GST Update Vol 54 13th July 2018
A. CHANGES IN THE GST REGIME
GST on profit earned by brand owner by allowing brand use: Karnataka AAR ruling
The applicant 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 on its own and sell the beer directly to
government corporations/ wholesale depending on the 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 applicant sought
advance ruling to determine (a) whether beer bearing brand/s owned by brand owner and manufactured
by CBUs would be considered as supply of services and whether GST is payable by the CBUs on the
profit earned out of such manufacturing activity; and (b) whether GST is payable by the brand owner
on the surplus profit transferred by the CBU to the brand owner out of such manufacturing activity.
The AAR held as follows:- (a) where the applicant has manufacturing arrangement with CBUs who
manufacture brands of beer belonging to applicant and supply such beer to market by procuring raw
materials, packaging materials, incurring overheads and other manufacturing costs on its own and
sell beer directly, since material is purchased by CBUs and ownership of raw material required
to manufacture beer rests with manufacturer and not with applicant, manufacturing
activity undertaken by CBUs does not qualify classification under Heading 9988 which is
applicable when the physical inputs are owned by person other than the manufacturer, as a result
CBUs are not engaged in supply of any service to applicant. Therefore there does not arise any
liability to pay GST on amount retained by CBUs as their profit; (b) GST is payable by the brand
owner on surplus profit transferred by the CBU to brand owner out of the manufacturing activity and
liable to pay GST at 18% on the amount received from the CBUs.
Input tax credit on packing materials used in exempted supply: Chhattisgarh AAR ruling
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