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TMI Blog2018 (7) TMI 835X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 - Therefore it is evident that the manufacturing activity carried out by the CBUs does not fall under the Heading 9989. 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 - 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 manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2017. 2. The Applicant is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has 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. 3. 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 retain a certain amount of profit. After accounting all these revenues the CBUs transfer the balance amount to the applicant. 4. In this backdrop the applicant has sought advance ruling on the following Questions:- (a) Whether beer bearing brand/s owned by M/s United Breweries Limited (Brand Owner/UBL) manufactured by Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in came under the purview of Service Tax with effect from 01.06.2015. 5.5 During the alternating periods when this arrangement of manufacturing at the hands of CBUs was taxable the then CBEC issued certain clarificatory Circulars to tide over issues related to valuation and taxability.UBL has extensively discussed and cited the contents of Circular F. No. 332/17/2009-TRU dated 30.10.2009. The contents of this Circular are discussed at the appropriate place in this Ruling. UBL has further added that during the periods from 23.09.2009 to 30.06.2012 and 01.06.2015 to 30.06.2017 the CBUs have discharged Service Tax on the agreed bottling charges (comprising of manufacturing overheads and margin of profit) and the amounts reimbursed by the brand owner towards agreed expenses. This indicates that service tax was being paid by the CBUs in respect of the amount retained with them, excluding the cost of the raw material, packing materials and statutory levies (excise duty/VAT). This fact closely relates to the first question raised by the applicant. 5.6 UBL has further traced the past litigations (pre-GST period) in respect of the matter contained in their second question seeking Ruli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that the activity of manufacturing would amount to supply of service only if manufacturing is carried out on physical inputs(goods) owned by others (serial No. 26 of the Notification). The sum and substance of the applicants contention is that since in their case the CBUs manufacture beer out of raw materials physically procured by themselves, the activity of manufacture of beer of their brands does not amount to supply of service by the CBUs to the applicant. Reference is also made to Serial number 27 of the said Notification to emphasise that the manufacturing activity carried out by the CBUs does not fall within the purview of HSN Heading 9989 also. It has thus been summed up by the applicant that the manufacturing activity undertaken by the CBUs does not amount to supply of service to the applicant and therefore GST is not payable in respect of the amount retained in the hands of the CBUs. 6.2 In respect of the second question concerning the applicability of GST on surplus profit earned by them, the applicant has cited several case laws in favour of their arguments. The case laws are decisions by Tribunals in the cases of M/s Skol Breweries Ltd reported in 2013(29) STR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questions raised by the applicant it is imperative to first study and analyse the business model adopted by the applicant and to examine the fine nuances of the various agreements between the applicant and other parties in business with them. There are two clearly distinguishable arms of the business model. On one hand is the applicant who owns the brands commanding a market for themselves and the second is the CBUs who have the licences to manufacture beer of any specification. The agreements between the applicant and the CBUs seek to synergise these two arms where the applicant would provide the authority to the CBUs to manufacture beer to their specifications and then sell the same after affixing their brand on the product. 8.1 The applicant is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has manufacturing arrangement with contract brewing / bottling units (CBUs) who manufacture beer under brand names belonging to the applicant and supplies such beer to market. Copies of the following brewing and distribution agreements have been submitted by the applicant for illustration:- (i) Master ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sell at cost raw materials, labels, packing material etc to UBL. 8.3 The brewing and distribution agreements between UBL as brand owner on one hand and brewers CMJ Breweries Private Ltd., Mount Everest Breweries Ltd and Denzong Albrew Private Ltd on the other hand are identical to the agreement between UBL and Master (India) Brewing Company and have the same salient features as enumerated above in para 8.2(i) to (xi). However the agreement between UBL and Mount Everest Breweries Ltd has a different clause (Clause 7.4) which stipulates that UBL will provide working capital finance for the operations of Mount Everest Breweries Ltd. Further the capital is controlled by UBL through the operation of a Collection Account to be opened by Mount Everest Breweries Ltd. but operated exclusively by the nominees of UBL. Further collections from the sale of beer and all payments under the agreement would be made out of this account. 9. A fine reading of the various agreements cited above brings out the following points for consideration. 9.1 UBL, being the brand owner, has the technical knowhow to manufacture beer to certain specifications typical of their brands. They are thus in pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the supply of alcoholic liquor for human consumption. The end product, i.e. beer, whether manufactured by the applicant or the CBUs, is thus not exigible to CGST,SGST or IGST. 10.2 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. 10.3 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. 10.4 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir 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 is provided that in case the agreement stands terminated then the applicant will buy all the raw material at cost. Further 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. 10.7 On the basis of discussions above the Authority has come to the considered conclusion that the CBUs are not engaged in supply of service to the applicant and therefore there doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CBUs to use their brand names amounted to provision of intellectual property service. The applicant further states that the description of service liable to tax has not been changed under GST compared to the provisions of Section 66E of Finance Act. The applicant has further drawn reference to various judgments of Tribunals in this regard, more so on the basis of decision by Tribunal in the case of BDA Pvt. Ltd reported in 2014(35) STR 570(Del) upheld by the Supreme Court as reported in 2016(42) sTr J143 SC. UBL has also discussed an adjudication order passed in their own case. The adjudicating authority held that service tax was payable on the amount accounted by them as brand fee under intellectual property service. UBL has challenged this Order before the Tribunal. The matter is sub-judice. 11.3 The applicant has further contended in this regard that the CBUs are permitted to use their brand name to enable them to manufacture beer on their behalf and that the CBUs are not allowed to exploit the brand name or trademark. Section 48(2) of the Trademark Act recognizes such usage of trademark as use by brand name owner . It is further contended that the activity per se doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no service in the nature of permitting the use of intellectual property right by the applicant to the CBUs. Therefore in the absence of any service being provided by the applicant to CBUs, either in the form of permitting the use of their brand names by the CBUs or in any other manner, there cannot be any levy of GST on the amounts received by the applicant from the CBUs. The amount so received represents the part of the sale proceeds of beer after meeting the cost of procurement. 12. We now proceed to examine the scope of supply and concept of service under the CGST Act and the KSGST Act, 2017. 12.1 The Scope of Supply is covered under Section 7 of the CGST Act, 2017, and corresponding Section of the KSGST Act, 2017. The said Section provides that the events mentioned therein from sub-section 1(a) to (d) constitute supply of goods or services or both. The events mentioned from sub-section 1(a) to (d) are not the only events that constitute Supply as evident from the usage of the term includes mentioned in sub-section 1. Further sub-section (d) provides that activities mentioned in Schedule II are to be treated as supply of goods or supply of services. 12.2 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as brand fee and business surplus/business profit. 14.3 There is a scope of supply of goods or services at three distinct places in this arrangement. The most evident scope of supply is the finished product sold by the CBUs. However as the product sold is alcoholic beverage for human consumption the same is beyond the scope of levy of GST as provided in Section 9(1) of the CGST Act,2017. The second event generating the scope for supply of service relates to the manufacturing activity undertaken by the CBUs. Here the CBUs undertake the manufacturing activity on behalf of the applicant. However the activity falls short of the scope of supply of service as discussed while answering the first question. The third and relevant event is the act of the applicant amounting to providing the specifications of the products to be manufactured by CBUs and also the right to the CBUs to affix their brands on the products so manufactured. 14.4 We proceed to examine the third event mentioned in para 14.3 in further detail. The applicant provides the technical know-how and supervision of various activities to enable the CBUs to achieve the desired results. It has been admitted by the applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, the expression supply includes- ..... The word includes signifies that activities beyond those mentioned from (a) to (d) may also constitute supply a supply. Therefore the scope of supply of service is not restricted to just those mentioned in Schedule II. The applicant concentrated their attention only on Schedule II. When the facts in this para are read in harmony with those of Para 14.5 it becomes evident that the applicant is engaged in supply of service which is not covered under Schedule II. The fact that the supply of service is not covered under Schedule II does not imply that there is no supply of service and that GST is not chargeable thereupon. In this regard we examine the provisions of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and the Annexure to the Notification. 14.7 The Notification applies All Services . It therefore applies to the present context because it has been held that the applicant is indeed engaged in supply of service to the CBUs. Now the question is the classification of the Service under appropriate Chapter or Heading. The Annexure to the Notification provides the scheme of services. This classification of various servi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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