TMI Blog2018 (11) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... er out of such manufacturing activity? - whether this amount which is transferred can be considered as supply or not? - Held that:- The levy clearly excludes the supply of alcoholic liquor for human consumption. The CBUs clearly make and supply alcoholic liquor (beer, in this case) for human consumption, and the same is excluded from the purview of GST - It is also clear that the CBUs collect a consideration/ payment for the supply of the product (beer) made by them to the Beverages Corporation/State regulated depots or to the Wholesalers / Indenters holding necessary permits / licences under the relevant Excise laws of the State concerned. The beer is made by the CBUs under a contractual agreement with the Appellant - Out of these goods and services that the CBUs spend on, many are exigible to GST levies as they may apply - there being no general exemption being available under GST, to such raw materials/ services that are used in making the alcoholic liquor for human consumption. The income so had from CBU operations are then partially disposed of by being charged as the expenses and the profit for CBU and as the payments for use of brand name etc. The remaining amounts which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tellectual property right or permitting the use of or enjoyment of any intellectual property right has been categorised as a supply of service. In the instant case, the Appellant has permitted the CBUs to use the trademarks Owned by it, permitted the Brewer to acquire the know-how relating to the production and packaging of UBL’s beer, which is the sole property of UBL and has permitted the Brewer to use the Labels for branding of beer for sale by the Brewer. All these amount to permitting the Brewer to use intellectual property rights. Therefore, by virtue of clause 5(c) of Schedule II of the CGST Act, the said activity amounts to a supply of service - the activity of the Appellant undertaken with contracting units in terms of the Agreements are in the nature of permitting the use of intellectual property right and hence is squarely covered under clause 5(c) of Schedule II of the Act. Reimbursed expenses received by the Appellant - Held that:- This expenditure incurred is in connection with according the representational rights for the manufacture and sale of branded beer to the CBU - the component ‘W’ also forms a part of the consideration received by the Appellant for supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the CGST Act would also mean a reference to the corresponding similar provision under the KGST Act. The present appeal has been filed under Section 100 of CGST Act, 2017 and the KGST Act, 2017 by M/s. United Breweries Limited (hereinafter referred to as Appellant ) against Advance Ruling No. KAR ADRG 09/2018 dated 28.06.2018 = 2018 (7) TMI 835 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA pronounced by the Karnataka Authority for Advance Ruling. Brief facts of the case:- 1. The appellant is registered under GST with GSTIN No. 29AAACU6053CIZH and is engaged in manufacture and supply of beer under various -brand names. The appellant, apart from manufacturing beer on its own, also has an arrangement with contract brewing/bottling units ( hereinafter referred to as the CBU ) who make the brands of beer belonging to the appellant and Supply such beer to market. CBUs in making the beer brands owned by the Appellant, procure the raw materials, packaging materials, incur Overheads and other manufacturing costs etc, on their own; and the beer they make is sold by them directly to Government Corporations/ in wholesale depending on the state market regulation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the brand owner. 6. The contract manufacturing arrangement empowers the CBUs to use the brand name of the Appellant for the limited purpose of facilitating manufacture of Appellant s own brands of beer and this usage is in accordance with Section 48(2) of Trademark Act. 7. The Appellants submitted that the Ievy of service tax in relation to the activity of production/process of alcoholic liquor for or on behalf of the brand owners like the Appellant commenced on 01.09.2009 under Business Auxiliary Service and continued up to 30.06.2012, They further state that thereafter, w.e.f 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 w.e.f. 01.06.2015. 8. During the alternating periods when this arrangement of manufacturing at the hands of CBUs was taxable, the then CBEC issued clarificatory Circular F.No.332/17/2009-TRU dated 30.10.2009 to tide over issues related to valuation and taxability w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TRJ 143 (SC) = 2015 (11) TMI 1585 - SUPREME COURT . 12. Further, the Appellant presented that in the GST regime, post 01.07.2017, alcoholic liquor for human consumptions has been kept out of the levy of GST. With respect to the manufacturing activity carried out by the CBUs the levy of GST would arise only on the activity of treatment or process which is applied to another persons goods as per Schedule II to the CGST Act, 2017. They further submitted that since the CBUs procure the materials on their own account and are not applying any treatment or process on the goods belonging to the Appellant, GST would not be applicable on the activity . In respect of the income earned by the brand owner, they submitted that the CBEC had already clarified that there is no service from the brand owner. 13. Before the Authority, the Appellant also drew attention to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 to drive home the point that the activity of manufacture would amount to supply of service only if manufacturing is carried out on physical inputs(goods) owned by others (Sl.No.26 of the Notf). In their case, since the CBUs manufacture beer out of raw materials ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds: i. The appellant Submitted that in the impugned order, AAR has held that the GST is payable by the Brand Owner (Appellant) 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 GST at (CGST-9% SGST-9%) on the amount received from the CBU s. ii. The Authority has erred in holding that the classification of other miscellaneous service under Service Code (Tariff) 999799 would apply to the amount of Surplus Profit transferred by the CBUs to the Appellant when there is no rendition of service by the Appellant to the CBC s in the first place. iii. The appellant submitted that the activity of supply of alcoholic liquor for human consumption is outside the purview of GST and the sale proceeds from the supply of alcoholic liquor for human consumption or any part thereof would not become exigible to GST for the reason that it is shared between CBUs and the Appellant as per agreement. iv. The appellant submitted that the Authority erred in holding that GST is leviable on surplus profit without following the already settled pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the said supply is part of the negative list or exemption notification and therefore not chargeable to GST. The Appellant made written submissions during the time of the personal hearing and also submitted additional written submissions on 28.09.2018. 18. In the written submissions, they Submitted that for anything to constitute a supply in terms of Section 7 or the CGST Act, it must necessarily be demonstrated that there has been a supply of goods or services, there must be a consideration for such supply and the supply should be in the course of or furtherance of business. They submitted that in the present arrangement, the Appellant has no occasion to supply any goods or services to the CBUs as the arrangement merely requires the CBUs to undertake the activity of manufacturing beer using their already established, functional distilleries for which the CBUs hold a licence. Further, as the beer manufactured by the CBU is the Appellants branded beer, it is in the Appellant s own interest to ensure that the quality standards of the raw material procured by the CBUs and the manufacturing process followed by the CBUs are within standards commensurate with the brand image of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice which is provided by the Appellant to the CBUs; that the line of reasoning by the Authority that, even though the present arrangement is not covered under Section 7(1)(a) to Section 7(1)(d) of the CGST Act, even activities which do not fit within the aforesaid clauses would be in the nature of supply is erroneous and the ruling is to be set aside on this ground. 21. In order to clarify certain queries raised by the Members during the personal hearing, the Appellant made additional written submissions vide letter dated 28.09.2018 wherein they inter alia stated that the following activities are performed by the Company in terms of the agreement with the CBUs, viz: a) Allow the CBUs the representational right for manufacture and supply of beer under labels specified in the Agreement. b) Prescribe process parameters and specifications through process executive appointed by the Company, c) Depute a Process Executive for inspection of the brewery, laboratory and advise on processing and quality control of beer produced for and on behalf of the Company. d) Depute a Commercial Executive for procurement of raw materials, packaging materials and such other materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... = 2018 (2) TMI 1325 - SUPREME COURT OF INDIA . In view of the above, they submitted that the surplus profit received by the Company can in no way be said to be consideration received by the Company and therefore the question of levy of GST on the said amount does not arise. DISCUSSION AND FINDINGS: 23. We have gone through the records in detail and have taken into consideration the submissions made by the Appellant in writing as well as the detailed arguments made by their Advocate during the personal hearing. 24. To frame the matters that lie for a decision before us, the facts are briefly summarized hereunder: The Appellant, M/s. United Breweries Ltd has held itself out as being engaged in the manufacture and supply of beer under various brand names. Apart from manufacturing beer on its own, and for different commercial and economic considerations, the Appellant enters into agreements with other brewing units (called Contract Brewing Units, CBUs), who have their own bottling plants and the necessary licences to manufacture and supply beer. In terms of the agreement with the CBUs, the Appellant permits its brands to be used by Contract Brewing Units who manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the Appellant. The amount towards such reimbursement of expenses incurred by the Appellant is arrived at as under: Amount (Rs/case) Turnover of the Brewer (X) Less: Variable cost incurred (raw material, PM and other consumables) (Y) Less: Bottle cost (at prevailing market rates) (Z) Less: Retention for energy and fixed cost by the brewer 73 Balance payable to UBL Brand fee 5 Remaining as reimbursement to UBL (W) 27. In the background of the above facts, two questions were raised before the Karnataka Authority for Advance Ruling (AAR) viz: a) Whether manufacture of beer (bearing brand owned by the Appellant) by the CBUs under its invoicing would be considered as a supply of service and whether GST is payable by the CBUs on the profit earned out of such manufacturing and supply of beer? b) Whether GST is payable by the brand owner on the surplus pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , by bringing comprehensiveness and clarity to the object of taxation in GST. Each of these concepts that existed earlier, plays a part in understanding the concept of what is meant by supply, but as is obvious, neither is sufficient alone to understand supply , In order to construe what is supply one starts with the layman s understanding of the expression as meaning to make something available to another or to fulfill the want of another . 30. Under the GST law, the word supply has not been defined but rather the scope of what constitutes supply is stated in Section 7 of the CGST Act which reads as under: 7. (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; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration ; and (d) the activities to be treated as suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be a supply, and Subsection (3), enables the the Government to on the recommendations of the Council, specify, by notification, the transactions that are to be treated as a supply of goods and not as a supply of services and vice- versa. 31. Therefore, for an activity to qualify as supply in terms of Section 7 of the CGST Act, the following conditions are to be fulfilled: (i) The activity has to involve a transaction in either goods or services or both; (ii) The activity should be undertaken for a consideration (iii) There should be agreement to engage in the transactions of the nature specified; (iv) The activity should be in course or furtherance of business Broadly speaking, when the above circumstances are accomplished by (at least) the two persons involved in the transactions, then it can be inferred that the activity is a supply under GST law and thereby chargeable to GST. There are however, certain exceptions to the above principles viz. (i) Certain activities have been termed as a Supply even when they are made Without a consideration. Such supplies have been listed in Schedule I to the CGST Act; and (ii) Certain activities, ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax: Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax. The levy clearly excludes the supply of alcoholic liquor for human consumption. This is in line with the Amendment of the following clause of Article 366 effected vide The Constitution (One Hundred And First Amendment) Act, 2016 that received the assent of the President on the 8th September, 2016, and was published for general information On the same day. 14. In article 366 of the Constitution,- (i) after clause (12), the following clause shall be inserted, namely:- (12A) goods and services tax means any tax oh supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption; ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispose off UBL S beer in the territory and for no other purpose upon the condition that UBL beer shall be produced according to the process parameters and specifications prescribed by the Process Executive appointed by UBL from time to time during the Agreement. 3. Personnel and Raw materials 3.1 UBL shall, at its own cost throughout the duration of this Agreement, arrange for its Process Executive to be deputed to the Brewery, and UBL will inform Brewer about the deputation of such Process Executive and his replacements from time to time. Such Process Executive shall be responsible for the brew as per specifications provided from time to time, inspection of brewery, laboratory and other departments and advice on processing and quality control of beer produced for and on behalf of UBL 3.2 UBL Shall depute other key personnel, as may be required by UBL to the brewery for supervising the production, processing and quality control of the beer manufactured. UBL may also depute a Commercial Executive who shall guide the procurement of raw materials, packaging and such other materials used in the manufacture of beer. 4. Confidentiality 4.6 All know-how acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred (raw material, PM and other consumables) (Y) Less: Bottle cost (at prevailing market rates) (Z) Less: Retention for energy and fixed cost by the brewer 73 Balance payable to UBL Brand fee 5 Remaining as reimbursement to UBL (W) All proceeds from sale of product Will be deposited in a bank account, jointly operated by the two parties, exclusively for beer produced for the company. The operational costs (including variable costs, bottle cost and retention fee) will be serviced from this account. The surplus will then be transferred into UBs account, 11. Representational Rights UBL has permitted Brewer to use the Labels for branding of UBL beer for sale pursuant to the terms and conditions contained in this Agreement and such representational right is granted only for manufacture and supply of Beer and for no other purpose. Any steps taken by Brewer or UBL for recordal under the relevant provisions of the Trade Marks Act shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcoholic liquor for human consumption. The income so had from CBU operations are then partially disposed of by being charged as the expenses and the profit for CBU and as the payments for use of brand name etc. The remaining amounts which represent the sales turnover or income from the sale of beer (termed as surplus profits by the Appellant) are transferred to the Appellant. 35. As regards the role of the Appellant in the contractual agreement, they, on their part, give the brewer the right to use their process for manufacture of their branded beer under their supervision and control. To ensure that the beer made at the brewery meets their specified standards, the Appellant, at their cost, deputes Process Executives and Commercial Executives to the brewer, who will provide the specifications, methods and quality parameters; guide the brewer in procurement of raw materials, packing materials and such other materials; give directions for carrying out quality control of the beer manufactured by the brewer; take samples for analytical and quality tests and advise changes in the brew from time to time and advise the brewer on the brewing, fermentation and lagering time of the UBL be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r whom the activity is done in exchange for a consideration. There is no dispute that the amount transferred to the Appellant s account is a Brand Fee which is fixed at ₹ 5 per case as per the agreement. This Brand Fee being a fixed rate is paid to the Appellant every month based on the volume of sales of beer. As regards, the amount denoting a reimbursement of expenses, this amount which is denoted as W in the Agreement, is variable and depends on the balance remaining if any, after adjusting components Y , Z , ₹ 73 per case, and ₹ 5 per case from the turnover of UBL brand beer sales. The Appellant in his submission has stated that in some months no amount as surplus is transferred to the Appellant. 38. As regards Brand Fee, clause 7 of the Agreement states that Brewer agrees that in consideration of the representational right for manufacture and supply of beer under labels mentioned in Annexure I having been granted by UBL, Brewer shall pay a Brand Fee of ₹ 5 per case. Such payment shall be made on a monthly basis and not later than 10th day of the following month. A plain reading of this clause makes it evident that the Brand Fee paid by the Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he UBL beer manufactured is done from time to time, as per the directions of the Process Executive and the data is submitted to UBL. The Process Executive may also advise the Brewer on changes in the brew from time to time. The labelling and packaging of the UBL beer is done as per the specifications of UBL and the Brewer is bound to adopt and comply with any requests made by UBL in such matter. Therefore, it is seen that at every stage in the manufacture, starting from the procurement of raw materials to the methods of brewing, fermentation, lagering, bottling, packing and labelling, the Brewer is provided with technical know-how and supervision by the Appellant and is also using the right vested on him to use the Trademarks and labels of the Appellant on the UBL branded beer manufactured and sold by him. The entire know-how regarding the manufacture of Beer, such as nature of raw materials to be procured, the ratio and proportion of mixing the raw materials, the manner of packing the beer, etc being the sole intellectual property of the Appellant is shared with the Brewer under an agreement. The purpose of entering into such an arrangement with other breweries is purely for econo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STC 117 (MAD) = 2004 (4) TMI 539 - MADRAS HIGH COURT , the High Court held that the Royalty received as consideration of use of trade mark is consideration of transfer of right to use a movable asset and upheld its taxation under the sales tax laws. The court observed that For transferring the right to use the trademark, it is not necessary to hand over the trademark to the transferee or give control or possession of trademark to him. The Court further observed that Simply because the assessee retained the right for himself to use the trademark and reserved the right to grant permission to others to use the trademark, it would not take away the character of the transaction as one of transfer of a right to use. 41. In the GST law, by virtue of clause 5(c) of Schedule II, the act of temporarily transferring any intellectual property right or permitting the use of or enjoyment of any intellectual property right has been categorised as a supply of service. In the instant case, the Appellant has permitted the CBUs to use the trademarks Owned by it, permitted the Brewer to acquire the know-how relating to the production and packaging of UBL s beer, which is the sole property of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident from the agreement that the Appellant incurs expenses towards deputing his personnel to the CBU s distillery; expenses are incurred by the Appellant in ensuring that its business interests are secured by the manufacture of beer to its specifications and standards. These expenses are being reimbursed by the CBU out of the profit arising from the sale of beer by the CBUs. It is important to note that the amount transferred to the Appellant (M/s UBL) is out of the surplus profit earned by the CBUs from the sale of beer. It is not a profit earned by the Appellant. As per the agreed terms, the surplus profit earned by the CBU is transferred to the Appellant as a reimbursement of the expenses incurred by the Appellant. Clearly, the amount transferred under the nomenclature reimbursement of expenses is a payment made by the CBU out of its surplus profit and the payment made is in return for an activity performed by the Appellant. The question is whether the activity so performed is in connection with goods or service ? The Appellant as per his own submissions states that he is not selling goods in his transactions with the CBUs. When we look at clause 3.1 of the Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding in various fora. In the course of these proceedings, to determine whether GST is leviable on the said amount, the Appellant has heavily relied on the decisions given by the CESTAT and the Courts on the subject matter of levy of service tax on the Brand Fee. We have taken note of the said case laws. We note that the Bombay HC quoted the following observations of Earl of Halsbury in the case of Qumin vs. Leathem (1901) AC 495 (HL) in Blue star Ltd. vs, CIT (1996) 217 ITR 514 520. = 1994 (12) TMI 7 - BOMBAY HIGH COURT Every judgment must be read, as applicable to the particular facts proved or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are found and a case is only an authority for what it actually decides. A study of the decisions cited by the Appellant reveals that the facts in the cases before the Tribunal and Court are not similar to the instant case as is indicated hereunder: a) Skol Breweries Ltd vs Commissioner of C.Ex ST, Aurangabad reported in 2014 (35) STR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the CBU manufactured the beer on behalf of the assessee and supplied only to the assessee or to its indentors; no right was given to the CBUs to directly sell the beer to its own customers; the CBUs neither had any right over the product nor did they have any right to sell or exploit the beer so produced, nor fix any price of the product. The High Court concluded that the CBU was only the captive manufacturer of the assessee and hence the brand franchise fee of ₹ 10 per case is not subjected to KST. This case again is on a different footing on basic facts and hence Cannot be Considered for the present issue at hand. d) Radico Khaitan Ltd vs Commissioner Of Service Tax, Delhi reported in 2016 (44) STR 133 (Tri-Del) = 2016 (6) TMI 366 - CESTAT NEW DELHI : In this case too the Tribunal held that, in terms of the agreement, the CBUs are actually manufacturing the branded liquor as job workers for the appellant (Radico) for which they are getting fixed amount as per the rate approved in terms of the agreement; the CBU has no freedom of marketing the manufactured products; the sale and distribution of the manufactured product is in control of the appellants; full sale p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramification in terms of determining exigibility. The roots of this practise can be understood by looking at the erstwhile Service Tax regime wherein the CBEC vide Circular No. 165/16/2012 ST dated 20.1 1.2012 has restored service specific old accounting codes. These codes had been restored solely for the purpose of statistical analysis. These 120 service specific accounting codes were used for payment of service tax and registration. 47. After considering the entire gamut of activities performed by the Appellant, it may be difficult to arrive at any nomenclature for the services delivered by the Appellant to the CBU. While the Brand fee end the reimbursed expenses, are received by the Appellant in (direct) consideration for permitting the CBUs the use of the representational right to make and sell their branded beer, the service supplied can at times have the colour and character of being an erstwhile franchise service or/ and IPR service in terms of the Finance Act 1994. On the other hand, the so termed surplus profit amounts received have the characteristics of being a consideration received for a mixed supply . While in overall terms, at times the service supplied ..... X X X X Extracts X X X X X X X X Extracts X X X X
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