Goods and Services Tax – GST – By: – Dr. Sanjiv Agarwal – Dated:- 29-9-2018 Last Replied Date:- 15-11-2018 – Recent Advance Ruling on Taxability under GST The issue of whether: 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? and 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? recently came up before Authority for Advance Rulings, Karnataka on the application of M/s United Breweries Ltd. [ 2018 (7) TMI 835 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA ]. According to the facts, the Applicant was engaged
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d by the CBUs. 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 to themselves, is transferred to UBL as surplus/profit earned by the brand owner. The contract manufacturing arrangement empowers the CBUs to use 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. The scheme of the agreements provides that UBL would provide the technical knowhow to the breweries, including close supervision of procuring and manufacturing processes, and the breweries in turn would endeavour to manufacture beer of the requisite standards and sell the same as regulated by the State laws. The revenue sharing agreement stipulates that apart from the cost of the raw material, cost related to energy
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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 also retain a certain amount of profit. After accounting all these revenues the CBUs transfer the balance amount to the applicant. 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. 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
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eadings. Services related to manufacture appear in Section 8 under Heading 9988. The Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 at serial number 26, also 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. It was evident that the manufacturing activity carried out by the CBUs does not fall under the Heading 9989. In order that a manufacturing activity be covered under Heading 9988, it is necessary that the goods worked upon should be supplied by a registered person to the manufacturer. Therefore, to determine whether the activity undertaken by the CBUs falls u
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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. In view of this factual matrix, AAR concluded that 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 CBUs as their profit. On the question of taxing on the surplus profit transferred by the CBU to the brand owner arising out of manufacturing activity, it was observed that the applicant enters into a business agreement with the CBUs in the nature of a principal to principal arrangement. This arrangement calls upon the
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as at serial number 35 of the Notification. It was ruled that 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 (Tariff) 999799 and liable to pay GST at 18% ( CGST-9%, SGST-9%) on the amount received from the CBUs. – Reply By Prasanna Kumar – The Reply = The issues were dealt by you in your article NO GST ON CONTRACTUAL LIQUOR BOTTLING (PART-1).Since the manufacturing of beer doesnot fit into the definition of Job work under GST laws, the authorities cannot levy GST on this activity. RulingIt was ruled that since the applicant is engaged in supply of service and the service does not find mention at any other entry in the Classification table it has to be placed in the residual entry. The applicable rate of Central Tax is as at serial number 35 of the Notification.It was ruled that GST is payable by the Brand owner (UBL) on 'Sur
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