TMI Blog2019 (3) TMI 537X X X X Extracts X X X X X X X X Extracts X X X X ..... o the question whether the Applicant (i.e. Brand Owner) is paying consideration to the Contract Bottling Unit by way of bottling charges does not fall under any of the clauses of sub-section (2) of section 97 of the CGST Act, 2017 and is not maintainable. The only question that is being taken up in this ruling is, which falls under Section 97 (2) of the CGST Act, 2017 is 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? - Held 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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? At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the GST Act . 02. FACTS AND CONTENTION - AS PER THE APPLICANT The submissions, as reproduced verbatim, could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 draws reference to sample Agreements for Tie-Up Manufacture of IMFL ( Manufacturing Agreement ) with various CBUs (S.P.Y. Agro Industries Ltd., Unistil Alcoblends Pvt. Ltd., Devicolam Distilleries Ltd. and Hi-Tech Bottling Pvt. Ltd., United Brothers Distilleries Pvt. Ltd., Chandigarh Distillers Bottlers Ltd.), which are attached herewith as Exhibit-A. The salient features of the said arrangement are set out below: The CBU will typically have a Letter of Intent issued in its favour for setting up a bottling unit at the relevant location. Every CBU is contractually mandated to have adequate capac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediately 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 own name (sample copies of insurance policy are attached herewith as Exhibit-G); Any claims arising from the aforesaid insurance on the manufactured goods are also received by the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NTAINING APPLICANTS INTERPRETATION OF LAW IN RESPECT OF THE QUESTIONS RAISED Statement containing the applicant's interpretation of law and/or facts, as the case may be, in respect of the aforesaid question(s) 1. RELEVANT PROVISIONS OF THE GST LAW 1. The charging provision under the Central Goods and Services Tax Act, 2017 (CGST Act), viz Section 9, stipulates that a supply of goods and/ or services will be liable to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s manufactured by the licencee/ manufacturer, the latter holding the required State Licences for manufacture of the alcoholic beverages. In trade, such licencees /manufacturers are called the Contract Bottling Units or CBUs. The cost of raw materials (and in some cases, even capital goods) and other expenses are either paid by the BO or reimbursed by the BO. Statutory levies (i.e., State Excise Duty) are also reimbursed to the CBU by the BO. The alcoholic beverages are sold by or as per the directions of the BO and profit or loss on account of manufacturing and sale of alcoholic beverages is entirely on account of BO, who thus holds the property, risk and reward of the products. The CBU receives consideration (i.e. job charges) for undertaking the manufacturing activity on job work basis. There is no doubt that under such an arrangement, CBU is a service provider providing services 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, manufacture and sale of the IMFL are carried out by the CBUs who holds the necessary licences. However, the entirety of the supervision and control of various aspects (including the designation of the sources of raw materials, payment the said raw materials, every stage of the process of manufacture, determination price for sale of IMFL and identification of the buyers of the IMFL) rests with the Applicant. Under no circumstances can the CBU source inputs from a vendor who has not been approved by the Applicant, nor manufacture the IMFL contrary to the specifications stipulated by the Applicant, nor sell the manufactured IMFL to a buyer who has not been approved by the Applicant or sell at a price which is lesser or greater than the exact price approved by the Applicant, nor retain any proceeds from the buyer (in excess of the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement 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 handover; Most significantly, instead of being paid the sale price (as would have been expected if the goods were owned by the CBU), there is a payment of a bottling charge which in its true nature is a payment towards the bottling services rendered by the CBU; All aspects of the transaction, extending from sourcing to manufacture to distribution are carried out under the close monitoring, supervision and express approval of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auto-transfer from the CBUs) towards the supply of the IMFL. There are no payments made by the CBUs to the Applicant, only payment by the Applicant to the CBUs in the form of the bottling charges 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 Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is. Accordingly, there may be two types of arrangements between the Brand Owner and the CBU. 7. In the first type of arrangement, the CBU approaches the Brand Owner seeking a licensing of the brand in order to undertake manufacture of alcoholic beverages on its own account. In return, the CBU makes payment to the Brand Owner for the licensing of the brand. In such a case, the Brand Owner is providing brand licensing service to the CBU. 8. In the second type of arrangement, the Brand Owner approaches and engages the CBU to obtain bottling services of alcoholic beverages. The Brand Owner pays a bottling fee to the CBU. Further, 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 ty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct labels were handed over in the course of the hearing on 28.11.2018, and are also enclosed as Annexure-B. The aforesaid agreements in the Applicant's case, therefore, clearly fall under the second type of arrangement, wherein the CBU is providing services to the Applicant, and not vice versa. Accordingly, the CBUs of the Applicant have always charged and paid Service Tax on the Bottling Fees. Currently, the CBUs of the Applicant have been duly charging and paying GST on the Bottling Fees (Refer sample invoices at Pg. 325 of the Compilation Vol 2). In the Applicant's own case, the jurisdictional Service Tax Commissioner also confirmed that no Service Tax was payable on the surplus/ profit retained by the Applicant. [Refer Letter F. No. ST/HQ/PREVlA.198(2)/2006/5734 dated 14.12.2009 at Pg. 354 of the Compilation Vol. 2] Further, in the Applicant's own case, BDA Pvt. Ltd. vs. CCE, Meerut (2015 (40) STR 352 (Tri-Del)] = 2015 (6) TMI 586 - CESTAT NEW DELHI , the Hon'ble Customs, Excise and Service Tax Appellate Tribunal had held that the surplus/ profit earned by the Applicant was not liable to Service Tax (Refer Paras 8-15 of the said Tribunal judgem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Brand Owner, that there was no service being provided by the CBU, and no GST was being paid thereon (Refer Para 28 of the Karnataka AAAR ruling). The present case is the exact opposite, as the CBU is rendering bottling services to the Applicant, and GST has been duly discharged on the consideration for the services supplied, viz. the Bottling Fee. PRAYER: In view of the foregoing, the Applicant prays that this Hon'ble AAR may be pleased to issue a ruling to the effect that, in terms of the agreements entered into by the Applicant with the CBUs, the aforementioned surplus/ profit of the Applicant, is not liable to GST. 03. CONTENTION - AS PER THE CONCERNED OFFICER The su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 same by manufacturing and selling alcoholic beverages under the various brand names. However, the BO does not have the requisite State Excise licences in the various States, and therefore made contracts with the CBUs who will carry out the procurement, man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufactured goods is obtained by the BO in its own name. (ix) In terms of the sale of the IMFL, the BO identifies the persons to whom the IMFL is to be sold and also decides the price at which the IMFL is to be sold. The CBU has no discretion on the distribution of the IMFL. The sale price of the IMFL is also received directly by the BO from the buyer. 8. Accordingly, the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted and called for final hearing on 28.11.2018, Sh. Rohan Shah, Advocate along with Ms. Divya Jeswant, Advocate and Sh. Atit Dalai, head taxation appeared argued case on merit. Jurisdictional Officer Sh. Sashiknnt Bhasgauri Supt., appeared and made written submissions. 05. OBSERVATIONS We have gone through the facts of the case, documents on records and submissions made by both, the department and the applicant. The questions put before us is as under:- 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 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? 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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 noaminated 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 their profit. The applicant has very rightly stated that the true commercial nature of the arrangement in the subject case is one in which the CBU provides manufacturing services to the Applicant, and is remunerated in the form of bottling cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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