Analysis of the ruling passed by AAAR, Maharashtra in the case of Crown Beers 2019 (7) TMI 1507

[niranjan gupta]

IN RE: M/S. CROWN BEERS INDIA PRIVATE LIMITED [2019 (7) TMI 1507 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA]

1. Brief facts of the case:
   1. Crown is a company incorporated under the provisions of the Companies Act, 1956. Crown has entered into the Agreement with PIL to brew / manufacture, package and supply Products, as specified under the Agreement, from its bottling unit to buyers / distributors in the territory identified by Crown. PIL holds valid licenses, permits and permissions necessary under the applicable laws for manufacture of Products at its bottling unit.
   2. In order to understand the transactions being undertaken under the Agreement, summarized the relevant terms of the Agreement are given below:

a. In accordance with the instructions received from Appellant during the term of the Agreement, PIL undertakes to manufacture the Products at its Bottling Unit and perform certain other allied activities, including the following: 

(Clause 2.1 of the Agreement):

i. Purchasing the required materials, arranging labour and all other facilities and inputs, in compliance with the standards prescribed under the Agreement, for the purpose of manufacturing the Products; 

ii. Carrying out all the processes required for brewing / manufacturing, bottling and packing of the Products;

iii. Maintaining physical stock of Products in the Bottling Unit or in bonded or other warehouses; and

iv. Preparation of sales invoices, ensuring timely dispatches and delivery of the Products to buyers / distributors in the territory identified by the Appellant.

b. PIL would be responsible for carrying out its obligations under this Agreement in a timely manner and in accordance with the directions and instructions of Crown (Clause 2.2 of the Agreement).

c. PIL shall manufacture the Products in terms of the Agreement in strict compliance with the policies, operating procedures and quality and performance parameters and standards prescribed by Crown (Clause 5.1 of the Agreement). Crown would be entitled to specify, inter alia, as part of the above mentioned parameters and standards, the quality, specific varieties, sources and terms for procurement of raw materials used in the manufacture of Products, the design, content and manner of affixation of labels, marks and trademarks to the Products, the manner of production and quality control procedures to be maintained in the manufacture of Products by the PIL (Clause 5.2 of the Agreement).

d. PIL shall maintain in force, at all times during the term of the Agreement, full and complete insurance cover for Products, raw materials and ingredients used in the manufacture of Products and work in process in relation thereto by nominating Crown as the beneficiary. Cost of aforesaid insurance shall be to the account of Crown (Clause 4.11 of the Agreement).

e. In consideration for fulfilment of the above-mentioned obligations by PIL to manufacture the Products in terms of the Agreement, PIL shall be entitled to a fixed fee for the Products so manufactured, calculated and payable in accordance with this Agreement (Clause 2.3 of the Agreement).

f. The costs incurred on purchase of materials, other expenses set out in Schedule Il and the sale revenue generated from sale of Products will always be incurred on account of and inure to the benefit of Crown. The following costs and expenses are specified under Schedule Il of the Agreement:

i. Cost of all raw materials and ingredients used to manufacture the Products, based upon parameters agreed under the Agreement on actual price basis; 

ii. Labour and manpower cost upon actual cost, based upon parameters agreed under the Agreement;

iii. Cost of consumables towards boiler fuel, cost (initially furnace oil and later rice husk / briquette), demineralised water, carbon dioxide, effluent treatment plant, water treatment plant, laboratory supplies, inkjet printers, ink and any other consumables which is consumed in routine working of the Bottling Unit; 

iv. Power cost based upon parameters agreed under the Agreement on actual price basis;

v. Bottling fee (including without limitation franchise fee and label registration charges) that may be levied by the excise department of the State of Maharashtra; 

vi. Other duties, taxes and fees levied by the State Government or Central Government payable in relation to the dispatch of Products as applicable on the date of Agreement; 

vii. Cost for taking insurance as contemplated under Clause 4.11 of the Agreement; 

viii. Cost of any permit fees or levies to be submitted under any applicable rule, regulation or law towards supply of Products pursuant to the Agreement; 

ix. Cost of loading and unloading of raw materials and ingredients used to manufacture Products and the Products;

x. Approved cost of running and operating a bonded or other warehouse as advised by Crown; and 

xi. Cost of inwards freight charges in relation to the Material and Products.

g. Any costs other than as specified in Schedule II shall be borne by Crown (Clause 7.3 of the Agreement).

h. PIL shall open a separate bank account (‘Account’) wherein all proceeds from sale of Products made to buyers / distributors under the Agreement shall be deposited (Clause 7.1 of the Agreement). All costs specified in Schedule Il to the Agreement shall be paid or incurred from the Account (Clause 7.2 of the Agreement). The fixed fee payable to PIL under the Agreement shall be incurred or paid from the Account(Clause 7.3 of the Agreement). The proceeds from the sale of Products shall be credited into the Account (Clause 7.4 of the Agreement).

i. Any credits, subsidies, benefits, refunds, whether monetary or otherwise, received by Crown in relation to costs or amounts receivable by Products pursuant to Schedule II (‘Cost Subsidies’) shall be to Crown’s benefit and Crown may elect, at its sole discretion, to deduct or adjust the same from the amounts payable by Crown to PIL under the Agreement (Clause 3.5 of the Agreement).

2. Analysis:
   1. It is ruled that PIL is providing job work services to Crown as it is expressly clear that PIL is being paid a fixed amount of fee for undertaking the manufacturing and other allied activities required for the manufacturing of the Product i.e. beer for Crown and not for the sale of the manufactured beer. In fact, the manufactured Product i.e. beer is sold to the buyers identified by Crown. Thus, there is no sale taking place between PIL and Crown. Thus, the contention of Crown that the consideration received by PIL from Crown is for supply of alcoholic liquor for human consumption, is factually incorrect and fallacious, and hence not tenable.

In our opinion, the authority should have taken into consideration the basic concept of job work under GST Laws. The definition of ‘job work’ under section 2 (68) and procedure defined under section 143 of CGST Act clearly specify that  Job work is a concept of treatment or process undertaken by the job worker on the goods belonging to another registered person. The concept of job work was to exempt supply for job work from GST. In the present case, there is no supply of inputs  by Crown (the Principal) to PIL (the Job worker). Since, there is no supply of input to treat or process the goods, there is no job work as specified in section 2(68) and section 143 of the CGST Act.

1. 2. It had further been held that purchase transaction of the raw materials and other ingredients required for the brewing of beers is undertaken by PIL. It is aptly clear that though PIL is undertaking the purchase transaction of the raw materials and other ingredients used in the manufacture of beers, it is Crown, who is deciding not only the qualities and varieties of the materials, but also the suppliers from whom these materials are to be purchased along with the terms and conditions for the purchase transaction. It is stated in the ruling  that PIL is  undertaking these purchase transaction simply as an agent or representative of Crown as they do not enjoy any autonomy, whatsoever, while performing these transaction.

It is a basic concept that buyer determine the quality of the product, which he is going to get from the supplier. A person cannot be an agent in a situation where he himself is buying the goods, insuring in his name, having all risk and rewards with him, supplies final product to the buyer on his invoices, pays appropriate duties on the goods from his own account. PIL cannot be an agent of Crown. The contract is on Principal to Principal basis, hence supply of liquor for home consumption.

1. 3. It has further been ruled that it is germane that the cost of the purchase of the entire raw materials and other inputs is also incurred to Crown. All the suppliers receive cost of the material, cost of labour and margin in supplies.

The supplier has to justify his cost to the buyer. Every buyer wants to know the each component of the cost of the product, he buys. Giving break up of each cost for the supply cannot change the nature of the transaction. Hence, PIL cannot be an agent to Crown.

1. 4. It is ruled that that the final manufactured Products i.e. beer also belong to and are owned by Crown, as the final products are delivered by PIL to the buyers, which are identified by Crown and entire sale consideration against the same is credited to the designated bank account meant for manufacturing expenses and sale proceeds of the Product i.e. beer.

Crown becomes the owner of the goods after supply to Crown or his agent by PIL. Crown does not become owner of the goods unless, PIL sales the goods. In case, we accept basis given by the Authority, then whole concept of “bill to ship to” is wrong. The amount of the consideration is being credited to supplier i.e PIL account and not to Crown. Further, the consideration has been credited to the account of PIL and to CB.

1. 5. It is ruled that the activities performed by the PIL, on the goods of Appellant, are in the nature of the Job work and accordingly attract 18% GST.

This is not a job work as it does not fall under the concept of job work under GST as discussed above. It is supply of liquor for home consumption hence, out of GST.

The ruling may not hold good in time to come.

(View expressed by the author is personal)