CA O. P. Agarwalla, Guwahati

As per clause (e) of Service serial no. 54 (heading 9986) of the Notification no. 12/2017, Central Tax (Rate) dated 28/06/2017, services of loading, unloading, packing, storage or warehousing of agricultural produce are made exempted under sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017).

The term ‘Agricultural Produce’ has been defined in the said notification in the following words:-

‘agricultural produce’ means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market.

To-day, I have gone through the press release issued after the completion of the 23rd meeting of the GST Council, which inert-alia contains that a circular will be issued clarifying that processed products such as tea (i.e. black tea, white tea etc.), processed coffee beans or powder, pulses (de-husked or split), jaggery, processed spices, processed dry fruits & cashew nuts etc. fall outside the definition of agricultural produce given in notification No. 11/2017-CT(R) and 12/2017-CT(R) and therefore the exemption from GST is not available to their loading, packing, warehousing etc.

In light of this press release, I would like to discuss that whether processed tea falls under the definition of ‘agricultural produce’ or not? Or whether by way of a circular, tea can be excluded from the ambit of the ‘Agricultural Produce’.

Whether ‘processed tea’ is ‘Agricultural Produce’ or not can be determined only on the basis of the aforesaid definition of the term ‘Agricultural Produce’. If the aforesaid definition is analysed, it appears that an item will be constitute as an agricultural produce’, if the item is:-

a) A produce out of cultivation plants;

b) on which either no further processing is done, or such processing is done as is usually done by a cultivator or producer;

c) processing has not altered its essential characteristics and made it marketable for primary market.

The item ‘green tea leaves’ is a direct and raw outcome of agricultural activities and the same are directly plucked from tea plants. Green Tea leaves, which are plucked from tea plants, without grading and processing, has no market value, as unless it is graded and processed, the green leaves get rotten. In order to make the same marketable in primary market, such green tea leaves are processed.

It seems prudent to discuss the matter in the light of the judgment of the Apex Court. In the case of “Commissioner Of Sales Tax, … vs D. S. Bist & Ors [1980] AIR 169” The case was in the context of Uttar Pradesh Sales Tax Act,1948. The Hon’ble Court while upholding the decision of the Allahabad High Court has held that ‘Processed Tea’ is ‘Agricultural Produce’.

The Court observed:- Unlike many agricultural products tea-leaves are not marketable in the market fresh from the tea gardens. No body eats tea-leaves. It is meant to be boiled for extracting juice out of it to make tea liquor. Tea-leaves are, therefore, only fit for marketing when by a minimal process they are made fit for human consumption. Of course, the processing may stop at a particular point in order to produce inferior quality of tea and a bit more may be necessary to be done in order to make it a bit superior. But that by itself will not substantially change the character of the tea-leaves, still they will be known as tea-leaves and sold as such in the market. In my opinion all the six processes enumerated above from the primary findings of fact recorded in the order of the Revising Authority were necessary for the purpose of saving the tea-leaves from perishing, making them fit for transporting and marketing them. The process applied was minimal. Withering, crushing and roasting the tea-leaves will be surely necessary for preserving them. The process of fermentation or final roasting with charcoal for obtaining suitable flavour or colour and also the process of grading them with seives were all within the region of minimal process and at no point of time it crossed that limit and robbed the tea-leaves, the agricultural produce, of their character of being and continuing as such substantially. In my opinion, therefore, the view expressed by the High Court is quite justified and sustainable in law.

While overruling the judgment of the Calcutta High Court, their lordship said “If the Calcutta High Court can be said to have laid down that as a result of those processes the tea leaf ceased to be agricultural produce, I am unable to agree with it. To my mind, the tea leaf remained what it always was. It was tea leaf when selected and plucked and it continued to be tea leaf when after the process of withering, crushing and roasting it was sold in the market. The process applied was intended to bring out its potential qualities of flavour and colour. The potential inhered in the tea leaf from the outset when still a leaf on the tea bush. The potential surfaced in the tea leaf when the mechanical processes of withering, crushing and roasting, fermenting by covering with wet sheets and roasting again were applied. The tea leaf was made fit for human consumption by subjecting it to those processes. At no stage, did it change its essential substance. It remained a tea leaf throughout. In its basic nature, it continued to be agricultural produce.”

Though the aforesaid judgment was in context of a different law, but the principles decided in the said judgment is binding in the instant case also. The Apex Court has categorically held as:-

a) In the processing of tea leaves, the essential substance of the tea leaves does not get changed.

b) Tea leaves remains tea leaves throughout and even after completion of the processing.

c) The processing of tea leaves are required to make the same marketable and make the same fit for human consumption.

Coming back to the aforesaid definition of the term ‘Agricultural Produce’ as contained in the aforesaid notification, it appears that ‘processed tea’ passes all the test of being an ‘Agricultural Produce’. If we read the definition in the light of the aforesaid judgment of the Apex Court, it seems to be a settled law that ‘processed tea’ falls under the ambit of ‘Agricultural Produce’.

In this context the following judgments are also relevant:-

a) Commissioner of Sales Tax, U.P., Lucknow Vs East Hope Town Co. Ltd. [(2005) 142 STC 319 (Uttarakhand)]

b) Dehradun Tea Company Ltd. Vs. State of Uttaranchal and Others [(2006) 148 STC 56 (Uttarakhand)].

c) Dehradun Tea Company Commissioner of Sales Tax [(1980) UPTC 459, (Allahabad)]

Not only the same, in the regime of Service Tax also, processed tea were treated as ‘Agricultural Produce’ and accordingly warehousing and other services relating to the said goods were exempted from service tax.

Prior to 1st July, 2012, ‘storage and warehousing services for goods were taxable but the definition of the term ‘Storage and Warehousing’965(87)] has excluded the warehousing of ‘Agricultural Produce’ from its ambit. Thus the warehousing of ‘Agricultural Produce’ was exempted. The Service Tax (Removal of Difficulty) Order, 2002 was issued vide Notification no. 1/2002-ST dated 1 August 2002, which clarified the term “agricultural produce” as follows:-

For the purposes of clause (87) of section 65 of the said Act, the expression “agricultural produce” means any produce resulting from cultivation or plantation, on which either no further processing is done or such processing is done by the cultivator like tending, pruning, cutting, harvesting, drying which does not alter its essential characteristics but make it only marketable and includes all cereals, pulses, fruits, nuts and vegetables, spices, copra, sugar cane, jaggery, raw vegetable fibres such as cotton, flax, jute, etc., indigo, unmanufactured tobacco, betel leaves, tendu leaves,  rice, coffee and tea but does not include manufactured products such as sugar, edible oils, processed food, processed tobacco.  

Being ‘tea’ was specifically included in the definition, there was no liability to pay service tax on warehousing of processed tea.

From 1st July 2012, negative list concept was introduced under Service tax laws. During the period 1st July 2012 to 30th June 2017, services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another were liable to service tax. The negative list of services, in respect of which service tax was not payable, was contained in Section 66D of Chapter V of the Finance Act, 1994. Services by way of ‘loading, unloading, packing, storage or warehousing of agricultural produce’ have been specifically included in the negative list under clause (d) of Section 66D.

The termagricultural produce’ was defined under section 65B (5) of Finance Act, 1994 (inserted vide Finance Act 2012) as- “agricultural produce” means any produce of agriculture on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market. It is apparent that this definition is narrower in comparison to the definition provided in notification no. 12/2017 Central Tax (Rate). Even after insertion of definition u/s. 65B(5), “processed tea was treated as ‘Agricultural Produce’ and no service tax was levied on warehousing of processed tea.

In this background, it was but obvious that many warehouse service providers with a reasoned and bona fide belief has treated ‘processed tea’ as ‘Agricultural Produce’ and did not collected any GST on the ware housing of the same. By doing so, such persons had incurred loss as because they did not get any benefit of tax paid on input services. In such a situation the press release about such clarification has created panic in such service providers as because they apprehend that by such clarification they will be asked to pay tax w.e.f. 1stJuly 2017.

It is really surprising that in light of the facts and legal position, whether it will be justifiable to clarify that ‘processed tea’ does not fall under the definition of ‘Agricultural Produce’. Won’t such clarification will cause undue disputes and litigations. Everybody may appreciate that in the name of clarification, fresh tax liability cannot be and should not be imposed.

Imposing GST on warehousing, transporting etc. of ‘processed tea’, in my view will ultimately not enhance the revenue collection, rather it will have a negative impact. However, it will be a welcome step for warehousing service providers, I believe they will be pleased to pay tax on such services, certainly with current effect only. If the government really wants to exclude processed tea and other few items from the ambit of ‘Agricultural Produce’ and to avoid unwarranted disputes and litigations, instead of issuing clarifications, it should suitably amend the definition provided under notification no. 12/2017 Central Tax (Rate).

At this juncture, I can only pray to the almighty to help the authorities to take a proper decision.

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November 2020