Case Law Details
PHI Seeds Pvt Ltd Vs Commissioner of Service Tax (CESTAT Hyderabad)
The appeal before CESTAT Hyderabad arose from an Order-in-Original confirming Service Tax of ₹85,38,967 along with interest and penalties against the appellant, engaged in the cultivation, processing, and sale of hybrid seeds. The demand originated from an audit that found differences between freight expenses recorded in the profit and loss account and the figures disclosed in ST-3 returns. Based on these differences, the Department alleged non-payment of Service Tax under the Reverse Charge Mechanism on freight and related charges and issued a show cause notice invoking the extended period for Financial Years 2010-11, 2012-13, and 2013-14.
The appellant challenged the demand on merits and limitation. It contended that the show cause notice was vague as it did not specify the precise taxable service, charging provision, legal basis for levy, classification of service, or the methodology adopted for computation. It further argued that a mere mismatch between the books of account and ST-3 returns could not automatically create a Service Tax liability. The appellant submitted that a substantial part of the freight-related expenditure comprised provisions, market cess, reimbursements, loading and unloading charges paid to non-GTA vendors, and courier freight on which tax had already been discharged by the vendors. It also claimed that hybrid seeds are agricultural produce and that their transportation and incidental loading and unloading were exempt under Notification No. 25/2012-ST.
The Revenue argued that hybrid seeds cease to be agricultural produce after processing and relied on judicial precedents to support the demand. It also contended that the freight expenses reflected suppression of taxable value.
The Tribunal identified the principal issues as the validity of the show cause notice, whether hybrid seeds qualify as agricultural produce, whether freight and loading-unloading charges attract Service Tax, and whether the extended period and penalties were invocable.
CESTAT held that the show cause notice lacked the necessary specificity. It observed that the demand was founded mainly on numerical differences between the profit and loss account and ST-3 returns without clearly identifying the taxable service, charging provision, service classification, or computation basis. It reiterated that tax liability cannot be sustained merely on accounting mismatches and that the burden to establish a taxable event rests on the Revenue.
On the issue of hybrid seeds, the Tribunal distinguished the decision relied upon by the Revenue relating to tea, observing that processed tea becomes a commercially marketable product for consumption, whereas hybrid seeds remain intended exclusively for sowing and agricultural cultivation. The processing undertaken for preservation, grading, treatment, and germination quality does not transform them into a distinct commercial commodity. Accordingly, the Tribunal held that hybrid seeds continue to qualify as agricultural produce.
The Tribunal further found that the Department had treated all freight-related expenses as taxable without segregating non-taxable items such as provisions, market cess, reimbursements, and loading and unloading charges paid to non-GTA vendors. It held that Service Tax under the Reverse Charge Mechanism cannot arise merely from an expense being recorded under the freight head, as taxability depends upon the nature of the service provider and the applicable statutory liability.
The Tribunal also held that the extended period of limitation was not invocable, as the dispute involved interpretation of the exemption notification, the scope of agricultural produce, and classification of freight-related services. No fraud, suppression, wilful misstatement, or intent to evade tax was established. Consequently, interest and penalties under Sections 76, 77, and 78 were also held to be unsustainable. The impugned order was set aside, and the appeal was allowed with consequential relief as per law.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
M/s PHI Seeds Pvt Ltd., (now known as Corteva Agriscience Seeds Pvt Ltd.,) (hereinafter called as appellant) has filed the present appeal against the impugned Order-in-Original No. HYD-SVTAX-000-COM 135-16-17 dated 28.11.2016, whereby, Service Tax amounting to Rs. 85,38,967/- along with applicable interest and penalties, has been confirmed against the appellant.
2. The fact, in brief, is that the appellant are engaged in cultivation, processing and sale of hybrid seeds. During audit conducted by the Department, differences were noticed between freight expenses reflected in the profit and loss account and figures declared in ST-3 returns. Based on such differences, the Department entertained a view that the appellant had failed to discharge Service Tax liability, particularly under Reverse Charge Mechanism in respect of freight and related charges.
3. Accordingly, Show Cause Notice dated 19.10.2015 was issued invoking the extended period and proposing recovery of Service Tax with interest and penalties for Financial Year 2010-11, 2012-13 and 2013-14.
4. The Adjudicating Authority confirmed the demand. Aggrieved by the said order, the appellant is before this Tribunal.
5. The Learned Counsel submits that the entire demand is not sustainable both on merits and limitations. It is argued that the Show Cause Notice is vague and does not specify; precise taxable service, charging provision, legal basis for levy or, computation methodology. Learned Counsel for the appellant relied on the following decisions:
i. EID Parry India Ltd., 2023 (7) TMI 1018 – CESTAT, Hyd.
ii. ITC Ltd., 2025 (6) TMI (1967) – CESTAT, Chennai.
6. It is further argued that mere difference between figures in books of account and ST-3 returns cannot automatically lead to tax liability.
7. The appellant submits that a substantial portion of freight-related expenses consist of provisions, market cess, reimbursements, loading and unloading charges paid to Non-GTA vendors, and courier-freight charges on which tax already stood discharged by vendors. It is further submitted that hybrid seeds are agricultural produce, and therefore, transportation thereof as well as incidental loading-unloading is exempt under Notification No. 25/2012-ST.
8. Learned Counsel for the appellant submitted that the reliance place by the revenue on Apeejay Tea Ltd., is mis-placed because Tea is a finished consumer product, whereas hybrid seeds are not meant for consumption but only for sowing and cultivation.
9. It is further submits that even assuming tax were payable, the issue is interpretational and therefore extended period of limitation and penalties cannot survive. Learned Counsel for the appellant has relied on the following judgments:
i.Stemcyte India – SC – 2025 (7) TMI 1007.
ii. Padmini Products – SC- (1989) 4 SCC 275.
iii. Chemphar Drugs – SC – (1989) 2 SCC 127.
iv. Pushpam Pharmaceuticals – SC – 1995 Supp (3) SCC 462.
v. Ramakrishna Electricals – CESTAT Hyderabad – 2026 (1) TMI 713.
vi. Srinivasa Outsourcing – CESTAT Hyderabad – 2026 (1) TMI 1398.
10. Learned Authorized Representative reiterates the findings of the impugned order, inter alia, that hybrid seeds cannot treat as agricultural produce after processing and therefore exemption is not available.
11. Learned Authorized Representative submits that freight expenses reflected in financial records indicate suppression of taxable value. It is also submitted that demand has been correctly confirmed. Learned AR has relied on the following judgments:
i. Bihar State Warehousing Corporation Vs CCE & ST, Patna [2024 (23) Centax 64 (Tri-Cal)]
ii.Bird and Co. (Pvt) Ltd., Vs Kalyan Kumar Sen Gupta [1988 (37) E.L.T. 70 (Cal.)]
iii. Apeejay Tea Ltd., and others Vs The Union of India and others [MANU/GH/0933/2018]
12. We have heard both the parties and perused the records with their submissions.
13. The following issues arise for adjudication in the present appeal.
i. Whether the Show Cause Notice is legally sustainable?
ii. Whether hybrid seeds qualify as agriculture produce?
iii. Whether freight / loading-unloading charges attract Service Tax?
iv. Whether extended period and penalties are invocable?
14. We find substantial force in the submission of appellant that the Show Cause Notice lacks specificity. The notice proceeds largely on numerical difference between the profit and loss account and ST-3 returns. However, the notice fails to clearly specify:
i. Precise taxable service,
ii. Charging provision,
iii. Classification of service, and
iv. Basis of its computation.
15. A demand cannot be sustained merely on accounting mis-match without establishing taxable event. The burden to establish taxability squarely lies upon revenue.
16. Further, the core issue is whether hybrid seeds continue to remain agricultural product after processing. Revenue has strongly relied on Apeejay Tea Ltd., and others, supra, we have carefully gone through the said judgment. In Appejay Tea, the Hon’ble Gauhati High Court was concerned with Tea, which after processing becomes a commercially marketable finished product meant for consumer consumption. In our view, the factual matrix of the present case is materially different. Hybrid seeds are not sold for consumption. They are intended exclusively for sowing and agricultural cultivation. The processing carried out on seeds is for preservation, grading, treatment and ensuring germination quality. Such processing does not transform seeds into a new commercial commodity distinct from agricultural produce. Therefore, reliance on Apeejay Tea without appreciating factual distinction is misplaced. However, it is well settled that precedents must be applied after considering factual background. The Hon’ble Calcutta High Court in Bird & Co. (Pvt) Ltd., supra, observed that precedents cannot be mechanically applied ignoring factual distinctions. Similarly, judicial discipline requires examination of ratio in the context of facts under adjudication.
17. We also note the decision in Bihar State Warehousing Corporation, supra, wherein, the Tribunal Kolkata emphasised that tax demand must rest on clearly established taxable activity and proper legal foundation, not mere assumptions or accounting discrepancies. Applying the above principles, we find revenue’s citations do not advance its case sufficiently.
18. We further find that the Department has treated all freight-related expenses as taxable without proper segregation. Evidence placed on record shows that significant amounts relate to:
i) Provisions,
ii) Non-taxable maximum cess,
iii) Reimbursement,
iv) Loading unloading charges paid to Non-GTA vendors.
19. Service Tax under Reverse Charge cannot arise merely because an expense is recorded under freight head. Taxability depends on the nature of service provider and statutory liability. The Adjudicating Authority failed to undertake this exercise.
20. The demand has been raised by invoking extended period. Extended period of limitation requires proof of fraud, suppression, wilful misstatement, or deliberate intend to evade tax. No such ingredient is established. The dispute essentially concerns interpretation of exemption notification, scope of agricultural produce, and freight-related service classification. It is settled law that where issue involves interpretation, extended period cannot ordinarily be invoked. Mere accounting difference is insufficient to establish suppression. Therefore, invocation of extended period of limitation is not sustainable.
21. Since, the demand itself fails, penalties cannot survive. Even otherwise, no mala fide intent is established. Accordingly, penalties under Section 76, 77 and 78 are liable to be set aside.
22. In view of the above discussions, we hold that revenue failed to establish taxable service with specificity; hybrid seeds continue to qualify as agricultural produce; demand based on accounting difference is not sustainable; extended period is wrongly invoked, Interest and penalties are not sustainable.
23. Therefore, the impugned order is set aside and appeal filed by the appellant is allowed with consequential relief, if any, as per law.
(Pronounced in the open court on 23.06.2026 )
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