GST on Surplus Profits Received from Contract Manufacturers
Karnataka AAR ruled that brand owners must pay 18% GST on surplus profits received from contract manufacturers.
- Ruling
- Advance Ruling No. KAR ADRG 9 / 2018 Dated: 29 June, 2018
- Dated
- 29 Jun 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- UBL asked if contract manufacturing and profit sharing attract GST.
- Units buying their own raw materials are not doing job work.
- Contract manufacturing units pay no service GST on retained profits.
- Brand owners must pay 18% GST on surplus profit received.
In short
United Breweries Limited (UBL) allowed independent brewing units to manufacture beer using UBL's brand name and technical specifications. These manufacturing units bought raw materials on their own, brewed the beer, sold it, and kept a fixed margin. They then sent the remaining surplus profit to UBL as a brand fee. UBL asked the tax authority whether GST applies to the profits made by the manufacturing units and the surplus money sent back to UBL.
What has changed
How it worked before
Before this ruling, many brand owners assumed that receiving surplus profits from contract manufacturers was merely a division of business income rather than a service. Businesses also assumed that contract manufacturing was always classified as job work, regardless of who bought the raw materials.
What has changed
The Karnataka Authority for Advance Ruling (AAR) in Order 9/2018 ruled that manufacturing is not job work if the factory buys its own raw materials. As a result, the manufacturing unit pays no GST on its retained profit. However, the brand owner is providing a service by letting the unit use its brand name and know-how, making the surplus profit received by the brand owner taxable at 18% GST under Service Code 999799.
Who this affects
This applies to brand owners in sectors like beverages, FMCG, and pharmaceuticals who allow contract manufacturers to buy raw materials, produce goods, and transfer back surplus profits.
An example
Suppose a beverage brand named ColdSip enters an agreement with a local factory to make fruit juices. The factory buys all ingredients, packages the juice under the ColdSip brand, sells it, and keeps a set cost and profit margin. The remaining surplus profit is transferred back to ColdSip. Based on this ruling, the factory is not providing job work services, but ColdSip must pay 18% GST on the surplus profit it receives for letting the factory use its brand and recipe.
What you should do
Review your manufacturing agreements to see who purchases raw materials and how profits are transferred. Note that an advance ruling binds only the business that applied for it and its tax office. You should consult a tax professional or apply for your own advance ruling before changing your tax position.
If you do nothing
If you receive surplus profit or brand fees from contract manufacturers without paying GST, tax officers may treat it as undisclosed service income. They can demand unpaid GST at 18% along with heavy interest and penalties. Assuming another company's advance ruling automatically protects you can lead to unexpected tax demands during an audit.
The terms explained
- Job Work
- A service where a factory processes or manufactures goods using raw materials that belong to another registered business.
- Advance Ruling
- An official written decision given by tax authorities to a specific business explaining how GST laws apply to its business setup.
- Input Tax Credit
- A mechanism that lets businesses reduce the GST they owe on sales by deducting the GST they already paid on business purchases.
The ruling in detail
Authority for Advance Ruling
M/s United Breweries Limited
Advance Ruling No. KAR ADRG 9 / 2018 Dated: 29 June, 2018 · Karnataka
Questions before the authority
- (a) Whether beer bearing brand/s owned by M/s United Breweries Limited (Brand Owner/UBL) manufactured by Contract Brewing Units (CBUs) out of the raw materials, packaging materials and other input materials procured by it and accounted by it and thereafter selling such beer to various parties under its invoicing would be considered as supply of services and whether GST is payable by the CBUs on the profit earned out of such manufacturing activity?
- (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?
Facts
The applicant, United Breweries Limited (UBL), owns beer brands and enters into brewing and distribution agreements with Contract Brewing Units (CBUs). The CBUs procure raw and packaging materials on their own account, manufacture beer according to UBL's technical specifications under UBL's supervision, and sell the finished product directly to market entities or state corporations under their own invoicing. After paying statutory taxes and retaining manufacturing costs, overheads, and an agreed profit margin, the CBUs remit the remaining sale proceeds as **brand fee and surplus profit** to UBL.
Ruling
| Question | What the authority ruled |
|---|---|
| Supply of service by CBUs to Brand Owner and GST on profit earned by CBUs | 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. CBUs purchase and own the raw materials, taking the activity outside job work under Heading 9988. |
| GST liability on Surplus Profit transferred by CBU to Brand Owner (UBL) | Yes, GST is payable by the Brand owner (UBL) on ‘Surplus Profit” transferred by the CBU to brand owner out of the manufacturing activity and the supply of service to the CBUs is classified under Service Code (Tariff) 999799 and liable to pay GST at 18% ( CGST-9%, SGST-9%) on the amount received from the CBUs. Taxable under residual entry for services not specified elsewhere. |
The Authority held that CBUs are not providing job work services to UBL because the raw materials are purchased and owned by the CBUs themselves, meaning no GST applies to the profits retained by CBUs. However, UBL is providing a taxable service to CBUs by granting technical know-how and brand permission in exchange for consideration. Consequently, UBL is liable to pay **18% GST on the surplus profit** transferred by CBUs under the residual classification Code 999799.
Reasoning
Under Section 2(68) and Schedule II (Serial No. 3) of the CGST Act, job work services apply only when treatment or processing is undertaken on goods **belonging to another registered person**. Since CBUs procure and account for raw materials in their own books, their manufacturing does not qualify as job work under Heading 9988. Conversely, Section 2(102) defines services as **anything other than goods, money and securities**, and Section 7(1) contains an open-ended definition of supply. Thus, UBL's act of providing technical parameters, supervision, and authorization to affix brand names constitutes a service rendered to CBUs for consideration, classified under residual Service Code 999799 under Notification No. 11/2017-Central Tax (Rate).
Provisions relied on
- Section 2(68) of CGST Act, 2017
- Section 2(102) of CGST Act, 2017
- Section 7 of CGST Act, 2017
- Section 9(1) of CGST Act, 2017
- Schedule II, Serial No. 3 & Serial No. 5(c) of CGST Act, 2017
- Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 (Heading 9988, Heading 9989, Code 999799)
For the practitioner
This ruling establishes that contract manufacturing where the unit owns the inputs does not constitute a job-work service. Crucially, it cautions brand owners that receiving residual business profits or brand fees from contract manufacturers will be treated as a taxable supply of service under the **residual classification entry (999799)**, even if it does not strictly qualify as an IPR transfer under Schedule II.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/krntk_9.18_dt_29.06.18_ubl.pdf
Legibility of the scan, as read: high.
Prepared 19-10-2026.
About Patron Accounting LLP
Patron Accounting LLP is a CA and CS-led accounting and compliance firm that has been working with businesses across India since 2019. We handle the work that keeps a company correct with every department it answers to: day-to-day bookkeeping and accounting, GST registration and returns, income tax filing and assessments, TDS, payroll and PF/ESI, company and LLP incorporation, ROC and MCA compliance, statutory and internal audit, physical stock and inventory audits, trademark and other registrations, and the certificates and reports that banks, buyers and regulators ask for.
Our clients range from a first proprietorship registering for GST to established companies running operations across several states. Much of our work is exactly this: reading what a department has published and telling a business, in plain terms, whether it changes anything for them.
We operate from five offices and serve clients across the rest of India remotely:
- Pune (HQ): RTC Silver, B4-708, Sai Satyam Park, Wagholi, Pune, Maharashtra 412207
- Mumbai: 104, Rajshila Building, 597 J.S.S. Road, Marine Lines, Mumbai 400002
- Delhi: 3rd Floor, B-6/154-155, Sector 5, Rohini, Delhi 110085
- Gurugram: Pioneer Urban Square, B109, Golf Course Ext Road, Sector 62, Gurugram 122098
- Ahmedabad: Phoenix Tower, 1107, near Commerce Six Road, Drive In Road, Navrangpura, Ahmedabad, Gujarat 380009
If anything on this page affects you and you would like somebody to look at your own position, we are glad to help. Call +91 94594 56700, write to sales@patronaccounting.com, or visit patronaccounting.com. The first conversation costs nothing.