#GSTCase-9-United Breweries Ltd.- 99 taxmann.com 107 (AAAR-KARNATAKA)
Query: Whether GST is payable by brand owner on ‘surplus profit’ transferred by contract brewing/bottling units (hereinafter referred to as the ‘CBU’) to Brand Owner out its manufacturing activity.
Facts of the Case:
Appellant was engaged in manufacture and supply of beer under various brand names. Appellant, apart from manufacturing beer on its own, also had an arrangement with contract brewing/bottling units (hereinafter referred to as the ‘CBU’) who made brands of beer belonging to appellant and supplied such beer to market.
a) Role of the CBU:
CBU procured raw materials, packaging material; incurred overheads and other manufacturing costs etc, on their own. CBU had agreed to make a specified quantity of beer per annum and sell it through Government corporations/or in wholesale depending on State market regulations. Upon sale of such goods, CBU paid statutory levies and taxes. CBU accounted for all manufacturing cost and distribution overheads in their books of account and retained a certain amount of profit.
b) Role of the Appellant:
- Appellant, at their cost, deputed Process Executives and Commercial Executives to the CBU, who provided specifications, methods and quality parameters; would guided CBU in procurement of raw materials, packing materials and such other materials; gave directions for carrying out quality control of beer manufactured by CBU; took samples for analytical and quality tests and advised changes in the brew from time to time and advise the CBU on the brewing, fermentation and lagering time of the UBL beer.
- CBU also used right vested on him to use Trademarks and labels of Appellant on UBL branded beer manufactured and sold by him.
- The entire know-how regarding manufacture of Beer, such as nature of raw materials to be procured, ratio and proportion of mixing raw materials, the manner of packing the beer, etc being the sole intellectual property of the Appellant was shared with the CBU under an agreement.
c) Consideration to the Appellant:
For providing CBU with the representational right to make and supply beer under their brand, appellant received two kinds of amount from the CBU in terms of the Agreement.
- One was the Brand Fee which was fixed at Rs 5 per case, and
- Second was the amount which in terms of clause 8 of Agreement, was termed as “reimbursement of expenses incurred by brand owner”. This amount was not fixed but was variable depending on the sales in a particular month, adjustment from sale proceeds towards variable costs incurred by CBU, CBU’s profit and brand fee paid by the CBU to Appellant. Surplus remaining after this, if any, was transferred to Appellant’s account. (Referred as component “W” in the agreement)
Observation by AAAR:
In the instant case, appellant permitted CBU to use trademarks owned by it, permitted CBU to acquire the know-how relating to production and packaging of UBL’s beer, which was sole property of UBL and had permitted CBU to use Labels for branding of UBL beer for sale by the CBU. All these amount to permitting the CBU to use UBL’s intellectual property rights. Therefore, AAAR observed that by virtue of clause 5(c) of Schedule II of the CGST Act, the said activity amounts to a supply of service.
As per the agreement between the CBU and the appellant; registration of labels and payment of fees was responsibility of the appellant. Therefore, appellant on its part was incurring expenditure to enable the CBU to manufacture and sell its branded beer. This expenditure incurred was treated by the AAAR in connection with the representational rights for manufacture and sale of branded beer to the CBU for which the appellant was receiving the surplus profit under the nomenclature of “W” as “reimbursement of expenses incurred by brand owner”.
Held: AAAR held that in return for rendering service of providing right to manufacture and supply branded beer to the CBU along with the right to use Trademarks and Labels, appellant gets a consideration which comprises of a Brand Fee of Rs 5 per case as well as a reimbursement of expenses. The quantum of reimbursement is dependent on the surplus profit available at the hands of the CBU.
a) Decision of AAAR about Taxability of the amount received as Brand Fee and Surplus amount
In this case, ‘Brand Fee’ is the consideration for grant of the representational right to manufacture and sell beer bearing the UBL brand name.
This surplus, as the agreement denotes, is a reimbursement for the ‘expenses incurred’ by the brand owner. It is evident from agreement that appellant incurs expenses towards deputing his personnel to 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 CBU. It is important to note that amount transferred to Appellant (M/s UBL) is out of the surplus profit earned by the CBU from the sale of beer. It is not a profit earned 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. Therefore, AAAR held that the component ‘W’ would also form part of consideration received by appellant for supply of service. This component ‘W’ therefore, is also liable to GST being a consideration for the supply of taxable service.
b) Decision of AAAR about nomenclature of taxability of service
AAAR held that looking to the entire gamut of activities performed by appellant, it was difficult to arrive at any nomenclature for services delivered by appellant to CBU. While Brand fee and reimbursed expenses, received by appellant was in (direct) consideration for permitting CBU to use representational right to make and sell their branded beer, service supplied can at times have colour and character of being an erstwhile “franchise’ service or/ and “IPR service’ in terms of the Finance Act 1994. On the other hand, so termed ‘surplus profit’ amounts received have characteristics of being a consideration received for a ‘mixed supply’.
While in overall terms, at times service supplied assumes character of permitting use of intellectual property rights, or of being a franchise service, at other times it takes on colour and character of being secondment of personnel.
AAAR categorized services under Service Code 99979 as ”Other Miscellaneous services’. The sub-heading under this service code is 999799 which is “other services nowhere else classified’. The GST applicable under this category of service is 18%.
Comment: The judgement lays down important guidelines about taxability of transactions where profit is transferred by one party to the contract in consideration of their services. The nomenclature in these contracts might be of remittance of profit but then as AAAR has observed that 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’.
Further another important observation by AAAR in its decision was regarding the importance of SAC/HSN Codes in GST wherein it observed that
“This code is merely an accounting code and is primarily an instrument for assembling and tabulating statistical data on different services. Although it does, at the end of the day, decide the rate of tax to be imposed, it does not appear to have any other statutory ramification in terms of determining exigibility.”
These two observation coupled with the detailed judgement laying out the different parameters and considerations in the contract makes the judgement a must read.