In Re : M/s United Breweries Limited
GST
2018 (7) TMI 835 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – 2018 (14) G. S. T. L. 546 (A. A. R. – GST), [2018] 2 GSTL (AAR) 112 (AAR), [2019] 67 G S.T.R. 83 (AAR)
AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – AAR
Dated:- 29-6-2018
Advance Ruling No. KAR ADRG 09/2018
GST
Mr. Harish Dharnia. Member And Dr. Ravi Prasad M.P, Member
For The Represented : Sri K S Ramesh, Advocate, Sri. Govind Iyengar, Sr. Vice President, Legar & Secretarial, UBL & Sri Venkatesh, Authorised Representatives
RULING
M/s United Breweries Limited, 20th Mile, Tumkur Road, Nelamangala, Bangalore Rural, Karnataka – 562 123, having correspondence address at UB City, UB Tower, 4th Floor, 24, Vittal Mallya Road, Bengaluru – 560 001 (herein after referred to as 'UBL' / 'Applicant') having GSTIN number 29AAACU6053C1ZH, have filed an application, on 10.01.2018, for advance ruling under Section 97 of CGST Act,2017, KGST Act, 2017 & IGST Act, 2017 read with ru
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
d 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 Contract Brewing Units (CBUs) 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 the Brand Owner out of such manufacturing activity?
5. The 'Statement of Facts' enclosed as Annexure -2 to the application reveals as follows:
5.1 UBL is in the bus
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
se the brand name of UBL for the limited purpose of facilitating manufacture of UBL owned brands of beer by the CBUs and this usage is in accordance with Section 48(2) of Trademark Act.
5.4 UBL has further trailed the levy of service tax in relation to the activity of production/process of alcoholic liquor for or on behalf of brand owners like UBL commencing on 01.09.2009. This levy of service tax under Business Auxiliary Service continued up to 30.06.2012. Thereafter with effect from 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 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 clarifica
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
at the hands of UBL in respect of the amount received by them from the CBUs. It is stated the even though the CBEC had clarified that there was no service provided by the brand owner to the CBUs by permitting use of brand name, the filed formation of Service Tax administrations held out that the activity amounted to provision of intellectual property service and charged service tax thereon. The brand owners contested the issue and finally the Tribunals, relying of the aforementioned CBEC Circular dated 30.10.2009, held that the said activity was not liable to Service Tax.
5.7 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. UBL has further based their challenge in the matter on the basis of decision by Tribunal in the case of BDA Pvt. Ltd report
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
d for Ruling on both the issues.
6. In Annexure-3 of the application comprising of 'Statement containing the applicant's interpretation of law and facts', the applicant has more or less reiterated the contents of Annexure-2.
6.1 Additionally, the applicant has drawn attention to Notification 11/2017 Central Tax (Rate) dated 28.06.2017 to further drive home the assertion 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 th
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ategory of IPR service. The applicant 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 them.
7. The applicant and their representatives appeared before the Authority on 30.01.2018 and thereafter again on 09.02.2018. All the narrations made in their application and both the Annexures were reiterated during the hearing. The representatives also submitted the following records for consideration in the matter:-
(a) Brewing and Distribution Agreements between UBL and,-
(i) Master (India) Brewing Company
(ii) CMJ Breweries Private Ltd.
(iii) Mount Everest Breweries Ltd
(iv) Denzong Albrew Private Ltd
(b) Technical know-how agreements between UBL and M/s Baba Loknath Glass Industries and Pacific Pa
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
rst 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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ry and advice on processing and quality control
(v) UBL may also depute commercial executive to guide the procurement of raw materials, packing material etc.
(vi) Master (India) will not obtain any commercial advantage from the process information available to them
(vii) Master (India) will pay a brand fee of Rs. 5 per case as consideration for the representational right for manufacture and supply of beer under UBL Labels
(viii) the proceeds from the sale of the beer would be remitted in a joint account. This account will be used to service the operational costs (raw material, PM, other consumables, bottle cost and retention for energy and fixed costs by brewer). The surplus will be transferred to UBL.
(ix) representational rights in terms of use of the trademark are also earmarked allowing the brewer to only affix the marks and labels and sell the beer. The rights over the trademark remain UBL.
(x) UBL shall be responsible for physical/financial injury, loss or damage aris
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
es 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 possession of the intellectual property associated with their brands of beer.
9.2 The breweries, like Master (India), CMJ Breweries etc, are entities which have the licences and infrastructure to manufacture beer.
9.3 The scheme of the agreements provides that UBL would provide the techni
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
tion or expiry then UBL would be entitled to take over all the unused labels, unfinished goods, semi finished goods in process at landed cost. Further unsold finished goods would be lifted by UBL at ex-brewery price and UBL shall make payment to the brewery as per the agreement.
Discussions and Rulings
10. The first question for discussion and Ruling in the matter is:-
Whether beer bearing brand/s owned by M/s United Breweries Limited (Brand Owner/UBL) manufactured by Contract Brewing Units (CBUs) 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?
10.1 Section 9(1) of the CGST Act, 2017, and Section 9(1) of the Karnataka GST Act, 2017 and Section 5(1) of the IGST Act, 2017 provide for levy of CGST, SGST and IGST respec
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
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 is the relevant entry in the matter. The entry reads as follows
Any treatment or process which is applied to another persons' goods is a supply of service.
Therefore in the realm of undertaking any manufacturing activity under an agreement, the manufacturer would supply service to the other registered person only in the event of the said registered person supplying goods to the manufacturer to work upon them. In other words the manufacturer would not be purchasing and accounting the goods in their account books.
10.5 Furthermore it would be relevant in this context to examine the provisions of Notification 11/2017 Central Tax (Rate) dated 28.06.2017 as well as the scheme of classification of services enume
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
he goods worked upon should be supplied by a registered person to the manufacturer. Therefore to determine whether the activity undertaken by the CBUs falls under Heading 9988 or not we need to see whether the raw material is supplied by the applicant or not.
10.6 In this regard we once again visit the observation made in Para 8 and 9 above. 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. 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
d Ruling in the matter is:
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?
11.1 The applicant is the owner of brands of beer. Under the afore-discussed agreements the applicant permits the CBUs to manufacture beer according to their specifications, label them with the brands of the applicant and then sell them as per the State excise laws. The clause related to 'Reimbursement' at Para 8 of the agreement provides as follows:
8. Reimbursement
Balance due towards reimbursement of expenses incurred by the brand owner is arrived at as under
Turnover of the brewer &
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
nbsp; (Rs/case)
(X) Less:Variable cost incurred(Raw material, PM & other consumables)
(Y) Less: Bottle cost (at prevailing market rates)
(Z) Less: Retention for energy & fixed cost by brewer (73)
Balance payable to UBL as Brand Fee
(5) Remaining as reimbursement to UBL
(W) The retention on account of energy and other utilities will be Rs. 18/case and the remainder, on account of fixed cost and ROI on investments.
………
This provision in the agreement indicates that the applicant gets a brand fee in lieu of the permission granted to the CBU to utilize their brand. Further the surplus amount over and above the brand fee is taken as reimbursement or business surplus by the applicant. The question relates to the liability or otherwise of GST on this amount in the hands of the applicant received from the CBU after the deduction of all costs related to CBU.
11.2 The applicant has drawn extensively from the disputes related to the tax liability on t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
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 does not amount to transfer of right to use. The applicant has also drawn attention to decisions of Tribunal in the cases of M/s Skol Breweries Ltd reported in 2013(29) STR 9 (Tri), Radico Khaitan Ltd reported in 2016(44) sTr 133 (Tri) and BDA Pvt Ltd reported in 2014 (35) STR 570 (Tri).The decision in the case of BDA Pvt Ltd was maintained by the Supreme Court as reported in 2016 (42) STR J143 (SC) where it was ruled by the Supreme Court that
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
CBUs. The various orders to this effect were agitated before the Tribunals and it was finally held by the Tribunals that the brand owners were not providing any intellectual property right services to the CBUs. The amount accruing into the hands of the brand owners was held as business surplus or profit. The applicant discussed the orders of the Tribunal at length in their application as well as during the hearing. We have gone through all the Orders of the Tribunals and they support the contention of the applicant.
11.6 In the written rejoinder submitted by the applicant it is stressed that the amount in their hands represents the business profit (sale price of UBL beer to State owned corporations minus price payable to CBUs) earned by UBL, out of sale of beer. It is further added that CBUs are manufacturing alcoholic liquor only for and on behalf of the brand owner and they are not exploiting the brand names owned by UBL and thus there is no service in the nature of permitting the
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
. 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 The activities mentioned at serial number 5(c) of Schedule II have been discussed by the applicant as the relevant services. This entry in the Schedule provides that 'temporary transfer or permitting the use or enjoyment of any intellectual property right' constitutes supply of service. The applicant has argued that the erstwhile entry at Section 66E (c) of the Finance Act 1994 also reads exactly the same, meaning thereby that there has been no change in the GST regime on the issue.
12.3 Section 2(102) of the CGST Act, 2017 defines 'services' as 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. This provides that anythin
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
specifications to the manufacturer and also ensures that the CBUs buy raw materials as per their guidance and also manufacture the products under their supervision and to their exact specifications. The applicant then also gives the CBUs the authority to affix their brands on the products and then to sell them to the State Corporations.
14.2 The sale proceeds are utilized to first pay the CBUs the cost of the raw materials, bottling cost, energy charges and fixed retention charges. The balance amount accrues to the applicant 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
of the two, supply of goods or supply of service. Since there is evidently no supply of goods from the applicant to the CBUs it is beyond doubt that the amount received is on account of supply of service. Moreover 'service' means anything other than goods (as per Section 2(102) of the CGST Act, 2017). It is thus beyond doubt that the applicant is engaged in supply of service to the CBUs. for which money is received and called as brand fee and business surplus. The terminology employed apart, the fact remains that the applicant receives an amount on account of supply of a certain service. This amount can thus rightly be termed as a consideration. The nomenclature of the amount received as brand fee or business surplus or business profit does not alter the fact that it is a consideration that flows to the applicant.
14.5 The applicant has consistently held that their act of allowing the CBUs to affix their brand names on the products manufactured by them does not amount to supply of se
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ction 7 from (a) to (d) are not exhaustive. The applicant has failed to observe the expression '(1) For the purpose of this 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
