Classification of Water Sold under GST: AAAR directs AAR for re-examination

In re Mannarai Common Effluent Treatment Plant (P) Limited (GST AAAR Tamilnadu)

The recent decision by the Appellate Authority for Advance Ruling (AAAR) in the case of Mannarai Common Effluent Treatment Plant (P) Limited sheds light on the classification of water sold under the Goods and Services Tax (GST) regime. The AAAR directed the Authority for Advance Ruling (AAR) to re-examine the matter, emphasizing the need for a thorough reconsideration in light of new evidence presented.

Background: Mannarai Common Effluent Treatment Plant (P) Limited, a registered entity under the GST Act, sought clarification on the classification of its output, particularly water sold after treating effluents from dyeing units. The company’s application for an advance ruling questioned whether the classification of water under heading 2201, as specified in Notification No.2/2017-Central Tax (Rate) dated 28.06.2017, was appropriate.

The AAR, in its order dated 19.06.2023, classified the output as the sale of goods and upheld the classification of water sold by the appellant under heading 2201, with a NIL rate of tax. Dissatisfied with the ruling, Mannarai Common Effluent Treatment Plant (P) Limited appealed to the AAAR, citing various grounds, including discrepancies in the AAR’s decision and the failure to consider crucial aspects of the processing carried out by the company.

Appellant’s Arguments: During the personal hearing before the AAAR, the appellant presented additional submissions, including a test report from the South Indian Textile Research Association (SITRA) and a consent order from the Tamil Nadu Pollution Control Board. These documents highlighted the industrial use and specific restrictions on the reuse of the treated water, challenging its classification under heading 2201.

The appellant argued that the effluent treatment process, aimed at achieving zero liquid discharge and making the water reusable in dyeing industries, resulted in significant reductions in various contaminants. They contended that equating their effluent treatment plant with sewage treatment plants overlooked the distinct characteristics and intended use of the treated water.

AAAR’s Decision: After considering the appellant’s arguments and reviewing the additional evidence presented, the AAAR concluded that a re-examination by the AAR was warranted. The AAAR emphasized the importance of considering the new evidence, including the test report and consent order, in determining the classification of the treated water.

Conclusion: The AAAR’s decision to remand the case to the AAR for re-examination underscores the complexity of classifying water sold under the GST framework. It highlights the need for a comprehensive assessment, taking into account not only statutory provisions but also the specific nature of the product and its intended use. As the matter returns to the AAR, stakeholders await further clarity on the classification of treated water and its implications under GST regulations.

Read AAR Order : Classification of Unsweetened Mineral & Aerated Waters (Excluding 20L Drinking Water Bottles)

FULL TEXT OF THE ORDER OF AUTHORITY FOR APPELLATE ADVANCE RULING,TAMILNADU

At the outset, we would like to make it clear that the provisions of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act are in pari materia and have the same provisions in like matter and differ from each other only on few specific provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act, 2017 would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act, 2017.

2. The subject appeal was filed under Section 100(1) of the Tamil Nadu Goods & Services Tax Act 2017/Central Goods & Services Tax Act 2017 (hereinafter referred to ‘the Act’) by M/s Mannarai Common Effluent Treatment Plant (P) Limited, (hereinafter referred to as ‘Appellant’). The Appellant was registered under the GST Act vide GSTIN 33AACCM4445J1ZJ. The appeal was filed against the Order No. 20/AAR/2023 dated 19.06.2023 passed by the Tamil Nadu State Authority for Advance Ruling (hereinafter referred to AAR) on the Application for Advance Ruling filed by the Appellant.

2.1 The Appellant has stated that they are an effluent treatment plant, promoted by the dyeing units. The appellant plans to engage themselves in the purchase of effluent from dyeing units, treat the effluent at its plant, and sell the water, salts, and output. The appellant by application number GST-ARA-01 dated 12lh August 2022 sought an advanced ruling, as to whether

➣ The classification of output, as supply of goods, is correct?

➣ The classification “Water including natural or artificial mineral waters and aerated waters, not containing added sugar or sweetening matter, not flavored (other than drinking water packed in 20 litre bottles) under heading 2201, is correct?

2.2 After detailed submissions, and after hearing the appellant, the Advance Ruling Authority, passed a ruling vide its order 20/ARA/2023 dated 19.06.2023, holding that,

➣  Classification of outputs, as sale of goods is correct, subject to the conditions that applicant follows the guidelines mentioned in para 4.9 of the order.

➣  The classification of water sold by the applicant is correctly classifiable as per notification No. 2/2017 – Central tax rate, as under:

3. Aggrieved, M/s Mannarai Common Effluent Treatment Plant (P) Limited preferred the subject appeal. In the grounds of appeal, they stated, inter alia, that

➣ The order of the learned AAR is against the facts of the case and against the principles of natural justice and interpretation of the law.

➣  The learned AAR failed to appreciate the nature of processing carried out by the applicant and failed to consider that the minerals and hardness are removed in the processing to make the output fit for reuse.

➣  The learned AAR erred in equating the plant run by the applicant to process effluents with sewage water treatment plants and relying on the circular issued for the purpose of sewage plants when there are inherent differences in the processing as well as output which is characterized as Trade permeate, MEE condensate in TN pollution control board consent order.

➣  The learned AAR erred in holding that the output is classifiable as Water under heading 2201 after observing Effluent water does not fit under Chapter 22 as it is not fit for human consumption under the heading “Beverages, Spirits and Vinegar”

➣  The learned AAR failed to provide an opportunity to the applicant to make submissions to the materials relied on by the AAR in arriving at the decision and erred in not considering the materials submitted by the applicant.

➣  The learned AAR erred in not considering the decisions of M/s Hojwala infrastructure Limited (AAR Gujarat GUJ/GAAR/R/2002/48), and M/s Kasipalayam Common Effluent Treatment Plant Private Limited (AAR Tamil Nadu 23/AAR/2021) where it has been held demineralized water for industrial use is classifiable as water taxed at 18%.

➣  And additional grounds which may be added at the time of hearing with the permission of authority.

Hence, the Appellant prayed that the Appellate Authority may pass orders to set aside/modify the impugned order under Appeal, grant a personal hearing, and pass such other orders, as deemed fit.

PERSONAL HEARING;

4.1. The appellant, after consent, was given an opportunity to be heard in person on 07.12.2023. Mr. S. Harishankar, Chartered Accountant and Mr. S Chandrakumar, Director, who are the Authorised Representatives (ARs) of the Appellant, appeared for the personal hearing on 07.12.2023.

4.2. The AR reiterated the grounds of appeal and made additional submissions dated 07.12.2023. They furnished test report dated 12.10.2023 in their own case given by South India Textile Research Association, Consent Order dated 24.03.2023 of Tamilnadu Pollution Control Board and copies of 2 Advance Rulings in the case of M/s Palsana Enviro Protection Ltd (Gujarat AAR) and M/s Kasipalayam CETP (TN AAR). They submitted that according to them the subject goods would fall under CTH 2853 – Other inorganic compounds and not under CTH 2201. They submitted that according to them even if considered as water (CTH 2201), it should be treated as demineralized water.

5. Under the additional submissions made by the AR on behalf of the appellant, documents like test report No.V2300446A dated 12.10.2023 of M/s. South India Textile Research Association (SITRA), Process Explanation, Additional Written submissions, Consent Order dated 24.03.2023 of Tamilnadu Pollution Control Board, relevant case laws, CBIC Circular No.179/11/2022-GST dated 03.08.2022, etc., have been furnished by the appellant. Further, under the additional written submissions, the following points were highlighted, viz.,

➣ The input in the treatment processing done by their plant is the effluent discharged from the textile dyeing industries. The effluent contains dyes, chemicals, salts etc. and the total dissolved solids is 7932 mg/1.

➣ The effluent is subject to extensive processing at the treatment plant which includes equalization, biological aeration, nitrification, denitrification, biological degradation, secondary clarifier, oxidation reduction, filtration, evaporation.

➣ The intention of the processing is to achieve zero liquid discharge as mandated by the Madras High Court and to make the resulting products fully reusable in the dyeing industries. The outputs of the processing are the following and* the mode of disposal / usage as per the consent order of Tamil Nadu Pollution Control Board are as follows:-

➣ That they had applied for advanced ruling including the query regarding the correct classification of RO Permeate, MEE condensate (Trade effluent II); that at the time of filing the application, they had applied under the name “Water” falling under heading 2201 and the advanced ruling authority passed the order grouping the product as Water [other than aerated, mineral, distilled, medicinal, ionic, battery, demineralized and water sold in sealed container] under heading 2201 with ‘NIL’ rate of tax.

➣  Now they state that the classification of RO Permeate as per the Advanced Ruling order is incorrect for the following reasons

a) Characteristics of the RO Permeate and test report from SITRA

That in respect of RO Permeate, Phenolphthalein alkalinity, turbidity, phosphate, Fluoride, Nitrate, Iron, Silica is reduced to non-deductible or very negligible levels. Only minor number of chlorides, sulphates and bicarbonate which aid in the processing are retained. The intention of the processing is to make the Permeate fit for usage in the dyeing industry, whereby the dissolved solids are reduced from 7932 mg/1 to 148 mg/1, and for achieving this result the company has made huge investment with the aid of Central and State Governments. In this regard, they have submitted the test report from “The South Indian Textile Research Association”, an organization supported by Ministiy of Textiles, which classifies the product as RO Permeate Industrial Use and not for human consumption.

b) Consent order of the “Tamil Nadu Pollution Control Board”

The ‘Consent Order’ from the Tamil Nadu Pollution Control Board which is the nodal organization, specifies the name of the product as RO Permeate (Trade Effluent II) and the only specified use permitted is reuse by the dyeing units. Hence the RO permeate is prohibited from being used for any other purpose such as drinking, irrigation, river discharge, and therefore cannot be termed as water falling under heading 2201.

c) Applicant’s RO Permeate cannot be equated with Sewage treatment

The advanced ruling authority has equated sewage treatment plant with the effluent treatment plant run by the applicant. The authority has failed to appreciate the fact that the characteristics of the dyeing effluent and sewage are entirely different. Further the norms for sewage plants are different, as the treated sewage water is allowed to be permitted to be used for irrigation, discharged into water bodies. But the RO Permeate can only be discharged for reuse in dyeing units and cannot be used for irrigation or discharged into water bodies. Hence the exemption given to treated sewage water under the heading 2201 is not applicable to the RO permeate. This has been upheld by Gujarat AAR in case of Palsano Enviro while holding, “This clearly shows the intention of the legislature that any type of water which are being sold in terms of commercial purpose have been kept out of the purview of exemption as provided under entry No. 99 of the Notification.”

d) Therefore the RO permeate, do not get covered under the Chapter 22, “Beverages, Spirits, Vinegars”, and that the same is classifiable under either of the following headings, viz.,

2853 00 99 – Other Inorganic Compounds

Since the RO permeate which is not fit for human consumption does not have the characteristic of water covered under 2201, it is classifiable under this residuary head. Comparable products like distilled water, conductivity water are grouped here.

2201 – Demineralised water

Without prejudice the above, if in the opinion of authority, it is classifiable as water under 2201, the RO permeate is to be treated as ‘Demineralised water’ since most of the minerals and chemical elements including Phosphate, Fluoride, Nitrate, Iron, Silica are reduced to nondeductible or very negligible levels. This view has been followed in Hojwala Infrastructure Limited (AAR Gujarat), Palsano Enviro Protection Limited (AAR Gujarat) and Kasipalayam Common Effluent Treatment Private Limited (AAR TamilNadu). In case of Palsano Enviro it was held that “It can be concluded that after undergoing out all the process, treated water obtained from CETP have micro amount of dissolved minerals and chemical and virtually free from all types of toxic materials. Looking to the presence of small amount of metal and water obtained after treatment from CETP is covered under ‘de-mineralize water’. Hence, we are of the view that the treated water obtained from CETP is not eligible for exemption under Sr. No. 99 of Notification No. 12/2017-CT (Rate) dated 28-6-2017“.

DISCUSSION AND FINDINGS:

6.1 We have carefully considered the submissions made by the appellant including the additional submissions made during the personal hearing, and the applicable statutory provisions. On perusal and analysis of the documents involved and the facts relating to the case, we observe that the instant case basically revolves around the classification of treated water from the effluents gathered from the dyeing units. We also notice from the Advance Ruling No.20/AAR/2023 dated 19.06.2023, passed by the Original Advance Ruling Authority that the water sold by the appellant was held as classifiable under the Heading 2201, and held as exempted from payment of GST as laid down in SI.No.99 of the Notification No.2/2017-Central Tax (Rate) dated 28.06.2017.

6.2 We observe that in order to arrive at the said decision, the Advance Ruling Authority has considered the Test report No. V2000610 dated 30.03.2021 furnished by M/s. South India Textile Research Association (SITRA) Textile Testing and Service Centre, in respect of a sample relating to M/s. Kasipalayam Common Effluent Treatment Plant (P) Ltd. Further, it has been stated in the said order that treated sewage water attracts ‘Nil’ rate of GST, as clarified in CBIC Circular No. 179/11/2022 dated 03.08.2022, and that the same analogy would apply to the case in hand.

6.3 Apart from the Appeal filed in Form GST ARA-02 dated 23.09.2023, before the Appellate Authority for Advance Ruling (received on 26.09.2023), it is seen that the appellant has also filed additional submissions during the personal hearing on 07.12.2023, wherein the applicant had furnished additional grounds/documents in respect of their appeal, which has been reproduced in detail in para 5 above.

6.4 Under the additional submissions made, the appellant brings to our attention that

➣they have submitted the test report No.V2300446A dated 12.10.2023 in their own case issued by “The South Indian Textile Research Association”, an organization supported by Ministry of Textiles, which classifies the product as RO Permeate Industrial Use and not for human consumption.

➣ Further, as per the ‘Consent Order’ issued by the Tamil Nadu Pollution Control Board, the name of the product has been specified as RO Permeate, and the only specified use permitted, is reuse by the member units, i.e., the dyeing units.

➣ The advanced ruling authority has erred in equating sewage treatment plant with the effluent treatment plant run by the appellant whereby they have failed to appreciate the fact that the characteristics of the dyeing effluent and sewage are entirely different. Further the norms for sewage plants are different, as the treated sewage water is allowed to be permitted to be used for irrigation, discharged into water bodies, whereas the RO Permeate can only be discharged for reuse in dyeing units and so, the exemption given to treated sewage water under the heading 2201 is not applicable to the RO permeate. They stated that the Gujarat AAR in case of Palsano Enviro has upheld the same by holding as follows “This clearly shows the intention of the legislature that any type of water which are being sold in terms of commercial purpose have been kept out of the purview of exemption as provided under entry No. 99 of the Notification.”

6.5 We also notice that the test report No.V2300446A dated 12.10.2023 issued by “The South Indian Textile Research Association” (SITRA), has now been put forth, which relates to the appellant themselves, i.e., M/s. Mannarai CETP (P) Limited. We find that the Authority for Advance Ruling (AAR) while passing Ruling No.20/AAR/2023 dated 19.06.2023, had discussed the test report No. V2000610 dated 30.03.2021 furnished by SITRA, in respect of a sample relating to another unit, viz., M/s. Kasipalayam Common Effluent Treatment Plant (P) Ltd.

6.6 The appellant has furnished the following documents now, which were not available before the AAR while deciding the matter, viz.,

(i) Test report No.V2300446A dated 12.10.2023 of SITRA

(ii) Consent Order No.2308150947958 dated 24.03.2023 of Tamilnadu Pollution Control Board

(iii) Process explanation furnished by the appellant, etc.,

Therefore, we are of the view that the issue in the instant case requires a reexamination by the AAR, especially in view of the fact that a test report is now available in respect of a sample of the appellant themselves, and in view of the fact that such other documents like consent letter, process explanation, etc., have also been adduced by the appellant.

6.7 Accordingly, we hold that interest of justice will be met by remanding the case to the lower authority, with a direction to re-visit the issue, take into cognizance the documents now available such as the test report, consent order, etc., and to pass necessary orders as per the provisions of law, after offering an opportunity of personal hearing to the appellant. All aspects of the matter are kept open for decision by the AAR. We further find that this authority is empowered vide Section 101(1) of the CGST/TNGST Acts, 2017 to pass such orders as deemed fit.

7. In view of the above, we order as under

ORDER

The Advance Ruling No.20/AAR/2023 dated 19.06.2023 passed by the Lower Authority in the case of the appellant is set aside. The matter is remanded to the Lower Authority for re-examination and passing of appropriate fresh orders into the matter, after following the principles of natural justice.