Goods and Services Tax

In Re: M/s. Allied Blenders And Distillers Private Limited

2019 (3) TMI 537 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – TMI – Levy of GST – Supply of goods/services made by brand owner or not – Liquor licence – Contracting Bottling Units (CBU) scope of supply – Applicant permits the CBU to affix the labels etc. on the finished products and packaging. – CBU provides manufacturing services to the Applicant, and is remunerated in the form of bottling charges – whether the aforementioned surplus/ profit earned by the Applicant as the Brand Owner is liable to GST – maintainability of advance ruling aplication – Held that:- As per Section 95 (a) of the CGST Act. 2017 “advance ruling” means a decision provided by the Authority or the Appellate Authority to an applicant on matters or on questions specified in sub-section (2) of section 97 or sub-section (1) of section 100, in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant – the supply of services or goods or both, if any is not und

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ain 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, 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

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le supply to the Contract Bottling Unit” is answered in the negative. – GST-ARA-67/2018-19/B-155 Dated:- 15-12-2018 – SHRI B.V. BORHADE, AND SHRI B. TIMOTHY, (MEMBER) PROCEEDINGS (under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017) The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as the CGST Act and MGST Act ] by ALLIED BLENDERS AND DISTILLERS PRIVATE LIMITED, the applicant, seeking an advance ruling in respect of the following issue. 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

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of the present ruling sought: 1. Allied Blenders and Distillers Pvt. Ltd. ( ABD / Applicant ) has its GST registered premises at 394/C, Lamington Chambers, Lamington Road, Mumbai – 400 004. The Applicants are duly registered with the GST department, holding Registration No. 27AAACY3846K1ZX. 2. The Applicant, also known in the industry as a Brand Owner ( BO ), is the holder of various registered brands in relation to Indian Made Foreign Liquor ( IMFL ). As the owner of the said IMFL brands, no one other than the Applicant has the ability to exploit the brands, including by way of sale of IMFL under those brands. At the same time, the State Excise laws mandate that the manufacture and sale of IMFL, as well as the procurement of Extra Neutral Alcohol ( ENA ) required for the manufacture of IMFL, can only be undertaken by parties, who have been duly licensed by the State Excise authorities. 3. In order to the meet the requirements under the State Excise laws, the Applicant approaches vario

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he aforesaid contractual arrangements with the CBUs on a strictly non-exclusive basis. In fact, in order to fully exploit its brand, the Applicant simultaneously enters into multiple such arrangements with various CBUs. The 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

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erials pertaining to the manufacturing operations are to be handed over by the CBU to the BO. The packing materials (bottles, labels, caps, seals, outer cartons, etc.) are to be procured from sources identified by the BO. The risk, property and interest in the manufactured product passes from the CBU to the BO upon delivery of the product to the carrier nominated by the BO. The price at which the CBU is to sell and deliver the manufactured products is as per the directions of the BO (sample rate approvals are attached herewith as Exhibit-C). The entities to whom sales of the manufactured products are to be made are also identified by the B O. The BO has the discretion to directly make payments for the raw materials, packing materials, transportation and payment of various taxes/ fees. The sale price of the goods is received by the BO. The consideration payable to the CBU is in the nature of bottling charges which are fixed on a per month case basis, and not the sale price of the manufa

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s, 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 Applicant, and not by the CBUS (sample copy of a claim payment is attached herewith as Exhibit

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L manufactured is attached herewith as Exhibit-K). 6. As stated hereinabove, under the arrangement between the Applicant and the CBUS, in terms of the clause on Consideration, the CBU is remunerated in the form of bottling charges per case of IMFL manufactured. In this regard, sample invoices/ debit notes raised by the CBUs on the Applicant for the manufacturing and bottling charges are attached herewith as Exhibit L. 7. In terms of the flow of funds, the sale price of the IMFL is received directly by the Applicant from the State Corporation or other buyer (in a few cases, they money is received by the CBUs but is immediately auto-transferred to the Applicant vide standing instructions or otherwise). The Applicant then makes payment of the bottling charges and agreed upon reimbursements (such as for taxes) to the CBUs. The Applicant also makes payment directly to the raw material suppliers. The amount left with the Applicant (i.e. Brand Owner) after making all of the aforesaid payments

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ic 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 as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business 2. Definitions In this Act, unless the context otherwise requires, – (52) goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply (102) services means anything other than goods, money and securities

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e position under GST, as the supply of alcoholic liquor for human consumption has been constitutionally excluded from the purview of the GST. 4. However, an issue arose under the Service Tax provisions as to whether the CBUs were providing a service to the BOs, or vice versa, so as to attract the levy of Service Tax. In this regard, the Central Board of Indirect Taxes and Customs ( CBIC / Board ) had clarified vide two Circulars that under such contract manufacturing arrangements, the CBU is providing manufacturing services to the BO, but no services are being provided by the BO to the CBU. The relevant extracts of the said Circulars are extracted below for ease of reference: Circular No. 249/1/2006-C.X.4 dated 27.10.2008 Under such arrangement the BO gets alcoholic beverages 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

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n the nature of business profit (which falls within the purview of direct taxes), will not be chargeable to service tax. Copies of the aforesaid Circulars are attached herewith as Exhibit-N. 5. Further, pursuant to a Letter addressed by the Applicant to the jurisdictional Service Tax Department, it was affirmed vide Letter F.No. ST/HQ/PREVIA. 198(2)/2006/5734 dated 14.12.2009 that the surplus/ profit of the BO is not liable to Service Tax, per the previously issued Circulars. A copy of the said letter is attached herewith as Exhibit-O. 6. In terms of judicial decisions, in the Applicant's own case, as well as in the case of various other BOs in the industry operating under similar arrangements (as listed below), the Hon'ble CESTAT has held that the CBU is providing services to the BO which are taxable and/or that no service is rendered by the BO to the CBU. BDA Pvt. Ltd. vs. CCE, Meerut [2015 (40) STR 352 (Tri-Del)] = 2015 (6) TMI 586 – CESTAT NEW DELHI affirmed in Commissioner

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57 – SUPREME COURT. At the outset, in the present context, it is to be appreciated that the aforesaid contractual arrangement between the Applicant and the CBUs has evolved as a result of the intersection of; (i) the commercial requirements of the Applicant (i.e. to exploit the brands under 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 identifi

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termines the remuneration (in terms of the bottling charge on a per case basis) which it is willing to pay to the CBU. It is also significant that the Applicant enters into the aforesaid contractual arrangements with the CBUs on a strictly non-exclusive basis. In fact, in order to fully exploit its brand, the Applicant simultaneously enters into multiple such arrangements with various CBUs. The 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. 9. Accordingly, the true commercial nature of the arrangement is one in which the CBU provides manufacturing services to the Applicant, and is remunerated in the form of bottling charges. BOs such as

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terials, 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 un

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ng the CBUs to affix the Applicant's brand on the products is evidently merely to enable the manufacture of the IMFL per the commercial requirements of the Applicant, which cannot in any manner be treated as a supply of service by the Applicant to the CBUs. Any such position would result in the absurdity that in every transaction of job work or contracting manufacturing, there would be a supply of service by the party placing an order for the manufacture/ processing of goods, to the party manufacturing processing those goods. 12. Moreover, in terms of Section 7 of the CGST Act, the requirements of a supply liable to GST are: (i) goods or services or both; (ii) made for a consideration; (iii) by a person; (iv) in the course or furtherance of business. Even if the provision of the specifications by the Applicant and permitting the CBUs to affix the Applicant's brand on the products can be seen as a supply of service by a person (i.e. the Applicant), in the course of furtherance o

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f 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 Service Tax regime and the current GST regime which would necessitate a change in the position on issue. In fact, manufacturing services carried out for or on account of another party (whether on the inputs of another or otherwise) continue to be taxable under Heading 9988, and in any event, services nowhere elsewhere classified are also covered under Heading 9997. Additional

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s (either to a State Corporation or to a private buyer) under the instructions of the Applicant, and at the price fixed by the Applicant. The sale price of the alcoholic beverages is received by the Applicant, out of which the Bottling Fee and other reimbursements are paid to the CBU. The balance amount is retained by the Applicant as its surplus/ profit. ISSUE INVOLVED: 5. In the above background, the issue referred to this Hon'ble AAR is whether the aforementioned surplus/ profit earned by the Applicant as the Brand Owner is liable to GST. LEGAL SUBMISSIONS: 6. The Applicant submits that there is no supply of service by the Applicant to the CBUs for the following reasons. • The true commercial nature of the transaction can be determined by an examination of critical factors, such as who engages whom, who pays whom and who can terminate the agreement. In terms of these factors, it requires to be seen who the service recipient is, and who the service provider is. Accordingly,

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er 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 type of arrangement entered into by the present Applicant), it is the CBU who was liable to pay Service Tax on the Bottling Fee. (Refer Pg. 350 of the Compilation Vol. 2, Para 1 and Para 2] • A further clarification in the form of Circular F. No. 332/17/2009-TRU dated 30.10.2009 was subsequently issued, which again clarified that Service Tax was payable on the Bottling Fee earned by the CBU, but not on the surplus/ profit retained by the Brand Owner. (Refer Pg. 352 of the Compilation Vol. 2, Para 2(7) and Para 4(d)/ • In the present case, the Applicant as the Brand Owner approaches the CBU to seek out bottling services, and not vice versa. In some cases, the Applicant terminates the CBU and appoints a new CBU. In this regard, sample copies of such Termination letters issued by the Applicant to certain CBUs wer

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ntation) which indicate that the nature of the arrangement is one in which the CBU provides services of bottling to the Applicant. (Refer Para 5 of Annexure B to the AAR Application) The fact that the manufacture is clearly being carried out by the CBU for the Applicant is also clear from the fact that the product labels bear the brands of the Applicant as well as state that the said brands are registered to the Applicant. Separately, the labels state that the products are manufactured by the CBU in question. In this regard, sample copies of product 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 bee

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Aurangabad [2014 (35) S T R 570 (Tri-Mum)] = 2014 (4) TMI 1040 – CESTAT MUMBAI [Refer 364 and 367 of the Compilation Vol. 2). Furthermore, the said Tribunal ruling in the Applicant's own case was also upheld by the Hon'ble Supreme Court in Commissioner vs. BDA Pvt. Ltd. [2016 (42) S.T.R. [J143 (S.C.) = 2015 (11) TMI 1585 – SUPREME COURT [Refer Pg. 363 of the Compilation Vol. 2). No material change has occurred under the GST, which warrants a change from the aforesaid taxing position under the erstwhile Service Tax provisions. Under Section 7 of the CGST Act, 2017, the taxable event continues to be a supply of service by a person, for a consideration, in the course of furtherance of business. In response to a specific query from the Hon'ble AAR, it was also submitted that the brand value is reflected in the sale price of the alcoholic beverages, which suffers a levy of State Excise duty and VAT, as the Legislature has chosen not to include alcoholic beverages under GST. Furt

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r case plus reimbursed expenses. Accordingly, a consideration was being paid to the Brand Owner for 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 th

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under the State Excise laws, there are various Contracting Bottling Units ( CBUs ) who hold the requisite licences under the State Excise laws to source the ENA and carry out the manufacture and bottling of the IMFL'. 3. M/s Allied Blenders and Distillers Pvt. Ltd., approaches the CBUs and enter into contractual arrangements under which the CBUs undertake the manufacture of the IMFL for the BOs, in return for the payment of bottling charges (and certain agreed upon reimbursements, such as taxes and expenses). To enable the manufacturing of IMFL under the BO's brands, the BO as part of the arrangement permits the CBU to affix the brand labels etc. on the finished products and packaging. 4. In terms of the sale of the IMFL, in certain States, the sale of alcoholic beverages can only take place through a State-owned corporation; accordingly, the CBUs deliver the goods to the relevant State Corporation or other buyer as per the directions of the BO. 5. As regards the flow of funds,

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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, manufacture the IMFL and sell the same under the State Excise licences held by them. (iii) The BO accordingly enters into non-exclusive arrangements with various such CBUs

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td. (v) The total working capital as required by the CBU for its corresponding manufacturing operations is to be arranged by the BO. (vi) In terms of procurement, the BO has right to either directly arrange, or, recommend suppliers for the procurement of all raw materials and packing materials, and the BO always approves the price at which materials are to be procured by the CBU. The CBU has no discretion on the procurements. The BO may also directly make payment for the raw materials, packing materials etc. to the vendors. (vii) The entire manufacturing activity by the CBU is carried out under the supervision of the BO, and, for this purpose, the BO deputes fixed personnel to the premises of the CBU. During the manufacturing, any unusable or damaged materials are to be handed over by the CBU to the BO. In respect of any wastage which occurs, the disposal of such wastage is to be done only at the rates approved by the BO and all such amounts are to be paid to the BO. On termination of

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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. 10. This poisition was also affirmed under the previous Service lax regime, vide Circular No. 249/1/2006-CX4-dated 27.10.2008 and Circular F. No. 332/17/2009-TRU dated 30.10.2009 issued by the Ministry of Finance. The latter Circular specifically confirmed that Service tax would be payable on the bottling/job charges, distribution costs and other reimbursable… the surplus /profit earned by the BO being in the nature business profit (which falls within the purview of direct taxes), will not be chargeable to service tax . 11. The Notification No. 39/2009-Service Tax dated 23.09.2009 under the previous Servi

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roduction, inventor) dispatches of goods as well as financial transactions relating thereto. 12. There has been no material change in the provisions between the erstwhile Service Tax regime and the current GST regime, and the above position should continue to apply. 04. HEARING The case was scheduled for 11.09.2018 for Preliminary hearing when Sh. Rohan Shah, Advocate along with Ms. Divya Jeswant, Advocate and Sh. Kalan Jain Tax Adviser and Sh. Atit Dalal, head taxation appeared and made contentions tor admission of application as per contentions in their ARA application. Jurisdictional Officer Sh. Ashok S. Gupta Supt., Division I, Mumbai Central appeared and stated that they would be making submissions in due course. The application was 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 mad

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g a taxable supply to the Applicant? 2. 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? 3. 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? 4. Whether the Contract Bottling Unit is paying consideration to the Applicant by way of brand owner surplus? We find from the above that questions numbers 1 and 4 are asked by the applicant but pertains to the CBU. As per Section 95 (a) of the CGST Act. 2017 advance ruling means a decision provided by the Authority or the Appellate Authority to an applicant on matters or on questions specified in sub-section (2) of section 97 or sub-section (1) of section 100, in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant. In respect of question nos. 1 and 4, we f

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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, 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

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Us to get the IMFL manufactured in under their brand name. There is no service rendered by the applicant in this case. It is very clear from the terms of the agreement that there is neither any supply of goods nor services flowing from the applicant. The applicant actually gets the products manufactured by the CBUs. Hence as per GST laws there is no supply of goods or services or both by the applicant as per Definition of 'supply' under section 7 of the GST Act, 2017, which reads as follows: – 'supply' includes (a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. (b) …………………………. 05. In view of the extensive deliberations as held hereinabove, we pass an order as follows : ORDER (under section 98 of the Central Goods and Services ax Act, 2017 and the Maharashtra Goods and Services T

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