LEVY OF GST ON OVERHEAD CHARGES IN BEER MANUFACTURING

[Dr. Sanjiv Agarwal]

In one of the recent judgments, Bombay High Court refused to entertain a writ petition against a Show Cause Notice (SCN) alleging non-payment of Goods and Services Tax (GST) on ‘production overhead changes’ received from brand-owner for beer production on behalf of brand owner. The said notice also alleged mis-classification of the product as DPGS Husks & Cattle feed (spent grains) taxable at Nil rates under HSN 1104 instead of HSN Code 2303, being residue of starch, brewing or distiller dregs and waste under HSN Code 2303. [Refer BLOSSOM INDUSTRIES LIMITED VERSUS UNION OF INDIA, UNION TERRITORY OF DAMAN AND DIU THROUGH ITS DIRECTOR GENERAL, DIRECTORATE GENERAL OF GOODS AND SERVICES TAX INTELLIGENCE, SURAT, ADDITIONAL DIRECTOR, DGGSTI, SURAT ZONAL, UNITED BREWERIES LIMITED - 2024 (12) TMI 1078 - BOMBAY HIGH COURT].

It was paying tax at nil rate as against 5% applicable on HSN 2303.  HSN Code 2303 and thus evading payment of GST. The taxpayer instead of replying to the allegation in SCN, preferred a writ petition before Bombay High Court to declare said SCN as ultra vires and without jurisdictions.

The High Court without commenting upon the validity of demand and SCN, observed that the petitioner avoiding payment of tax on production overhead changes need to be factually investigated and hence it could not hold the impugned SCN ex-facie without jurisdiction or that it was issued without authority of law.

While the action of High Court is based on a settled law and that petition could not have been entertained at SCN stage, the moot question is whether there could be a levy of GST an production overhead charges for beer production ?

As per the provisions of  prevailing GST law, both under Section 9 (1) of the Central Goods and Services Tax Act, 2017 (CGST Act 2017) and the Constitutional scheme, no CGST or IGST could be levied on the sale of alcoholic liquor for human consumption by any authority other than the State Authority. It was contended that the subject matter of the impugned show cause notice was, in fact, alcoholic liquor for human consumption. The production overhead charges for which the impugned show cause is issued do not amount to consideration for the supply of service/agreeing to do any act. It was thus, contended that show cause notice suffers from the fundamental flaw of assuming a jurisdictional fact. For this reason, the impugned show cause notice is ultra vires and without jurisdiction.

Also, in a similar case relating to alcoholic beverages, the Appellate Authority for Advance Ruling, IN RE: M/S. UNITED BREWERIES LIMITED - 2018 (11) TMI 283 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA had ruled that the amounts earned and retained by bottlers such as the Petitioner herein are not liable to GST.

On SCN front, SCN alleged that the Petitioner is paying the IGST on the production overhead charges received from the brand-owner for producing beer from M/s. AB InBev Ltd. (Brand Haywards 5000) regularly but not paying IGST on production overhead charges received for the beer of the brand-owner – UBL production. The impugned show cause notice also alleged that the Petitioner is evading the GST by mis-classifying their product as “DDGS, Husk & Cattle Feed (Spent Grain) under HSN 1104 instead of HSN 2303 and clearing/supplying the same on `Nil’ GST rate while HSN 2303 attracts GST @5%.”

It took a view that GST was demanded for production overhead charges and that the process and supply of service involved in manufacturing the final product is exigible to GST. The Petitioner has been paying IGST qua the Brand Haywards 500. Still, the Petitioner has been evading the payment of GST regarding UBL’s brand “Kingfisher”.

Further, it was observed that the impugned show cause notice is not restricted only to the issue of production overhead charges. The Petitioner has classified their product as “DDGS, Husk & Cattle Feed (Spent Grain) under HSN 1104 instead of HSN 2303 and clearing/supplying the same on `Nil’ GST rate while HSN 2303 attracts GST @5%.” There is a serious issue with this classification. The show cause notice alleged that this is nothing but misclassification which is a matter that requires a thorough investigation. Therefore, the impugned show cause notice can never be styled as wholly without jurisdiction or ultra vires.

In the present case, there was no question of enforcement of any fundamental rights. It was also not a case of violation of principles of natural justice. The show cause notice was quite clear and provided the basis for issuing the same. This is also not a case where the proceedings are wholly without jurisdiction.

Court thus observed that without investigation, the fundamental premise that the impugned show cause notice seeks to levy GST on alcoholic liquor for human consumption cannot be accepted at face value. The petition was dismissed with the direction that if the reply to SCN is filed, the same should the considered for to disposal of the SCN.