In re United Breweries Limited (GST AAAR Karnataka)
The AAAR modified the ruling rendered by the AAR is as under: –
(a) The activity engaged in by the Appellant by way of granting the Central Brewing Unit the 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 2017, read with Clause 5(c) of the Schedule II of the said Act.
(b) The supply of service by the Appellant is taxable to GST in terms of Section 9 of the CGST Act.
(c ) The service supplied by the appellant is classified under the Service Code 999799 as “other services nowhere else classified”
(d) The amounts received by the appellant from the contract brewing 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%.
Also Read AAR Ruling- Brand Owner liable to pay GST on Profit earned by allowing brand use
FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING, KARNATAKA
At the outset, we would like to make it clear that the provisions of both the Central Goods and Service Tax Act, 2017 and the Karnataka Goods and Service Tax Act, 2017 (hereinafter referred to as CGST Act, 2017 and KGST Act, 2017) are identical, except in certain provisions. As such, unless a mention is made specifically to any such dissimilar provision, a reference to the CGST Act would also mean a reference to the corresponding similar provision under the KGST Act.
The present appeal has been filed under Section 100 of CGST Act, 2017 and the KGST Act, 2017 by M/s.United Breweries Limited (hereinafter referred to as ‘Appellant’) against Advance Ruling No. KAR ADRG 09/2018 dated 29.06.2018 pronounced by the Karnataka Authority for Advance Ruling.
Brief facts of the case:-
1. The appellant is registered under GST with GSTIN No. 29AAACU6Q53CIZH 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 owrn; 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 turnover that is had from the sale of such beer in each period, the CBUs transfer the balance of amount from the total turnover to the Appellant.
3. The appellant filed an application on 10.01.2018 before the Karnataka Authority for Advance Ruling (hereinafter referred to as ‘Authority”) under Section 97 of CGST/KGST Act, 2017 read with Rule 104 of CGST/KGST Rules.2017 in form GST ARA-01, seeking a ruling on the following:
a. Whether, 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 would be considered as supply of services and whether GST is payable by the CBUs on the profit earned out of such manufacturing activity?
b. Whether, GST is payable by the Brand Owner on the “Surplus Profit” transferred by the CBU to Brand Owner out of such manufacturing activity?
4. The appellant made elaborate submissions before the Authority that they are in the business of manufacture and sale of beer under brand owned by them. They also have manufacturing arrangement with CBUs; that the CBUs procure the required material and manufacture beer according to the specifications of the Appellant, label them with brand owned by Appellant and sell the final product as per the State excise laws. In order to ensure the quality and standard of the beer the manufacturing process is supervised by personnel deputed by the Appellant to work with the CBUs.
5. After realization of the Sale proceeds from the sale of beer made so, the CBUs pay all the statutory levies and taxes. Besides this the CBUs retain the manufacturing cost, the manufacturing and distribution overheads and its portion of net profit. The balance of the sale proceeds, after the CBUs have apportioned part of the proceeds as enumerated above, is transferred to the Appellant as surplusyprofit earned by the brand owner.
6. The contract manufacturing arrangement empowers the CBUs to use the brand name of the Appellant for the limited purpose of facilitating manufacture of Appellant’s own brands of beer and this usage is in accordance with Section 48(2) of Trademark Act.
7. The Appellants submitted that the levy of service tax in relation to the activity of production/process of alcoholic liquor for or on behalf 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 (bottling/job charges, distribution costs and other re-imbursubles.
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. Whether, such amount is paid by BO or by CBU, they have no nexus with the provisions of service. As such these levies will not be included for charging service tax.
4. Similarly, the surplus/profit earned by the BO being in the name of Business Profit (which falls within the purview of direct taxes) will not be chargeable to service tax.
9. Further, the Appellant submitted before the Authority that during the period 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 Appellant towards agreed expenses.
10. Further, the appellant had cited past litigations (pre-GST period) before the Authority, in respect of the matter regarding taxability at the hands of the BO in respect of the amount received by them from the CBUs; that even though CBEC had clarified that there was no service provided by the brand owner to the CBUs by permitting use of brand name, the field formation of service tax administrations held that the activity amounted to provision of Intellectual Property Service and charged service tax thereon. The brand owner contested the issue and the Tribunal, relying on the aforementioned CBEC Circular dated 30.10.2009 held that the said activity was not liable to Service Tax.
11. The appellant also discussed before the Authority, an adjudication order passed in their own case wherein the adjudicating authority held that Service Tax was payable on the amount accounted by them as ‘Brand Fee’ under Intellectual Property Service. In respect of activity of permitting the CBU to use Brand Name, the Appellant drew reference to the decision taken in the case of BDA Pvt Ltd reported in 2014(35)STR570(DeI)- the decision in case of BDA Pvt Ltd. was upheld by the Apex Court as reported in 2016(42)STRJ 143(SC).
12. Further, the Appellant presented that in the GST regime, post 01.07.2017, alcoholic liquor for human consumptions has been kept out of the levy of GST. With respect to the manufacturing activity carried out by the CBUs the levy of GST would arise only on the activity of ‘treatment or process which is applied to another persons’ goods as per Schedule II to the CGST Act, 2017. They further submitted that since 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 (SI.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 (29) STR 9(Tri), Radico Khaitan Limited reported in 2016(44) STR133(Tri) and BDA Pvt Ltd reported in 2014(35) STR570(Tri) which was later upheld by the Hon’ble Supreme Court as reported in 2016(42) STR J143(SC) 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 appellant has further stated that there has been no change in the law during the GST regime as compared to the law existing during the prior period for which the issue was decided by the Supreme Court. Consequently, the ratio of the judgments applies to the present law and therefore they are not liable to pay GST on the surplus profit earned by Appellant.
15. On a detailed examination of the issue, the Authority, vide Advance Ruling No.KAR ADRG 09/2018, dated 28.06.2018 (hereinafter referred to as ‘Impugned Order) made the following observations:
a. 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 CBU’s as their profit.
b. GST is payable by the Brand Owner(UBL) 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(Tarrif)999799 and liable to GST at 18% (CGST- 9%, SGST- 9%) on the amount received from the CBU’s.
16. Being aggrieved by the above mentioned Ruling of the Authority (hereinafter referred to as ‘Impugned Order’), an appeal was preferred before Appellate Authority for Advance Ruling on 26.07.2018 on following grounds:
i. The appellant submitted that in the impugned order, AAR has held that the GST is payable by the Brand Owner (Appellant) 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 GST at 18% (CGST-9% & SGST-9%) on the amount received from the CBUs.
ii. The Authority 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.
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 lax 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 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; 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.
vii. In view of the above grounds, the appellant have filed this appeal.
Personal Hearing:-
17. The Appellant was called for a personal hearing before the AAAR on 28.08.2018 but they sought for an adjournment which was allowed by the AAAR. Another hearing was fixed on 25.09.2018 and the Appellant was represented by Mr.Shivadass, Advocate who made detailed submissions before the Appellate Authority. It was made clear that the clarification given by the Authority pertaining to the levy of GST on the activities of the CBU was accepted by the Appellant and is not a subject matter of challenge in the present appeal. The Advocate for the Appellant explained in detail the business model of the Appellant and took the Members through the various clauses of the agreements entered into with the CBUs to drive home the point that the amount which comes to the Appellant (UBL) is a sharing of profit and not a consideration for rendering any service. It was submitted that in order to levy GST there has to be a conscious supply of service by the Appellant and not a default supply of service as held by the Authority; that in their case there is no ‘supply’ per se as defined under Section 7 of the CGST Act; that it is not there case that there is a supply by the Appellant to the CBUs but the said supply is part of the negative list or exemption notification and therefore not chargeable to GST. The Appellant made written submissions during the time of the personal hearing and also submitted additional written submissions on 28.09.2018.
18. In the written submissions, they submitted that for anything to constitute a supply in terms of Section 7 of the CGST Act, it must necessarily be demonstrated that there has been a supply of goods or services, there must be a consideration for such supply and the supply should be in the 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 the trademark/brands owned by it to the CBUs either and the impugned order itself holds that the Appellant is not providing any services relating to intellectual property owned by it to the CBUs. They submitted that one of the mandatory pre-requisites of ‘supply’ is consideration which in itself covers two aspects viz., that there ought to be payment by the recipient to the supplier and that such payment ought to be in respect of, in response to or for the inducement of the supply in question; that in their case, the arrangement between the CBU and the Appellant is such that all proceeds from the sale of beer by CBUs would be deposited in a bank account jointly operated by the Appellant and the CBUs: that from such account the operational costs of the CBU would be serviced and the surplus remaining after deducting the manufacturing cost incurred is nothing but profit earned by the Appellant, which would be transferred to the Appellant: that the arrangement does not involve any payment of money by the CBU from its pocket/share to the Appellant; that the surplus profit belongs to the Appellant itself to begin with and appropriation of the Appellant’s own money to itself cannot take the character of consideration: that this was clearly clarified by the CBIC vide Circular dated 30.10.2009 in relation to service tax wherein it was clarified that the surplus profit earned by the brand owner being in the nature of business profit (which falls within the purview of direct taxes) will not be chargeable to service tax.
20. They reiterated that for any payment of money to amount to consideration, it should be directly relatable to the supply of service or goods; that in the present case, the Authority has held that there is no supply of goods from the Appellant to the CBUs then it is logical to assume that there might be a service which is provided by the Appellant to the CBUs; that the line of reasoning by the Authority that, even though the present arrangement is not covered under Section 7(1 )(a) to Section 7(1 )(d) of the CGST Act, even activities which do not fit within the aforesaid clauses would be in the nature of supply is erroneous and the ruling is to be set aside on this ground.
21. In order to clarify certain queries raised by the Members during the personal hearing, the Appellant made additional written submissions vide letter dated 28.09.2018 wherein they 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 home by the Company and is not recovered from the CBUs; that the representational right for manufacture and supply merely enables the CBU to affix the brand logo of the Company on the bottles of beer manufactured by the CBU; that it does not authorize the CBU to exploit the brand for its own business or interest. Therefore, there is no supply in relation to the brand either.
22. They submitted that ‘consideration’ has been defined under the CGST Act 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: that there must be a conceivable correlation between the supply and the payment; that unless an actual link is established between a payment and any supply of goods or service, the payment will not assume the character of consideration; that in the present case, ‘surplus profit’ by no stretch of imagination can be said to be fining within the definition of ‘consideration’ for the reason that the surplus reimbursed to the Company varies from month to month and is also ‘NIL’ in certain months, even though the activities performed remain constant: that when the activities remain constant but the surplus paid to the Company varies or no surplus flows to the Company, it can be said that the surplus profit has no correlation with the activities in question; that if the surplus profit was to be treated as consideration for the activities undertaken by the Company then there would not be any month where no amount is paid by the CBU to the Company. To substantiate the above arguments, they relied on the Service Tax Education Guide dated 19.06.2012 and the Supreme Court’s decisions in the case of UOI vs Intercontinental Consultants and Technocrats Pvt Ltd reported at 2018 (10) GSTL 401 (SC) and Commissioner of Service Tax vs Bhyana Builders (P) Ltd reported at 2018 (10) GSTL 118 (SC). In view of the above, they submitted that the surplus profit received by the Company can in no way be said to be ‘consideration’ received by the Company and therefore the question of levy of GST on the said amount does not arise.
DISCUSSION AND FINDINGS:
23. We have gone through the records in detail and have taken into consideration the submissions made by the Appellant in writing as well as the detailed arguments made by their Advocate during the personal hearing.
24. To frame the matters that lie for a decision before us, the 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 CBUs and the process of making beer followed by the CBUs are within the standards commensurate with the brand image of the Appellant, the Appellant deputes a Process Executive, Commercial Executive and other key personnel to the CBU’s brewery to guide the procurement of raw material, supervise the manufacturing process and packaging of finished goods. As per the agreement, the CBU makes a specified quantity of beer per annum that it has been mutually agreed to and which it then causes to be sold in the market ultimately, through the Government corporations/or in wholesale depending on State market regulations. The Appellant has permitted the CBUs to use its labels for branding of its beer for sale pursuant to the terms of the agreement and such representational right is granted only for making and supply of beer but for no other purpose.
26. As per the agreement, the CBUs shall pay a brand fee of Rs 5/- per case to the Appellant in consideration of the representational right to make and supply the beer to the market under labels granted by the Appellant. The beer so manufactured by the CBUs are disposed off to State Beverages Corporation/State regulated depots or to the Wholesalers / Indenters holding necessary permits / licences under the relevant Excise laws of the State. All proceeds from sale of the beer are to be deposited in a bank account, jointly operated by the two parties. This jointly operated bank account exclusively holds the proceeds of such sale as are had from the sale of beer produced under the above arrangement. The operational cost incurred by the CBU is serviced from this account and the balance amounts which remain are to be made over towards the reimbursement of expenses incurred by the brand owner (Appellant) by being transferred to the account of the Appellant. The amount towards such reimbursement of expenses incurred by the Appellant is arrived at as under:
