The Karnataka Authority for Advance Rulings (AAR) recently held that the contract brewing / bottling units ( CBU ) not liable to pay tax on the amount retained by them from the Brand Owners, M/s United Breweries Limited.
The Applicant, M/s United Breweries Limited is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has manufacturing arrangement with contract brewing / bottling units (CBU) who manufacture brands of beer belonging to the applicant and supply such beer to market. CBUs manufacture beer bearing brands owned by the applicant by procuring raw materials, packaging materials, incurring overheads and other manufacturing costs etc. on its own and sell the beer directly to Government corporations / wholesale depending on the state market.
The CBUs, upon the sale of the goods, pay the statutory levies and taxes. The CBUs further account for the manufacturing cost and distribution overheads in their books of account as they had procured all the resources for the manufacture of the beer. Further they retain a certain amount of profit. After accounting all these revenues the CBUs transfer the balance amount to the applicant.
The issue was with regard to the taxability of such amount retained by the CBUs out of profit earned out of such manufacturing activity.
The authority noted that UBL, being the brand owner, has the technical knowhow to manufacture beer to certain specifications typical of their brands. They are thus in possession of the intellectual property associated with their brands of beer. The CBUs undertake the manufacture of goods for or on behalf of the applicant, apparently in the nature of a job work.
“The ownership of the raw material required to manufacture beer rests with the manufacturer and not with the applicant. Therefore, the applicant had not supplied any goods used in the manufacturing activity undertaken by the CBUs. Consequently, the manufacturing activity undertaken by the CBUs does not qualify classification under Heading 9988. As a result, the CBUs are not engaged in supply of any service to the applicant,” the authority said.
It was therefore, held that the CBUs are not engaged in supply of service to the applicant and therefore, there does not arise any liability to pay GST on the amount retained by the CBUs as their profit.
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