CONTRACT BOTTLING A SERVICE

[Dr. Sanjiv Agarwal]

It is now affirmed that beer bearing a brand or owned by brand owners which are manufactured by Contract Bottling Units or tie-up units (generally known in trade as CBUs) is a supply of service which attracts Goods and Services Tax (GST).

A recap

United Breweries Ltd. sought an advance ruling from the Authority for Advance Rulings (AAR), Karnataka on the following two issues:

1. Whether beer bearing brand/s owned by Brand Owner 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?

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. 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.

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 as per serial number 35 of the Notification No. 11/2017-CT(Rate) dated 28.06.2017.

It was also ruled that GST is payable by the Brand owner 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. [As reported in IN RE : M/S UNITED BREWERIES LIMITED  (2018) 7 TMI 835;  vide ruling dated 28.06.2018].

Appellate Affirmation

Industry leader, not being satisfied, approached the doors of Appellate Authority of Advance Ruling (AAAR), Karnataka for a review.

It was submitted against the said ruling that AAR has erred 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 CBUs in the first place, based on the following contentions :

1. 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.

2. 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.

3. The Authority erred in holding that there was a supply of service under Central /State Goods and Service Tax Act, 20l7, whereas there is only a monetary transaction between the Appellant and the CBU by way of transfer of apportioned profit from supply of beer, which is excluded from the ambit of charge under provision of the said Act.

4. The Authority erred in not appreciating the fact that the arrangement between the Appellant and the CBU was in the nature of consortium for earning profit from operation of beer manufacture and supply, necessitated by the regulations governing the supply of beer.

5. That the Authority erred in not following the settled positions as cited in the relied upon decisions above wherein it was held that the activity of permitting the CBU to manufacture alcoholic beverages on behalf of the principal does not amount to rendering of taxable service under the category of IPR service.

The AAAR interpreted the scope of ‘supply’ as per section 7 and charging section 9 of the GST law. While section 9 clearly excludes the supply of alcoholic liquor for human consumption, but the activities and role of parties involved are under the agreement which inter alia, includes making of beer, disposing off beer, procurement of raw material, collection of consideration or payment, representational rights, right to use brand name etc.

The AAAR observed that in view of many inter-related activities involved in the transaction,  it may be difficult to arrive at any nomenclature for the services delivered by the Appellant to the CBU. While the brand fee and the reimbursed expenses, are received by the Appellant in (direct) consideration for permitting the CBUs the use of the representational right to make and sell their branded beer, the service supplied can at times have the colour and character of being an erstwhile ‘franchise’ service or / and ‘IPR service’ in terms of the Finance Act, 1994. On the other hand, the so term 'surplus profit' amounts received have the characteristics of being a consideration received for a ‘mixed supply’.

While in overall terms, at times 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 pre-dominancy in terms of characterisation since the consideration for some elements of the supply is being received in terms of a variable amount.

Since, the activity which the Appellant engages in with respect to contract does not essentially change, hut 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.

There is a standard rate of 18% which applies across the whole range of services that are taxed under GST. However, this fact of having one pre-dominant supply that may be constant across tax periods, does not do anything to negate exigibility of the service supplied. The framework of the Service Tariff Codes under GST still provides a possible solution by categorizing such services under Service Code 99979 as ‘Other Miscellaneous services'. The sub-heading under this service code is 999799 which is ‘other services nowhere else classified'. The GST applicable under this category of service is 18%.

The AAAR confirmed the taxability of contract bottling activities @ 18% GST but modified the ruling in following terms :

1. The activity engaged in by the Appellant by way of granting the contracting brewing units the representational right to manufacture and supply beer bearing its brand name, in return for a consideration, is a supply of service as mandated in Section 7 of the CGST Act read with clause 5(c) of the Schedule II of the said Act.
2. The supply of service by the Appellant is taxable to GST in terms of Section 9 of the CGST Act,
3. The service supplied by the Appellant is classified under the Service Code 999799 as ‘other services nowhere else classified’.
4. The amounts received by the Appellant from the contracting units under the Agreement, in the nature of brand fee and reimbursement of expenses, is termed as a consideration for the supply of service and is chargeable to GST at the applicable rate of 18%.

End Note

To conclude, it can be said that it is now settled from the advance ruling perspective that activities of contract bottling of beer shall be eligible to levy of GST @ 18%. However, an assessee may still knock the doors of High Court or Supreme Court by way of a writ petition.

Further, since we have now an AAAR affirmed advance ruling which is atleast binding on the applicant and its jurisdictional tax officer, it indicates that the same analogy would apply to other bottling activities like alcoholic liquor (other than beer), pharma, FMCG and other industries where such arrangements are in vogue. This would also be used as a guidance, though not a binding precedent, by the tax department, as it suits the revenue. Legally, it is not binding on other assessees.