GST Liability in Contract Brewing: Surplus Profit of Brand Owners Classified as Supply of Services

Introduction

The case of United Breweries Limited (UBL) v. Authority for Advance Rulings, GST, adjudicated on June 29, 2018, addresses pivotal questions concerning the applicability of Goods and Services Tax (GST) in the context of contract brewing arrangements. UBL, a prominent player in the beer manufacturing and supply industry, sought clarity on two primary issues:

• Whether Contract Brewing Units (CBUs) are liable to pay GST on profits earned from manufacturing beer under UBL's brand.
• Whether GST is applicable to the 'Surplus Profit' transferred by CBUs to UBL from such manufacturing activities.

The crux of the dispute lies in defining the nature of transactions between UBL and its CBUs and determining the scope of GST applicability under the existing legal framework.

Summary of the Judgment

The Authority for Advance Rulings delivered a comprehensive judgment addressing UBL's queries. The key findings are:

• Question 1: CBUs are not engaged in the supply of services to UBL in their manufacturing activities and, consequently, are not liable to pay GST on the profits earned from such operations.
• Question 2: UBL is liable to pay GST on the 'Surplus Profit' received from CBUs. This profit is classified under Service Code (Tariff) 999799 and is subject to an 18% GST rate (CGST-9% and SGST-9%).

The judgment meticulously analyzed the nature of the agreements between UBL and CBUs, the flow of funds, and relevant legal provisions to arrive at these conclusions.

Analysis

Precedents Cited

UBL referenced several pivotal cases to bolster its arguments against the imposition of GST on the surplus profits. Notably:

• BDA Pvt. Ltd. v. Commissioner of Central Excise: The Tribunal held that permitting CBUs to manufacture alcoholic beverages on behalf of the principal does not constitute taxable services under Intellectual Property Rights (IPR).
• Radico Khaitan Ltd. v. Commissioner of Service Tax: This case reinforced the stance that certain brand-related activities do not amount to taxable services.
• Skol Breweries Ltd. v. Commissioner of C. Ex. & S.T.: Further established that brand owners are not liable to service tax on proceeds from similar arrangements.
• UBL's Own Adjudication Order: Highlighted inconsistencies in Service Tax applicability, which UBL is challenging in the current GST era.

These precedents collectively underscored the argument that the activities in question did not constitute the provision of taxable services, a point UBL sought to extend into the GST regime.

Legal Reasoning

The Authority's legal analysis revolved around interpreting the definitions and scopes outlined in the Central Goods and Services Tax (CGST) Act, 2017, Karnataka GST Act, 2017, and relevant Notifications.

• Supply of Services by CBUs: The CBUs' activities were scrutinized under the definition of 'Job Work' (Section 2(68) of CGST Act). Since CBUs procured raw materials independently and manufactured beer under UBL's specifications without supplying goods to UBL, their operations did not fall under 'Supply' as per Schedule II of the CGST Act. Thus, CBUs were not providing taxable services to UBL.
• Surplus Profit by UBL: The surplus profits received by UBL were analyzed under the concept of 'service' as defined in Section 2(102) of the CGST Act. Even though Schedule II did not explicitly categorize this activity as a taxable service, the Authority determined that the funds received by UBL were consideration for services rendered, specifically the use of brand specifications and technical know-how, thereby attracting GST under Service Code 999799.

The Authority also considered the comprehensive classification under Notification 11/2017-Central Tax (Rate) dated June 28, 2017, which outlined the taxonomy of services for GST applicability.

Impact

This judgment holds significant implications for the alcoholic beverages industry and, more broadly, for any sector involving brand licensing and contract manufacturing:

• For Manufacturers (CBUs): The decision exempts CBUs from paying GST on profits derived from manufacturing activities under brand licensing agreements, provided they do not supply services to the brand owner.
• For Brand Owners (Like UBL): It clarifies that surplus profits received from CBUs are taxable as services, ensuring compliance and binding frameworks for such financial transactions.
• Legal Precedent: Establishes a clearer demarcation of what constitutes a 'supply of service' under GST in contract manufacturing scenarios, aiding future litigations and tax rulings.
• Policy Formulation: Offers insights for policymakers to refine GST laws concerning intellectual property and brand-related transactions.

Complex Concepts Simplified

The judgment delves into several intricate legal concepts under GST law. Here's a breakdown:

• Job Work: Under GST, 'Job Work' refers to any processing, treatment, or repair of goods belonging to another person. The key is whether the service provider (CBUs) is undertaking the work on goods supplied by the principal (UBL).
• Supply of Services: Defined under Section 2(102) of the CGST Act, any activity other than the sale of goods, money, or securities is deemed a service. This broad definition encompasses various transactions not explicitly listed under Schedule II.
• Schedule II of the CGST Act: Lists specific activities that are considered as supply of goods or services. However, not all services need to be enumerated here; the definition of 'supply' is inclusive.
• Service Code 999799: A residual classification used for services that do not fit into any specified category, ensuring that all services are accounted for under GST.

By understanding these definitions, stakeholders can better navigate GST implications in contract-based business models.

Conclusion