NO GST ON CONTRACTUAL LIQUOR BOTTLING (PART-2)

[Dr. Sanjiv Agarwal]

Recent Advance Ruling on Taxability under GST

The issue of whether:

1. 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 activity? and

2. 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?

recently came up before Authority for Advance Rulings, Karnataka on the application of M/s United Breweries Ltd. [ 2018 (7) TMI 835 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA ].

According to the facts, the Applicant was engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also had 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.

The CBUs procure the required material and manufacture beer according to the specifications of UBL, label them with brands owned by UBL and sell the final produce as per the extant excise laws of the State(s). In order to ensure the quality and standard of the beer, the manufacturing process is supervised by personnel from UBL.

The CBUs realize the sale proceeds and the same are apportioned as follows. The statutory levies and taxes are paid by the CBUs. Besides this the CBUs retain the manufacturing cost, the manufacturing and distribution overheads and its portion of net profit. The balance of the sale proceeds, after the CBUs have apportioned part of the proceeds as enumerated above to themselves, is transferred to UBL as surplus/profit earned by the brand owner.

The contract manufacturing arrangement empowers the CBUs to use the brand name of UBL for the limited purpose of facilitating manufacture of UBL owned brands of beer by the CBUs and this usage is in accordance with Section 48(2) of Trademark Act.

The scheme of the agreements provides that UBL would provide the technical knowhow to the breweries, including close supervision of procuring and manufacturing processes, and the breweries in turn would endeavour to manufacture beer of the requisite standards and sell the same as regulated by the State laws.

The revenue sharing agreement stipulates that apart from the cost of the raw material, cost related to energy consumption, fixed costs etc, the brewery would be entitled to a fixed sum. The balance left over after deducting all the costs, including statutory dues and taxes, shall pass on to UBL. UBL provides for this inflow of revenue as (i) brand fee at the fixed rate per case and (ii) balance as surplus income.

The agreements provided that the brewery shall be procuring the raw materials required, even if it was under the close supervision of UBL. This is also evident from the provisions related to 'obligations and rights of parties upon termination or expiration'. It is provided that in the eventuality that the agreement suffers termination or expiry then UBL would be entitled to take over all the unused labels, unfinished goods, semi finished goods in process at landed cost. Further unsold finished goods would be lifted by UBL at ex-brewery price and UBL shall make payment to the brewery as per the agreement.

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 also retain a certain amount of profit. After accounting all these revenues the CBUs transfer the balance amount to the applicant.

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.

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.

Further Section 7 of the CGST Act and KSGST Act define the scope of 'supply'. Section (1)(d) of the said Act provides that 'Supply' includes activities referred to in Schedule II to the Act. As the activity undertaken by the CBUs is the manufacture of goods, the entry at Serial number 3 of Schedule II is the relevant entry which reads as follows:

Any treatment or process which is applied to another persons' goods is a supply of service.

Therefore, 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.

The AAR observed that the scheme of classification of services indicates that all the services have been divided into various Sections and further into headings. Services related to manufacture appear in Section 8 under Heading 9988. The Notification No. 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.

It was evident that the manufacturing activity carried out by the CBUs does not fall under the Heading 9989. In order that a manufacturing activity be covered under Heading 9988, it is necessary that the goods worked upon should be supplied by a registered person to the manufacturer. Therefore, to determine whether the activity undertaken by the CBUs falls under Heading 9988 or not we need to see whether the raw material is supplied by the applicant or not.

In the instant case, 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. 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 was provided that in case the agreement stands terminated then the applicant will buy all the raw material at cost. 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 service to the applicant.

In view of this factual matrix, AAR concluded that 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.

On the question of taxing on the surplus profit transferred by the CBU to the brand owner arising out of manufacturing activity, it was observed that 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.

The sale proceeds are utilized to first pay the CBUs the cost of the raw materials, bottling cost, energy charges and fixed retention charges. The balance amount accrues to the applicant as brand fee and business surplus/business profit.

Ruling

It was ruled that since 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.

It was ruled that 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.

Discussions to this article

[Prasanna Kumar]

The issues were dealt by you in your article NO GST ON CONTRACTUAL LIQUOR BOTTLING (PART-1).Since the manufacturing of beer doesnot fit into the definition of Job work under GST laws, the authorities cannot levy GST on this activity.

Ruling

It was ruled that since 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.

It was ruled that 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.

In my opinion, the authorities are bringing in the manufacture of beer /alcohol for human consumption under GST net though it is specifically exempt under the provisions of the GST law. Aslo State governements are empowered to levy state excise duty on these activities.

By leving on the profit of Applicant and the CBUs, it is a deemed application of GST on the manufacture of beer /alcohol for human consumption.

[Dr. Sanjiv Agarwal]

Let there be some writ to settle this issue.

GST Council is also not taking any decision of this.