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2018 (11) TMI 283 - AAAR - GSTLevy of GST on profit earned - supply or not - beer bearing brand/s owned by the Appellant manufactured by Contract Brewing Units 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 - liability of GST on Brand Owner on the Surplus Profit transferred by the CBU to Brand Owner our of such manufacturing activity. Whether manufacture of beer (bearing brand owned by the Appellant) by the CBUs under its invoicing would be considered as a supply of service and whether GST is payable by the CBUs on the profit earned out of such manufacturing and supply of beer? - Held that - The Authority ruled that the activity undertaken by the CBUs is not in the nature of job-work, and hence no GST is payable. The ruling on this aspect has been accepted by the Appellant and is not challenged in this appeal. 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? - whether this amount which is transferred can be considered as supply or not? - Held that - The levy clearly excludes the supply of alcoholic liquor for human consumption. The CBUs clearly make and supply alcoholic liquor (beer, in this case) for human consumption, and the same is excluded from the purview of GST - It is also clear that the CBUs collect a consideration/ payment for the supply of the product (beer) made by them to the Beverages Corporation/State regulated depots or to the Wholesalers / Indenters holding necessary permits / licences under the relevant Excise laws of the State concerned. The beer is made by the CBUs under a contractual agreement with the Appellant - Out of these goods and services that the CBUs spend on, many are exigible to GST levies as they may apply - there being no general exemption being available under GST, to such raw materials/ services that are used in making the alcoholic liquor for human consumption. The income so had from CBU operations are then partially disposed of by being charged as the expenses and the profit for CBU and as the payments for use of brand name etc. The remaining amounts which represent the sales turnover or income from the sale of beer (termed as surplus profits by the Appellant) are transferred to the Appellant. For providing the brewer the representational right to make and supply beer under their brand, the Appellant receives from the brewer a Brand fee of ₹ 5 per case. In addition, the Appellant also receives an amount which in terms of clause 8 of the Agreement, is termed as reimbursement of expenses incurred by the brand owner . This amount is not fixed but is variable depending on the sales in a particular month, the adjustment from the sale proceeds towards the variable costs incurred by the brewer, the brewer s profit and the brand fee paid by the Brewer to the Appellant. The surplus remaining after this, if any (denoted as W in the Agreement), is transferred to the Appellant s account - It is evident that the Appellant receives two kinds of amount from the Brewer in terms of the Agreement One is the Brand Fee which is fixed at ₹ 5 per case, and The other is the variable component W which is the surplus amount remaining in balance after the sale proceeds have been apportioned towards the brewer s operational costs and brand fee. Whether, GST is payable on both the amounts received by UBL i.e Brand Fee of ₹ 5/- per case and on the Component W ? - Held that - It is evident that, the Appellant has provided a service to the Brewer by way of granting him the know-how to manufacture the beer according to their specified standards and has also provided the Brewer with adequate personnel to supervise its manufacture, packing and sale. This service has been rendered by the Appellant in the course of his business. As per the terms of the Agreement, the Brewer pays a consideration to the Appellant in return for the latter granting the representational right to use its Trademarks and labels in the manufacture and supply of beer by the Brewer. Hence, the activity rendered by the Appellant to the Brewer is a service which has been undertaken by the Appellant in the course of his business under an agreement and for which, in terms of the agreement, he gets a consideration. As such, the activity performed by the Appellant in terms of the agreement can be termed as a supply under Section 7 of the CGST Act. In the GST law, by virtue of clause 5(c) of Schedule II, the act of temporarily transferring any intellectual property right or permitting the use of or enjoyment of any intellectual property right has been categorised as a supply of service. In the instant case, the Appellant has permitted the CBUs to use the trademarks Owned by it, permitted the Brewer to acquire the know-how relating to the production and packaging of UBL s beer, which is the sole property of UBL and has permitted the Brewer to use the Labels for branding of beer for sale by the Brewer. All these amount to permitting the Brewer to use intellectual property rights. Therefore, by virtue of clause 5(c) of Schedule II of the CGST Act, the said activity amounts to a supply of service - the activity of the Appellant undertaken with contracting units in terms of the Agreements are in the nature of permitting the use of intellectual property right and hence is squarely covered under clause 5(c) of Schedule II of the Act. Reimbursed expenses received by the Appellant - Held that - This expenditure incurred is in connection with according the representational rights for the manufacture and sale of branded beer to the CBU - the component W also forms a part of the consideration received by the Appellant for supply of service. This component W therefore, is also liable to GST being a consideration for the supply oftaxable service. The grant of representational right to the Brewer and the receipt of the consideration in the form Of Brand Fee and reimbursed expenses, are all undertaken in the course of the business of the Appellant. Therefore, all the parameters of supply as defined in Section 7 of the CGST Act are duly satisfied and therefore, the entire amount i.e Brand Fee as well as the reimbursed expenses, received by the Appellant as a consideration for the supply of service is chargeable to GST. Classification of the service - Held that - The framework of the Service Tariff Codes under GST still provides a possible solution by categorising 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%. Ruling - 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. The supply of service by the Appellant is taxable to GST in terms of Section 9 of the CGST Act. The service supplied by the Appellant is classified under the Service Code 999799 as other services nowhere else classified . 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%.
Issues Involved:
1. Whether the manufacture of beer by Contract Brewing Units (CBUs) under the appellant's invoicing is considered a supply of service and whether GST is payable by the CBUs on the profit earned. 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. Issue-Wise Detailed Analysis: 1. Supply of Service by CBUs and GST Liability: The appellant, engaged in the manufacture and supply of beer, also has arrangements with CBUs who manufacture beer under the appellant's brand names. The CBUs procure raw materials, incur manufacturing costs, and sell the beer directly to Government Corporations or wholesalers. The CBUs pay statutory levies and taxes, account for manufacturing costs, distribution overheads, and retain a profit before transferring the balance to the appellant. The appellant sought a ruling on whether the manufacture of beer by CBUs is considered a supply of service and whether GST is payable by CBUs on their profit. The Authority ruled that the CBUs are not engaged in the supply of service to the appellant and thus, no GST liability arises on the amount retained by the CBUs as their profit. This ruling was accepted by the appellant and not challenged in the appeal. 2. GST on Surplus Profit Transferred to Brand Owner: The appellant also sought a ruling on whether GST is payable by the brand owner on the "surplus profit" transferred by the CBU to the brand owner. The Authority ruled that GST is payable by the brand owner (UBL) on the surplus profit transferred by the CBU, classifying the service under Service Code 999799 and liable to GST at 18%. The appellant argued that the surplus profit is not a consideration for any service rendered by the brand owner to the CBUs. They contended that the arrangement is a consortium for earning profit from beer manufacture and supply, not a service provision. The appellant cited past litigations and case laws under the erstwhile Service Tax regime, arguing that similar arrangements were not considered taxable services. The Appellate Authority examined the agreement between the appellant and the CBUs, noting that the appellant grants the CBUs the right to use their brand, provides process parameters, and deputes personnel to supervise the manufacturing process. The CBUs pay a brand fee and transfer any surplus profit to the appellant. The Authority held that the brand fee and surplus profit are considerations for the service of granting the representational right to manufacture and supply branded beer, which is a supply of service under Section 7 of the CGST Act. The Authority further classified the service under Service Code 999799 as "other services nowhere else classified" and held that the entire amount received by the appellant, including the brand fee and surplus profit, is chargeable to GST at 18%. Conclusion: The Appellate Authority upheld the ruling that the activity of granting the representational right to manufacture and supply branded beer is a supply of service and taxable under GST. The amounts received by the appellant from the CBUs, including the brand fee and surplus profit, are considered consideration for the supply of service and are chargeable to GST at the applicable rate of 18%. The appeal was disposed of accordingly.
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