In Re: M/s. Allied Blenders And Distillers Private Limited
GST
2019 (3) TMI 537 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2019 (23) G. S. T. L. 353 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – AAR
Dated:- 15-12-2018
GST-ARA-67/2018-19/B-155
GST
SHRI B.V. BORHADE, AND SHRI B. TIMOTHY, (MEMBER)
PROCEEDINGS
(under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by ALLIED BLENDERS AND DISTILLERS PRIVATE LIMITED, the applicant, seeking an advance ruling in respect of the following issue.
Whether in the facts and circumstances of the present case, the Contract Bottling Unit is making a taxable supply to the Applicant (i.e. Brand Owner), or, alternatively, whether the
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eproduced verbatim, could be seen thus-
STATEMENT OF THE RELEVANT FACTS HAVING A BEARING ON THE QUESTIONS AS PROVIDED IN ANNEXURE 1
The following are the relevant facts in the context of the present ruling sought:
1. Allied Blenders and Distillers Pvt. Ltd. (“ABD” / “Applicant”) has its GST registered premises at 394/C, Lamington Chambers, Lamington Road, Mumbai – 400 004. The Applicants are duly registered with the GST department, holding Registration No. 27AAACY3846K1ZX.
2. The Applicant, also known in the industry as a Brand Owner (“BO”), is the holder of various registered brands in relation to Indian Made Foreign Liquor (“IMFL”). As the owner of the said IMFL brands, no one other than the Applicant has the ability to exploit the brands, including by way of sale of IMFL under those brands. At the same time, the State Excise laws mandate that the manufacture and sale of IMFL, as well as the procurement of Extra Neutral Alcohol (“ENA”) required for the manufacture of IMFL, can on
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per the directions of the Applicant. The sale price for the goods so delivered is typically received by the Applicant from the State Corporation or other buyer.
4. The Applicant enters into the aforesaid contractual arrangements with the CBUs on a strictly non-exclusive basis. In fact, in order to fully exploit its brand, the Applicant simultaneously enters into multiple such arrangements with various CBUs. The Applicant is also at liberty to terminate the arrangement with any CBU. Upon such termination, all the raw materials, packing materials, finished goods, scrap, etc. which are financed by the Applicant are to be handed over to the Applicant, and the CBU is obligated to immediately cease and desist from using the brands of the Applicant associated with the IMFL products which were being manufactured.
5. The terms and conditions of all such arrangements between the Applicant (as the Brand Owner) and the CBU are the same, and for the purposes of this Application, the Applicant dra
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for the procurement of all raw materials and packing materials.
* The price at which materials are to be procured is fixed by the BO (sample rate approvals are enclosed as Exhibit-B);
* All unusable or damaged materials pertaining to the manufacturing operations are to be handed over by the CBU to the BO.
* The packing materials (bottles, labels, caps, seals, outer cartons, etc.) are to be procured from sources identified by the BO.
* The risk, property and interest in the manufactured product passes from the CBU to the BO upon delivery of the product to the carrier nominated by the BO.
* The price at which the CBU is to sell and deliver the manufactured products is as per the directions of the BO (sample rate approvals are attached herewith as Exhibit-C).
* The entities to whom sales of the manufactured products are to be made are also identified by the B O.
* The BO has the discretion to directly make payments for the raw materials, packing materials, transportation and
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ely cease and desist from using the trademarks of the BO associated with the products manufactured.
* The CBU is obligated to create a hypothecation/ lien in favour of the BO for both the market receivables and the goods (including raw materials, packing materials, finished goods, etc.) in respect of such materials which are either directly paid for by the BO or covered by the working capital financed by the BO (sample copies of signs affixed at the premises of the CBU affirming the hypothecation/ lien in favour of the Applicant are attached herewith as Exhibit-E).
* The CBU does not have any lien nor can it create any charge on any of the raw materials, packing materials or products of the BO. If so required by the BO, the CBU is obligated to issue a “no lien certificate” which is to be endorsed to the bankers of the BO (sample copies of the said certificate are attached herewith as Exhibit-F).
* Insurance in respect of the manufactured goods are obtained by the Applicant in its
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Any issues in relation to strength or quality of the IMFL manufactured are raised by the State Corporation/ State Excise authorities directly with the Applicant, and not with the CBU (sample copy of notice issued by the State Excise authorities to the Applicant pertaining to the strength of the IMFL manufactured is attached herewith as Exhibit-K).
6. As stated hereinabove, under the arrangement between the Applicant and the CBUS, in terms of the clause on Consideration, the CBU is remunerated in the form of bottling charges per case of IMFL manufactured. In this regard, sample invoices/ debit notes raised by the CBUs on the Applicant for the manufacturing and bottling charges are attached herewith as Exhibit L.
7. In terms of the flow of funds, the sale price of the IMFL is received directly by the Applicant from the State Corporation or other buyer (in a few cases, they money is received by the CBUs but is immediately auto-transferred to the Applicant vide standing instructions or o
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GST. The relevant provisions are reproduced below for ease of reference:
9. Levy and collection
(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.
7. Scope of supply
(1) For the purposes of this Act, the expression “supply” includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business
2. Definitions In this Act, unless the context otherwise requires, –
(52) “goods” m
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erson”) is also covered. Further, there is also a residuary /entry for 'Other services nowhere else classified' (Heading 9997).
II PAST CLARIFICATIONS AND RULINGS ON THE ISSUE
3. Under the erstwhile Indirect Tax regime, the manufacture and sale of IMFL was liable to State Excise and VAT. This continues to be the position under GST, as the supply of alcoholic liquor for human consumption has been constitutionally excluded from the purview of the GST.
4. However, an issue arose under the Service Tax provisions as to whether the CBUs were providing a service to the BOs, or vice versa, so as to attract the levy of Service Tax. In this regard, the Central Board of Indirect Taxes and Customs (“CBIC”/ “Board”) had clarified vide two Circulars that under such contract manufacturing arrangements, the CBU is providing manufacturing services to the BO, but no services are being provided by the BO to the CBU. The relevant extracts of the said Circulars are extracted below for ease of re
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vices to BO.
Circular F. No. 332/17/2009-TRU dated 30.10.2009
4. For the removal of doubts and with a view to avoid disputes on valuation, it is clarified that –
(a) Service tax would be payable on the bottling/job charges, distribution costs and other reimbursables.
(d) Similarly, the surplus/profit earned by the BO being in the nature of business profit (which falls within the purview of direct taxes), will not be chargeable to service tax.
Copies of the aforesaid Circulars are attached herewith as Exhibit-N.
5. Further, pursuant to a Letter addressed by the Applicant to the jurisdictional Service Tax Department, it was affirmed vide Letter F.No. ST/HQ/PREVIA. 198(2)/2006/5734 dated 14.12.2009 that the surplus/ profit of the BO is not liable to Service Tax, per the previously issued Circulars. A copy of the said letter is attached herewith as Exhibit-O.
6. In terms of judicial decisions, in the Applicant's own case, as well as in the case of various other BOs in the ind
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actions under the contractual arrangements between the BOs and the CBUs constitute a supply of goods and/or services.
8. It is well settled that the determination of the taxability of a given transaction is to be carried out on the basis of its true commercial nature (UoI vs. Playworld Electronics Pvt. Ltd [1989 (41) ELT 368 (SC)) = 1989 (5) TMI 57 – SUPREME COURT. At the outset, in the present context, it is to be appreciated that the aforesaid contractual arrangement between the Applicant and the CBUs has evolved as a result of the intersection of;
(i) the commercial requirements of the Applicant (i.e. to exploit the brands under its ownership through the manufacture and sale IMFL under those brands); and
(ii) the licensing requirements under the State Excise laws (viz. that only a licence holder can source the ENA for such manufacture, carry out the manufacture of the IMFL, and sell the alcoholic beverages). It is for the latter reason that the procurement of the raw materials, m
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CBUs is to enable the Applicant (as the owner of the brands) to fully commercially exploit his rights in relation to the brands, through the production and distribution of IMFL under those brands. It is for this reason that the Applicant approaches the CBUs and negotiates the terms of the Manufacturing Agreement (and not vice versa), as well as determines the remuneration (in terms of the bottling charge on a per case basis) which it is willing to pay to the CBU. It is also significant that the Applicant enters into the aforesaid contractual arrangements with the CBUs on a strictly non-exclusive basis. In fact, in order to fully exploit its brand, the Applicant simultaneously enters into multiple such arrangements with various CBUs. The Applicant is also at liberty to terminate the arrangement with any CBU. Upon such termination, all the raw materials, packing materials, finished goods, scrap, etc. which are financed by the Applicant are to be handed over to the Applicant, and the CBU
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count of the Applicant. In particular, the following features of the arrangement lead to the conclusion that the CBUs are manufacturing IMFL for the Applicant (in addition to the various other features set out at paragraph 3 of the Statement of Facts at Annexure B):
* The total working capital required by the TBU is to be arranged by the BO;
* All raw materials, packing materials, etc. can either directly be procured by the BO or can only be procured from sources identified by the BO;
* A hypothecation or lien in favour of the BO is to be created in relation to market receivables and the goods (raw materials, packing materials, finished goods, etc.);
* Qua scrap, it can only be sold at the rates pre-approved by the BO and any amount realized is to be credited to the BO; On a termination of the agreement, all finished goods, raw materials, packing materials, etc. financed or paid for by the BO are to be handed over to the BO without receiving any charge or consideration for such
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ain reimbursements as agreed upon. There is evidently a supply of service by the CBU to the Applicant, in return for consideration (i.e. the bottling charges) paid by the Applicant to the IMFL. Concomitantly, there is no supply of service by the Applicant to the CBU which can be brought to tax. The provision of the specifications by the Applicant, as well as permitting the CBUs to affix the Applicant's brand on the products is evidently merely to enable the manufacture of the IMFL per the commercial requirements of the Applicant, which cannot in any manner be treated as a supply of service by the Applicant to the CBUs. Any such position would result in the absurdity that in every transaction of job work or contracting manufacturing, there would be a supply of service by the party placing an order for the manufacture/ processing of goods, to the party manufacturing processing those goods.
12. Moreover, in terms of Section 7 of the CGST Act, the requirements of a supply liable to GS
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rges and reimbursements (which are for the manufacturing services). Accordingly, on this basis as well (viz. absence of consideration), there cannot be said to be a supply by the Applicant to the CBUs which is liable to GST.
13. The aforesaid position (i.e. that there is no service being rendered by BOs such as the Applicant, to the CBUs), is also well established in terms of the past Circulars and rulings under the erstwhile Service Tax regime, which are referred to hereinabove at paragraphs 6 to 8. It is submitted that there has been no change in the contractual arrangements analysed in the said Circulars and rulings under the erstwhile regime, and the conclusion reached by the Board and the Courts/Tribunals on the true commercial nature of the said arrangements (viz. that the CBU is rendering a service to the BO, and not vice versa) continues to hold good under the GST. Furthermore, it is also submitted that there has been no material change in the provisions between the erstwhile
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Units (“CBUs”) in various States, in order to obtain services of manufacture, bottling and packing of alcoholic beverages.
3. The Applicant and the CBU then enter into an Agreement, in terms of which the CBU undertakes the manufacture, bottling and packing of the alcoholic beverages, in return for a fixed Bottling Fee paid by the Applicant.
4. The CBU sells the alcoholic beverages (either to a State Corporation or to a private buyer) under the instructions of the Applicant, and at the price fixed by the Applicant. The sale price of the alcoholic beverages is received by the Applicant, out of which the Bottling Fee and other reimbursements are paid to the CBU. The balance amount is retained by the Applicant as its surplus/ profit.
ISSUE INVOLVED:
5. In the above background, the issue referred to this Hon'ble AAR is whether the aforementioned surplus/ profit earned by the Applicant as the Brand Owner is liable to GST.
LEGAL SUBMISSIONS:
6. The Applicant submits that there is n
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ther, the Brand Owner can terminate the services of the CBU at any point. In this case, the CBU is providing service to the Brand Owner, by manufacturing and bottling the alcoholic beverages for the Brand Owner.
* Under the erstwhile Service Tax regime, these two cases are specifically discussed by Circular No. 249/1/2006-C.X.4 dated 27.10.2008. The said Circular clarifies that under the first type of arrangement, the Brand Owner was liable to pay Service Tax on the brand licensing fees. However, under the second type of arrangement (which is the type of arrangement entered into by the present Applicant), it is the CBU who was liable to pay Service Tax on the Bottling Fee. (Refer Pg. 350 of the Compilation Vol. 2, Para 1 and Para 2]
* A further clarification in the form of Circular F. No. 332/17/2009-TRU dated 30.10.2009 was subsequently issued, which again clarified that Service Tax was payable on the Bottling Fee earned by the CBU, but not on the surplus/ profit retained by the Bra
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urance in the raw materials and the final products is taken by the Applicant and the insurance claims are paid to the Applicant, and not to the CBU.
[Refer insurance claim payments at Pg. 235 of the Compilation Vol. 2). Accordingly, the risk and reward in the goods is with the Applicant.
* The Applicant has also highlighted various other factors (supported by relevant documentation) which indicate that the nature of the arrangement is one in which the CBU provides services of bottling to the Applicant. (Refer Para 5 of Annexure B to the AAR Application)
* The fact that the manufacture is clearly being carried out by the CBU for the Applicant is also clear from the fact that the product labels bear the brands of the Applicant as well as state that the said brands are registered to the Applicant. Separately, the labels state that the products are manufactured by the CBU in question. In this regard, sample copies of product labels were handed over in the course of the hearing on 28.1
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held that the surplus/ profit earned by the Applicant was not liable to Service Tax (Refer Paras 8-15 of the said Tribunal judgement at Pg. 355 of the Compilation Vol. 2). In coming to its conclusion, the Tribunal also relied upon similar judgments in Radico Khaitan Ltd. vs. CST, Delhi (2016 (44) STR 133 (Tri-Del)] = 2016 (6) TMI 366 – CESTAT NEW DELHI and Skol Breweries Ltd. vs. CCE&ST, Aurangabad [2014 (35) S T R 570 (Tri-Mum)] = 2014 (4) TMI 1040 – CESTAT MUMBAI [Refer 364 and 367 of the Compilation Vol. 2). Furthermore, the said Tribunal ruling in the Applicant's own case was also upheld by the Hon'ble Supreme Court in Commissioner vs. BDA Pvt. Ltd. [2016 (42) S.T.R. [J143 (S.C.) = 2015 (11) TMI 1585 – SUPREME COURT [Refer Pg. 363 of the Compilation Vol. 2).
* No material change has occurred under the GST, which warrants a change from the aforesaid taxing position under the erstwhile Service Tax provisions. Under Section 7 of the CGST Act, 2017, the taxable event continu
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under Section 7 of the CGS T Act, 2017.
* Lastly, attention was drawn to the recent ruling of the Karnataka Appellate Authority for Advance Rulings (“AAAR”) in the case of M/s. United Breweries Ltd. It was highlighted that in that case, the arrangement was of the first type, viz. where the brand is licensed by the Brand Owner to the CBU. In return, the Brand Owner was receiving a brand fee of Rs. 5 per case plus reimbursed expenses. Accordingly, a consideration was being paid to the Brand Owner for the grant of a representational right in relation to the brand. Consequently, the amounts received by the Brand Owner were not in the nature of profit [Refer Para 35, 43 of the Karnataka AAAR ruling). It was also highlighted that the ruling nowhere states that both the Brand Owner and CBU could simultaneously be suppliers of service. Either the Brand Owner can be a supplier of service, or the CBU can be a supplier of service. In that case, it was held by the AAAR, and also accepted by the
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exploit the brands, including by way of manufacture and sale of IMFL under those brands.
2. At the same time, the State Excise laws mandate that the manufacture and sale of IMFL, as well as the procurement of Extra Neutral Alcohol (“ENA”) required for the manufacture of IMFL, can only be undertaken by parties who have been duly licensed by the State Excise authorities. While the BOs do not hold the licenses under the State Excise laws, there are various Contracting Bottling Units (“CBUs”) who hold the requisite licences under the State Excise laws to source the ENA and carry out the manufacture and bottling of the IMFL'.
3. M/s Allied Blenders and Distillers Pvt. Ltd., approaches the CBUs and enter into contractual arrangements under which the CBUs undertake the manufacture of the IMFL for the BOs, in return for the payment of bottling charges (and certain agreed upon reimbursements, such as taxes and expenses). To enable the manufacturing of IMFL under the BO's brands, the
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Service Tax regime, the aforesaid arrangement was seen as a rendition of service by the CBUs to the BOs. Simultaneously, no service was being rendered by the BOs to the CBUs, and the surplus / profit was seen as the earnings from the entrepreneurial venture which would not be liable to Service Tax. This view was affirmed by Circulars as well as judicial precedents (referred to herein below).
POSITION ON TAXABILITY UNDER GST:
7. In the aforesaid transactions, it is the CBU who provides services to the M/s Allied Blenders and Distillers Pvt. Ltd. (the BO) in return for the bottling charges (and other reimbursements). It is not the case that the BO is providing brand-related services to the CBU, for the CBU to manufacture and sell the IMFL on its own account. This conclusion is borne out by the following factors:-
(i) At the outset, it is the BO who approaches the CBU to manufacture the IMFL for it.
(ii) The IMFL brands belong to the BO and the BO seeks to commercially exploit the sam
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selling price of the IMFL, and would have then paid the brand-related fees to the BO. In such a scenario, the contract would have specified a brand-related fee to be paid by the CBU to the BO. Whereas, the contract clearly sets out a bottling fee which the CBU is entitled to receive from the BO. In such cases the title of the Brands and goods is remain with the Brand Owner i.e. M/s Allied Blenders and Distillers Pvt. Ltd.
(v) The total working capital as required by the CBU for its corresponding manufacturing operations is to be arranged by the BO.
(vi) In terms of procurement, the BO has right to either directly arrange, or, recommend suppliers for the procurement of all raw materials and packing materials, and the BO always approves the price at which materials are to be procured by the CBU. The CBU has no discretion on the procurements. The BO may also directly make payment for the raw materials, packing materials etc. to the vendors.
(vii) The entire manufacturing activity by t
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true commercial nature of the arrangement is one in which the CBU provides manufacturing services to the BO, and is remunerated in the form of bottling charges.
9. The BO therefore clearly cannot be a service provider to the CBU, but is an entrepreneur seeking to exploit the brands under its ownership, viz. through the sale of IMFL bearing their brands. In the course of exploiting the brands, M/s Allied Blenders and Distillers Pvt. Ltd. (the BO) incurs various expenses, including the bottling charges paid to the CBUs. 1 Ire balance amounts retained by them represent their earnings / profit from the entrepreneurial venture. These earnings duly suffer Income Tax but cannot be brought to tax under GST, as there is no supply being made by the M/s Allied Blenders and Distillers Pvt. Ltd. (the BO) to the CBUs.
10. This poisition was also affirmed under the previous Service lax regime, vide Circular No. 249/1/2006-CX4-dated 27.10.2008 and Circular F. No. 332/17/2009-TRU dated 30.10.2009 iss
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s, namely:-
a) that no Cenvat credit has been taken under the provisions of the Cenvat Credit Rules, 2004;
b) that there is documentary proof specifically indicating the value of such inputs; and
c) where the service provider also manufactures or processes alcoholic beverages, on his or her own account or in a manner or under an arrangement other than as mentioned aforesaid, he or she shall maintain separate accounts of receipt, production, inventor) dispatches of goods as well as financial transactions relating thereto.
12. There has been no material change in the provisions between the erstwhile Service Tax regime and the current GST regime, and the above position should continue to apply.
04. HEARING
The case was scheduled for 11.09.2018 for Preliminary hearing when Sh. Rohan Shah, Advocate along with Ms. Divya Jeswant, Advocate and Sh. Kalan Jain Tax Adviser and Sh. Atit Dalal, head taxation appeared and made contentions tor admission of application as per contentions in thei
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the Applicant (i.e. Brand Owner) is paying consideration to the Contract Bottling Unit by way of bottling charges, or, alternatively, whether the Contract Bottling Unit is paying consideration to the Applicant by way of brand owner surplus?
From the above we find that the question raised by the applicant can be divided into 4 parts as under:-
1. Whether in the facts and circumstances of the present case, the Contract Bottling Unit is making a taxable supply to the Applicant?
2. Whether in the facts and circumstances of the' present case, the Applicant (i.e. brand owner) is making a taxable supply to the Contract Bottling Unit?
3. Whether in the facts and circumstances of the present case, the Applicant (i.e. Brand Owner) is paying consideration to the Contract Bottling Unit by way of bottling charges?
4. Whether the Contract Bottling Unit is paying consideration to the Applicant by way of brand owner surplus?
We find from the above that questions numbers 1 and 4 are asked by
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cant (i.e. brand owner) is making a taxable supply to the Contract Bottling Unit?
We find, from the submissions made, that the Applicant, holding various registered brands in relation to Indian Made Foreign Liquor (“IMFL') has approached and contracted with various Contracting Bottling Units (“CBUS”) who hold the requisite licences under the State Excise laws to undertake the manufacture of the IMFL for the Applicant, in return for the payment of bottling charges (and certain agreed upon reimbursements, such as taxes and expenses). The CBUs after manufacturing the IMFL, deliver the said goods to buyers as per the applicant's directions and the sale price for the said goods is received by the Applicant. All the raw materials, packing materials, finished goods, scrap, etc. used by the CBUs are paid for, by the Applicant.
From a perusal of the sample agreements submitted by the applicant, we find that the said agreements are on a principal-to-principal basis, the price at which
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e CBUs. In terms of Section 7 of the CGST Act, one of the requirements of a supply liable to GST is that there should be some consideration received by the applicant if it is to be considered that they are supplying goods/services. We find that in the instant case the applicant is not receiving any consideration for allowing the CBU to use their brand/logo etc on the IMFL. In fact the entire process can be seen as the applicant is contracting with the CBUs to get the IMFL manufactured in under their brand name. There is no service rendered by the applicant in this case.
It is very clear from the terms of the agreement that there is neither any supply of goods nor services flowing from the applicant. The applicant actually gets the products manufactured by the CBUs. Hence as per GST laws there is no supply of goods or services or both by the applicant as per Definition of 'supply' under section 7 of the GST Act, 2017, which reads as follows: 'supply' includes
(a) all
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