NO TAXABLE SERVICE BY BRAND OWNER IN CONTRACT BOTTLING ARRANGEMENT

[Dr. Sanjiv Agarwal]

In Re: Allied Blenders and Distillers Pvt. Ltd. 2019 (3) TMI 537 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA;  the Applicant being a brand owner and holding various registered brands in relation to Indian Made Foreign Liquor (IMFL) had 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, delivered the said goods to buyers as per the applicant’s directions and the sale price for the said goods was to be received by the Applicant. All the raw materials, packing materials, finished goods, scrap, etc., used by the CBUs were paid for, by the Applicant (brand owner).

Such contracts were on principle to principle basis. The price at which raw materials are to be procured is fixed by the applicant, the risk, property and interest in the manufactured product passes from the CBU to the applicant upon delivery of the product to the carrier nominated by the applicant, the selling price is as per the directions of the applicant, the sale price of the goods is received by the applicant, the applicant pays consideration to the CBU in the nature of bottling charges which are fixed on a per month case basis, and not the sale price of the manufactured products, the manufacturing activity by the CBU is carried out under the supervision of the Applicant, etc. The amount left with the Applicant after making all of the aforesaid payments is profit.

The brand owner, sought advance ruling in respect of the following issue:

“Whether in the facts and circumstances of the present case, the Contract Bottling Unit (CBU) is making a taxable supply to the applicant (i.e. brand owner), or, alternatively, whether the applicant (i.e. brand owner) is making a taxable supply to the Contract Bottling Unit? Correspondingly, 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, or, alternatively, whether the Contract Bottling Unit is paying consideration to the applicant by way of brand owner surplus?”

The Authority for Advance Ruling (AAR) divided the above question into following four questions:

1.   Whether in the facts and circumstances of the present case, the Contract Bottling Unit is providing any 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?

The AAR observed that in respect of question nos. 1 and 4, the supply of services or goods or both, if any is not undertaken by the applicant and, therefore, the said questions cannot be answered by the Authority for Advance Ruling. These questions were raised by applicant but relate to Contract Bottling Unit (CBU). The AAR observed that as per section 95(a) of the CGST Act, 2017 “advance ruling” means a decision provided by the Authority or the Appellate Authority to an applicant on matters or on questions specified in sub-section (2) of Section 97 or sub-section (1) of Section 100, in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant.

Question No. 3 does not fall under any of the clauses of sub-section (2) of Section 97 of the CGST Act, 2017. Hence the only question that was taken up in this ruling is Question No. 2 which falls under Section 97(2) of the CGST Act, 2017.

In the instant case, the AAR observed that there is neither any supply of goods nor services flowing from the applicant.  Further, the CBU provides manufacturing services to the Applicant, and is remunerated in the form of bottling charges and the applicant is not a service provider to the 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.  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 brand owner as per definition of ‘supply’ under Section 7 of the GST Act, 2017.

Thus, factually the applicant is contracting with the CBUs to get the IMFL manufactured under their brand name. There is no service rendered by the applicant in this case. Therefore, it was ruled that applicant (brand owner) is not making a taxable supply to the contract bottling unit. The remaining questions, were not answered being out of the purview of the Authority.