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Dr. Sanjiv Agarwal, FCA, FCS

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Liquor manufacture in India is very complicated with very few cases where brand owner, distiller and bottler are the same entity. Since license for distilleries are highly regulated by the State, brand owners get the liquor manufactured / bottled through on license lease basis which  could be either by leasing of the distillery or factory (immovable  property) itself or leasing of liquor license. Such liquor licensing is regulated by state excise laws and liquor manufacturing rules as made applicable to the State.

When we talk of renting or leasing services, we find that renting of immovable property is a taxable event and such renting or leasing of factory, plant etc would be liable to goods and services tax (service tax in pre-GST era). There could also be a case where factory is not leased but only liquor license is leased on a basis where consideration may be determined on lump-sum basis or production or sale basis or any other mode (say, on variable royalty basis). There may even be leasing of both in same example but if that be the case, both leasing transactions would take colour of different transactions leading to different set of risks and rewards and as such different tax treatment also.

In one of such cases, in Konkan Agro Marine Industries Pvt. Ltd. v. CCE, Customs & Service Tax, Aurangabad (2018) 9 GSTL 296 (Cestat, Mumbai), where both were leased, i.e. factory premises as well as license of potable liquor and rectified spirits, revenue department wanted that factory leasing and license leasing should not be delinked and sought to tax both as renting of immovable property service, the tribunal (Cestat, Mumbai) ruled in favour of the assessee and against the department.

The appellants were engaged in the business of manufacturing and bottling of alcoholic beverages. The appellants held Potable Liquor License (PLL) and Rectified Sprit License (RSII). The appellants entered into an agreement under which the appellants leased their licenses. The appellants thereafter entered into an agreement for bottling at their plant and recovered bottling charges for the same.

Revenue’s argument was that there cannot be a license without the premises in the provisions of Maharashtra Distillation of Spirit and Manufacture of Potable Liquor Rules, 1966. The licenses lease along with the factory as license by itself is not value. Potable Liquor License (PLL) is a license to manufacture and sell the noted varieties of liquor and the license gives permission only manufacture at the specified premises and nowhere else. The license is worthless without the factory which has been licensed.

It was held that ‘manufactory’ means that portion of a distillery premises which is set apart for the manufacture of potable liquor and includes a liquor room and every place therein from which such liquor is issued. Severe restrictions had been put on the factory, which had been licensed and no charges in the license premises could be made by the licensor without the permission.

It was further held that though license is granted in respect of manufactory but the same is granted to the person. The license given to a person in respect of a manufactory can be transferred to another manufactory on another site in the name of same person. License can be granted even before the manufactory comes into existence. From the Rules it was apparent that license by itself is not a immovable property and therefore leasing of license could not be treated as renting of immovable property service.

It thus concluded that license by itself is not immovable property and therefore, leasing of license can not be treated as renting of immovable property service. However, in order to have clarity and proper planning, it would be desirable to have proper agreements in place to mitigate tax burden. In GST regime, it is advisable to have separate agreements to avoid mixed or composite supply of services. License leasing may be treated as IPR service if so designed.

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July 2024