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TMI Blog2018 (11) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... KARNATAKA pronounced by the Karnataka Authority for Advance Ruling. Brief facts of the case:- 1. The appellant is registered under GST with GSTIN No. 29AAACU6053CIZH and is engaged in manufacture and supply of beer under various -brand names. The appellant, apart from manufacturing beer on its own, also has an arrangement with contract brewing/bottling units (hereinafter referred to as the 'CBU') who make the brands of beer belonging to the appellant and Supply such beer to market. CBUs in making the beer brands owned by the Appellant, procure the raw materials, packaging materials, incur Overheads and other manufacturing costs etc, on their own; and the beer they make is sold by them directly to Government Corporations/ in wholesale depending on the state market regulation. 2. The CBUs, upon the sale of such goods, pay the statutory levies and taxes. The CBUs further account for all the manufacturing cost and distribution overheads in their books of account since it is they who procured all resources for the manufacture -of the beer. Further, CBUs retain a certain amount of profit. After accounting all these revenues and deducting the part of their share from the total tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the brand owners like the Appellant commenced on 01.09.2009 under Business Auxiliary Service and continued up to 30.06.2012, They further state that thereafter, w.e.f 01.07.2012 the activity of production of or process amounting to manufacture was covered under Section 66D (Negative List), implying that the activity undertaken by the CBU went out of the purview of Service Tax. The statute was yet again amended and the process undertaken by the CBUs once again came under the purview of Service Tax w.e.f. 01.06.2015. 8. During the alternating periods when this arrangement of manufacturing at the hands of CBUs was taxable, the then CBEC issued clarificatory Circular F.No.332/17/2009-TRU dated 30.10.2009 to tide over issues related to valuation and taxability which reads as follows: 1. Service Tax would be payable on the bottling/job charges, distribution costs and other re-imbursables. 2. Service Tax on the value of raw materials and packaging materials would be exempt only when such charges are specifically mentioned in the invoice raised/documents maintained by the CBU. 3. Statutory levies, namely Excise Duty/VAT, do not present any 'consideration' for rendering the service. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the CBUs procure the materials on their own account and are not applying any treatment or process on the goods belonging to the Appellant, GST would not be applicable on the activity. In respect of the income earned by the brand owner, they submitted that the CBEC had already clarified that there is no service from the brand owner. 13. Before the Authority, the Appellant also drew attention to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 to drive home the point that the activity of manufacture would amount to supply of service only if manufacturing is carried out on physical inputs(goods) owned by others (Sl.No.26 of the Notf). In their case, since the CBUs manufacture beer out of raw materials physically procured by them, the activity of manufacture of beer of Appellant's brand does not amount to supply of service by the CBUs to the Appellant and therefore GST is not payable in respect of the amount retained in the hands of the CBUs. 14. Further, in respect of question-2, Appellant has argued its case by citing several case laws in favour of their arguments before the Authority, viz. Tribunal's decision in the cases of M/s. Skol Breweries Ltd reported in 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ariff) 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 CBC's in the first place. iii. The appellant submitted 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. iv. The appellant submitted 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. v. The Authority erred in holding that there was a supply of service under Central/State Goods and Service Tax Act,2017, 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. vi. The Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of or furtherance of business. They submitted that in the present arrangement, the Appellant has no occasion to supply any goods or services to the CBUs as the arrangement merely requires the CBUs to undertake the activity of manufacturing beer using their already established, functional distilleries for which the CBUs hold a licence. Further, as the beer manufactured by the CBU is the Appellants branded beer, it is in the Appellant's own interest to ensure that the quality standards of the raw material procured by the CBUs and the manufacturing process followed by the CBUs are within standards commensurate with the brand image of the Appellant. For this purpose, the Appellant deputes a process executive, commercial executive and other key personnel as may be required by it to the CBU's brewery to guide the procurement of raw material, supervise the manufacturing process and packaging of finished goods; that the true intent of such supervision is only in the interest of the Appellant's own business and not an activity for the CBUs; that therefore, the question of supply of service does not arise. 19. They further submitted that the Appellant does not provide any right on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey inter alia stated that the following activities are performed by the Company in terms of the agreement with the CBUs, viz: a) Allow the CBUs the representational right for manufacture and supply of beer under labels specified in the Agreement. b) Prescribe process parameters and specifications through process executive appointed by the Company, c) Depute a Process Executive for inspection of the brewery, laboratory and advise on processing and quality control of beer produced for and on behalf of the Company. d) Depute a Commercial Executive for procurement of raw materials, packaging materials and such other materials. They submitted that the above activities are undertaken in the interest of its own business and not for the CBUs; in other words, these supervisory activities are undertaken by the Company to ensure that the manufacturing undertaken by the CBUs is of the desired quality of beer so as to ensure the business of the Company and its brand image is not compromised; that the cost incurred in appointing these executives is borne by the Company and is not recovered from the CBUs; that the representational right for manufacture and supply merely enables the CBU to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts are briefly summarized hereunder: The Appellant, M/s. United Breweries Ltd has held itself out as being engaged in the manufacture and supply of beer under various brand names. Apart from manufacturing beer on its own, and for different commercial and economic considerations, the Appellant enters into agreements with other brewing units (called Contract Brewing Units, CBUs), who have their own bottling plants and the necessary licences to manufacture and supply beer. In terms of the agreement with the CBUs, the Appellant permits its brands to be used by Contract Brewing Units who manufacture and sell beer under the Appellant's brands directly to Government corporations/or in wholesale depending on State market regulations. 25. Under the agreement, CBUs manufacture beer by procuring raw materials, packaging materials, incurring overheads and other manufacturing costs. The CBUs undertake the activity of making the beer using their already established functional distilleries for Which the CBUs also hold a licence to operate. As the beer manufactured by the CBUs bears the Appellant's brand, in order to ensure that the quality standards of the raw material procured by the CBU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? b) 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? 28. On the first question, 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. On the second question. the Authority ruled that GST is payable by the Brand Owner (UBL) on what has been termed as the 'surplus profit' transferred by the CBU to the brand owner out of the manufacturing activity since the said amount is received as a Consideration for rendering a service. The Authority has classified the service rendered by the Appellant under S A Code 999799 as "Other services nowhere else classified" and held that the rate of GST payable on such amount transferred from the CBUs is 18%. It is on this latter issue that the present appeal has been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. (2) Notwithstanding anything contained in sub-section (1),-- (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services. (3) Subject to the provisions of sub-sections (1), and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as- (a) a supply of goods and not as a supply of services; or (b) a supply of services and not as a supply of goods. The word 'includes' in Section 7 (1) of the CGST Act, gives a wider meaning to the words or phrases in the Statute. The word includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les viz. (i) Certain activities have been termed as a 'Supply' even when they are made Without a consideration. Such supplies have been listed in Schedule I to the CGST Act; and (ii) Certain activities, even when made for a Consideration, have been termed as not a supply of either goods or services and thus kept outside the scope of levy of GST. These activities have been listed in Schedule III of the CGST Act. The CGST Act 2017 in CHAPTER III dealing with LEVY AND COLLECFION OF TAX lays down in Section 9: 9. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person. (2) The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services tax" means any tax oh supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;'; (ii) after clause (26), the following clauses shall be inserted, namely:- '(26A) "Services" means anything other than goods, (26B) "Stare With reference to articles 246A, 268, 269, 269A and article 279A includes a Union territory with Legislature;'; 32. We also take note of the decision in Gursahai Saigal vs. CIT 48 ITR (SC) 1 =1962 (8) TMI 66 - SUPREME COURT, wherein it has been held that those sections which impose the charge or levy should be strictly construed; but those which deal merely with the machinery of assessment and collection should not be subjected to a rigorous construction but should be construed in a way that makes the machinery workable. In proceeding to apply the above principles to the instant case to determine whether the activity undertaken by the Appellant qualifies as a 'supply' within the Scope of Section 7 of the CGST Act, we have gone through the actual Brewing and Distribution Agreement entered into by the Appellant with M/s. Master (India) Brewing Company. The Appellant has also submitted copies of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erials used in the manufacture of beer. 4. Confidentiality 4.6 All know-how acquired by Brewer under the terms of this Agreement and any improvement in the specifications made by Brewer relating to the production and packaging of UBL's beer shall remain the sole property of UBL and shall be used by Brewer only in accordance with the provisions of this agreement. 5. Production 5.1 Brewer shall brew, bottle, package and Store UBL beer. 5.1.1 In conformity with the brew specifications provided by the Process Executive of UBL from time to time, including usage if all ingredients, raw materials, brew specifications, methods and quality parameters laid down by the Process Executive under the supervision of UBI„ UBL will provide it's own yeast, if necessary, and the brewer will propagate and store this yeast separately, solely for the use of UBL brands. 5.4. The Process Executive deputed by UBL may take samples of UBI,'s beer free of cost as and when required by UBL for analytical and quality tests and advise such changes in the brew from time to time. 5.6. Brewer shall label and package UBL beer as per directions and/or specifications of UBL Bottles, cans and other containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se who are authorised to purchase ideal in beer in terms of the relevant regulations. The brewer will make the beer in strict conformity to the brew specifications and quality parameters laid down by the Appellant. In order to make the UBL beer, the brewer procurers the raw material, packaging material and other materials, at their own cost. The UBL beer is made by the brewer in his own distillery using his own equipment. The proceeds from the sale of the UBL beer are used by the brewer to cover his Operational costs like purchase of raw materials, packaging materials, consumables, bottle cost, cost on account of energy consumption and his profit. 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, the terms of which have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore. it is evident that the Appellant receives two kinds of amount from the Brewer in terms of the Agreement. a) One is the Brand Fee which is fixed at Rs. 5 per case, and b) 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. 37. The question on which a ruling was sought from the Authority was whether, GST is payable on both the amounts received by UBL i.e Brand Fee of Rs. 5/- per case and on the Component 'W'. The ruling held in the affirmative in respect of both the amounts treating both of them as 'Surplus Profit'. The reasoning adopted by the Authority is that the amounts received by UBL is for an act which is either a supply of goods or a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell branded beer is ä 'supply' by the Appellant, in terms of Section 7 of the CGST Act. As already stated in Para 31 above, for an activity to qualify as "supply", following conditions are to be fulfilled: (i) The activity has to involve 'goods' or 'services' or both; (ii) The activity should be undertaken for a consideration; (iii) The activity should be in course or furtherance of business 39. The term 'Goods' has been defined in Section 2 (52) of the CGST Act, to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply". The term 'Services' has been defined in Section 2(102) of the said Act to mean "anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a Separate consideration is charged." Given the above definitions, in the instant case, the Brand Fee will clearly not be categorised as 'goods'. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 40. In terms of Section 7(1) of the CGST Act, 'supply' also includes within its scope, the activities referred to in Schedule II of the Act which have been categorised as either a supply of goods or a supply of service. Clause 5(c) of the said Schedule II, refers to "temporary transfer or permitting the use or enjoyment of any intellectual property right" as a supply of service. The phrase "in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2018, they stated that, "it becomes evident that the applicant is engaged in supply of service which is not covered under Schedule ll." We hold that 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. 42. In return for rendering the service of providing the right to manufacture and supply branded beer to the Brewer along with the right to use the Trademarks and Labels, the Appellant gets a consideration which comprises of a Brand Fee of Rs. 5 per case as well as a reimbursement of expenses, The quantum of reimbursement (denoted as W in the Agreement) is dependent on the surplus profit available at the hands of the Brewer. Section 2(31) of the CGST Act defines 'consideration' in relation to the supply of goods or services as "any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and sell its branded beer. This expenditure incurred is in connection with according the representational rights for the manufacture and sale of branded beer to the CBUs. We have already held in the preceeding paras, that the Appellants have rendered a service to the Brewer which is categorised as a 'supply' taxable to GST. In connection with rendering the taxable service, the Appellants have incurred expenditure which is being reimbursed by the Brewer out of his surplus profit. In other words, the reimbursement of expenses by the Brewer to the Appellant is a form of payment made in connection with a service of permitting the CBUs to use the intellectual property rights as well as providing other services as laid out in their agreement. The total consideration given to the Appellant by the Brewer in terms of the Agreement, for this service rendered by the Appellant, is- comprised of two components and quantified as a fixed amount of Rs. 5 per case (Brand Fee) and any surplus remaining with the Brewer. Therefore, we are of the view that the component 'W' also forms a part of the consideration received by the Appellant for supply of service. This component 'W' therefore, is also l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge the price from the notified Indenter of the appellant as fixed by the appellant. Taking these facts into consideration, the Tribunal held that no services have been provided by the appellant to FIPL. The facts in the instant case are not identical and hence this case cannot be relied upon. b) BDA Pvt Ltd vs Commissioner of C.Ex, Meerut reported in 2015 (40) STR 352 (Tri-Dei) = 2015 (6) TMI 586 - CESTAT NEW DELHI : The facts in this case are that the appellant (BDA) gets IMFL manufactured by M/s. Pilkhani (CBU) on job work basis; as per the agreement, the cost of raw material and other expenses were either paid by the appellant or reimbursed by the appellant; the State levies such as excise levy or taxes were also reimbursed to M/s. Pilkhani by the appellant; the IMFL was sold by or as per the directions of the appellant ; profit/loss on account of the manufacturing and sale of IMFL is entirely on account of appellant who holds the property risk and reward of the product. The Tribunal held that since the CBU received a consideration for manufacture on job work basis, the appellant is not required to pay service tax. In terms of the CGST Act 2017, Section 2 (68) defines "job ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CBEC to hold that no ser-vice tax was to be paid by the brand owner. In the two Circulars mentioned above, the factual matrix was that the CBUs were job workers for the brand owners and rendering service to the brand owners and the CBUs were required to pay service tax on the service rendered by them to the brand owners. These Circulars do not have any relevance to the instant case as the question is whether the brand owner (the Appellant in this case) has rendered any service to the CBU and whether GST is required to be paid by the brand owner. 45. Thus, the different cases cited by the Appellant in support of its contentions may be applicable to the definitions, to what were the objects of taxation in the existing laws - each of such objects of taxation in the existing laws, covers only partially, at best, the idea of what is sought to be taxed as supply in GST. In view of the above, the reliance placed by the Appellant on the decisions taken by the High Court and the Tribunals in the pre-GST scenario will not come to their assistance in deciding their liability under GST. The concept of GST is based on the taxable event of 'supply'. We have already observed that there ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognise that in each tax period, the manner of determination of 'W' as it has been laid down in the Contract with CBUs would likely make it a variable for each tax period. Since, the activity which the Appellant engages in with respect to contract does not essentially change, but 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, However, this aspect is limited the issue of the SAC alone and that too when one proposes to generalise the classification across all tax periods- within one particular tax period, it may still be possible to have a determinate 'W' which could help in applying the predominancy test. At the moment though, we note that there is a standard rate of which applies across the whole range of services that are taxed under GST. However, this fact of having one predominant 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 categorising such services unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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