plus reimbursements for taxes etc.). This bottling charge is only a fraction of the selling price of each case of IMFL. Had it been the case that the CBU was manufacturing and selling the IMFL on its own account, the CBU would have received and relaim i the entirety of t....
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..../s Allied Blenders and Distillers Pvt. Ltd. (the BO) incurs various expenses, including the bottling charges paid to the CBUs. 1 Ire balance amounts retained by them represent their earnings / profit from the entrepreneurial venture. These earnings duly suffer Income Tax but cannot be brought to tax under GST, as there is no supply being made by the M/s Allied Blenders and Distillers Pvt. Ltd. (the BO) to the CBUs. 10. This poisition was also affirmed under the previous Service lax regime, vide Circular No. 249/1/2006-CX4-dated 27.10.2008 and Circular F. No. 332/17/2009-TRU dated 30.10.2009 issued by the Ministry of Finance. The latter Circular specifically confirmed that "Service tax would be payable on the bottling/job charges, distribution costs and other reimbursable... the surplus /profit earned by the BO being in the nature business profit (which falls within the purview of direct taxes), will not be chargeable to service tax". 11. The Notification No. 39/2009-Service Tax dated 23.09.2009 under the previous Service Tax regime, exempted the taxable service specified in sub-clause (zzb) of clause 105 of section 65 of the Finance Act, provided by a person (hereinafter called t....
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....e, the Applicant (i.e. Brand Owner) is paying consideration to the Contract Bottling Unit by way of bottling charges, or, alternatively, whether the Contract Bottling Unit is paying consideration to the Applicant by way of brand owner surplus? From the above we find that the question raised by the applicant can be divided into 4 parts as under:- 1. Whether in the facts and circumstances of the present case, the Contract Bottling Unit is making a taxable supply to the Applicant? 2. Whether in the facts and circumstances of the' present case, the Applicant (i.e. brand owner) is making a taxable supply to the Contract Bottling Unit? 3. Whether in the facts and circumstances of the present case, the Applicant (i.e. Brand Owner) is paying consideration to the Contract Bottling Unit by way of bottling charges? 4. Whether the Contract Bottling Unit is paying consideration to the Applicant by way of brand owner surplus? We find from the above that questions numbers 1 and 4 are asked by the applicant but pertains to the CBU. As per Section 95 (a) of the CGST Act. 2017 "advance ruling" means a decision provided by the Authority or the Appellate Authority to an applicant on matters ....
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....of the Applicant, etc. The amount left with the Applicant after making all of the aforesaid payments is their profit. The applicant has very rightly stated that the true commercial nature of the arrangement in the subject case is one in which the CBU provides manufacturing services to the Applicant, and is remunerated in the form of bottling charges and the applicant is not a service provider to the CBUs. In terms of Section 7 of the CGST Act, one of the requirements of a supply liable to GST is that there should be some consideration received by the applicant if it is to be considered that they are supplying goods/services. We find that in the instant case the applicant is not receiving any consideration for allowing the CBU to use their brand/logo etc on the IMFL. In fact the entire process can be seen as the applicant is contracting with the CBUs to get the IMFL manufactured in under their brand name. There is no service rendered by the applicant in this case. It is very clear from the terms of the agreement that there is neither any supply of goods nor services flowing from the applicant. The applicant actually gets the products manufactured by the CBUs. Hence as per GST laws....