M/S. NASH INDUSTRIES (I) PVT. LTD.

Valuation – inclusion of amortized cost of the tools in assessable value – tools are supplied by the customer free of cost and used by the Appellant in the manufacture of the components – Section 15 of the CGST Act read with Rule 27 of CGST Rules – challenge to AAR decision – Held that:- Under the erstwhile Central Excise regime, Rule 6 of the Central Excise Valuation Rules, 2000 required an assessee to calculate the intrinsic value of the excisable goods by including any additional consideration flowing directly or indirectly from the buyer to the assessee – Under the GST regime of taxation, the taxable event which attracts the levy of GST is the ‘supply’ of goods or services, in terms of Section 9 of the CGST (and SGST) Act or Section 5 of the IGST Act, depending on whether the transaction of ‘supply’ is intrastate or interstate.

In so far as the valuation of the supply is concerned, Section 15 of the CGST Act provides that the value of taxable supply shall be the transaction value which is the price paid or payable by the recipient provided the supplier and recipient are unrelated parties and price is the sole consideration for the supply. Further Section of the said Act specifically states that where any amount which the supplier is liable to pay in relation to a supply but the same has been incurred by the recipient on behalf of the supplier, then such amount is required to be added while determining the transaction value.

On going through the terms and conditions of the contract between the Appellant and DICV, it is evident that the Appellant is required to use DICV Owned Tools concerning the part to be manufactured with the tool. The tool shall be used only for the purpose of fulfilling its manufacturing obligations under the supply contract – in this case, the customer, DICV, has assumed the responsibility to provide the tools to the Appellant in the interest of ensuring that there is uninterrupted supply of their parts. While the first priority is that the supplier should use the DICV Owned Tools for the manufacture of the component parts, there is also the possibility that Non-DICV Owned Tools can also be used for the manufacture of parts for the customer. In the event of the second possibility, the customer, DICV takes ownership of the Non-DICV Owned Tools by way of a security only with the objective of ensuring that the supply of their parts by the Appellant is uninterrupted. In the event there is an interruption in delivery of manufactured components using the Non-DICV Owned Tools, then the customer, DICV, has the right to demand the surrender of the tools and reimburse the Appellant the percentage of the tool cost which has not been amortized. On perusal of the contract, it is understood that, in the case Non- DICV Owned Tools are used in the manufacture of the components, the price agreed upon includes the amortized cost of the Non-DICV Owned Tools.

CBIC in its Circular No 47/21/2018-GST dated 08.06.2018 has clarified that goods owned by OEM that are provided to a component manufacturer on FOC basis do not constitute a supply as there is no consideration and in such cases, the value of goods provided on FOC basis shall not be added to the value of supply of components.

Thus, the cost of the tools supplied by the OEM customer on FOC basis to the Appellant is not required to be added to the value of the components supplied by the Appellant – the ruling of the AAR is set aside.

No.- KAR/AAAR/07/2018-19

Dated.- March 1, 2019

Citations:

  1. In Re: M/s Nash Industries (I) Pvt Ltd., – 2018 (11) TMI 607 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA
  2. In Re: M/s. Lear Automotive India Private Limited – 2018 (12) TMI 766 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

SRI D.P. NAGENDRAKUMAR, SRI SRIKAR M.S., MEMBER

PROCPEDINGS

(Under Section 101 of the Central Goods and Service Tax Act, 2017 and the Karnataka Goods and Services Tax Act, 2017)

At the outset, we would like to make it clear that the provisions of both the CGST Act and the KGST Act are pari materia and have the same provisions in like matters, and differ from each other only on a few specific provisions; therefore; unless a mention is particularly made to such a dissimilar provision, a reference to the CGST Act would also mean a reference to the corresponding similar provisions under the KGST Act.

The present appeal has been filed under section 100 of the Central Goods and Services Tax Act, 2017 and the Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act and KGST Act”) by M/s. Nash Industries (I) Private Limited, (herein after referred to as the “‘Appellant’) against the Advance Ruling No. NO. KAR ADRG 24/2018 dated 25th October 2018 = 2018 (11) TMI 607 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA.

BRIEF FACTS OF THE CASE

1. M/s. Nash Industries (I) Private Limited is registered under GST with GSTIN No. 29AADCN9558Q1ZC and is a manufacturer of sheet metal pressed components and supplies to industrial customers like Automotive, Banking Hardware, Power Protection, Alternate Energy etc. The tools required to manufacture these components were designed and manufactured by the Appellant. Such manufactured tools are billed to the customer and the payment is received for the same but the tools are retained by the Appellant for the manufacture of components.

2. The Appellant had filed an application for Advance Ruling under section 98 of the CGST Act, 2017 and KGST Act, 2017 on the following question:

a. Whether the amortized cost of the tools is to be added to arrive at the value of the goods supplied for the purpose Of GST under Section 15 of the CGST Act read with Rule 27 of CGST Rules.

3. The Karnataka Authority for Advance Ruling, vide Advance Ruling No. NO. KAR ADRG 24/2018 dated 25th October 2018 = 2018 (11) TMI 607 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA. (hereinafter referred to as ‘Impugned Order) gave the following ruling:

“The amortised cost of tools which are re-supplied back to the applicant free of cost shall be added to the value of the components while calculating the value of the components supplied as per Section 15 of the CGST/KGST Act,2017.”

4. Aggrieved by the said ruling of the Authority, the applicant has filed an appeal under section 100 of the CGST Act, 2017 / KGST Act, 2017 on the following grounds:

4.1. The appellant submitted that the purchase order provided by the recipient/customer is only for the manufacture of components out of the tools supplied by the recipient at free of cost.

4.2. Further, the appellant submitted that the CBIC vide Circular No.47/21/2018-GST dated 08.06.2018 has clarified the position regarding amortization of tool cost supplied free of cost by the customer, to the value of components manufactured by the component manufacturer, The relevant extract of the circular is provided below:

Sl.No.

Issue

Clarification

1 Whether moulds and dies owned by Original Equipment Manufacturers(OEM) that are sent free of cost FOC to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case? 1.1. MouIds and dies owned by the original equipment manufacturer (OEM) which are provided to a component manufacturer (the two not being related persons or distinct persons) on FOC basis does not constitute a supply as there is no consideration involved. Further, since the moulds and dies are provided on FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of input tax credit availed on such moulds and dies by the OEM.

1.2. It is further clarified that while calculating the value of the supply made by the component manufacturer , the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of Section 15(2)(b) of the Central Goods and Service Tax Act, 2017 (CGST Act for short)

1.3. However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the Component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis; the amortised cost of such moulds/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on such moulds/dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business

4.3. They submitted that the above circular covers two situations, which are as follows:

a. The value of the moulds and dies owned by the original equipment manufacturer (OEM) which are provided to a component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer.

b. The contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis-the amortised cost of such moulds/dies shall be added to the value of the components.

4.4 They submitted that in the instant case,

a. The obligation of the supply of tools is on recipient/customer.

b. Accordingly, the owner of the tool is recipient /customers.

c. The recipient /customer provided the purchase order to appellant, wherein the scope is merely supply of components.

From the above it is evident that the present case falls under the first situation explained in the above circular. That means, the tool is owned by the OEM (Customer) and supplied at free of cost to appellant. Further, the purchase order is provided for supply of component. As the present case falls under first situation, the cost of the tool is not to be added to the price of component as per the clarification provided by the board.

4.5. Further, they submitted that the cost of the tool is required to be added only if the tool is belonging to the component manufacturer (Appellant). In the present case, the owner of the tool is the recipient / customer and hence the cost of tool is not required to be added to the price of the component; that the scope of the Appellant’s activity is limited to manufacture and supply of components; that, the burden of supply of tools is on the customer and not on the Appellant. Therefore, the tool supplied by the customer at free of cost is not required to be added to the cost of components manufactured by the Appellant.

4.6. The appellant drew attention to the provisions of Section 15 of CGST/KGST Act,2017 and submitted that there is no amount which was liable to be paid by the Appellant but incurred by the recipient. Instead the agreement between the Appellant and the customer is only for manufacture and supply of components and not to manufacture the tool. That being the case, the cost of the tool is not be included in the value of components manufactured and supplied by the appellant to the customer.

4.7. The appellant further submitted that the earlier decisions of Central Excise cannot be applied to GST. The Central Excise duty was levied and collected on the activity of the manufacture, whereas the levy of GST is on the supply of goods/services. Further, the scope of supply depends on the scope of the agreement and obligation of the supplier in the agreement. If there is no obligation on the supplier on any aspect, such aspect cannot be constituted as supply and also cannot be considered as value of supply.

4.8. In view of the above submissions, the Appellant pleaded that the ruling of the Authority for Advance Ruling is required to be modified.

Personal Hearing:

5. The Appellant was called for a personal hearing on 19.02.2019 and were represented by Shri. Rajesh Kumar T.R, Chartered Accountant. He reiterated the submissions made in the grounds of appeal. The representative also filed additional submissions before this Authority wherein they stated that the Maharashtra Authority for Advance Ruling in the case of Lear Automotive India Private Ltd had passed a ruling GST-ARA-19/2018-19/B-80 dated 31.07.2018 = 2018 (12) TMI 766 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA on the same issue i.e. whether amortized value of the tool received on FOC basis from the customer is required to be included in the value of finished goods manufactured and supplied by the applicant to the customer. The Maharashtra AAR had based on the facts and circumstances of the case before them, held in the negative. Relying on the above said order they submitted that the same is also applicable in their case. During the personal hearing, this Authority asked for the details of the terms of the contract between the Appellant and their customer to be furnished in order to understand each party’s obligations.

The representative agreed to submit it in due course.

6. The Appellant through their representative Chartered Accountants submitted copies of the following additional documents vide letter dated 28.02.2019.

a) Purchase order of tool and component of the same design

b) Comparison of facts of M/s. Nash Industries (I) Pvt Ltd with M/s Lear Automotive India Pvt Ltd along with supporting documents.

DISCUSSION AND FINDINGS

7. We have gone through the records of the case and taken into consideration the submissions made by the Appellant in writing and during the personal hearing and also the documents produced by them.

8. The short point for determination is whether the value of the components manufactured and supplied by the Appellant should include the cost of the tools which are supplied by the customer free of cost and used by the Appellant in the manufacture of the components.

9. Under the erstwhile Central Excise regime, Rule 6 of the Central Excise Valuation Rules, 2000 required an assessee to calculate the intrinsic value of the excisable goods by including any additional consideration flowing directly or indirectly from the buyer to the assessee. In other words, since excise duty was levied on the activity of manufacture, any activity which was contributing to the manufacturing activity was included in the assessable value irrespective of the fact as to who owned the inputs and capital goods. In view of the same, the Appellant was amortizing the value of such tools supplied by their customers free of charge and was including the same in the assessable value of the final goods for discharging applicable Central Excise duty. With the advent of GST with effect from 1st July 2017, a provision similar to the erstwhile Rule 6 of the Valuation Rules does not exist thereby warranting the question whether, under the GST regime, the value of the tool cost is required to be amortized.

10. Under the GST regime of taxation, the taxable event which attracts the levy of GST is the ‘supply’ of goods or services, in terms of Section 9 of the CGST (and SGST) Act or Section 5 of the IGST Act, depending on whether the transaction of ‘supply’ is intrastate or interstate. The word ‘supply’ has not been defined under the GST law but rather the scope of  what constitutes ‘supply’ is stated in Section 7 of the CGST Act which reads as under:

7. (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;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

In so far as the valuation of the supply is concerned, Section 15 of the CGST Act provides that the value of taxable supply shall be the transaction value which is the price paid or payable by the recipient provided the supplier and recipient are unrelated parties and price is the sole consideration for the supply. Further Section of the said Act specifically states that where any amount which the supplier is liable to pay in relation to a supply but the same has been incurred by the recipient on behalf of the supplier, then such amount is required to be added while determining the transaction value.

11. In the present case, there is no dispute on the fact that the Appellant and their customers are not related parties. We need to examine whether the price paid by the customers is the sole consideration for the supply made by the Appellant. For this purpose, it is necessary to understand the contractual arrangement between the Appellant and their customers to see whether the scope of the supply mandates that, the Appellant is to incur a cost for the manufacture and use of the tool but the same has been supplied by the customer free of charge. In the course of the present appeal proceedings, the Appellant has provided us with details of the contract and purchase orders placed by their OEM customer M/s. Daimler India Commercial Vehicles Pvt Ltd (DICV).

12. We have gone through the terms (General and Special terms) of the contract entered into between the Appellant and DICV. As per para 16 of the General Terms and Conditions of DICV for the purchase of products and spare parts, which form an integral part of the Contract between DICV and the Appellant, the Appellant is obligated to comply with the requirements of DICV’s Special Terms pertaining to tooling. Para 16.2 reads that “If and to the extent the agreed total cost for an item of tooling has been paid by Buyer in full, title to such tooling and any and all IPR created in the course of the development of such tooling for buyer will immediately be transferred to Buyer. Supplier is entitled to keep the tooling only as a temporary possession until the Purchase Order has been performed Supplier must hand over the tooling to Buyer following fulfillment of the Purchase Order if so requested by Buyer.”

13. The Daimler India Special Terms (DIST) are a set of rules governing the supply arrangement between DICV and the Appellant. The DIST forms an integral part of the contract along with the General Terms and Conditions of DICV for the purchase of products that are specifically mentioned in the purchase contract. The relevant provisions of the DIST relating to tools are reproduced hereunder:

1.4. With regard to tools, a distinction must be made between tools which are or will become the property of DICV (hereinafter “DICV Owned Tools”) and tools which are not the property of DICV (hereinafter “Non-DICV Owned Tools”)

To ensure the aforementioned distinction is made appropriately, DICV Asset Accounting team will provide Asset Identification Tags to the supplier, which should be affixed in the most appropriate place of DICV Owned Tools.

Regardless of ownership, the supplier must handle all tools and other equipments with the degree of care necessary to guarantee that DICV is properly supplied without any interruption.

2.1 The supplier is hereby authorized and required to use DICV Owned Tools within the framework of the supply Contract concluded with DICV concerning the parts to be manufactured with the tools.

The supplier shall use the tools only for the purpose of fulfilling its manufacturing obligations under the supply contract. Hence the supplier is prohibited front any deviating use of DICV Owned Tools in Particular the use of tools for production of parts to supply third parties or the transfer of usage to third parties or unauthorized handover of tools to third parties, without the prior written consent of DIC.V.

2.2 The supplier shall retain DICV Owned Tools at the location as originally agreed between the supplier and DICV

2.4 As a consideration for availing the tools from DICV free of charge, the supplier shall abide by the following terms of maintenance. The supplier must ensure constant defect-free functional capacity and readiness of the tools during their use within the framework of the supply contract with DICV for the purpose of uninterrupted delivery to DICV by means of continuous maintenance and repair at its own expense.

2.5 In the event where changes in DICV’s technical specifications require any modifications to the tools, the supplier must submit a prior written offer to DICV to modify the tools with the least possible expenditure.

2.6 The supplier must clearly and permanently identify those tools which are DICV Owned Tools as the property Of DICV.

2.8 At the end of delivery or termination of contractual relationship with the supplier, the supplier shall return the tools to DICV in the condition to be expected following fulfillment of the supplier’s duties arising from these DIST.

3. Insofar as Non-DICV Owned are concerned, DICV shall Obtain ownership of the existing and subsequent tools by way of security in order to ensure delivery.

DICV reserves its right to demand surrender of tools to DICV in the event of an interruption in delivery. In this case, DICV may reimburse the supplier the of the tool costs which had not yet been amortised. Upon reimbursement of such Costs, DICV shall be deemed to have unlimited ownership of the tools.

14. On going through the above terms and conditions of the contract between the Appellant and DICV, it is evident that the Appellant is required to use DICV Owned Tools concerning the part to be manufactured with the tool. The tool shall be used only for the purpose of fulfilling its manufacturing obligations under the supply contract. The Tool is developed and manufactured by the Appellant under a specific Purchase Order. The applicable GST on the supply of the tool is levied in the invoice raised by the Appellant for the supply of the Tool. Once the agreed cost of the tool has been paid by DICV, the title of the tool and all IPR created in the course of the development of the Tool will be transferred to DICV. The Appellant is entitled to keep the tool in his premises only as a temporary possession until the completion of the supply of components manufactured using the tool. During the course of temporary possession of the tools owned by DICV, the Appellant is required to affix Asset Identification Tags on the DICV Owned Tools in order to identity the DICV owned tool. On completion of the contractual relationship, the Appellant is required to return the tools to DICV. In so far as Non-DICV Owned Tools are concerned, the terms of the contract state that in order to ensure uninterrupted supply of parts, DICV obtain ownership of the existing and subsequent tools by way of security. Thus it is evident that, in this case, the customer, DICV, has assumed the responsibility to provide the tools to the Appellant in the interest of ensuring that there is uninterrupted supply of their parts. While the first priority is that the supplier should use the DICV Owned Tools for the manufacture of the component parts, there is also the possibility that Non-DICV Owned Tools can also be used for the manufacture of parts for the customer. In the event of the second possibility, the customer, DICV takes ownership of the Non-DICV Owned Tools by way of a security only with the objective of ensuring that the supply of their parts by the Appellant is uninterrupted. In the event there is an interruption in delivery of manufactured components using the Non-DICV Owned Tools, then the customer, DICV, has the right to demand the surrender of the tools and reimburse the Appellant the percentage of the tool cost which has not been amortized. On perusal of the contract, it is understood that, in the case Non- DICV Owned Tools are used in the manufacture of the components, the price agreed upon includes the amortized cost of the Non-DICV Owned Tools.

15. CBIC in its Circular No 47/21/2018-GST dated 08.06.2018 has clarified that goods owned by OEM that are provided to a component manufacturer on FOC basis do not constitute a supply as there is no consideration and in such cases, the value of goods provided on FOC basis shall not be added to the value of supply of components. However, in case the contractual obligation is cast upon the component manufacturer to provide moulds/dies but the same have been provided by the OEM on FOC basis, then the amortized cost of the moulds/dies is required to be added to the value of the components supplied. In the present case, the terms and conditions of the contract between the OEM DICV and the Appellant clearly indicate that no such obligation is cast on the Appellant. The OEM has taken the responsibility to provide the tools. In a case where the tools are developed and manufactured by the Appellant according to the requirements of the customer (DICV), then the total cost of the tools is borne by DICV and the title of the tools transfers to DICV, while the Appellant is allowed to retain the tool in his premises for undertaking the manufacture and supply of the components to DICV. In such a case, the value of the tools, which has already suffered tax and supplied FOC to the Appellant, is not required to be added to the value of the components supplied by the Appellant.

16. We accordingly set aside the ruling of the AAR and hold that the cost of the tools supplied by the OEM customer on FOC basis to the Appellant is not required to be added to the value of the components supplied by the Appellant. We emphasize that the ruling given by us in this appeal proceeding is based on examination of the contract and purchase orders furnished by the Appellant in the case of their customer M/s. Daimler India Commercial Vehicles Pvt Ltd. This ruling will apply to other contracts entered into by the Appellant only if the terms and conditions contained therein are the same as those contained in the contract placed before us.

17. The appeal is disposed off accordingly on the above terms.

INDIAN INSTITUTE OF MANAGEMENT, BANGALORE.

Exemption from GST – educational institute or not – long duration post graduate diploma/degree granting programs offered by the IIMB, other than those specifically mentioned in Sl.No 67 of Notification No 12/2017 CT(Rate) dated 28th June 2017 – supply of online educational journals or periodicals to the IIMB – Held that:- All IIMs (which includes IIMB) became eligible for exemption as an educational institution with effect from 31st January 2018 under entry Sl.No. 66 of Notification No.12/2017 CT(R). However, post 31st January 2018, the exemption under Sl.No. 67 loses its relevance since the IIMs are now covered under the entry Sl.No 66. However, the entry Sl.No.67 was deleted only with effect from 01.01.2019 vide Notification No. 28/2018 CT (R) dated 31.12.2018. Therefore, during the period January 2018 to 31st December 2018 both the entries at Sl. No. 66 and 67 were in force granting exemption to the services provided by IIMs. It is trite law that if there are two or more exemptions available to an assessee, he can claim the one which is more beneficial to him – during the period 31st January 2018 to 31st December 2018, IIMB can avail the exemption under either Sl.No. 66 or Sl.No. 67 of Notification No 12/2017 CT(R) dated 28.06.2017 as amended.

With effect from 31st January 2018, the long duration Post graduate diploma/degree programs offered by IIMB, where a degree/ diploma is conferred as recommended by the Board of Governors as per the power vested on them under the IIM Act, 2017, will be eligible for exemption from GST by virtue of Sl.No 66 of the Notification No 12/2017 CT(R) dated 28.06.2017 as amended.

Supply of online educational journals or periodicals to the IIM – plea of the Appellant is that since they are to be considered as an ‘educational institution’ post enactment of the IIM Act, 2017, the supply of online journals and periodicals to their institution should be given the benefit of exemption under Sl.No 10 of Notification No. 09/2017 IT(R) – Held that:- IIMB is an educational institution as defined in clause 2(y) of the Notification No 12/2017 CT (R) dated 28.06.2017 and it is an educational institution which offers qualification recognized by law. Therefore, the receipt of online journals and periodicals by IIMB from a person located in a non-taxable territory will be eligible for exemption from payment of IGST in terms of Sl.No 10 of Notification No 09/2017 IT (R) dated 28.06.2017 as amended – In the case of online journals and periodicals received by IIMB from domestic service providers, the exemption from payment of GST will be available to the domestic suppliers on intra-state supplies by Virtue of Sl.No. 66 (b) (v) of Notification No. 12/2017 CT (R) dated 28.06.2017, and exemption on inter-state supplies will be available Vide Sl.No. 69 of Notification No 09/2017-IT (R) dated 28.06,2017 as amended vide Notification No 02/2018 IT (R) dated 25.01.2018.

No.- KAR/AAAR/08/2018-19

Dated.- March 8, 2019

Citations:

  1. SHARE MEDICAL CARE Versus UNION OF INDIA – 2007 (2) TMI 2 – Supreme Court
  2. COLLECTOR OF CENTRAL EXCISE, MEERUT Versus MARUTI FOAM (P) LTD. – 2004 (1) TMI 328 – Supreme Court
  3. In Re: M/s Indian Institute of Management – 2018 (11) TMI 662 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA
  4. COLLECTER OF CENTRAL EXCISE, MEERUT Versus MARUTHI FOAM (P) LTD. – 1995 (9) TMI 194 – CEGAT, NEW DELHI
  5. HCL. LIMITED Versus COLLECTOR OF CUSTOMS, NEW DELHI – 2001 (3) TMI 971 – SC Order
  6. COLLECTOR OF CENTRAL EXCISE, BARODA Versus INDIAN PETRO CHEMICALS – 1996 (12) TMI 66 – SC Order

SHRI. D.P. NAGENDRAKUMAR, MEMBER AND SHRI. MS. SRIKAR, MEMBER

Represented by: Guru & Jana, Chartered Accountants

ROCEEDING

(Under Section 101 of the CGST Act, 2017 and the KGST Act, 2017)

At the outset we would like to make it clear that the provisions of CGST, Act 2017 and SGST, Act 2017 are in pari materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act.

The present appeal has been filed under section 100 of the Central Goods and Service Tax Act 2017 and Karnataka Goods and Service Tax Act 2017 (herein after referred to as CGST Act, 2017 and SGST Act, 2017) by Indian Institute of Management, Bangalore, (herein after referred to as ‘IIMB’/’Appellant’) against the advance Ruling NO. KAR/ADRG 25/2018 Dated: 25th Oct 2018 = 2018 (11) TMI 662 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA.

Brief Facts of the case:

1. Indian Institute of Management, Bangalore was registered as a society with the Registrar of Societies, Mysore State and is recognized as a premier institute of higher learning and seat of academic excellence in the field of management. Consequent to the passing of the Indian Institute of Management Act, 2017 which received presidential assent on 31st December 2017 and came into force with effect from 31.01.2018, IIMB is now a body corporate as per Section 4 of the said Act. The object of the Act was to declare certain institutes of management to be institutions of national importance with a view to empower them to attain global standards of excellence in management, management research and allied areas of knowledge.

2. In the light of the enactment of the IIM Act, 2017, IIMB applied for an advance ruling before the Authority for Advance Ruling on 09.05.2018 on the following questions:

a) Whether the long duration post graduate diploma/degree granting programs offered by the IIMB, other than those specifically mentioned in Sl.No 67 of Notification No 12/2017 CT(Rate) dated 28th June 2017 as amended by Notification No 02/2018 dated 29 January 2018, are exempted from GST output liability, being education as a part of a curriculum for obtaining qualification recognized by any law for the time being in force, in the light of the enactment of the IIM Act, 2017?

b) Whether supply of online educational journals or periodicals to the IIMB is exempted from reverse charge liability of GST under SI.NO 66 of Notification No 12/2017 CT(Rate) dated 28th June 2017 as amended by Notification No 02/2018 dated 25th Jan 2018, being education as a part Of a curriculum for obtaining a qualification recognized by any law for the time being in force in the light of the enactment of the IIM 2017?

3. Based on the facts submitted by the applicant, the Authority for Advance Ruling observed that entry Sl.Nos. 66 and 67 of Notification No 12/2017 CT (Rate) dated 28.06.2017 relate to education services falling under Heading 9992; that Sl.No. 66 of the said Notification is a general entry providing exemption to services provided by an educational institution and /or to an educational institution; that all educational services provided by an institute, which leads to a qualification/degree, recognized by the law, are exempt from payment of GST. Sl.No. 67 has been carved out specifically for the educational services provided by IIMs; that IIMs have been segregated from all other educational institutes and the educational services provided by them are subject to different treatment in terms of exemptions; that in so far as educational services provided by IIMs are concerned, the provisions contained in SI.No. 67 alone shall apply; that the Notification does not allow selective application of SI.No. 67 in respect of certain long term educational programs and application of Sl.No. 66 for the rest of the educational programs. In effect, the AAR held that when Notification No 12/2017 CT(R) provides for a specific entry for the IIMs at SI.No. 67, the provisions of Sl.No. 66 shall not apply to them. As regards the second question, the AAR held that since this also relates to the applicability of entry SINO 66 in the light of specific entry at SI.NO 67, the same view holds good and therefore, the answer for the second question posed by the applicant is also in the negative;

4. Aggrieved by the ruling of the AAR, an appeal has been preferred before this Authority on the following grounds:

4.1 IIMB is an institution recognized worldwide as an institution of higher learning and seat of academic excellence in the field of management. IIMB currently offers the following 5 long duration programs which collectively develop entry and middle level management professionals for companies, government and non-governmental organizations.

Table 1

Sl.No.

Program offered

Duration

1

Fellow Program in Management (FPM) is a full time doctoral program and is committed to train individual who will excel in their area of research through publication of high-quality work of international standard.

5 years

2

Post Graduate Program in Management (PGP) is designed to equip the student with skill and capabilities that will enable them to reach responsible global position in management. The PGP revolves around the principle that world class business leaders are not mass produced; they are nurtured and developed in a practical application oriented, user friendly environment. This is a flagship MBA degree equivalent program where students are admitted through CAT.

2 years

3

Post Graduate Program in Public Policy and Management (PGPPM) catalyzed by the Government of India and United Nations Development Program, the PGPPM is packed with path breaking insights about winning policy and making management strategies.

1 years

4

Post Graduate Program in Enterprise Management (PGPEM) is a weekend management program, designed for middle and senior level working professionals. Participants learn from world class faculty, while strengthening their network through collaboration with peers during their on-campus long weekend session

2 years

5

Post Graduate Program in Management (EPGP) is an intensive program designed to enhance skills and capabilities essential for responsible position at senior management level. Challenging widespread and globally oriented, the objective of this program is to produce future leaders who can handle the dynamic corporate environment.

1 year

In addition to the above, IIMB also offers certificate programs of short and long term durations under Executive Education Programs for mid and senior level executives.

4.2. The Indian Institute of Management Act, 2017 was passed and received Presidential Assent on 31st December 2017. The objective of the Act was to declare certain Institutes of management (of which IIMB is one) to be institutions of national importance and to empower them to grant degrees, diplomas and other academic distinctions or titles and to institute and award fellowships, scholarships, prizes and medals, honorary awards and other distinctions. The Government notified the IIM Act which came into effect on 31 January 2018. With the enactment of the IIM Act, IIMB is now a body corporate as per Section 4 of the said Act.

4.3. Till 31st January 2018, the courses mentioned at Sl.Nos 1 and 2 of the Table above were exempted in terms of Sl.No 67 of Notification No 12/2017 CT(R) dated 28.06.2017 whereas the courses mentioned at SI.Nos 3, 4 and 5 were taxable to GST. Post 31st January 2018, the courses mentioned at Sl. Nos 3, 4 and 5 of the above table also become exempt from GST by virtue of Sl.No 66 of Notification No 12/2017 CT(R) dated 28.06.2017 since IIMs are considered as ‘educational institutions’ by virtue of being vested with the power to grant degrees, diplomas and other academic distinctions or titles. Therefore, with effect from 31st January 2018, all the courses offered by IIMB qualify for exemption under Sl.No. 66 of the Notification No. 12/2017 CT(R) since IIMB is recognized as an educational institution as they provide a qualification which is recognized by the IIM Act, 2017.

4.4. A similar question was referred to the Authority for Advance Ruling, West Bengal by IIM Calcutta viz: whether, after the introduction of the IIM Act w.e.f. 31.01.2018, the Applicant should be considered as an ‘educational institution’? The AAR, West Bengal held that the Applicant is an ‘educational institution’ within the meaning of sub-clause (ii) of clause 2(y) of the exemption notification No 12/2017 CT(R) dated 28.062017 in terms of the IIM Act and the Applicant is eligible for benefit of exemption under Entry No 66(a) of the said Notification.

4.5. Placing reliance on the above Advance Ruling, the appellant states that they qualify as an ‘educational institution’ as defined under clause 2(y) of the Notification No 12/2017 CT (R) and are eligible for exemption under entry No. 66(a) of the Said exemption notification since IIMB is also recognized by the IIM Act and Offers the same courses; that the CGST Act and the relevant Notification has not taken into consideration the enactment of the IIM Act, 2017; that based on the existing Notification No 12/2017 CT (R), exemption in Sl.No 67 will be applied for the courses mentioned in Sl.No. 1 & 2 of the above Table and exemption in Sl.No. 66 will be applied for the courses mentioned in Sl.Nos 3, 4 and 5 of the above Table. They further submitted that since IIMB qualifies to be an educational institution, supply of online journals and periodicals to IIMB should be exempted from reverse charge liability under SI.NO 66 of the Notification No 12/2017 CT(R). In view of the above submissions they requested that the order of the AAR may be set aside and the exemption be granted to them as an educational institution.

PERSONAL HEARING:

5. The Appellant was called for a personal hearing on 19.02.2019 and was represented by M/s. Guru & Jana, Chartered Accountants. The CA reiterated the submissions made in the grounds of appeal and also relied on the CBIC Circular No 82/2019 dated 01.01.2019 which clarifies the applicability of GST on the various programs conducted by IIMs. He stated that as per the clarifications given by the CBIC, IIMB will now be considered as an educational institution and will be eligible for the exemption. As regards, the applicability of GST on the supply of online journals and periodicals, the authorized representative explained that IIMB procures online journals and periodicals both from abroad and from local publishers. However, since details of the transactions with regard to online journals and periodicals were not available, the authorized representative agreed to furnish further details regarding their claim for exemption under reverse charge.

5.1. The Appellant vide letter dated 27.02.2019 filed additional submissions to the present appeal wherein with reference to the import of online educational journals, they submitted that SI.No. 10 of Notification No 09/2017 (IT) dated 28.06.2017 exempts services received from a provider of service located in a non-taxable territory by way of supply of online educational journals or periodicals to an educational institution. other than an institution providing services by way of (i) pre-school education and education up to higher secondary school or equivalent; or (ii) education as a part of an approved vocational education course. They stated that IIM subscribes to the online educational journals or periodicals for the benefit of its students and faculty members from within India and abroad. These journals are made available to authorized users such as persons affiliated with IIMB as students, faculty or employees, The authorized users may access and use the journals only for scholarly and research purpose; that in view of the above, the procurement of the online journals are eligible for the exemption under Sl.No. 10 of the Notification No 09/2017 (IT) dated 28.06.2017.

DISCUSSIONS & FINDINGS:

6. We have gone through the records of the case and taken into consideration the submissions made by the Appellant in their grounds of appeal and at the time of the personal hearing.

7. The two issues for determination before us are:

a) Whether the long duration post graduate diploma/degree granting programs offered by the IIMB, other than those programs specifically mentioned in SI.No. 67 of Notification No 12/2017 CT(Rate) dated 28th June 2017, are exempted from GST in the light of the enactment of the IIM Act, 2017?

b) Whether supply of online educational journals or periodicals to the IIMB is exempted from reverse charge liability of GST under SINO 66 of Notification No 12/2017 CT(Rate) dated 28th June 2017 in the light of the enactment of the IIM Act, 2017?

8. Since both the issues revolve around the entries at SINO 66 and 67 of Notification No 12/2017 CT(R) dt 28.06.2017, we reproduce the relevant text of the said notification.

Table 2

Sl.No.

Chapter, Section, Heading, Group or Service Code (Tariff)

Description of Services

Rate (per cent.)

Condition

66

Heading 9992

Services provided –

(a) by an educational institution to its Students, faculty and staff:

(b) to an educational institution, by way of,-

(i) transportation of students faculty and staff;

(ii) catering including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory;

(iii) security or cleaning or housekeeping services performed in such educational institution;

(iv) services relating to admission to, or conduct of’ examination by, such institution; up to higher secondary:

Provided that nothing contained in entry (b) Shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or equivalent.

Nil

Nil

67

Heading 9992

Services provided by the Indian Institutes of Management, as per the guidelines of the Central Government, to their students, by way of the following educational programs. except Executive Development Program: –

(a) Two year full time. Post Graduate Programs in Management for the Post Graduate Diploma in Management, to which admissions are made on the basis of Common Admission Test (CAT) conducted by (he Indian Institute of Management;

(b) Fellow program in Management;

(c) Five year integrated program in Management

Nil

Nil

2. Definitions. – For the purposes of this notification, unless the context otherwise requires, –

(y) “educational institution” means an institution providing services by way of, –

(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

(iii) education as a part of an approved vocational education course;

9. The entry at SINO 66 of Notification No. 12/2017 CT(R) dt 28.06.2017 was amended vide Notification No 02/2018 CT(R) dt 25.01.2018. The amended entry Sl.No 66 with effect from 25.01.2018 reads as under:

Table 3

Sl.No.

Chapter, Section, Heading Group or Service Code (Tariff)

Description of Services

Rate (per cent)

Condition

66

Heading 9992

Services provided –

(a) by an educational institution to its students, faculty and staff;

(aa) by an educational institution by way of conduct of entrance examination against consideration in the form of entrance fee;

(b) to an educational institution, by way of,-

(i) transportation of students, faculty and Staff;

(it) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory;

(iii) security or cleaning or housekeeping services performed in such educational institution;

(iv) services relating to admission to, or conduct of examination by, such institution;

(v) supply of online educational journals or periodicals:

Provided that nothing contained in sub-items (i), (ii) and (iii) of item (b) shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or equivalent.

“Provided further that nothing contained in sub-item (v) of item (b) shall apply to an institution providing services by way of,-

(i) pre-school education and education up to higher secondary school or equivalent; or

(ii) education as a part of an approved vocational education course

Nil

Nil

10. As can be seen from Table 2, with effect from 1st July 2017, services provided to/by educational institutions were granted exemption under entry SI.NO 66. The term ‘educational institution’ has been defined in clause 2(y) of the said Notification to mean an institution which provides services of

(i) pre-school education

(ii) education up to higher secondary school or equivalent

(iii) education as part of a curriculum for obtaining a qualification recognized by any law for the time being in force

(iv) education as part of an approved vocational education course.

The question is whether IIMs will be considered as an ‘educational institution’ in terms of the above definition. If so, what is the significance of the entry Sl.No 67 which grants exemption specifically to IIMs? In order to answer this, let us look at the history behind the Creation of IIMS. In order to cater to the need for Suitable managers for the large number of public sector enterprises which were being established as part of independent India’s industrial policy, the Planning Commission, in 1959, recommended the setting up of elite management institutes named the Indian Institute of Management. Since the setting up of the first IIM at Calcutta in 1961, many IIMs were set up Over the years bringing the total number of IIMs in the country to 20. The IIMs were registered as societies under the Indian Societies Registration Act. Each IIM was autonomous and exercised independent control over its day to day functioning. The administration of the IIM and overall strategy of the IIMs was overseen by the IIM Council which was headed by the Minister for Human Resource Development. Being an autonomous body (not affiliated to any University), the IIMs gives a diploma on completion of the management courses conducted by them.

11. The two year Post Graduate program in Management offering the Post Graduate Diploma in Management is the flagship program across all IIMs. This two-year post Graduate program in Management is equivalent to an MBA degree. The Fellow Program in Management is equivalent to a Ph.D. degree. Many IIMs offer Executive Education Certificate Program for working professionals. This Executive Certificate Programs are not considered as equivalent to any MBA. Only the diploma level programs are considered as equivalent to an MBA degree. Being Societies, IIMs were not authorized to award degrees (which as per Indian law can be conferred only by Universities and deemed-to-be- universities) and hence, IIMs were awarding diplomas and fellowships in management. These diplomas and fellowships were only equivalent to an MBA or Ph.D. and the equivalence was not universally accepted. Since the diplomas and fellowships given by IIMs were not qualifications recognized by any law in India, they were not considered as an ‘educational institution’ in terms of the definition at clause 2(y) of Notification No 12/2017 CT(R), However, having due regard to the fact that certain programs of IIMs are akin to university degrees, the GST law has provided for a separate exemption to IIMs who provide the two year Post Graduate Program in Management, Five year integrated program in management and the Fellow Program in Management by virtue of entry Sl.No 67 of the above said Notification. The Executive Development Program is excluded from this exemption since the certificate awarded for this program is not equivalent to any MBA degree or PhD.

12. With the introduction of the Indian Institute of Management Act, 2017, IIMs were declared as institutions of national importance and were given the power to confer degrees. The IIM Act, 2017 received Presidential assent on 31 December 2017 and the provisions of the Act came into force on 3 1st January 2018. Since IIMs can award degrees recognized by law with effect from 31st January 2018, they are now considered as an ‘educational institution’ as defined under clause 2(y) of Notification No 12/2017 CT(R), Therefore, during the period 1 Ä July 2017 to 30th January 2018, IIMs cannot be termed as ‘educational institutions’ since they were not qualified to award degrees which were recognized by law. During the said period, the IIMs were eligible for exemption under a separate entry at Sl.No. 67 in respect of 3 educational programs provided by them. The intention of the law in providing a separate exemption specifically for IIMs makes it evident that IIMs were not considered as an ‘educational institution” as defined in clause 2(y) of the Notification No. 12/2017 CT(R) and hence not covered under the entry Sl.No 66 for the period 1st July 2017 to 31st January 2018. This has been clarified by the CBIC Vide Circular No 82/01/2019 GST dated 01.01.2019.

13. All IIMs (which includes IIMB) became eligible for exemption as an educational institution with effect from 31st January 2018 under entry Sl.No. 66 of Notification No.12/2017 CT(R). However, post 31st January 2018, the exemption under Sl.No. 67 loses its relevance since the IIMs are now covered under the entry Sl.No 66. However, the entry Sl.No.67 was deleted only with effect from 01.01.2019 vide Notification No. 28/2018 CT (R) dated 31.12.2018. Therefore, during the period January 2018 to 31st December 2018 both the entries at Sl. No. 66 and 67 were in force granting exemption to the services provided by IIMs. It is trite law that if there are two or more exemptions available to an assessee, he can claim the one which is more beneficial to him. Therefore, during the period 31st  January 2018 to 31st December 2018, IIMB can avail the exemption under either Sl.No. 66 or Sl.No. 67 of Notification No 12/2017 CT(R) dated 28.06.2017 as amended. This has also been clarified by the CBIC vide Circular No 82/01/2019 GST dated 01.01.2019. The relevant para of the Circular is reproduced hereunder:

5. For the period from 31st January, 2018 to 31st December, 2018, two exemptions, i.e. under Sl. No. 66 and under SI. Nov 67 of notification No.12/2017- Central Tax (Rate), dated 28.06.2017 are available to the IIMs. The legal position in such situation has been clarified by Hon’ble Supreme Court in many cases that if there are two or more exemption notifications available to an assessee, the assessee can claim the one that is more beneficial to him. Therefore, from 31st January, 2018 to 31st December, 2018, IIMs can avail exemption either under SI. No 66 or SI. No. 67 of the said notification for the eligible programmes. In this regard following case laws may be referred-

I. H.C.L Limited vs Collector of Customs [2001 (130) ELT 405 (SC)]  = 2001 (3) TMI 971 – SUPREME COURT OF INDIA

ii. Collector of Central Excise, Baroda vs Indian Petro Chemicals [1997 (92) ELT 13 (SC)] = 1996 (12) TMI 66 – SUPREME COURT OF INDIA

iii Share Medical Care vs Union of India reported at 2007 (209) ELT 321 = 2007 (2) TMI 2 – SUPREME COURT OF INDIA

iv. CCE vs Maruthi Foam (P) Ltd [1996 (85) RLT 157 (Tri.) = 1995 (9) TMI 194 – CEGAT, NEW DELHI as affirmed by Hon‘ble Supreme Court vide 2004 (164) ELT 394 (SC) = 2004 (1) TMI 328 – SUPREME COURT OF INDIA

14. In this case, the Appellant had sought a ruling whether, pursuant to the enactment of the IIM Act, 2017, the long duration post graduate programs will be exempt from GST under SI.No. 66 of the Notification No 12/2017 CT(R). We hold that, With effect from 31st  January 2018, the long duration Bost graduate diploma/degree programs offered by IIMB, where a degree/ diploma is conferred as recommended by the Board of Governors as per the power vested on them under the IIM Act, 2017, will be eligible for exemption from GST by virtue of Sl.No 66 of the Notification No 12/2017 CT(R) dated 28.06.2017 as amended.

15. As regards the second issue regarding supply of online educational journals or periodicals to the IIMB, the question on which the Appellant sought a ruling was whether such supply of online journals and periodicals to IIMB are exempt from reverse charge liability. The plea of the Appellant is that since they are to be considered as an ‘educational institution’ post enactment of the IIM Act, 2017, the supply of online journals and periodicals to their institution should be given the benefit of exemption under Sl.No 10 of Notification No. 09/2017 IT(R). The relevant extract of the Notification No 09/2017 IT (R) dated 28.06.2017 as amended by Notification No 02/2018 IT (R) dated 25.01.2018 is reproduced below:

Notification No 09/2017 IT (R) dated 28.06.2017

G.S.R….(E).- In exercise of the powers conferred by sub-section (1) of section 6 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the inter-State supply of services of description as specified in column (3) of the Table below from so much of the Integrated Tax leviable thereon under sub-section (1) of section 5 of the said Act, as is in excess of the said tax calculated at the rate as specified in the corresponding entry in column (4) of the said Table, unless specified otherwise, subject to the relevant conditions as specified in the corresponding entry in column (5) of the said Table, namely:-

Table

Sl.No.

Chapter, Section, Heading, Group or Service Code (Tariff)

Description of Services

Rate (per cent.)

Condition

1

2

3

4

5

10

Chapter 99

Services received from a provider of service located in a non- taxable territory by –

(a) ————-;

(b) ————–; or

(ba) way of supply of online educational journals or periodicals to an educational institution other than an institution providing services by way of-

(i) pre-school education and education up to higher secondary school or equivalent; or

(ii) education as a part of an approved vocational education course;

Nil

Nil

The Appellant in their additional submissions have stated that they subscribe to online journals and periodicals for its students and faculty, both from within India and abroad. The exemption as per the above Notification is applicable to an educational institution (other than pre-school educational institutions, institutions offering education up to higher secondary school or equivalent and vocational educational institutions), when they receive online journals and periodicals from a supplier located in a non-taxable territory. We have already concluded that IIMB is an educational institution as defined in clause 2(y) of the Notification No 12/2017 CT (R) dated 28.06.2017 and it is an educational institution which offers qualification recognized by law. Therefore, the receipt of online journals and periodicals by IIMB from a person located in a non-taxable territory will be eligible for exemption from payment of IGST in terms of Sl.No 10 of Notification No 09/2017 IT (R) dated 28.06.2017 as amended.. In the case of online journals and periodicals received by IIMB from domestic service providers, the exemption from payment of GST will be available to the domestic suppliers on intra-state supplies by Virtue of Sl.No. 66 (b) (v) of Notification No. 12/2017 CT (R) dated 28.06.2017, and exemption on inter-state supplies will be available Vide Sl.No. 69 of Notification No 09/2017-IT (R) dated 28.06,2017 as amended vide Notification No 02/2018 IT (R) dated 25.01.2018.

17. In view of the aforesaid discussions, we set aside the ruling dated 25.10.2018 of the Karnataka Authority for Advance Ruling and answer the questions .in the following manner:

a) Pursuant to the enactment of the IIM Act, 2017, with effect from 31st January 2018, the long duration post graduate programs offered by IIMB will be exempt from GST under Sl.No. 66 of the Notification No 12/2017 CT(R) as amended. During the period 31st January 2018 to 31st December 2018, IIMB can avail the benefit of exemption under either SI.No. 66 or Sl.No. 67 of Notification No 12/2017 CT(R) dated 28.06.2017 as amended.

b) IIMB will be eligible for exemption from payment of IGST in respect of supply of online journals and periodicals received from a person located in a non-taxable territory in terms of SI.No. 10 of Notification No 09/2017 IT (R) dated 28.06.2017 as amended.

The appeal is disposed off on the above terms.

M/S. MAHAVIR NAGAR SHIV SRUSHTI CO-OPERATIVE HOUSING SOCIETY LIMITED

Supply of goods or services or both – Construction of building on the plot allotted by MHADA – co-operative housing society registered under the Maharashtra State Co-operative Societies Act, 1960 – ITC on input and inputs services for repairs, renovations & rehabilitation works carried out by the Applicant – HELD THAT:- A housing society is a collective body of persons, who stay in a residential society and the collective body, supplies certain services to its members, like collecting statutory dues to be remitted to statutory authorities, or maintenance of the building, etc. As per section 2(17)(e) of the CGST Act, 2017 provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members is deemed to be a business. Thus, a housing society may be seen to be providing club and association services to its members but does not provide works contract service to its members.

The housing society i.e. the applicant in the subject case, is making provisions of the facilities/benefits to its members and is not providing any works contract services to its members and therefore the applicant is debarred from taking Input Tax Credit under the provisions of Section 17 (5) (c) of the CGST Act, 2017.

No.- GST-ARA-19/2021-22/B-94

Dated.- November 10, 2021

SHRI. RAJIV MAGOO, AND SHRI. T. R. RAMNANI, 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” respectively] by M/s. Mahavir Nagar Shiv Srushti Co-operative Housing Society Limited, the applicant, seeking an advance ruling in respect of the following questions.

1) Whether the activities carried out by the applicant for its members qualify as “supply” under the definition of Section 7 of the CGST Act, 2017.

2) Whether the applicant is liable to obtain registration under the GST law?

3) If the activities of the applicant are treated as “supply” under CGST Act, 2017 then whether the applicant is eligible to claim the ITC on input and inputs services for repairs, renovations & rehabilitation works carried out by the Applicant?

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression ‘GST Act’ would mean CGST Act and MGST Act.

2. FACTS AND CONTENTION – AS PER THE APPLICANT FACTS:

2.1 The Applicant, M/s Mahavir Nagar Shiv Srushti Co-operative Housing Society Limited, is a co-operative housing society registered under the Maharashtra State Co-operative Societies Act, 1960 and has constructed a building on the plot allotted by MHADA. The Applicant Society is formed, by its members who are the shareholders of the society, with the object of managing, maintaining and administering the property of the society.

2.2 For purpose of achieving the above objects of the society, the Applicant raises funds by collecting contributions/charges from members of the society. The charges include: property taxes water charges, common electricity charges, contribution to repairs and maintenance funds, expenses on repairs and maintenance of the lifts of the society, including charges to running the lifts, contribution to sinking fund, service charges, car parking charges, interest on the defaulted charges, repayment of the installment of the loan and interest, non-occupancy charges, insurance charges, lease rent, non-agricultural tax, or any other charges. The said charges are collected by issuing invoices.

2.3 The Applicant Society, uses the said funds for the specified purposes as enumerated in the bye laws. For example, the property taxes/water charges collected by the society from a particular member is paid to the Municipal Corporation. The Applicant Society does not carry out any other activity other than those mentioned in the bye laws of the society.

2.4 The Applicant Society has appointed M/s. Unique Rehab Pvt. Ltd. (hereinafter referred to as the “contractor”) for carrying our major repairs, renovations and rehabilitation works for the society on 21.01.2021. The said contractor is charging service charges along with the GST for carrying out the works contract service.

2.5 Under the GST Laws, the tax is levied on supply of goods or services and the term “supply” is defined in Section 7 (1) of the CGST Act, 2017. The Applicant, under the assumption of law, that the activities of the society for its members amounts to supply, had obtained registration under GST. The Applicant has filed the present Advance Ruling Application for determining whether the said activities carried out by the Applicant for its members qualifies as supply and hence liable to GST and also further seeks to know that if the activities of the society amounts to supply liable to GST then whether the applicant is eligible to obtain the ITC of the GST charged by contractor on the works contract service of repairs, renovations and rehabilitation provided to the Applicant society.

2.6 The Applicant submits that by a plain reading of the term “supply” as defined under Section 7(1) of the CGST Act, 2017, the activities carried out by the Applicant for its members does not amount to supply and hence not liable for GST.

2.7 As per Section 7(1) (a) all forms of supply of goods or services or both for a consideration in the furtherance or course of business will qualify as “supply” liable for GST. Thus, the supply is an inclusive definition encompassing all kinds of supply, however only those transactions which are for a consideration and in the furtherance or course of business will qualify as supply.

2.8 It is therefore pertinent to note the definition of “business” under Section 2(17) of the CGST Act, 2017. Clause (e) of Section 2 (17) specifically provides that business shall include provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members. Though the above definition of the business includes the provision of facilities or benefits to its members, on a case to case basis it has to be determined whether any facilities or benefits have indeed been provided by the society to its members.

2.9 In the present case the Applicant Society does not provide any facilities or benefits to its members. It is merely formed for managing the housing society. Thus, the applicant society cannot be considered to be doing any business. Further, the said definition of ‘business’ also fails on the touchstone of the settled principle of law i.e. principal of mutuality. The Supreme Court in the number of cases has held that a housing society cannot be said to the providing any services to its member by applying the principals of mutuality. It is only logical to say that the society is formed by its members and members cannot be said to be supplying services to their own selves by forming the society. Thus, the applicant’s activities does not amount to supply and are not liable for the GST.

2.10 Alternatively, without prejudice, if the Applicant is held to be supplying services to its members, then it is eligible to claim ITC on the input and input services received. Applicant shall be eligible to claim the ITC of GST charged by M/s. Unique Rehab Pvt. Ltd under the provisions of Section 16 (1) of the CGST Act, 2017 which provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

2.11 Applicant submits that though the services provided by contractor qualify as works contract, it will have no bearing on the eligibility of the ITC to the Applicant society. The works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. Thus even when there is a transfer of property in goods during execution of any works contract, such supply will be included in Works Contract only. Further, Entry 6(a) in Schedule II to the CGST Act provides that Works Contract under Section 2(119) shall be treated as “supply of service”. Thus works contract will be treated as service and tax would be charged accordingly (not as goods or part goods/part services which was done in the erstwhile regime).

2.12 Applicant submits that contract given for repairs, renovations and rehabilitation of the building which is an immovable property and thus, it may come under the definition of “Works Contract” and hence treated as works contract service. However, the Applicant Society shall be entitled to ITC in view of the Section 16(1). The denial of ITC can be only if there is blockage of credit under Section 17. In the present case there will be no blockage of credit of the reasons explained hereinbelow. From a reading of the provisions of Section 17 (5) (c) and (d) it is clear that no ITC shall be available of works contract service unless it is used for providing output works contract service. Further, the restriction does not apply to plant and machinery. In the present case, when it receives the works contract service of repairs, renovations and rehabilitation, the Applicant is further providing the said works contract services of repairs, renovations and rehabilitations to its members which is deemed to be supply. Thus, the Applicant Society shall be eligible to claim the ITC on the input works contract services as the same is used for providing the output works contract service.

2.13 The Applicant submits that it has used the works contract services provided by the contractor to provide further works contract service. The Applicant society is the main contractor as far as the members is concerned and the contractor is the sub-contractor. The Applicant submits that it has stepped into the shoes of the main contractor for providing the said works contract services to its members. Especially, after the amendment brought about in the Finance Act, 2021, Applicant Society is deemed to be a distinct entity from its members and all the works contract service received by the Applicant Society is used for providing further works contract service to its members. Thus, the said restrictions of Section 17 (5) shall not be applicable in the present case.

2.14 Alternatively, without prejudice, the said repairs, renovations and rehabilitation for plant and machinery shall be entitled as ITC to the Applicant Society.

2.15 Alternatively without prejudice the applicant has submitted that in general, on a plain reading of section 17 (5) (d) it is inferred by the authorities that, what is contemplated and provided for a particular situation where inputs are consumed in the construction of an immovable property, which is meant and intended to be sold as immovable property post issuance of completion certificate does not attract any levy of GST. Consequently, in such a situation, there is a break in the tax chain and therefore there is full justification of denial of input tax credit, as on the completion of the construction, no GST would at all be payable and therefore no set off of the input tax credit would be required or warranted or justified. The applicant has submitted that the position in the present case is totally different, where the repairs and maintenance is collected from the members and GST is charged therein. In that event, the Tax Chain is not broken. The denial of input tax credit in such a situation would be completely arbitrary, unjust and oppressive and would be directly opposed to the basic rationale of GST itself, which is to prevent the cascading effect of multi stage taxation. In this aspect there is a clear violation of article 14 of Indian Constitution.

03. CONTENTION -AS PER THE CONCERNED OFFICER:

The jurisdictional/concerned officer has not made any submissions.

04. HEARING

The application was admitted and called for final hearing on Final e-hearing on 29.10.2021. The Authorized representative of the applicant, Shri. Rahul Thakkar, Advocate was present. The Jurisdictional officer was absent. Question No. 1 & 2 are withdrawn by the Applicant. The Applicant argued only the Question No 3. The Applicant to file the missing Annexure 3 of the ARA application which remained to be filed. The Applicant informed during the course of hearing that the question 3 is mainly for ITC on capital expenditure or major expenditure incurred by the society i.e. whether applicant is entitled to such ITC.

4.2 Heard the matter.

05. DISCUSSIONS AND FINDINGS:

5.1 We have gone through the facts of the case, documents on record and both, oral and written submission of the applicant. During the course of the final online hearing held on 29.10.2021, the applicant, through the authorized representative Shri. Rahul Thakkar, Advocate, withdrew Question Numbers 1 and 2. Hence we are required to answer only question no. 3 raised by the applicant.

5.2 Question No. 3 is: “if the activities of the applicant are treated as “supply” under CGST Act, 2017 then whether the applicant is eligible to claim the ITC on input and inputs services for repairs, renovations & rehabilitation works carried out by the Applicant”.

5.3 The Applicant, M/s Mahavir Nagar Shiv Srushti Co-operative Housing Society Limited, is a co-operative housing society registered under the Maharashtra State Co-operative Societies Act, 1960, formed by its members who are the shareholders of the society, with the object of managing, maintaining and administering the property of the society for which, it raises funds by collecting contributions/charges from members of the society which include property taxes, contribution to repairs and maintenance funds, contribution to sinking fund, etc.

5.4 The Applicant Society has appointed M/s. Unique Rehab Pvt. Ltd., a contractor for carrying our major repairs, renovations and rehabilitation works for the society on 21.01.2021. The said contractor is charging service charges along with the GST for carrying out the works contract service. The applicant seeks to know whether they are eligible to obtain the ITC of such GST charged by contractor and has made submissions supporting its contention that they are eligible to obtain ITC on GST amounts paid to the contractor under the provisions of Section 16 (1) of the CGST Act, 2017.

5.5 Section 16 of the CGST Act, 2017, prescribes the eligibility and conditions for taking Input Tax Credit (ITC) and states that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

5.6 Further, the Section 17 of CGST/RGST Act, 2017 debars certain activities/ supplies/work from the eligibility to claim ITC. The relevant portion of sub-section 5 of Section 17 of CGST/RGST Act, 2017 in this regard is reproduced below:-

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation: For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;”

5.7 Applicant has submitted that they shall be entitled to ITC in view of the Section 16 (1). The denial of ITC can be only if there is blockage of credit under Section 17. In the present case when the applicant receives the works contract service of repairs, renovations and rehabilitation, the Applicant is further providing the said works contract services of repairs, renovations and rehabilitations to its members which is deemed to be supply. Thus, the Applicant Society shall be eligible to claim the ITC on the input works contract services as the same is used for providing the output works contract service. Thus, the Applicant submits that it has used the works contract services provided by the contractor to provide further works contract service since it is the main contractor as far as the members is concerned and the contractor is the sub-contractor.

5.8 The applicant has submitted that they are receiving works contract service from M/s. Unique Rehab Pvt. Ltd., who is a contractor. The applicant has also submitted that the said works contract services is supplied for construction of an immovable property, (where, the expression “construction” includes re-construction, renovation, additions or alterations or repairs). The applicant has further submitted that they are supplying works contract service to its members and therefore the works contract service received by them from M/s. Unique Rehab Pvt. Ltd. is for further works contract supply by the applicant to its members. Hence, eligible to take Input Tax Credit of GST paid to the contractor i.e. M/s. Unique Rehab Pvt. Ltd.

5.9 A housing society is a collective body of persons, who stay in a residential society and the collective body, supplies certain services to its members, like collecting statutory dues to be remitted to statutory authorities, or maintenance of the building, etc. As per section 2(17)(e) of the CGST Act, 2017 provision by a club, association, society, or any such body (for a subscription or any other considerationof the facilities or benefits to its members is deemed to be a business. Thus, a housing society may be seen to be providing club and association services to its members but does not provide works contract service to its members.

5.10 The housing society i.e. the applicant in the subject case, is making provisions of the facilities/benefits to its members and is not providing any works contract services to its members and therefore the applicant is debarred from taking Input Tax Credit under the provisions of Section 17 (5) (c) of the CGST Act, 2017.

06. In view of the above discussions, we pass an order as under:

ORDER

(Under Section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

For reasons as discussed in the body of the order, the questions are answered thus –

Question Nos 1 and 2 have been withdrawn by the applicant.

Question 3: If the activities of the applicant are treated as “supply” under CGST Act, 2017 then whether the applicant is eligible to claim the ITC on input and inputs services for repairs, renovations & rehabilitation works carried out by the Applicant?

Answer: – In view of the discussions made above, the applicant is not eligible for Input Tax Credit in the subject case where the contractor has provided works contract service for repairs, renovations & rehabilitation works.

M/S. SRI MUKTHENAHALLY SIVAKUMAR CHANNABASAVAIAH, SRI BASAVESHWARA CORPORATION

Classification of goods – rate of tax – sale of Poha Bran or Avalakki Bran or Bran of beaten rice which supplied to cattle feed manufacturing units – Taxability – HELD THAT:- The said poha bran is nothing but rice bran and is by product of Poha or Avalakki manufacturing process from paddy. Both rice bran and poha bran are derived from Paddy and the constituents of both are same. They are given different commercial narnes due to the different process of manufacture which give rise to them. Both are used as ingredient for manufacturing of cattle feed. The composition of the poha bran contains oil to the extent of 3 to 4 % and fibre to the extent of 35%. Hence poha bran is nothing but Rice bran – As for as classification of Poha bran is concerned the said goods can be classified under HSN chapter /heading vide HSN 2302 40 00. The present classification applied by the applicant for Poha bran under HSN 2304 00 90 is incorrect as it is applicable to those from soyabean.

Taxability – HELD THAT:- The poha bran, which is same as Rice bran is covered under entry no. 103B of Schedule I of Notification No. 1/2017 – Central Tax (Rate) dated 28.06.2017 as amended by Notification No. 6/2018 – Central Tax (Rate) dated 25.01.2018 and the same is liable to tax at 2.5% from 25.01.2018 under the CGST Act. Similarly the same is also liable to tax at 2.5% under the KGST Act, 2017 from 25.01.2018.

No.- KAR ADRG 23/2020

Dated.- April 23, 2020

DR. M.P. RAVI PRASAD AND SRI. MASHHOOD UR REHMAN FAROOQUI, MEMBER

Represented by: Sri. Sihva Kumar M.C. Proprietor

ORDER UNDER SUB-SECTION (4) OF SECTION 98 OF CENTRAL GOODS AND SERVICES TAX ACT, 2017 AND UNDER SUB-SECTION (4) OF SECTION 98 OF KARNATAKA GOODS AND SERVICES TAX ACT, 2017

1. Sri Mukthenahally Shivakumar Channabasavaiah, M/s. Sri Basaveshwara Corporation, 117/10/3, 1st Floor, RMC Link Road, Davanagere, Karnataka- 577001, having GSTIN 29AEWPC0067M1ZZ, has filed an application for Advance Ruling under Section 97 of CGST Act, 2017 read with Rule 104 of the CGST Rules, 2017 and Section 97 of the KGST Act, 2017 read with Rule 104 of the KGST Rules 2017, in FORM GST ARA-01 discharging the fee of ₹ 5,000-00 each under the CGST Act and the KGST Act.

2. The applicant is a private firm and is registered under the Goods and Services Act, 2017. The applicant has sought advance ruling in respect of the following question:

1. Rate of tax on sale of Poha Bran or Avalakki Bran or Bran of beaten rice which supplied to cattle feed manufacturing units

3. The applicant company furnishes some facts relevant to the stated activity:

a) The applicant is a registered dealer engaged in manufacturer and trading of Poha Bran or Bran of beaten rice which is supplied to cattle feed manufacturing units.

b) Poha Bran or Avalakki Bran is an by-product obtained while manufacturing Poha or Avalakki and is used as food for consumption, poha bran which is in powder form with fibre content of 35% and oil content of 2% to 3%, is invariably used as an ingredient in cattle feed manufacturing units.

PERSONAL HEARING / PROCEEDINGS HELD ON 02.01.2020

4. Sri. Shiva Kumar M.C, Proprietor of the applicant appeared for personal hearing proceedings held on 02.01.2020 & reiterated the facts narrated in their application.

4.1 The applicant states that while making poha bran, the paddy is soaked in water to the extent of twenty four hours and subjected to roasting process followed by paddy hulling process and afterwards three by products are available such as Avalakki (Poha) and Mandakki (Puffed rice) and Poha Bran (husk).

5. The composition of the Poha bran contains oil to the extent of 3 to 4 % and fibre to the extent of 35% used the same is used as ingredient for manufacturing of cattle feed or poultry feed is being exempted from payment of taxes. The said product is partly oil bran and partly de-oiled bran presently classifying under HSN Code 2304 at the rate of 5 percent. Others are of the opinion that the said goods being exempted from the payment of taxes. Hence the applicant is under dilemma and wants to know the right classification of the said goods and tax rate of exempted?

6. FINDINGS & DISCUSSION:

6.1 We have considered the submissions made by the Applicant in their application for advance ruling as well as the submissions made by Sri. Shiva Kumar M.C, Proprietor appeared during the personal hearing. We have also considered the issues involved, on which advance ruling is sought by the applicant, and relevant facts.

6.2 At the outset, we would like to state that the provisions of both the Central Goods and Services Tax Act, 2017 and the Karnataka Goods and Services Tax Act, 2017 are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the corresponding similar provisions under the KGST Act.

6.3 The said poha bran is nothing but rice bran and is by product of Poha or Avalakki manufacturing process from paddy. Both rice bran and poha bran are derived from Paddy and the constituents of both are same. They are given different commercial narnes due to the different process of manufacture which give rise to them. Both are used as ingredient for manufacturing of cattle feed. The composition of the poha bran contains oil to the extent of 3 to 4 % and fibre to the extent of 35%. Hence poha bran is nothing but Rice bran.

6.4 As for as classification of Poha bran is concerned the said goods can be classified under HSN chapter /heading vide HSN 2302 40 00. The present classification applied by the applicant for Poha bran under HSN 2304 00 90 is incorrect as it is applicable to those from soyabean.

6.5 Regarding the taxability, The poha bran, which is same as Rice bran as discussed above, is covered under entry no. 103B of Schedule I of Notification No. 1/2017 – Central Tax (Rate) dated 28.06.2017 as amended by Notification No. 6/2018 – Central Tax (Rate) dated 25.01.2018 and the same is liable to tax at 2.5% from 25.01.2018 under the CGST Act. Similarly the same is also liable to tax at 2.5% under the KGST Act, 2017 from 25.01.2018.

RULING

The Poha bran is classified under HSN 2302 40 90 and attracts tax at the rate of 2.5% each under CGST and SGST Act.

M/S. CHAMUNDESHWARI ELECTRICITY SUPPLY CORPORATION LIMITED

Levy of GST – Administration fees – post connection fees – pre-connection fees – same matter pending decision – HELD THAT:- The applicant will fix and recover non-tariff charges as per provisions of the Karnataka Electricity Act 2003 and regulations of the KERC and Karnataka Electricity Regulatory Commission (KERC) 1999 – As per Circular no. 34/8/2018-GST dated 1st March, 2018 issued by Ministry of Finance, Government of India, it was clarified that the services by way of transmission or distribution of electricity by an electricity transmission or distribution utility is only exempted as per entry number 25 of notification No. 12/2017- CT (R) dated 28.06.2017 and other services provided by the applicant to consumer are taxable – it was clarified in the circular that the other services such as meter rent, application fees, testing fees for meters etc. provided by these companies to their consumers are taxable.

The facts of the judgment is narrated that the ancillary charges collected by Electricity Distribution Company towards application fee, meter rent, other pre and post connection charges for shifting of lines, etc are covered by entry 25 of exemption notification number 12/2017-Central Tax (Rate) dated 28-06-2017 relating to transmission and distribution of electricity. Hence the same would constitute composite supply as per section 8 of the GST Act.

The issue of the exemption activities carried out by the applicant with reference to administration and Pre and Post connection charges towards supply of electricity is pending before Honorable Supreme Court of India vide UNION OF INDIA AND ORS. VERSUS TORRENT POWER LTD. AND ANR. [2019 (8) TMI 779 – SC ORDER] – Since the matter is sub-judice therefore advance ruling on aforesaid issue cannot be given.

No.- KAR ADRG 22/2020

Dated.- April 23, 2020

Citations:

  1. OSWAL AGRO MILLS LTD. Versus COLLECTOR OF CENTRAL EXCISE – 1993 (4) TMI 73 – Supreme Court
  2. DOYPACK SYSTEMS (PVT) LTD Versus UNION OF INDIA – 1988 (2) TMI 61 – Supreme Court
  3. TORRENT POWER LTD. Versus UNION OF INDIA – 2018 (5) TMI 1391 – GUJARAT HIGH COURT
  4. IN RE : M/s TP AJMER DISTRIBUTION LIMITED – 2018 (6) TMI 1196 – AUTHORITY FOR ADVANCE RULING – RAJASTHAN
  5. Union of India And Ors. Versus Torrent Power Ltd. And Anr. – 2019 (8) TMI 779 – SC Order
  1. M.P. RAVI PRASAD AND SRI. MASHHOOD UR REHMAN FAROOQUI, MEMBER

Represented by: Sri. B.C. Bhat, Advocate

ORDER UNDER SUB-SECTION (4) OF SECTION 98 OF CENTRAL GOODS AND SERVICES TAX ACT, 2017 AND UNDER SUB-SECTION (4) OF SECTION 98 OF KARNATAKA GOODS AND SERVICES TAX ACT, 2017

  1. M/s Chamundeshwari Electricity Supply Corporation Limited, No.29, CESC Corporate Office, 2nd Stage, Vijayanagar, Near Hunsur Main Road, Hinkal, Mysuru-570017., having GSTIN number 29AACCC6636P1Z1, has filed an application for Advance Ruling under Section 97 of the CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of the KGST Act, 2017 read with Rule 104 of KGST Rules 2017, inFORM GST ARA-01discharging the fee of ₹ 5,000-00 each under the CGST Act and the KGST Act.
  2. The Applicant is a limited company and is registered under the Goods and Services Act, 2017. The applicant has sought advance ruling in respect of administration and Pre connection and Post Connection service of 91 services as shown below.
S.N. Amount Collected by CESC for providing Various Services Description of Service
ADMINSTRATION- FEES/AMOUNT COLLECED FOR ADMINSTRTIONN RELATED SUPPLY
1. RTI Application Fee Application Fee Collected from Information seekers as Prescribed by the Govt. for giving information to the applicant seeking Information under RTI Act.
2. Amount Collected towards providing information under RTI Act. Amount Collected from the Applicant seeking Information. as Prescribed by the Govt. for providing additional information under RTI Act.
3. Departmental Exam fees collected form employees of CESC/ KPTCL Exam fees collected form employees for appearing to the Exams conducted by department (CESC/KPTCL) for promotions as per departmental norms.
4. E.M.D-Earnest money Deposit Earnest money Deposit received (cash, cheque, BG) against tender notification as. As per terms and condition of the Tender, Deposit paid to company by vendors for applying for tender for various work contracted for improvement and enhancement of distribution network. The EMD /Security Deposit /BG will be refunded after final settlement of the account or cancellation of Work Order
5. Interest on Bank Short Term Deposit Interest received from Bank for short term Deposit. It is shown as Other income in the P/L account
6. Interest amount recovered from employees Loan / Advances given to the employees for their needs. A nominal Interest is recovered Along with monthly EMI amount. (Interest is less than the Bank Interest).
7. Discount Supply of electricity by KPC to CESC is exempted if KPC has given certain Discount the same will be accounted in Books of A/c
8. Rebate Rebate received for settlement of Power purchase bills in time from the power Generator like KPCL and other Power generators.
9. Rebates collected for in time payment of energy purchase bills dues Discount given by the Power supply company for in-time payment for energy bills We purchase Electricity from Power supply Company for distribution. If the payment to the Power Supply company is made within the due date for their energy bills, the Power Supply Company will give discount/ rebate for in-time payment.
10. Income accrued on account of energy savings Due to Power savings by the consumers, the Govt. will give certain incentives. A part of such Energy Savings will be passed on to CESC. The same is accounted under the head “Income accrued on account of energy saving”
11. Incentives Received Incentives received from the Power Corporation/State Govt. from time to time under various schemes.
12. Rebate on Power Purchase Bills  Rebate received for settlement of Power purchase bills in time from the power Generator like KPCL and other Power generators.
13. Liquidated damages 1. Energy purchase bills 2. Others Miscellaneous recoveries/income Related to power purchase. Amount Recovered as Damages from the supplier/vendors due to under/Non-performance of the work / Delay in delivery of Goods / Electricity Delivered less than the stipulated quantity as stipulated in the Power Purchase agreement. The loss to the company is recovered as damages at the time of Payment of Bills.
14. Goods given under Barter System At the time of Installation/ Commissioning of Transformers at the Site or at consumer end by the Contractors, certain material gets short. The items will be given free of cost to the Contractor by CESC. Subsequently item will be replenished by the Contractor to CESC
15. Replacement of Assets during the Guarantee Period (Using Delivery Challan) The defective items like Transformers etc, are replace by the supplier of Goods under Delivery Challan without making any invoice. No additional payment is made as the asset is replaced within Guarantee period
16. Profit on sale of Stores Purchased Goods (Stores) are Accounted in Books of A/c under Written Down Value (WDV). When it is scrap materials sold, Invoice is prepared and applicable GST is paid. Sale proceeds shown separately. Where the Scraps are sold at a higher price than the WDV, the difference is accounted as profit in Books of Account under the Profit on Sale of Stores a/c head. It is only Book Adjustment
17. Depreciation withdrawn from Contribution / subsidies as per AS-12 In respect of Purchase of Capital goods like Transformers, Poles, Cables etc. the depreciation accounted earlier is reversed. This is only reversal entry.
18. Write-back of Interest Interest accounted/demanded earlier if found to be accounted incorrectly, it is written back in books of accounts. This is only reversal entry.
19. Excess found on Physical verification of Materials Stock, Fixed Assets & Cash During the stock verification of Stores Materials if found excess, the same will be shown in P/L A/c as Excess found on Physical Verification. The GST is Already paid at the time of purchase of Material.
20. Excess provision for IT Excess provision made in Income Tax payment at the end of year for present financial year before finalization of Company account
21. Excess provision for Depreciation in Prior periods Excess Provision made in which difference between Provision Depreciation is made with the actual depreciation accounted in Books of Accounts.
22. Excess provision for Interest and Finance Excess provision for Interest and Finance charges on Borrowings etc for the next Financial Year made in the previous period is written back in current year.
23. Other Excess provision in Prior Periods Other Excess provision made earlier period (Pre-GST and after GST) is written back in current financial year.
24. Other income relating to prior periods Income if any relating to pre-GST period received if any is accounted in book of accounts after GST Implementation.
25. Security Deposits transfer to Income after 3year pre-GST Deposit Amounts like ISD, ASD, EMD, etc collected from the consumers for connection or contract works if not refunded due to non-traceability of consumer/contractors after 3 years the amount will be transferred to Misc Income of the company. (along with amount pertaining to pre-GST Transferred in GST Period). The amount will be paid back to the consumer when the consumer traced out or requested for refund
26. Rental from Staff Quarters Amount Collected form the Employee/ Officers of the CESC for lent out of the residential quarters. The HRA amount paid in the salary to the Employee will be recovered as the rent amount.
27. Part-time Sweepers wages Wages paid to the Part-time sweepers employees directly engaged by CESC (Not through contractors)
28. SR Books sold to Employees Printed Books sold to employees as Service register at time of appointment to service of the company
29. Other Miscellaneous receipts from Trading Amount received from sale of Miscellaneous items viz. News Paper, Books & Periodicals
30. Advance on sale of scraps Advance paid to the company by the vendors before finalization of sale of scrap pending confirmation of sale. If the sale is not finalized the same amount will refunded to the vendors
31. Penalty recovered from supplier Bills Penalty recovered during payment of the suppliers bill for delay in work & delay in delivery of Goods/ under performance/supply of damaged Goods / Services as per terms and condition of contract/ work award
32. Stale Cheque If amount paid through Cheque by CESC as payment is not enchased or presented to bank by the vendor/ supplier/contractors/deposit refund/ service provider within due dates the cheque is cancelled or treated as stale cheque and amount is accounted as income if the same amount is not paid to the vendor/supplier/ contractors/ deposit refund/ service provider.
33. Transformer Rent Charges collected on Lending Transformer on temporary Basis to the consumers.
34. Rental From others Rent collected for using of CESC property like store yard/Buildings/ Poles for cable connection etc., from customers.
35. Sale of Scrap Amount collected for Sale of Burnt Meters, Damaged Transformers, Waste Transformer Oil, Waste Cables, Conductors, Gunny / Plastic Bags, Carboys, Drums are sold as Scrap to the contractors/Vendors
36. Cheque Dishonour Fee In case cheque issued by the consumer is dishonoured due to insufficient funds, the Bank charges & other incidental charges incurred by CESC is recovered from the consumers as Cheque Dishonour Fee
POST CONNECTION- FEES/AMOUNT COLLECED FOR POST SERVICE CONNECTION OF ELELCTRCITY RELATED SUPPLY
37. Miscellaneous charges collected for storage/transport /installation of CFL Lamps Under Belaku Yojane. Miscellaneous charges levied for storage/transport /installation of CFL Lamps from the consumers under Belaku Yojane or any scheme declared by State Govt. in respect of Power supply to the consumers
38. Re-Connection Fee If the consumer defaults for payment of Electricity Bill for consecutive three months, the Electricity supply will be disconnected. When consumer makes the payment of dues, Re-Connection Fee will be collected at the time of re-connection of Electricity supply. Further the amount is collected in the Power Bill itself and not collected separately from the consumers
39. Fee for Testing of Installation Fee collected from the consumers for the testing of authenticity or working condition of installation like meter, capacitor, etc for supply of Electricity
40. Installation Fee Collected towards Issue of NOC (No Objection Certificate) Fees Collected form consumer for Issuing No Objection Certificate (NOC) at the time change of ownership of the premises
41. Name Transfer Fee Name Transfer Fee will be collected from the consumers for change of name from existing consumer name at the time change of ownership of the premises by purchase or lease or rent
42. Service Line Charges Amount collected for giving connection through Service Line from point of supply to the premises of the consumer.
43. Additional load Fees Fee collected for Providing additional load of power in addition to existing load as per requirements requested by the consumer as per KERC Regulations.
44. Load Reduction Fees Fee collected for Providing Reduction in load of power from the existing load as per requirements requested by the consumer as per KERC Regulations.
45. Disconnection Fee Amount collected from the consumers for disconnection of Power supply services due to non-payment of Electricity charges within stipulated time as per KERC Regulations.
46. Reconnection Fee Amount collected from the consumers for Re-connection of Power when it is disconnected. Further the amount is collected in the Power Bill itself and not collected separately from the consumers
47. Disconnection / Reconnection Fees It is the Reconnection charges collected for non-payment of electricity bills for the earlier period. It is not Fees as mentioned earlier. Further the amount is collected in the Power Bill itself and not collected separately from the consumers
48. Tariff Change Fee Fee collected for Change of Higher Tariff to lower Tariff and vice-versa due to Change of purpose of usage of Electricity supply as per request from consumer.
49. Ledger Abstract Fee Amount collected for providing Ledger Extract of the installations power usage, billing, payment and other information for a specific period of time of consumer account as per consumer request.
50. CT Testing Fees (Current Transformer) Fees collected for testing of working conditions of current transformers at the time installation of Transformer.
51. Additional Security Deposit Security Deposit collected in addition to the already existing deposits due to increase in tariff charges/load/annual usage of electricity. The same will be refunded at the time of surrender of installation/ permanent disconnection at consumer Request
52. Deposits on MBC (Meter Burnt Cost) Deposit Amount collected towards Burnt out meter (for various reasons like short circuit, overload) Pending decision Subjected to Finding fault from either party. Refund Subjected to the condition fault Found on Distribution side. If not fault is from consumer the amount account as income
53. Re-Sealing charges (if found broken) At the time of Meter installation seal is put on the meter. In case the seal is broken or tampered with then the same needs to be replaced. Charges for sealing the meter is collected from the consumers
54. Miscellaneous Recoveries Recoveries from the consumers relating to distribution of electricity not specified in the above list
55. Changes of meter/replacement Charges collected for Changing Electro-mechanical Meters to EVM Meters request/ replacement of burnt Meter/fast gripping meters etc, at consumers or at complaint by Meter readers.
56. Line shifting Charges Chargers levied for shifting of Line/poles from one place to other at consumers request/ as per city requirements like widening/construction of roads etc
57. Delayed Payment Charges In case delay in payment of electricity Bill, by the consumers, delay payment charges are collected from the consumers at the rate of 1% per month calculated for the no of days delayed. Further the interest amount is added in next month Electricity Bill and collected as Electricity bill payment from the consumers
58. HT/LT Meter Testing Charge Charges collected for Technical Testing and Analysis of Meters to check the working condition of Meters like capacitors, current, reading constant etc. The testing can be made at consumer requests (at time of new connection and/or change of meter) or if complaint lodge at the time of reading of meter not working.
59. Calibration Charges Charges collected for Technical Testing and Calibration of Meters like precision of reading, and other features of Meters
60. Meter testing Charges Charges collected for Technical Testing and Analysis of Meters to check the working condition of Meters. The testing can be made at consumer requests or if meter readers complaint of not working/ slow reading/ fast gripping etc at the time of billing.
61. Duplicate Bill Charges Chargers levied on issue of Duplicate Bill at consumer’s request. i.e., if the original bill is lost by consumers, they can apply/ask for duplicate bill for any previous month. Charges is applied for every month Duplicate bill issued
62. Rebate- for collection of Electricity Tax Electricity Tax levied at the time of electricity billing and the same is paid to the Govt. If the Electricity taxes are paid to government within stipulated time CESC receives rebate on such Electricity Tax paid and account under the head as “Rebate for payment of Electricity Tax.” in the Books of A/c
63. Cross subsidy charges Amount received from Govt. as subsidy for supply of power to certain Tariffs like Bhagya Jyothi, Power-looms, etc installations as stipulated by the Govt.
64. Any amount transferred to Misc. Revenue Ex:- Deposits, ACC, ISD, ASD, MSD, MBC. Deposit Amounts like ISD, ASD, EMD, etc collected from the consumers for connection or contract works if not refunded due to non-traceability of consumer/contractors after 3 years the amount will be transferred to Misc Income of the company. (along with amount pertaining to pre-GST Transferred in GST Period). The amount will be paid back to the consumer when the consumer traced out or put request for refund
65. Receipts from consumers relating to prior periods Old dues received from consumers/contractors for works and other charges pertaining in Pre-GST period received after GST implementation which was written off earlier but received subsequently
66. Fuel cost adjustment charges Amount billed towards fuel cost like Petrol, Diesel borne by company for transport at the time of billing as per KERC regulations. The amount is revised every 3 months by KERC.
67. Power Factor penalty Penalty levied if the power recorded by the capacitor is excess than standard power factor stipulate at the time of agreement for both HT and LT connection during bill cycle. The charges will be levied on the excess power recorded as Power factor penalty
68. Meter Burnt-out Cost Amount collected towards Burnt out meter (for various reasons like short circuit, overload) Pending decision Subjected to Finding fault from either party. Refund Subjected to the condition fault Found on Distribution side. If the fault is from consumer the amount account as income
PRE CONNECTION- FEES/AMOUNT COLLECED FOR PRE SERVICE CONNECTION OF ELELCTRCITY RELATED SUPPLY
69. Application Fee Application Fee collected from the consumers for initial connection of Electricity supply to their premises as per KERC regulations.
70. Collection of Registration Fee on HT/LT/ Temporary Application on supply of Electricity Registration Fee collected from the consumers for Temporary connection of Electricity supply KERC regulations.
71. Facilitation fee towards Solar Roof Top system (SRTPV) After installation of Solar Roof Top system (SRTPV) in the consumer’s premises, facilitation fee is collected from the consumers for the Supervision Services provided by CESC from time to time.
72. Registration fee towards Solar Roof Top system (SRTPV) Registration fee collected from consumers for new connection of Solar Roof Top system (SRTPV) in their premises
73. Facilitation fee towards Solar Roof Top system (SRTPV) After installation of Solar Roof Top system (SRTPV) in the consumer’s premises, facilitation fee is collected from the consumers for Supervision Services provided by CESC from time to time.
74. Regularization of the un-authorized IP SET Infrastructures Charges Charges collected from Consumers for new connection/ regularization (Infrastructures Charges) of connection for providing Electricity supply to Irrigation Pump set.
75. Vendor Approval Fee Amount collected for providing approval of vendor for supply of Goods/Services for CESC who is qualified as per terms and conditions of the tender
76. Tender Application Fee Application Fee collected for applying quotations of tenders by the Vendors/Service Providers for supply Goods/Services to CESC.
77. Vendor Approval Fees Amount collected for providing approval of vendor for supply of Goods/Services for CESC who is qualified as per terms and conditions of the tender
78. Tender Application Fees Application Fee collected for applying quotations of tenders by the Vendors/Service Providers for supply Goods/Services to CESC.
79. Initial Security Deposit Initial Security Deposit collected from the consumers for providing Electricity connection. The same will be refunded at the time of surrender of installation/ permanent disconnection at consumer Request
80. Meter Security Deposit Security Deposit collected as collateral for installation of LT/HT meters to consumers at the time of New connection. The same will be refunded at the time of surrender of installation/ permanent disconnection at consumer Request or when meter is returned.
81. Advance Consumption Charges Advance amount collected as collateral from the consumers for supply of Electricity of Temporary Connection. The Advance amount so collected will be refunded or adjusted towards Electricity charges at the time of conversion from temporary to permanent connection at the consumers request
82. EMD/ Security Deposits/Bank Guarantees Amount collected towards Earnest Money Deposit (EMD) / Security Deposit /Bank Guarantee for applying tender for supply of Goods/Services. The EMD/ Security Deposit /BG will be refunded after final settlement of the account or cancellation of Work Order
83. Augmentation Charge To enhance the Power connection to the consumers for e.g. from LT to HT or from 10KVA to 20KVA, Augmentation Charge is collected.
84. Amount Collected towards Self-Execution Works Amount collected for goods/ services given for self-execution of Electrical Works in relation to connection of Electricity for new Layouts.
85. Development Charges Nominal Amount collected from the consumers for development of infrastructure to give supply of Electricity to a specific place.
86. Service connection charges (Supervision charges) Amount collected towards supervision charges for initial service connection to the consumers relating to supply of Electricity.
87. Amount Collected towards Deposit Contribution Works (DCW) Amount collected from Consumers for execution of Deposit Contribution Works in relation to the Electricity connection at Layouts. The amount is the cost collected against the purchase of goods and labour cost for the estimated work subsequently paid to the contractors upon completion of work.
88. One time maintenance cost of New Layouts For Power connections at the time of formation of new layouts, one time maintenance cost will be collected from the consumers.
89. Fee Collected towards Inspection of Installation Fee collected from the consumers for the physical Inspection of Installations like meter, capacitor, etc for supply of Electricity.
90. Rating / Re-Rating Charges Amount collected from Supplier/ Consumer for Rating/Re-Rating of Installation of Meter at the consumers request to verify the working condition of the Meter / meter rating
91. Supervision Charge Supervision charges collected from the consumers for supervising the execution of the Electrical works as Self execution work/DCW work. A 10% supervision charges collected on total estimate cost of the work.
  1. The applicant company furnishes some facts relevant to the stated activity:
  2. The applicant company is a limited and engaged in distribution of electricity. In turn they procure the electricity from various power suppliers such as KPTCL, KPCL, NTPC, KAOGA, JSW, PTCL, PGCIL etc. In addition to that, the applicant buys power from industries and individuals and also by the Solar Power generators.
  3. The Company supplies and distributes the powers to the various consumers, such as Companies, Industries, Commercial Shops, Hospitals, Farmers Irrigation pumps, Individuals, Government Organizations etc., in the Mysore, Mandya, Chamarajanagar, Hassan & Kodagu Districts. The power tariff rate is fixed by the government as per the mutual understanding between ESCOMS.
  4. In addition to that the applicant renders other essentials services in or relation to the distribution of Electricity to consumers like application fee, Registration fee. Supervision fee, Security deposit, Meter testing charges.
  5. Further the applicant has stated that Intra and interstate supply of Electrical energy is goods being exempted from the payment of taxes as per entry number 104 and Chapter Heading 2716 00 00 of the notification number 2/2017-Central Tax (Rate) dated 28-06-2017. And also stated that Transmission or distribution of electricity by an electricity transmission or distribution utility being exempted from payment of taxes as per entry number 25 of the notification number 12/2017-Central Tax (Rate) dated 28-06-2017.
  6. The applicant states that from the provisions of the CGST Act mentioned in Para 6 above, the service of transmission or distribution of electricity by an electricity transmission or distribution utility is exempt under said Notification. The applicant is being distribution licensee under the Electricity Act, 2003. Hence, the applicant would clearly fall within the ambit of definition of the term ‘electricity transmission or distribution utility’.
  7. The applicant states that the said Exemption Notification does not define the terms ‘transmission or distribution of electricity’. Accordingly, it is pertinent to analyze whether the other charges collected by applicant would be treated as consideration for the activity of ‘transmission and distribution of electricity’ and thereby covered under the said Entry of the Exemption Notification.
  8. The Applicant being the licensee holder for the Distribution transmission of electricity to end user has to develop and maintain an efficient, coordinated and economical distribution system. hence the applicant undertakes certain activities like Supervision, installation, repair and maintenance of meter, electric lines and other related activities.These services are directly related to the “Distribution of Electricity”. The detailed list of activities done by the applicant is enumerated above.
  9. The applicant further states that as per section 2(30) of the CGST Act the said activities comes under purview of“composite supply”means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. Where in principal supply is electricity. From the above point of view the principal supply is distribution and transmission of electricity by licensee holder to the end-user hence whatever ancillary charges associated with supply transaction is being exempted from GST.
  10. The applicant has referred to the following judgements in support of his contention:

4.1 In this regard the applicant has referred to the judgement rendered by Honourable Supreme court in the case of Doypack Systems (Pvt) Ltd. Vs. Union of India [1988 (36) ELT 201 (SC)] = 1988 (2) TMI 61 – SUPREME COURT, in which the Hon’ble Apex Court has analyzed that-

Interpretation of Statute – Deeming provision – Intended to enlarge the meaning of a particular word. Deeming provision is intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provisions. [para 64]. Interpretation of Statute – Meaning to be given to words – Construction to be adopted. – And also referred the of judgement rendered by Honourable Apex Court in the case of Oswal Agro Mills Ltd Vs. Collector of Central Excise [1993 (66) ELT 37 (SC)] = 1993 (4) TMI 73 – SUPREME COURT, the Hon’ble Apex Court has held that :-

it is very clear that the statute should be interpreted in the liberal meaning. Interpretation of statute – Doctrines of reading down, Noscitur A Sociis and ejusdem generis – Applicability of – The doctrine of reading down has been applied only to sustain the constitutionality of the statute. i.e. when two or more words which are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense.

4.2 The applicant has also referred to the judgment rendered by the High Court of Gujarat in the matter of Torrent Power Ltd. has given a verdict in favour of applicant on validity of Circular No.34/8/2018-GST with regards to taxability of charges recovered for the activities directly connected with the distribution and transmission of electricity such as application fee, meter rent, testing fee, labour charges for shifting meters and shifting of service line, etc..

PERSONAL HEARING / PROCEEDINGS HELD ON 21.11.2019.

  1. Sri B.0 Bhatt Advocate and duly authorised representative of the applicant company appeared for personal hearing proceedings held on 21.11.2019 & reiterated the facts narrated in their application. And representative took one month time to furnish the required documents.
  2. FINDINGS & DISCUSSION:

6.1 We have considered the submissions made by the applicant in their application for advance ruling as well as the submissions made by Sri B.C. Bhatt, Advocate of the applicant during the personal hearing. We have also considered the issues involved, on which advance ruling is sought by the applicant, and relevant facts.

6.2 At the outset, we would like to make it clear that the provisions of both the Central Goods and Services Tax Act, 2017 and the Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act, 2017 and KGST Act, 2017) are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the corresponding similar provisions under the KGST Act.

6.3 On 19th December 2019 the applicant company has furnished classified status document in respect of administration and Pre and Post connection charges towards supply and distribution of electricity as enumerated above.

6.4 The applicant will fix and recover non-tariff charges as per provisions of the Karnataka Electricity Act 2003 and regulations of the KERC and Karnataka Electricity Regulatory Commission (KERC) 1999.

6.5 As per Circular no. 34/8/2018-GST dated 1st March, 2018 issued by Ministry of Finance, Government of India, it was clarified that the services by way of transmission or distribution of electricity by an electricity transmission or distribution utility is only exempted as per entry number 25 of notification No. 12/2017- CT (R) dated 28.06.2017 and other services provided by the applicant to consumer are taxable as under, –

  1. Application fee for releasing connection of electricity;
  2. Rental Charges against metering equipment;

iii. Testing fee for meters/ transformers, capacitors etc.;

  1. Labour charges from customers for shifting of meters or shifting of service lines; Circular No. 34/8/2018-GST 3
  2. charges for duplicate bill;

Further it is was clarified in the circular that the other services such as meter rent, application fees, testing fees for meters etc. provided by these companies to their consumers are taxable.

6.6 The same contentions was upheld by AAR Rajasthan issued ruling in the matter of M/s Tp Ajmer Distribution Limited vide RAJ/AAR/2018-19/AR-02 dated dated 11-05-2018 = 2018 (6) TMI 1196 – AUTHORITY FOR ADVANCE RULING – RAJASTHAN and relying upon the Circular No 34/8/2018-GST issued on 1st March 2018 also held that transmission/distribution of electricity alone shall be exempt in terms of Notification No.12/2017-Central Tax (Rate) and non-tariff charges which is recovered from customer with respect to provision of the following service as mentioned below is taxable

  1. Application fee for releasing connection of electricity
  2. Rental Charges against metering equipment

iii. Testing fee for meters/transformers, capacitors etc.

  1. Labour charges from customers for shifting meters or shifting of service lines
  2. charges for duplicate bill

6.7 Subsequently vide Judgment rendered by the Honorable High Court of Gujarat in the case of M/s Torrent Power Limited of, Gujarat High Court vide Special Civil Application NO. 5343 of 2018 dated 05-04-2018 = 2018 (5) TMI 1391 – GUJARAT HIGH COURT stating that Vide Circular No. 34/8/2018-GST dated 01.03.2018 was quashed.

6.8 The facts of the judgment is narrated that the ancillary charges collected by Electricity Distribution Company towards application fee, meter rent, other pre and post connection charges for shifting of lines, etc are covered by entry 25 of exemption notification number 12/2017-Central Tax (Rate) dated 28-06-2017 relating to transmission and distribution of electricity. Hence the same would constitute composite supply as per section 8 of the GST Act.

6.9 It is pertinent to note that the department has filed special leave petition vide Diary No(s). 24733/2019 dated 09-08-2019 = 2019 (8) TMI 779 – SC ORDER in the Honourable Supreme Court against the order passed by Honourable High court of Karnataka in the case of M/s Torrent Power Limited of, Gujarat High Court vide Special Civil Application NO. 5343 of 2018 dated 05-04-2018 = 2018 (5) TMI 1391 – GUJARAT HIGH COURT is at present pending for the decision

  1. In view of the foregoing, we pass the following

RULING

The issue of the exemption activities carried out by the applicant with reference to administration and Pre and Post connection charges towards supply of electricity is pending before Honorable Supreme Court of India vide Diary No(s). 24733/2019 dated 09-08-2019 = 2019 (8) TMI 779 – SC ORDER. Since the matter is sub-judice therefore advance ruling on aforesaid issue cannot be given.

M/S. SAN ENGINEERING & LOCOMOTIVE CCOMPANY LIMITED

Classification of supply – Composite Supply or independent of supply of power packs – supply of powerpacks, freight and insurance service and commissioning/ installation services – freight and insurance service and commissioning / Installation – HELD THAT:- The supply of installation and commissioning service would be and independent service and is not a part of the composite supply. The rate of tax applicable to the installation and commissioning service needs to be applied for such supply of service.

The applicant has to transport the goods and deliver the power packs to the recipient and the amount charged to do this is a part of the value of the goods supplied. Hence the freight and insurance charges are part of the value of supply of power packs, since the supply contract is a contract for supply of power packs and the value of the contract is the sum total of the value of the power pack plus all charges charged to the recipient for anything done till the goods are delivered to the recipient – Even if these supplies, i.e. supply of power pack and supply of freight and insurance are distinct supplies, the same would be covered under the definition of “composite supply” as per section 2(30) of the CGST Act, 2017, as the same are naturally bundled and supplied in conjunction with each other in the ordinary course of business – The principal supply in the case is the supply of power packs.

Thus, the supply of power packs and the supply of freight and insurance services involved in such power packs shall be treated as the “supply of power packs” and the applicable tax related to such power packs and the time of supply would apply to the entire transaction as it applies to the “supply of power packs”.

No.- KAR ADRG 21/2020

Dated.- April 23, 2020

  1. M.P. RAVI PRASAD AND SRI. MASHHOOD UR REHMAN FAROOQUI, MEMBER

Represented by: Sri. K.S. Kamalakara, Cost Accountant

ORDER UNDER SUB-SECTION (4) OF SECTION 98 OF CENTRAL GOODS AND SERVICES TAX ACT, 2017 AND UNDER SUB-SECTION (4) OF SECTION 98 OF KARNATAKA GOODS AND SERVICES TAX ACT, 2017

  1. M/s. SAN Engineering & Locomotive Company Limited, Whitefield Road, Bengaluru 560048, (hereinafter referred to “the applicant”) and having a GSTIN 29AAECS5331HIZA, has filed an application for Advance Ruling under Section 97 of the CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of the KGST Act, 2017 read with Rule 104 of KGST Rules 2017, in FORM GST ARA-01 discharging the fee of ₹ 5,000/- each under the CGST Act and the KGST Act.
  2. The applicant is a company registered under the provisions of the Goods and Services Act, 2017. The applicant states that he is engaged in the business of manufacturing power packs and supplying installation and commissioning service.
  3. The applicant has sought advance ruling in respect of the following questions:
  4. Whether the supply of powerpacks, freight and insurance service and commissioning/ installation services as per the Purchase Order 08/16/2730/1838/f dated 05.11.2016 has to be treated as “Composite Supply” as defined in section 2(30) of CGST Act, 2017 read with section 8(a) of CGST Act, 2017 or freight and insurance service and commissioning / Installation can be treated independent of supply of power packs given that installation and commissioning takes place after 4-5 months of supply of power packs.

Installation and commissioning invoice can be only raised after obtaining confirmation from the customer that the Installation and Commissioning has been completed and a Completion Certificate to that effect has been issued.

  1. The applicant furnishes some facts relevant to the stated activity.
  2. The applicant states that he is engaged in manufacture of power packs classifiable under HSN Code Chapter 86 and also in activity of installation and commissioning of the same.
  3. The applicant has been issued with purchase order bearing no. 08/ 16/2730/1838/F dated 05.11.2016 by M/s. Integral Coach Factory, Chennai to supply “twin power pack with underslung engine and hydraulic transmission and commissioning / installation of the same in High Speed Self Propelled Accident Relief Train (HS SPART)”. As per the said purchase order, the applicant was required to supply 18 numbers of Power Pack to M/s. Integral Coach Factory, Chennai and also to install / commission the same in HS SPART. The applicant states that he has supplied and installed some of the Power Packs in HS SPART during the excise/ service tax regime and remaining units of Power Packs during GST regime.
  4. The applicant states that as per Part-I of the said Purchase Order, the break-up of the price of each Power Pack, packing charges, freight charges, installation/ commission charges and duties/ taxes is as follows:
Details Price (Rs.)
Basic value for supply of each Power Packs ₹ 5,13,62,000-00
Packing Charges ₹ 7,70,000-00 extra
Duties / Taxes As applicable
Freight Charges ₹ 2,91,000-00 extra
Other Charges Commissioning/charges ₹ 40,00,000-00 extra
Insurance Charges ₹ 2,04,000-00 extra
  1. Since the value for the ‘supply of goods’ and ‘supply of services’ are separately provided in the Purchase Orders and the same not being naturally bundled and not supplied in conjunction with each other in the ordinary course of business, the applicant does not treat the supply of the same as ‘Composite Supply’.
  2. The applicant states that he on supply of the power packs in the GST regime, as per Sl.No. 241 of Schedule-I to the Notification No. 1/2017-IT (Rate) dated 28.06/2017 in their invoices charged IGST @ 5% on the basic value of ₹ 5,13,62,000-00 as agreed in the said Purchase Order.
  3. In view of the value for the ‘Freight & Insurance Charges’ and ‘Comnaissioning/ Installation charges’ being separately mentioned in the said Purchase Order, the applicant states that, by treating the same as “supply of service” has raised separate invoices for “Freight & Insurance Charges” and “Commissioning/ Installation Charges”. Classifying theFreight & Insurance Charges under SAC 996793 in the invoices they have charged 5% IGST and classifying the Commissioning/ Installation charges under SAC 9954 in the invoices they have charges 18% IGST. The applicant has produced the copies of the invoices raised.
  4. Regarding the grounds, the applicant submits as under:
  5. In the said Purchase Order placed by Integral Coach Factory, Chennai to supply Power Packs and Installation & Commissioning of the same in HS SPART, there is a component of ‘supply of goods’ and a component of ‘supply of service’. The value for such supply of goods and services are also separately mentioned in the said Purchase Orders.
  6. There is doubt that such supply of Power Packs and the related freight service and transit insurance are naturally bundled supply, as they are supplied in conjunction with each other in the ordinary course of business. Therefore, such supply of Power Packs with freight & insurance has to be treated as “composite supply” in terms of section 2(30) of COST Act, 2017. In the said supply, the Power Pack being the principal supply, the GST rate applicable to principal supply has to be applied for the purpose of levying GST in terms of section 8(a) of CGST Act, 2017.
  7. Since such supply of Power Packs and installation & commissioning of the same in HS SPAR are not naturally bündled and supplied in conjunction with each other in the ordinary course of business, the ‘supply of Power Pack’ as per requirement of M/s. Integral Coach Factory, Chennai and ‘installation’ of the same are two different supplies.
  8. The applicant submits that post such supply of Power Packs, the installation and commissioning of the same into HS SPART can be carried out by M/s. Integral Coach Factory, Chennai either by themselves or they can avail installation and commissioning service from any other supplier of service. The supply of Power Packs and the installation of the same in HS SPART are not in conjunction with each other in the ordinary course or business.
  9. The applicant states that as per the said purchase orders, the receipt of power packs at the premises of M/S Integral Coach Factory, Chennai and by inspection of the same, the supply of Power Pack ends. As the supply of commissioning / installation takes place only on receipt of the power packs at the premises of M/S Integral Coach Factory, Chennai and ends with certificate issued by the officer concerned after successful installation and commissioning, hence the ‘supply of power pack’ and ‘installation and commissioning’ cannot be considered as “composite supply”. The applicant reproduces the relevant provisions of section 2(30) and 8 of the CGST Act, 2017.
  10. The applicant states that it is clear from the provisions of section 2(30) and 8 of the CGST Act, that where there is a supply by the registered person to recipient, which consists of two or more taxable supplies of goods or services or both, or a combination thereof and such supplies are naturally bundled and supplied in conjunction with each other in the ordinary course of business and one of such supply is a principal supply, then such supply shall be treated as supply of principal supply.
  11. The applicant also submits that Board vide Flyer No.4 dated 01.01.2018 has laid down some illustrative indicators in determining the bundling of services in ordinary course of business which are
  • There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
  • The elements are normally advertised as a package
  • The different elements are not available separately
  • The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.
  1. The applicant also submits that in the given facts there is separate value for ‘supply of power packs’ and ‘installation and commissioning service’ invoices are also required to be raised separately on completion of such supplies; the applicant normally will not advertise such ‘supply of power pack’ and installation and commissioning service’ as package; the element of ‘supply of power pack’ andelement of ‘supply of installation and commissioning’ are separately available in the said purchase orders; and the ‘supply of power pack’ and ‘supply of installation and commissioning’ of the same are not integral to one overall supply. Without ‘installation and commissioning service’, the ‘supply of power packs’ can be affected.
  2. The applicant states that in view of the above submissions, as per the purchase orders the supply of power packs with freight and insurance services supplied by the applicant has to be treated as “composite supply” and “supply of installation and commissioning service” as independent supply of service classifiable under SAC 9954 for the purpose of levying GST.
  3. Regarding the applicable rate of GST, the applicant states that
  4. the supply of power packs with freight and insurance service should be treated as “composite supply’ as defined in section 2(30) of CGST Act, 2017 and the supply of power pack being principal supply, the same should attract IGST @ 5% upto 01.10.2019 as per Sl.No.241 of Schedule-I to the Notification No.1/2017-IT (Rate) dated 28.06.2017 and post 30.09.2019 should attract IGST 12% as per SI. No. 205G of schedule-Il to the Notification No.1/2017-IT (Rate) dated 28.06.2017 as amended read with section 8(a) of CGST Act, 2017, and
  5. the supply of installation and commissioning of power packs should be treated as independent supply of service classifiable under SAC 9954. The same should attract IGST @ 18% in terms of SI. No. 3 of Notification 08/2017 Integrated Tax (Rate) dated 28 June 2017 as amended.

PERSONAL HEARING / PROCEEDINGS HELD ON 20.02.2020

  1. Sri K.S.Kamalakara, Cost Accountant and duly authorised representative of the above concern appeared for personal hearing proceedings on 20.02.2020 before this authority and reiterated the facts already submitted above.

FINDINGS & DISCUSSION

  1. We have considered the submissions made by the Applicant in their application for advance ruling as well as the submissions made by him when he appeared for the personal hearing. We have also considered the issues involved, on which advance ruling is sought by the applicant, and relevant facts.

8.1 At the outset, we would like to state that the provisions of both the CGST Act and the KGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the KGST Act.

8.2 The applicant has filed the application seeking advance ruling whether the supply of power packs, freight and insurance service and commissioning and installation service is a composite supply or not and this is not related to the applicability of any entry of notification and hence the same is not dealt here. We do not answer whether the supply is covered at 5% or 12%, as the same is not sought.

8.3 The applicant has stated that there are three components involved in the overall supply between the supplier and the recipient. They are as under:

  1. Supply of power packs
  2. Freight and insurance related to the power packs
  3. Supply of Installation and Commissioning service.

The applicant himself has stated in para 4 of Annexure C of his submissions that the installation and commissioning can be carried out by the recipient either by themselves or they can avail the services from any other supplier of service. Hence it is clear that the supply of the installation and commissioning is not a part of the supply contract of power packs and hence is an independent service, in case that contract of installation and commissioning is also given to the applicant.

8.4 Hence, the supply of installation and commissioning service would be and independent service and is not a part of the composite supply. The rate of tax applicable to the installation and commissioning service needs to be applied for such supply of service. We are not going into the applicable rate of tax as it is not a part of the question before this Authority.

  1. Regarding the other two components, the Purchase Order is verified and found that the terms of conditions states that the mode of delivery is by road on freight pre-paid door-delivery basis. Further, the other charges shall read as Insurance Charges extra.

9.1 Section 15(2) of the CGST Act, 2017 states that the value of supply shall include incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services. Hence the applicant has to transport the goods and deliver the power packs to the recipient and the amount charged to do this is a part of the value of the goods supplied. Hence the freight and insurance charges are part of the value of supply of power packs, since the supply contract is a contract for supply of power packs and the value of the contract is the sum total of the value of the power pack plus all charges charged to the recipient for anything done till the goods are delivered to the recipient.

9.2 Even if these supplies, i.e. supply of power pack and supply of freight and insurance are distinct supplies, the same would be covered under the definition of “composite supply” as per section 2(30) of the CGST Act, 2017, as the same are naturally bundled and supplied in conjunction with each other in the ordinary course of business. The principal supply in the case is the supply of power packs. Further section 8 of the CGST Act, 2017 clearly states that the tax liability on a composite supply shall be determined by treating them as a supply of such principal supply. Hence going by this also, the composite supply of power pack and the supply of freight and insurance would be treated as “supply of power packs” only as per section 8 of the CGST Act, 2017.

9.3 In view of both the above paras, the supply of power packs and the supply of freight and insurance services involved in such power packs shall be treated as the “supply of power packs” and the applicable tax related to such power packs and the time of supply would apply to the entire transaction as it applies to the “supply of power packs”

  1. In view of the foregoing, we rule as follows

RULING

  1. The supply of power packs and the freight and insurance charges would form part of the value of supply of power packs.
  2. The supply of commissioning / installation services supplied by the applicant are independent services supplied by the applicant and is independent of the supply of power packs.

A.M. ABDUL RAHMAN ROWTHER & CO. (NIZAM TOBACCO FACTORY)

Maintainability of Advance Ruling application – issue pending before the Jurisdictional authority – Classification of goods – Unmanufactured Chewing Tobacco – applicability of N/N. 01/2()17-Compensation Cess-(Rate) – HELD THAT:- As per the first proviso to Section 98(2) of CGST/SGST Act, 2017 the authority shall not admit the application where the question raised in the application is already pending or decided in any proceeding in the case of an applicant under any of the provisions of this Act.

In the case at hand, it is established that on the issues raised by the applicant before this authority, the Central Tax authorities have initiated proceedings and the same is pending before the Jurisdictional authority at the time of filing of this application. Therefore, the application cannot be admitted and is to be rejected without going into the merits of the issue.

No.- TN/19/AAR/2020

Dated.- April 20, 2020

Citations:

  1. CRANE BETEL NUT POWDER WORKS Versus COMMR. OF CUS. & C. EX., TIRUPATHI – 2007 (3) TMI 6 – Supreme Court
  2. BARIUM CHEMICALS LTD. Versus A.J. RANA – 1971 (12) TMI 107 – Supreme Court
  3. In Re: M/s. A.M. Abdul Rahman Rowther & Co. (Nizam Tobacco Factory) – 2019 (10) TMI 273 – AUTHORITY FOR ADVANCE RULING, TAMILNADU
  4. In Re: M/s. A.M Abdul Rahman Rowther & Co. – 2019 (12) TMI 50 – APPELLATE AUTHORITY FOR ADVANCE RULING, TAMILNADU

MS. MANASA GANGOTRI KATA, I.R.S., AND THIRU KURINJI SELVAAN V.S., M.SC., (AGRI.), M.B.A., MEMBER,

Note Any appeal against the advance ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated.

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 the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.

M/s. A.M. Abdul Rahman Rowther & Co, No. 4, Old Palace Building, Pudukottai 622001 (hereinafter referred as applicant) are manufacturers of Chewing Tobacco and are registered under GST Act with Registration No. 33AAHFA0811C1ZD.

2. The applicant had filed an application for Advance Ruling on 06.02.2019 seeking ruling on the following question:

“Classification of the product “Chewing Tobacco” manufactured by them and applicability of Notification No.01/2()17-Compensation Cess-(Rate).”

In the application they had stated that they are the manufacturers of chewing tobacco under the registered brand of “Nizam Lady” and trade name of A.R. Abdul Rahman Rowther & Co

3.1 The original authority after hearing the applicant personally and on careful examination of the submissions of the applicant and the comments furnished by Commissioner, CGST Trichy ruled as follows vide Order No.37/AAR/2019 dated 27.08.2019 = 2019 (10) TMI 273 – AUTHORITY FOR ADVANCE RULING, TAMILNADU.

“The application is rejected under first proviso to Section 98(2) of the CGST/TNGST Act 2017, as the issue for which Advance Ruling is sought by the applicant is already pending before the appropriate authority.

The above decision was arrived at by the lower authority as per the first proviso to Section 98(2) of CGST/TNGST Act 2017 which forbids the authority to admit the application when the question raised is already pending or decided in any proceedings in the case of the applicant, under any provisions of the Act. Commissioner GST & Central Excise, Trichy in the comments furnished on the Application, has stated that the proceedings has been initiated and an offence case booked vide O.R. No. 17/2018-19(DPU-GST) dated 09.01.2019 in respect of the applicant on the very issue raised by him before the authority while the application is filed on 06.02.2019 i.e. after the proceedings initiated under the provisions of the GST Act.

3.2 The applicant aggrieved with the above decision of the lower authority filed an appeal on 17.09.2019 before the Tamilnadu Appellate Authority for Advance Ruling on the plea that in as much as their application was accepted and AAR satisfied that there is no pending issues in the subjected matter or matter already decided either in Department or court proceedings during PH on 22nd May 2019 before the lower authority, the said authority has rejected the application for the reason that proceedings are pending.

4. The appellate authority after carefully considering the various submissions of the applicant and keeping in view the applicable statutory provisions ruled vide Order-in-Appeal No. AAAR/07/2019(AR) dated 21.10.2019 = 2019 (12) TMI 50 – APPELLATE AUTHORITY FOR ADVANCE RULING, TAMILNADU as follows:

“The order No. 37/ AAR/2019 dated 27.08.2019 = 2019 (10) TMI 273 – AUTHORITY FOR ADVANCE RULING, TAMILNADU passed by the Lower Authority in the case of the Appellant is set aside. The matter is remanded to the lower authority for consideration and passing of appropriate orders on whether the issue raised in the application by the appellant was already pending before the department after extending opportunity to the appellant.”

5.1 On the directions of the appellate authority the applicant was requested to appear for personal hearing on 07.11.2019, Whereas the applicant requested for adjournment to the next convenient date in view of the fact that the authorized representative is out of station, Further, the applicant was extended another hearing on 13.12.2019 and the applicant again requested for adjournment. The applicant was once again extended an opportunity to be personally heard on 29.01.2020. The authorised representative of the applicant appeared before the authority and gave a written submission. They stated that the summons was issued on 08.01.2020 which was general in nature. The subsequent SCN was issued with specific issue of classification, hence, should not be counted towards proceedings under Section 98(2). The Jurisdictional Central Tax officer appeared and gave a written submission. They stated that a statement was recorded on 09.01.2019, where the specific issue of classification was raised and hence should be counted towards proceedings under Section 98(2) and not allowable for Advance Ruling. The Jurisdictional state officer also gave a written submission.

5.2 In their written submission the applicant has contended that

  • they have been summoned on 8th Jan 2019 as per the provisions of Section (70) of the GST Act by the Jurisdictional authority and on 9th of Jan 2019 the statement was recorded with all relevant details of the productions, revenue paid and clearance of assessable goods, etc.
  • The subject matter of the summon is regarding the possible shortfall in payment of GST during the past periods and in relation to it the jurisdictional authority had called for certain documents as mentioned in the schedule of summons. Under the schedule to the summon issued under Section 70 of CGST Act, they had called for
    • Abstract of GST invoices issued along with random sample copies for outward supply
    • List of buyers along with the copies of purchase order received from them
    • List of job workers and details of manufacturing premises
    • P& L account, Balance Sheet with notes and schedules for the financial years 2017-18 and 2018-19
    • Income tax returns for the above period
    • Copy of Partnership deed
  • The above list of documents were called for the purpose of analyzing the possible short fall in the revenue of GST and these are nothing to do with the classification of commodity which they are dealing
  • If the jurisdictional authority is really interested in classification issue, summon shall be so designed that purpose, documents, records and evidence shall relate to subject of classification of product. Further, the jurisdictional authority has not asked for the process of manufacture, lab test report and product specification and packing, labeling aspects which are the main element for determining and analyzing the classification of product in question.
  • There are number of reasons for shortfall in payment of GST and classification is one among the reason and it is, not the sole reason. Further, the enquiry officers have referred the provisions of GST in their enquiry mode such as section 37, 38, 49, and Rule 39. Hence, the summons has not been issued solely on the ground of classification of commodity and applicable GST rate.
  • Therefore the reason for rejection of their application is clearly been evident that it has been made after thought by correlating the summons issued in general with possible ground for rejection as regards the subject matter of application in particular filed before AAR

Further the authorized representative vide letter dated 30.01.2020 received on 04.02.2020 has submitted the decision of Hon’ble Supreme Court in the case of Barium Chemicals Ltd & Anr Vs A.J.Rana AIR 1972 SC 591 = 1971 (12) TMI 107 – SUPREME COURT and claimed that basis of documentary evidence which is not complete with respect to general and specific aspect are liable to be quashed.

5.3 The central Jurisdictional officer submitted the copy of the statement recorded on 09.01.2019 and also the copies of summon issued on 08.01.2019 and 19.06.2019.

5.4 The state jurisdictional officer forwarded comments on the issue raised in the application vide their letter dated 28.01.2020. They stated that under the present GST Act 2017, chewing tobacco is classified under HSN 2403 and taxable at 28% GST. They also referred to the Hon’ble Supreme Court’s findings in the case of Crane Betel Nut Powder Works Vs Commissioner of Customs & Central Excise Tirupathi and another reported in 2007 (6) VST 532 (SC) = 2007 (3) TMI 6 – SUPREME COURT.

6.1 We have carefully examined the submissions made by the applicant during the personal hearing and the documents submitted by the Central Jurisdictional authority. The remand directions are for consideration and pass appropriate orders on whether the issue raised in the application by the appellant was already pending before the department after extending opportunity to the appellant The applicant in their original application has sought advance ruling on Classification of goods- Unmanufactured Tobacco and applicability of Notification No 01/2017-Compensation Cess (Rate).

6.2 We find that the applicant accepts the fact that the Central Tax authorities have issued a Summon on 08.01.2019 and the applicant has tendered a Statement on 09.01.2019. It is the contention of the applicant that the summon and the related proceedings were not issued based on the classification of the product for which the advance ruling is sought by them, but the summon issued was about the possible shortfall in payment of GST for which the classification of the product may be one among the reasons for shortfall and not the sole reason for shortfall in GST Payment and has further contended that the reason for rejection of their application is an afterthought by correlating the summons issued in general with possible ground for rejection as regards the subject matter of application filed before this authority.

6.3 The Central Tax Authorities who have issued summon had recorded a statement on 09.01.2019 from Shri. A.R.Syed Ibramsa, Managing Partner of the applicant. The relevant portion of the statement is given below:

“…effective from July 2017, we have classified our final product “Branded Chewing Tobacco” under Chapter Heading CETH 24039990. Up to the month of June 2017 our product was classified under CETH 24039910. The manufacturing process of our final product namely “Branded Chewing Tobacco” is as follows. We use to procure raw tobacco leaves from various places. The tobacco leaves are minced, soaked in jiggery water, dried, essence added to the tobacco and packed in retail packets manually under the denomination (Rs.) 10X3 and (Rs.) 15X4. The packet of denomination of 10X3 contains 3 nos. of 30 Rs. Packets each in a paper pouch and similarly the 15X4 packets contain 4 nos. of 60 Rs. Packets each in a paper pouch. We do not add lime tubes in our final product packets. The process of manufacture does not involve machine packing. Machines are used only in the course of mincing of tobacco leaves. We clear the goods to the shop keepers from my factory gate. The final product is consumed by the user by way of Chewing. By chewing the tobacco, the same acts as a stimulant for the user. Today you pointed to us that our final product viz. “Branded Chewing tobacco without lime tube” is classifiable under HSN 24039910 and as such the same attracts GST Compensation Cess @ 160% as per notification 1/2017-Compensation Cess(Rate) dated 28.06.2017. In this regard, we wish to state that our above said final product is classifiable only under HSN 24039990. Though we have been classifying the same under CETH 24039910 upto June 2017, we honestly believe that our product is a product of such type classifiable under the category of “Other manufactured tobacco” also our product of manufactured tobacco is identifiable under Sl.No. 37 (aII goods other than Pan Masala containing tobacco gutka bearing a brand name) and SI.No. 38 (aII goods other than Pan Masala containing tobacco gutka not bearing a brand name) of the GST Compensation rate table. Accordingly, we have been paying GST Compensation @ 96% advalorem. Today as called for in your summons we hereby furnish you the month wise abstract of our clearances and tax payments for the period from 01.07.2017 to 30.11.2018. We will be furnishing the random sample copies of GST Bills, paper pouches and remaining documents to you within a week’s time. ….”

(Emphasis supplied)

From the above extract of the Statement rendered voluntarily by the managing Partner of the Applicant Company, before the Central Tax Officers, it is clearly evident that the investigation was also on the aspect of the classification of the product and the applicable compensation cess. Further, it is seen in the statement that the officer recording the statement has informed the applicant that their product viz. “Branded Chewing tobacco without lime tube” is classifiable under HSN 24039910 and as such the same attracts GST Compensation Cess @ 160% as per notification 1/2017-Compensatory Cess (Rate) dated 28.06.2017, which is different from the classification being followed by the applicant , Therefore, factually it is evident that the issue of classification of the product under consideration was initiated and proceedings were pending with the Tax authorities, when the applicant has filed the application 06.02.2019 before this authority seeking Advance Ruling on the classification and rate of Compensation Cess applicable to such product before this authority.

6.4 Section 98(2) of the GST ACT 2017, states as follows:

(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorised representative and the concerned officer or his authorised representative, by order, either admit or reject the application:

Provided that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act:

Provided further that no application shall be rejected under this sub-section unless an opportunity of hearing has been given to the applicant:

Provided also that where the application is rejected, the reasons for such rejection shall be specified in the order.

As per the first proviso to Section 98(2) of CGST/SGST Act, 2017 the authority shall not admit the application where the question raised in the application is already pending or decided in any proceeding in the case of an applicant under any of the provisions of this Act. In the case at hand, it is established that on the issues raised by the applicant before this authority, the Central Tax authorities have initiated proceedings and the same is pending before the Jurisdictional authority at the time of filing of this application. Therefore, the application cannot be admitted and is to be rejected without going into the merits of the issue.

7. Accordingly, we rule as under;

RULING

As per the remand directions, on considering whether the issue raised in the application by the appellant was already pending before the department after extending opportunity to the appellant we find that the issue raised before this authority was taken up by the Jurisdictional authority. Therefore, under first proviso to Section 98(2) or the CGST/TNGST Act 2017. the application is rejected.

M/S. JOHNSON LIFTS PRIVATE LTD.

Residential Complexes or not – building consists of more than one residential unit – One unit is occupied by the customers and the other units are occupied by his father, brother and sister, who are all not depending upon the customer, Single residential unit or not – N/N. 11 of 2017-CT(Rate) dated 28.06.2017.

HELD THAT:- Advance ruling can be extended only in respect of supplies made or intend to be made by the applicant based on the facts of such supply. As the details or transaction of supply on which advance ruling is sought is not furnished the application cannot be admitted and Accordingly rejected.

The application is not admitted as the applicant failed to furnish the details of supply made or proposed to be made by him for which ruling was sought.

No.- TN/18/AAR/2020

Dated.- April 20, 2020

MS. MANASA GANGOTRI KATA, IRS AND THIRU KURINJI SELVAAN V.S. M.SC., (AGRI.), M.B.A., MEMBER

Note: Any appeal against the Advance Ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated.

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 the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.

M/s. Johnson Lifts Private Limited, No. 1, East Main Road, Anna Nagar Western Extn., Chennai 600101, Tamil Nadu is registered under GST with GSTIN 33AAACJ0838Q1ZD (hereinafter called the Applicant). They are engaged in the business of supplying, erecting and commissioning of elevators & escalators in building. The applicant has sought Advance Ruling on:

Whether Sl.No. 3(v)(b) of Notification 11/2017-CT (Rate)-6% CGST is available, when

a. Such building consists of more than one residential unit and falls under the definition of ‘residential complex’?

b. One unit is occupied by the customers and the other units are occupied by his father, brother and sister, who are all not depending upon the customer, falls under the definition of ‘Single residential unit’?

c. What are the criteria that determine that a residential unit is a ‘Single residential unit’ within the meaning of item (v)(b) of serial number 3 in the tables in the notification 11 of 2017-CT(Rate) dated 28.06.2017?

The Applicant has submitted the copy of application in Form GST ARA – 01 and also submitted a copy of Challans evidencing payment of application fees of ₹ 5,000/- each under sub-rule (1) of Rule 104 of CGST rules 2017 and SGST.

2. The applicant has stated that some of their customers are individual customers, who own a plot of land. They are placing an order on the applicant for supply, erection and installation of lifts pertaining to construction of a building, which consists of residential units, not intended for sale but for their own residential purpose; one residential unit will be used by the customer and the other units will be used by father, mother, brothers & sisters. The applicant has stated that the customer claims that it is a single residential unit for the family and insists for the payment of CGST at the rate of 6% and they are not entertaining such requests as they are not sure about the eligibility of such exemption because such supply is not pertaining to a single residential unit and that most of their competitors are paying CGST on such supply in terms of Notification No. 11/2017-CT (Rate)- Sl.No. 3(v)(b).

3.1 The applicant was extended an opportunity to be heard in person and was heard on 06.11.2019. The authorized representatives of the applicant appeared. They stated that they intend to make a supply of works contract of lift to residential building where there is a single building in which there are multiple members who they state to be a family. The applicant sought to know whether they will be eligible for the notification 11/2017, The jurisdictional Central Tax Officer submitted a written submission stating only single residential unit where there are only dependents of a family as per the Notification is eligible for the said entry of the notification No. 11/2017. The applicant requested for another hearing where they will produce copy of work order and the property details to decide-the issue.

3.2 The applicant was extended another opportunity and heard on 11.12.2019. The authorized representative appeared. They submitted a covering letter submitting plan approvals stating that these pertain to transaction. However, the applicant did not give any details of supply they intend to make or have made. No quotation, or request for supply of lift from any buyer was provided. The applicant sought time upto 31st December to submit the details of the transactions that they intend to make.

3.3 The applicant did not furnish the details undertook for submission. Therefore the applicant was addressed vide letter No. 37 / 2019/ARA dated 05.02.20 to furnish the details. The applicant vide their letter dated 21st February 2020 stated that they had requested their customer to provide the copy of Sale Deed, Construction approval letter and copy of approved construction plan to ensure that they fall under the category of Single Residential unit otherwise than as a part of a residential complex as per the notification issued; The customers are not willing to share these documents on the ground these are not required for installation of lift. As such they had not accepted these type contracts at the stage of offer itself, since it would be difficult to prove to the department the requirement of the notification to avail the benefit of concessional rate of tax. They had further stated that as such they are unable to provide the documents to proceed the hearing and stated the advance ruling could be closed based on the documents already filed at the time of hearings.

4. We have carefully examined the contents raised by the applicant in their application, oral and written submissions during personal hearing and their letter dated 21st February 2020. The issue raised in the application is whether SI.No.3(v)(b) of Notification 11/2017-CT (Rate)-6% CGST is available, when

a. Such building consists of more than one residential unit and falls under the definition of ‘residential complex’?

b. One unit is occupied by the customers and the other units are occupied by his father, brother and sister, who are all not depending upon the customer, falls under the definition of ‘Single residential unit?

c. What are the criteria that determine that a residential unit is a ‘Single residential unit’ within the meaning of item (v)(b) of serial number 3 in the tables in the notification 11 of 2017-CT(Rate) dated 28.06.2017?

5. The applicant had stated in the application that their individual customers who owns land and propose to build a single residential complex which is not meant for sale but used for residential purpose of self, father, brother, sister, etc claims the applicable tax rate on the works of supply, erection & commissioning of Lift in such building under Sl.No.3 (v) (b) of Notification 11/2017-C.T.(Rate). To examine the applicability, the applicant was asked to furnish the details of supply made or intend to be made for which ruling is being sought by them. The applicant undertook to furnish the details during the hearing held for admission of application on 06.11.2019. When heard next on 11.12.2019, the applicant furnished letter dated 11.12.2019 in which they had stated as follows:

This has reference to our ARA application St. No. 36/2019. and further to the hearing held on 06.11.2019, we submitting herewith some of the documents pertaining for Advance Ruling sought out for determination of tax liability for works contract service provided to single residential unit.

Case No. 1

Mr. S.C. Kapoor. East of Kailash, New Delhi, is constructing residential units which are consisting of Ground plus 3 Floors. He is the absolute owner for the land, approval also obtained by him from the proper authority. Each floor is having 4 units, other floors are typical one. We are enclosing his plan drawing in Annexure 1.

Case No. 2

There Four owners such as H.R. Anand, H.S. Kamakshi, Manikanta Ananda and Santosh Ananda from Bangalore constructing 3 houses in Ground plus 2 Floors. Plan approval was obtained in the owner name. each floors has only one unit.

Case No. 3

Mr. Vijaya Shankar from Bangalore is the absolute owner for the land and he is construction Ground + 3 Floor residential units, each floor is having 2 houses. The plan drawing is enclosed.

All the above three order was placed by the individual customer and all are constructing units. The plan approval was taken by the individuals, they are placing an order for Supply, Erection and Installation of Lift with us, and requesting us to charge GST @ 12% based on the Notification vide Sl.No. 3(v)(b) of 11/2017-CT (Rate) dated 28.6.2017 and Notification No. 20/2017 Dated 22.08.2017.

We request you under the above circumstances can we charge GST @ 12% for this service.

On perusal, it was seen that the details furnished did not contain any details of the supply such as quotation or request for supply of lift from any buyer. The applicant therefore was asked to furnish the details of the transaction they intend to make for which the applicant sought time till 31St December 2019. The applicant did not furnish the details of transaction for which advance ruling is being sought and therefore was addressed to furnish the same. Applicant vide letter dated 21st February 2020 replied stating that they had not accepted such type of contracts at the stage of offer itself and they are unable to provide the documents to proceed.

6. Section 95 (a) of the GST Act, defines Advance Ruling as follows:

(a) “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.

From the above, it is clear that the ruling could be sought in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant. In the case at hand, the applicant in their application and during the hearing and thereafter, has not furnished the details of supply mode or intended to be supplied and have further stated that they have not accepted such of contract wherein the customer owning a single piece or land consisting of dwelling units for himself and his father, sister, brother and had required supply, erection and commissioning or lifts. Advance ruling can be extended only in respect of supplies made or intend to be made by the applicant based on the facts of such supply. As the details or transaction of supply on which advance ruling is sought is not furnished the application cannot be admitted and Accordingly rejected.

7. In view of the foregoing, we rule as under.

RULING

The application is not admitted as the applicant failed to furnish the details of supply made or proposed to be made by him for which ruling was sought.

M/S. GLOBAL TEXTILE ALLIANCE INDIA PVT. LTD., TEXTILE ALLIANCE INDIA PVT. LTD.

Classification of goods – Chewing Tobacco – product intended for manufacture – applicable rate of Compensation Cess – HELD THAT:- The cutting process prescribed in this note is along with the remarks ‘but not tobacco ready for smoking’. This explanation of HSN clearly brings out the classification in the Customs tariff at 240120, which covers tobacco products for further manufacture and not for consumption as such as in the case of the applicant. From the explanation given by ICAR-CTRI Central Tobacco Research Institute and Explanatory General notes to chapter 24, it is seen that only tobacco which is cured at farm level for before supply to market would fall under this classification as ‘Unmanufactured tobacco’. The fermentation that the applicant claims is by adding jaggery water does not get covered under this. As seen in the the Explanatory General notes to chapter 24, only natural fermentation is covered. Therefor, the product of the applicant doesnot fall under CTH 2401.

The product in question is a processed one in as much as the same is cured in jaggery water, undergoes the process of stalking and semi-drying, then cut into small pieces in minced form which is stored in a separate area for a few hours/days on which some natural/agricultural preservatives for maintaining the product in wet form is applied, packed in pouches/pottlams for supply. Also, the test reports of the chewing tobacco- before processing and after processing furnished by the applicant shows that the chemical parameters Moisture, total ash and acid insoluble ash are different in % content, indicating the product has been subjected to processing. Therefore, the product of the applicant does not merit classification as “unmanufactured tobacco” under CTH 2401 but rightly classifiable under CTH 2403 9910 as “Chewing tobacco”.

Rate of Compensation cess applicable to the Product – HELD THAT:- The rate of Compensation cess is provided vide Notification no. 01/2017-Compensation Cess/rate) dated 28.06.2017 and Sl.No. 26 provides the Compensation Cess Rate as 160% for the product “chewing tobacco” which is supplied “without lime tube”.

No.- TN/16/AAR/2020

Dated.- April 20, 2020

Citations:

  1. DAMODAR J. MALPANI Versus COLLECTOR OF CENTRAL EXCISE – 2002 (9) TMI 114 – Supreme Court
  2. The State of Madras Versus Bell Mark Tobacco Co. – 1966 (10) TMI 106 – Supreme Court
  3. AV Pachiappa Chettiar and Brothers Versus The State of Madras – 1961 (9) TMI 48 – MADRAS HIGH COURT
  4. Bell Mark Tobacco Company, Pudukottah and Others Versus The Government of Madras – 1960 (7) TMI 60 – MADRAS HIGH COURT
  5. In Re: M/s. Sringeri Yogis Pai, – 2019 (10) TMI 1015 – AUTHORITY FOR ADVANCE RULING, KARNATAKA
  6. In Re: Suresh. G. M/s. Govind Traders – 2019 (4) TMI 74 – AUTHORITY FOR ADVANCE RULINGS, KERALA
  7. In Re : Shri Shalesh Kumar Singh – 2018 (5) TMI 529 – AUTHORITY FOR ADVANCE RULING – DELHI
  1. MANASA GANGOTRI KATA, IRS AND THIRU KURINJI SELVAAN V.S., M.SC., (AGRI.), M.B.A., MEMBER

Note : Any appeal against the advance ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated. 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 the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.

Shri. Arumugam, (Prop: M/s. Kavi Cut Tobacco) No.2, RS No. 239 Abiramapuram, Thanjavur, 613007, are registered under GST Act with Registration No. 33AABPA9979P3Z2. The applicant has sought advance ruling on the

“Classification of the product intended for manufacture and applicable rate of Compensation Cess.”

The applicant has submitted the copy of application in Form GST ARA – 01 and also submitted copy of Challan evidencing payment of application fees of ₹ 5,000/- each under sub-rule (1) of Rule 104 of CGST rules 2017 and TNSGST Rules 2017.

2.1 The applicant has stated that after introduction of compensation cess which varies for different products, it had become imperative to go into the nuances of the actual nature of the product before determining the correct classification; during the pre GST period the tax structure on chewing tobacco that was packed manually did not pose much problem in the marketing side as the tariff description was simply chewing tobacco and the variation in the tax structure was solely on the basis of machine packed chewing tobacco with or without lime tube. However in the GST Period after introduction of compensation cess department has gone to the conclusion that even manually packed chewing tobacco without lime tube is classifiable only under chapter 24039910. The presence or absence of lime tube was nowhere in the earlier tariff classification. Therefore tobacco manufacturers especially in South India, which manufactured chewing tobacco manually could not vie in the competitive market with the abnormally high tax structure. Therefore, there was necessity to switch over to marketing simple alternate tobacco products to cater to the demands of the lower sector in the market.

2.2 The applicant has stated that they intend to manufacture and supply the following product: Raw dried tobacco leaves are purchased from wholesale dealers/growers; Stems and dust particles are removed; then cured using jaggery water for the purpose preventing it from moulding or further decaying; after this it is cut into small pieces in a cutting machine, which is packed in pouches/pottalams for the purpose of retail sale in the shops and sold under the brand name Kulavi’s Kavi cut tobacco.

2.3 The applicant has stated that the product which doesn’t undergo any change in the essential character and remains in its original nature is claimed as rightly classifiable under Chapter sub heading 24012090 (“Unmanufactured tobacco partly or wholly stemmed or stripped -Others”)

2.4 The applicant has claimed the above classification on the basis of the HSN chapter notes. They have stated that the product manufactured by them involves two activities that are referred in the Chapter Notes- First one is liquoring, the dried tobacco leaves are cured using jaggery water which is a preservative that prevents moulding/decaying of the tobacco leaves; Secondly, this is cut using a cutting machine to facilitate easy manual packing, this cutting to shape is also covered under the above chapter notes. They have further stated that the product is not one ready for smoking. The applicant has contended that their product therefore rightly falls within the ambit of the inclusive definition of unmanufactured tobacco of the HSN chapter notes to Chapter 2401 and since it is wholly stemmed and stripped they claim that it falls under Chapter 240120 and under the category “others” 24012090 as it is sold to the ultimate consumer for consumption as such.

2.5 The applicant has further contended that

  • The fact that the resultant product is intended for chewing cannot be a basis for concluding it as chewing tobacco, when the end use is applicable equally to two different varieties of the same product. The term “Chewing tobacco” has not been explicitly defined in the Tariff. Chapter notes to Chapter 2403 states that it covers chewing tobacco usually highly fermented and liquored. Raw tobacco as such is also consumed by chewing without addition of any other material thereto. Raw unpacked tobacco is purchased from vendors by the consumers and is consumed for chewing without any additives and at times in admixture with lime and other additives. The mixing of lime and tobacco is done by the individual consumer at the point of consumption and yet the raw tobacco un-mixed with any additives qualifies to be a chewing tobacco. Their product which is raw chewing tobacco without any additives catering to the demands of such consumers would therefore, qualify to be unmanufactured tobacco.
  • Considering the technical details of the processes referred to in the chapter notes, the activities fermentation and liquoring finds a place in both headings 2401 as well as in 2403. The only difference noted is that of the usage of the phrase “Highly”. The conclusion to be arrived at is whether the liquoring activity of adding jaggery water in their product is for the purpose of prevention of moulding and decay as referred to in chapter 2401 or high fermentation and liquoring as referred to in chapter 2403.
  • The consumers of this product are poor labourers and their product caters to their chewing needs and therefore unmanufactured tobacco leaves are sold to them as it is, by simply adding jaggery water to prevent it from any fungal / mould infection and cut into smaller sizes to facilitate easy manual packing
  • The product do not undergo any change in its essential nature and character and the above activities are also specifically included in the inclusive definition to merit classification under CTH 2401

2.6 The applicant has relied on a catena of decisions on the issue and to emphasis that the definition in the statute takes precedence over the commercial understanding. They have contended that the term “Chewing tobacco” has not been explicitly defined in the Tariff. Chapter notes to Chapter 2403 states that it covers chewing tobacco usually highly fermented and liquored. Phrases Fermented and liquored are referred to in respect of unmanufactured tobacco as well as chewing tobacco. They claim that even after adding of jaggery water the essential character of the tobacco leaves do not undergo any change.

3.1 The applicant was extended an opportunity to be heard in person and heard on 18.06.2019. The authorized representative appeared and gave a written submission. They stated that their product is cured natural tobacco leaves which are cut/minced with jaggery water and no other chemicals/preservatives are added. They stated that the product should be classified under 2401 1020. It is not manufactured tobacco. They submitted several case laws in this aspect. They submitted that their product is not, a food item and does not get covered under Food Safety Act as per Madras H.C. They stated that they will submit photographs of the product, manufacturing process. They submitted invoices of purchase from agriculture market agency and sale to petty shops. The packaging is upto 20 gms. They undertook to submit a test report of their product.

3.2 In the written submissions, it is inter-alia stated that

  • They are manufacturer of “Unmanufactured Chewing Tobacco Product” and own the brand “Kulavi Tobacco” for manufacture and sale of both manufactured and unmanufactured chewing tobacco products. Before the GST regime, they were manufacturing tobacco products with application of flavoring agents for chewing tobacco in the trade name of “Kulavi Tobacco Industries”.
  • As the product of chewing tobacco is under the regulation of FSSA and COPTA, the State Government of Tamil Nadu issue periodical yearly notification enforcing manufacture and sale of tobacco products.
  • Accordingly, the Govt. had issued notification on 23rd May 2017, banning the product of chewing tobacco with scented flavors along with the product of pan masala and gutkha. As a result of which the manufacturers and traders in Tamil Nadu had to restrict their trade of tobacco products by completely eliminating the chewing tobacco with flavoring contents.
  • As the result of chewing tobacco notification by TN FSSA and coupled with GST compensation cess notification No. 1/2017(bifurcating the chewing tobacco products under the umbrella of two categories such as “tobacco with lime tube and tobacco without lime tube”) in the GST regime, the GST compensation cess for the product of scented chewing tobacco (HSN 2403) is , comparatively high than that of unmanufactured chewing tobacco (I-ISN 2401), they were forced to close down the manufacture of chewing tobacco with application of flavoring contents.
  • During the financial year 2018-19, they commenced a new concern in the trade name of Kavi cut tobacco for manufacture of chewing tobacco without application of flavoring agents namely “Unmanufactured chewing tobacco” in order to comply with the Tamil Nadu State Food Safety Authorities and beneficial product’s production cost advantage in order to compete through cut throat competition in the market.
  • The basic differentiation of Manufactured and Unmanufactured Tobacco is not defined either in the Central Excise Act or Central Excise Rules. It is only through the Court citation, it is being observed that the tobacco product added with jaggery water either before or after cutting of tobacco leaves constitutes “Unmanufactured Tobacco” and such product being further added with flavoring essence, fragrances and foreign agents, it becomes the “Manufactured Chewing tobacco”. There are various court citations for determining the product of Unmanufactured Chewing Tobacco and the most appropriate court case being

A.V. Pachiappa Chettiar and Ors Vs. The State of Madras (22nd Sep 1961)-S.C. = 1961 (9) TMI 48 – MADRAS HIGH COURT

Damodar J. Malpani and Ors Vs. Collector of Central Excise (12th Sep’ 2002)-S.C. = 2002 (9) TMI 114 – SUPREME COURT

Bell Mark Tobacco Vs. Government of Madras (1961) 12 S.T.C. 123 = 1960 (7) TMI 60 – MADRAS HIGH COURT

  • Further, the product of chewing tobacco cultivated, harvested and processed in the State of Tamil Nadu being the wet form of tobacco and its usage is being entirely different from tobacco products in Northern part of India and it is called as dry of tobacco as per trade parlances.
  • They manufacture wet form of “Unmanufactured Chewing tobacco” and the product is devoid of chemical contents
  • Before implementation of GST, there were three rate of tariff applied for levy of duty for the product of “Unmanufactured Chewing Tobacco”. The first slab was applicable for wet form of tobacco products and packed through manual operation through labors and the second & third slab were being the Tate of duty applicable for dry form of tobacco products and packed through mechanized operations. The intention of the Govt. is being the levy of differential rate of duty for varieties of tobacco manufacturers; Machine (SME sectors) vs Manual (Village and Cottage industries). The central Excise duty for manual pack of tobacco products were levied comparatively lesser rate under Section 3 of Central Excise Act than that of machine pack of tobacco products levied under section 3A of Central Excise Act.
  • The GST Act being comprising of various Indirect tax Acts and the Central Excise Act one among it, the provisions of the C.E. Tariff are being copied in fixing the GST rate. Further in the 14th GST Council Meeting, it is being categorically mentioned by the GST officials that the existing central excise tariff are being followed in fixing up the GST Compensation cess rate for tobacco products
  • In GST there is no difference between the rate of duty for all forms of tobacco products either being Unmanufactured or Manufactured (all are subjected to 28% GST) and it is only at the levy of compensation cess, it has been differentiated
  • Since their product being Plain Unmanufactured tobacco (Wet form of nattu tobacco) and the concept of application of lime tube along with tobacco packets for manufacture and sale is not in usage as per the customs of trade and trade parlances, GST council has not determined any GST compensation cess.
  • Under GST, the goods are being classified under the Customs Tariff Act as per the International HSN code, the product of unmanufactured chewing tobacco is assigned with the HSN code of 2401.
  • As the GST Council has not assigned compensation cess for applicant’s varieties of tobacco product, they apply GST compensation cess rate applicable for “Unmanufactured tobacco without lime tube” category and paying cess at the rate of 71% on the value of product under self assessment basis.

3.3 The applicant vides their letter received on 05.07.2019 furnished the test report of the raw material and the finished product from Enviro Care India Private Limited, a NABL certified lab and also photographs of the manufacturing process as undertook by them during the hearing. The test report for the sample marked ‘Chewing Tobacco before processing’ and ‘Chewing Tobacco after processing’ are furnished. On perusal of the reports it is seen that the chemical parameters in both consists of Moisture, Total Ash, Acid Insoluble Ash and Nicotine. While the Nicotine content remains unchanged, the Moisture content is more than doubles and the content of Total Ash and Acid insoluble Ash are reduced. The photographs of the process undertaken shows the following process

  1. Raw Tobacco Leaves Stocked;
  2. Spread Out tobacco leaves sprayed with Water and Wet;
  3. Tobacco leaves sprinkled with water fed into cutting machine to be cut into desired shape;
  4. Cut tobacco out from the cutting machine;
  5. Cut tobacco is then dried in the sun to remove moisture content; and
  6. Dried tobacco is manually packed and sealed.

3.4 The Authorised representative made a further submission on 12.02.2020. They had enclosed an order from Madras High Court (Madurai Bench) in relation to classification of Tobacco Products-UNMANUFACTURED TOBACCO and claimed that their subject matter squarely falls under the said judgment and had requested to consider this aspect. They had also furnished the Advance Ruling rendered by Karnataka Authority for Advance Ruling in the case of M/s. Sringeri Yogis Pai = 2019 (10) TMI 1015 – AUTHORITY FOR ADVANCE RULING, KARNATAKAKerala Authority for Advance Ruling in the case of M/s. Govind Traders = 2019 (4) TMI 74 – AUTHORITY FOR ADVANCE RULINGS, KERALA and Delhi Authority for Advance Ruling in the case of Shri. Shalesh Kumar Singh = 2018 (5) TMI 529 – AUTHORITY FOR ADVANCE RULING – DELHI.

4.1 The applicant is under the administrative jurisdiction of Central Tax Authorities. The Commissioner of GST & Central Excise, Tiruchirapalli, the jurisdictional authority furnished the following:

  • In respect shri. Arumugam (M/s Kavi Cut Tobacco), correspondences have been made calling for particulars. However, as they claimed that effective from January 2018, they have changed their final products from chewing tobacco to ‘preparations containing chewing tobacco’ classifiable under heading 24039920, which contains various other ingredients like, lime, chilly, kasikatti, arisithippili, clove oil and menthol etc. the facts are being verified at this office. Now, as reported by the applicant, w.e.f. from November 2018, they have started manufacturing and clearing the preparation as mentioned in the AR application classifying the same under 24012090.
  • It is also informed that

(i) the taxpayer vide letter dated Nil received on 12.11.2018, stated that they had supplied branded chewing tobacco classifying it under Chapter sub-heading 24039910 paying GST Compensation Cess @ 160% in terms of Notification No.1/2017-Compensatin Cess (Rate) New Delhi dated 28.06.2017. From Jan,2018 to May, 2018 Cess has paid at the rate of 160%.

(ii) From June 2018 to September 2018 Cess has been paid at the rate of 72% and Chapter Head mentioned is 24039920 as per enclosure to the above letter.

(iii) The taxpayer vide letter dated 14.03.2019, has reiterated the classification as 24039920 for June,2018 to Oct,2018) and have paid Cess @ 72%; further the taxpayer has stated that NCCD has been paid in terms of Section 4A of Central Excise Act @ 10% on 45% of MRP; further it has been stated that from Nov,2018 onwards, they had changed the product manufactured from 24039920 to 24012090, stating that they were not required to pay NCCD under Central Excise Act and hence ER 1 Returns not filed; that however, GST returns filed with CGST, SGST and Cess.

  • Nov the applicant has requested for an advance ruling as to whether their product intended to be manufactured and supplied by them is rightly classifiable under Chapter heading 24012090 (Unmanufactured tobacco partly or wholly stemmed or tripped “others”) attracting 28% GST and 71% Compensation Cess. Under the above circumstances, it is opined that the product of the applicant, which is intended to be manufactured is not to be classified under 24012090 but only under 24039910.

4.2 The Central Tax authority on being asked specifically to furnish the details of action, if any initiated on the issue raised by the applicant, informed that:

(i) from the correspondences made by the applicant with the Superintendent of Central Excise, Thanjavur-I Range it is observed that the applicant seeks to classify their final product to HSN 24012090 only with effect from November’2018;

(ii) no action has either been initiated or pending for the period effective from November, 2018, as the assessee had already filed the Advance Ruling Application; and

(iii) verification is still pending in respect of the prior period.

It was further informed that no AE-II has been issued relating to subject verification.

  1. We have carefully examined the submissions of the applicant, the comments furnished by the Jurisdictional Officer and the related statutory provisions. The issue raised by the applicant is the classification of the product manufactured by them and the applicable Rate of Compensation cess.

6.1 The applicant is a proprietary concern engaged in the manufacture and supply of tobacco products with the brand name “Kavi cut tobacco”. From the submissions of the applicant, it is seen that the applicant during the financial year 2018-19, has commenced manufacture of chewing tobacco without application of flavoring agents namely “unmanufactured chewing tobacco” in order to comply with the Tamil Nadu State Food Safety Authorities. The manufacturing process of the applicant as elaborated in their application is that

(i) they procure dried tobacco leaves;

(ii) remove stems and dust particles;

(iii) cure the same in jaggery water;

(iv) the cured leaves are cut into small pieces in cutting machine; and

(v) then the cut tobacco is packed in small pouches for the purpose of retail sale in the shops.

6.2 Under GST, the applicable rates of CGST are notified by Notification No. 01/2017-C.T.(Rate) dated 28.06.2017 and in terms of explanation (iii) and (iv) to the said Notification,

(iii) “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

(iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification.

Thus for the purposes of classification under GST, the First Schedule to Customs Tariff Act is only applicable. Further the first schedule to the Customs Tariff Act, 1975, and the Rules of interpretation therein are to be followed for classifying a product, in terms of Explanation 1 and 2 to Notification No. 1/2017- Compensation Cess (Rate) dated 28.06.2017.

6.3 HSN Explanatory Notes to Chapter 24 states:

It is seen from the above that tobacco leaves after harvesting are cured in different ways either in open air (sun curing), air curing (in closed sheds with free circulation of air), flue curing (in hot air flues) or fire curing (with open fires).

The purpose of curing tobacco leaves can be understood by referring to information given for farmers by ICAR-CTRI Central Tobacco Research Institute available on their website https://ctri.icar.gov.in/for_curing.php

TOBACCO CURING

Curing is a process by which the harvested tobacco leaf is made ready for the market. It is a well standardized process especially in FCV tobacco to achieve the desirable qualities in the cured leaf along with the removal of moisture. The process of curing has an intimate bearing on the quality of cured leaf. A good quality leaf from the field can be made poor by an improper curing. The curing operations followed in India are dependent on type of tobacco, the mode of consumption. local preference, convenience, market value and production economics. Depending on the type of the tobacco principal methods of curing can be distinguished as i) flue-curing, ii) air-curing, iii) fire-curing and iv) sun-curing.

GENERAL

Tobacco is obtained from various cultivated varieties of the genus Nicotiana of the Solanaceae family. The size and shape of the leaves differ from one variety to another.

The harvesting method and curing process depend on the variety (type) of tobacco. The plant may be cut whole, at average maturity (stalk cutting), or the leaves may be picked separately. according to their state of maturity (priming). Thus, tobacco may be cured either as whole plants (on the stalk) or as separate leaves.

The various methods of curing are sun curing (in the open air), air curing (in closed sheds. with free circulation of air), flue curing (in hot air flues), or fire curing (with open fires)

Before packing for shipment. the dried leaves are treated in order to ensure their preservation This may be done by controlled natural fermentation (Java, Sumatra. Havana, Brazil, Orient, etc.) or by artificial re-drying. This treatment, and the curing, affect the flavour and aroma of tobacco, which undergoes spontaneous ageing after packing.

Tobacco so treated is packed in bundles, bales (of various shapes). in hogsheads or in crates. When so packed, the leaves are either aligned (Orient) or tied in hands (several leaves tied together with a band or with another tobacco leaf), or simply left as loose leaves. They are always tightly compressed in order to ensure preservation.

in some cases, in addition to (or instead of) fermentation, flavouring or moistening substances are added (casing) in order to improve the aroma or keeping qualities.

This Chapter covers not only unmanufactured and manufactured tobacco but also manufactured tobacco substitutes which do not contain tobacco.

It is seen that curing is a process of drying of the harvested leaves through various methods. Farmers do not sell green tobacco leaves but dried leaves or stalks. Curing happens at the farm level itself after harvest, before they are sold by the farmers in the market. It is seen from the applicant’s submissions that they buy dried tobacco leaves. This means that the tobacco procured by the applicant is already cured by any of the above methods. Further, as seen in the general notes above, before packing for shipment, the leaves can also be treated by natural fermentation. Thus, the claim of the applicant that the addition of jaggery water is for curing or for fermentation is not valid as the treatment process if any is a natural form of fermentation and not by addition of any liquids. Further, the curing and treatment process are carried out at the farm level before being sold in market. Only after these processes, the leaves are packed in bulk and sold. It is seen the product in question is not merely cured or treated tobacco.

Further, the website of ICAR-CTRI Central Tobacco Research Institute available at https://ctri.icar.gov.in/for_curing.php also gives the following information:

JAFFNA TOBACCO OF CEYLON AND CHEWING TOBACCO OF TAMIL NADU

Fire-curing: (Smoke curing)

Important type of tobacco that is fire-cured is Jaffna tobacco of Ceylon and Tamil Nadu used for chewing purpose. The leaf is harvested by either priming or stalk-cutting each leaf together with a portion of the stem.

The’ leaves are wilted for four hours in the field, tied into bundles and hung of laths in smoke huts. They are then smoked for 12 hours by burning coconut husks, leaf stalks and palmyrah nuts. stacked for 3 days and again smoked. Alteration of firing and stacking at an interval of few days helps in making the colour of leaf even. During smoke treatment the creosotic substances are deposited on leaf surface which gives it a peculiar taste. After smoking the leaves are bulked for 3-4 weeks and than given salt water/jaggery treatment prior to sale.

It is seen from the above that chewing tobacco is the tobacco which has been cured by smoking, stored and given jaggery water / salt water treatment. This is similar to the process described by the applicant in his production process. The product is universally known as Chewing Tobacco as acknowledged by the ICAR-CTRI Central Tobacco Research Institute. The final product sold by the applicant are in retail packets of up to 20 grins with brand name of the applicant. The purpose of the product is for the buyer to use it directly for chewing purpose. Therefore, it is seen that the product of the applicant is ‘Chewing Tobacco’ as universally understood and as it is being supplied.

6.4. The Customs Tariff Classification in respect of chapter 2401 are reproduced below for reference

24.01 Unmanufactured tobacco; tobacco refuse.
2401.10 Tobacco, not stemmed/stripped
2401.20 Tobacco, partly or wholly stemmed/stripped
2401.30 Tobacco refuse

This heading covers :

(1) Unmanufactured tobacco in the form of whole plants or leaves in the natural state or as cured or fermented leaves, whole or stemmed/stripped, trimmed or untrimmed, broken or cut (including pieces cut to shape, but not tobacco ready for smoking).

Tobacco leaves, blended, stemmed/stripped and “cased” (“sauced” or “liquored”) with a liquid of appropriate composition mainly in order to prevent mould and drying and also to preserve the flavour arc also covered in this heading.

2401 UNMANUFACTURED TOBACCO; TOBACCO REFUSE
240110 Tobacco , not stemmed or stripped :
24011010 Flue cured virginia tobacco
24011020 Sun cured country (natu ) tobacco
24011030 Sun cured virginia tobacco
24011040 Burley tobacco
24011050 Tobacco for manufacture of biris, not stemmed
24011060 Tobacco for manufacture of chewing tobacco
24011070 Tobacco for manufacture of cigar and cheroot
24011080 Tobacco for manufacture of hookah tobacco
24011090 Other
240120 Tobacco, partly or wholly stemmed or stripped :
24012010 Flue cured virginia tobacco
24012020 Sun cured country (natu ) tobacco
24012030 Sun cured virginia tobacco
24012040 Burley tobacco
24012050 Tobacco for manufacture of biris
24012060 Tobacco for manufacture of chewing tobacco
24012070 Tobacco for manufacture of cigar and cheroot
24012080 Tobacco for manufacture of hookah tobacco
24012090 Other
24013000 Tobacco refuse

Explanatory Notes to HSN 2401 is given as under:

From the above, it is evident that CTH 2401 covers unmanufactured tobacco. CTH 240110 covers Tobacco, not stemmed or stripped’ and CTH 240120 covers Tobacco, partly or wholly stemmed or stripped’.

The product is stated to be ‘wet form of tobacco’ and the applicant have stated in their submissions that the same is different from dry form of tobacco (with or without lime tube content) used in Northern Part of India called as dry of tobacco as per trade parlances. The applicant has furnished the manufacturing process of these two different types (as per their version and not substantiated through any literature/manual) and detailed the differences (again not substantiated with any test reports/ literature/ legal citations). The applicant’s argument for classifying the product under CTH 2401 is based on the HSN Chapter Notes for Heading 2401.

The applicants are of the view their process involves two activities that are referred to in the above notes, namely, (i) liquoring (soaking in jaggery water); and (ii) cutting (mincing into fine pieces) and therefore covered under this heading. On a

2403 OTHER MANUFACTURED TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES; “HOMOGENISED” OR “RECONSTITUTED” TOBACCO; TOBACCO EXTRACTS AND ESSENCES
Smoking tobacco, whether or not containing tobacco substitutes in any proportion :
240311 Water pipe tobacco specified in Sub-heading Note to this Chapter:
24031110 Hookah or gudaku tobacco
24031190 Other
240319 Other:
24031910 Smoking mixtures for pipes and cigarettes
Biris:
24031921 —- Other than paper rolled bins, manufactured without the aid of machine
24031929 —- Other
24031990 Other
Other:
24039100 “Homogenised” or “reconstituted ” tobacco
240399 Other :
24039910 Chewing tobacco
24039920 Preparations containing chewing tobacco
24039930 Jarda scented tobacco
24039940 Snuff
24039950 Preparations containing snuff
24039960 Tobacco extracts and essence
24039970 Cut -tobacco
24039990 Other

fine reading of the above, it is evident that the cutting process prescribed in this note is along with the remarks ‘but not tobacco ready for smoking’. This explanation of HSN clearly brings out the classification in the Customs tariff at 240120, which covers tobacco products for further manufacture and not for consumption as such as in the case of the applicant. From the explanation given by ICAR-CTRI Central Tobacco Research Institute and Explanatory General notes to chapter 24, it is seen that only tobacco which is cured at farm level for before supply to market would fall under this classification as ‘Unmanufactured tobacco’. The fermentation that the applicant claims is by adding jaggery water does not get covered under this. As seen in the the Explanatory General notes to chapter 24, only natural fermentation is covered. Therefor, the product of the applicant doesnot fall under CTH 2401.

6.5. CTH 2403 covers “Other manufactured tobacco and Manufactured Tobacco substitutes; “Homogenised” or “Reconstituted” Tobacco; Tobacco Extracts and Essences”. CTH 24039910- covers ‘Chewing Tobacco’.

Explanatory Notes to HSN 2403 is as below:

24.03 – Other manufactured tobacco and manufactured tobacco substitutes: “homogenized” or “reconstituted” tobacco: tobacco extracts and essences (+).

                – Smoking tobacco. whether or not containing tobacco Substitutes in any proportion :

                2403.11 – – Water pipe tobacco specified in Subheading Note 1 to this Chapter

                2403.19 – – Other

                – Other

                2403.91 – “Homogenised” or “reconstituted” tobacco

                2403.99 – – Other

This heading covers

(3) Smoking tobacco, whether or not containing tobacco substitutes in any proportion, for example, manufactured tobacco for use in pipes or for making cigarettes.

(2) Chewing tobacco, usually highly fermented and liquored.

As per the Explanatory notes, ‘Chewing tobacco’ falls under CTH 2403. It is seen from the information available on ICAR- CTRL Central Tobacco Research Institute website above that chewing tobacco is the tobacco which has been cured by smoking, stored and given jaggery water / salt water treatment. This is similar to the process described by the applicant in his production process. The product is universally known as Chewing Tobacco as acknowledged by the applicant. The final product sold by the applicant are in retail packets of up to 20 gms with brand name of the applicant. The purpose of the product is for the buyer to use it directly for chewing purpose. Hence, the product in question is ‘Chewing tobacco’.

The applicant relying on the Explanatory HSN, has stated that Chewing tobacco covered under 2403 is to highly fermented and liquored and theirs done only to a small extent. The notes above states that the heading covers ‘Chewing tobacco, usually highly fermented and liquored’. It doesn’t exclude the chewing tobacco which is not highly fermented and liquored. In other words, the degree of fermentation or liquoring is not the deciding factor to determine whether the product is “Chewing Tobacco” or not. Thus, going by the Explanation in HSN and the Customs Tariff Headings, it is evident that chewing tobacco supplied for consumption as ‘chewing tobacco’ merits to be classified under the specific heading under CTH 24039910.

The product in question is a processed one in as much as the same is cured in jaggery water, undergoes the process of stalking and semi-drying, then cut into small pieces in minced form which is stored in a separate area for a few hours/days on which some natural/agricultural preservatives for maintaining the product in wet form is applied, packed in pouches/pottlams for supply. Also, the test reports of the chewing tobacco- before processing and after processing furnished by the applicant shows that the chemical parameters Moisture, total ash and acid insoluble ash are different in % content, indicating the product has been subjected to processing. Therefore, the product of the applicant does not merit classification as “unmanufactured tobacco” under CTH 2401 but rightly classifiable under CTH 2403 9910 as “Chewing tobacco”.

6.6 The applicant has relied on various case laws pertaining to Sales Tax and Central Excise levy. In the case of A.V. Pachiappa Chettiar and… Vs. the State of Madras = 1961 (9) TMI 48 – MADRAS HIGH COURT, the question raised is, whether the goods sold by the assessee, which is described as tendu tobacco is “Chewing tobacco” and assessable as a manufactured product and do not have any relevance in the case at hand seeking classification of the product sold as “Chewing Tobacco”. In the case of State of Madras Vs. Bell Mark Tobacco company = 1966 (10) TMI 106 – SUPREME COURT, the question answered by the Hon’ble supreme court is Whether a dealer who pays excise duty on raw tobacco purchased by him is entitled to rebate of that duty in the computation of taxable turnover from the sale of chewing tobacco’ and therefore do not have application in the present case. In the central excise case referred though the issue raised is classification of chewing tobacco, the Hon’ble Supreme Court has remanded the case and the final classification is not spelt out and therefore has no application.

6.7 Further, the decision of the Madras High Court (Madurai Bench) said to squarely cover the issue at hand and relied upon by the applicant was perused. In the said case, the core issue involved whether purchasing minced tobacco in bulk quantity and re-packing the same with added flavour in small packs involve manufacturing process or not and the Hon’ble Court has held that there is no manufacturing process involved in the activities of the petitioners, in that case. As discussed in para supra, the product in hand has undergone processing other than that specified for the one to be classified under CTH 2401 and are also not used for further manufacture to merit classification under CTH 2401; is marketed as ‘Chewing Tobacco’ for the chewing needs of the customers; chewing tobacco finds a specific entry in the customs Tariff and specific entry is to be preferred; therefore we hold that the ratio of the judgment of the Hon’ble High Court of Madras(Madurai Bench) relied upon by the applicant do not find application in the case at hand.

6.8 Tlie applicant has also relied on the Advance Ruling rendered by authority for Advance Ruling, Karnataka, Kerala and Delhi on the application filed by M/s. Sringeri Yogis Pai = 2019 (10) TMI 1015 – AUTHORITY FOR ADVANCE RULING, KARNATAKAKerala Authority for Advance Ruling in the case of M/s. Govind Traders = 2019 (4) TMI 74 – AUTHORITY FOR ADVANCE RULINGS, KERALA and Delhi Authority for Advance Ruling in the case of Shri. Shalesh Kumar Singh = 2018 (5) TMI 529 – AUTHORITY FOR ADVANCE RULING – DELHI respectively. As per Section 103 of the Act. the Advance Ruling applies only to the applicant who sought the ruling, the Jurisdictional Authority or the Concerned Authority and do not find application in other cases and therefore the applicability of the same is not dealt with.

  1. The nest question raised is on the rate of Compensation cess applicable to the Product. The rate of Compensation cess is provided vide Notification no. 01/2017-Compensation Cess/rate) dated 28.06.2017 and Sl.No. 26 provides the Compensation Cess Rate as 160% for the product “chewing tobacco” which is supplied “without lime tube”.
  2. In view of the above, we rule us under.

RULING

  1. The pruduct intended to be manufactured by the applicant and supplied as ‘Chewing tobacco’ with the brand name ‘Kavi cut tobacco’ is classifiable under CTH 2403 9910- Chewing Tobacco.
  2. The applicable rate of Compensation Cass is provided under SI No. 26 of the Notification No 01/2017-Compensation cess dated 28.06.2017 @ 160%.

M/S. KAVI CUT TOBACCO (ARUMUGAM)

Classification of goods – Chewing Tobacco – product intended for manufacture – applicable rate of Compensation Cess – HELD THAT:- The cutting process prescribed in this note is along with the remarks ‘but not tobacco ready for smoking’. This explanation of HSN clearly brings out the classification in the Customs tariff at 240120, which covers tobacco products for further manufacture and not for consumption as such as in the case of the applicant. From the explanation given by ICAR-CTRI Central Tobacco Research Institute and Explanatory General notes to chapter 24, it is seen that only tobacco which is cured at farm level for before supply to market would fall under this classification as ‘Unmanufactured tobacco’. The fermentation that the applicant claims is by adding jaggery water does not get covered under this. As seen in the the Explanatory General notes to chapter 24, only natural fermentation is covered. Therefor, the product of the applicant doesnot fall under CTH 2401.

The product in question is a processed one in as much as the same is cured in jaggery water, undergoes the process of stalking and semi-drying, then cut into small pieces in minced form which is stored in a separate area for a few hours/days on which some natural/agricultural preservatives for maintaining the product in wet form is applied, packed in pouches/pottlams for supply. Also, the test reports of the chewing tobacco- before processing and after processing furnished by the applicant shows that the chemical parameters Moisture, total ash and acid insoluble ash are different in % content, indicating the product has been subjected to processing. Therefore, the product of the applicant does not merit classification as “unmanufactured tobacco” under CTH 2401 but rightly classifiable under CTH 2403 9910 as “Chewing tobacco”.

Rate of Compensation cess applicable to the Product – HELD THAT:- The rate of Compensation cess is provided vide Notification no. 01/2017-Compensation Cess/rate) dated 28.06.2017 and Sl.No. 26 provides the Compensation Cess Rate as 160% for the product “chewing tobacco” which is supplied “without lime tube”.

No.- TN/16/AAR/2020

Dated.- April 20, 2020

Citations:

  1. DAMODAR J. MALPANI Versus COLLECTOR OF CENTRAL EXCISE – 2002 (9) TMI 114 – Supreme Court
  2. The State of Madras Versus Bell Mark Tobacco Co. – 1966 (10) TMI 106 – Supreme Court
  3. AV Pachiappa Chettiar and Brothers Versus The State of Madras – 1961 (9) TMI 48 – MADRAS HIGH COURT
  4. Bell Mark Tobacco Company, Pudukottah and Others Versus The Government of Madras – 1960 (7) TMI 60 – MADRAS HIGH COURT
  5. In Re: M/s. Sringeri Yogis Pai, – 2019 (10) TMI 1015 – AUTHORITY FOR ADVANCE RULING, KARNATAKA
  6. In Re: Suresh. G. M/s. Govind Traders – 2019 (4) TMI 74 – AUTHORITY FOR ADVANCE RULINGS, KERALA
  7. In Re : Shri Shalesh Kumar Singh – 2018 (5) TMI 529 – AUTHORITY FOR ADVANCE RULING – DELHI
  1. MANASA GANGOTRI KATA, IRS AND THIRU KURINJI SELVAAN V.S., M.SC., (AGRI.), M.B.A., MEMBER

Note : Any appeal against the advance ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated. 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 the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.

Shri. Arumugam, (Prop: M/s. Kavi Cut Tobacco) No.2, RS No. 239 Abiramapuram, Thanjavur, 613007, are registered under GST Act with Registration No. 33AABPA9979P3Z2. The applicant has sought advance ruling on the

“Classification of the product intended for manufacture and applicable rate of Compensation Cess.”

The applicant has submitted the copy of application in Form GST ARA – 01 and also submitted copy of Challan evidencing payment of application fees of ₹ 5,000/- each under sub-rule (1) of Rule 104 of CGST rules 2017 and TNSGST Rules 2017.

2.1 The applicant has stated that after introduction of compensation cess which varies for different products, it had become imperative to go into the nuances of the actual nature of the product before determining the correct classification; during the pre GST period the tax structure on chewing tobacco that was packed manually did not pose much problem in the marketing side as the tariff description was simply chewing tobacco and the variation in the tax structure was solely on the basis of machine packed chewing tobacco with or without lime tube. However in the GST Period after introduction of compensation cess department has gone to the conclusion that even manually packed chewing tobacco without lime tube is classifiable only under chapter 24039910. The presence or absence of lime tube was nowhere in the earlier tariff classification. Therefore tobacco manufacturers especially in South India, which manufactured chewing tobacco manually could not vie in the competitive market with the abnormally high tax structure. Therefore, there was necessity to switch over to marketing simple alternate tobacco products to cater to the demands of the lower sector in the market.

2.2 The applicant has stated that they intend to manufacture and supply the following product: Raw dried tobacco leaves are purchased from wholesale dealers/growers; Stems and dust particles are removed; then cured using jaggery water for the purpose preventing it from moulding or further decaying; after this it is cut into small pieces in a cutting machine, which is packed in pouches/pottalams for the purpose of retail sale in the shops and sold under the brand name Kulavi’s Kavi cut tobacco.

2.3 The applicant has stated that the product which doesn’t undergo any change in the essential character and remains in its original nature is claimed as rightly classifiable under Chapter sub heading 24012090 (“Unmanufactured tobacco partly or wholly stemmed or stripped -Others”)

2.4 The applicant has claimed the above classification on the basis of the HSN chapter notes. They have stated that the product manufactured by them involves two activities that are referred in the Chapter Notes- First one is liquoring, the dried tobacco leaves are cured using jaggery water which is a preservative that prevents moulding/decaying of the tobacco leaves; Secondly, this is cut using a cutting machine to facilitate easy manual packing, this cutting to shape is also covered under the above chapter notes. They have further stated that the product is not one ready for smoking. The applicant has contended that their product therefore rightly falls within the ambit of the inclusive definition of unmanufactured tobacco of the HSN chapter notes to Chapter 2401 and since it is wholly stemmed and stripped they claim that it falls under Chapter 240120 and under the category “others” 24012090 as it is sold to the ultimate consumer for consumption as such.

2.5 The applicant has further contended that

  • The fact that the resultant product is intended for chewing cannot be a basis for concluding it as chewing tobacco, when the end use is applicable equally to two different varieties of the same product. The term “Chewing tobacco” has not been explicitly defined in the Tariff. Chapter notes to Chapter 2403 states that it covers chewing tobacco usually highly fermented and liquored. Raw tobacco as such is also consumed by chewing without addition of any other material thereto. Raw unpacked tobacco is purchased from vendors by the consumers and is consumed for chewing without any additives and at times in admixture with lime and other additives. The mixing of lime and tobacco is done by the individual consumer at the point of consumption and yet the raw tobacco un-mixed with any additives qualifies to be a chewing tobacco. Their product which is raw chewing tobacco without any additives catering to the demands of such consumers would therefore, qualify to be unmanufactured tobacco.
  • Considering the technical details of the processes referred to in the chapter notes, the activities fermentation and liquoring finds a place in both headings 2401 as well as in 2403. The only difference noted is that of the usage of the phrase “Highly”. The conclusion to be arrived at is whether the liquoring activity of adding jaggery water in their product is for the purpose of prevention of moulding and decay as referred to in chapter 2401 or high fermentation and liquoring as referred to in chapter 2403.
  • The consumers of this product are poor labourers and their product caters to their chewing needs and therefore unmanufactured tobacco leaves are sold to them as it is, by simply adding jaggery water to prevent it from any fungal / mould infection and cut into smaller sizes to facilitate easy manual packing
  • The product do not undergo any change in its essential nature and character and the above activities are also specifically included in the inclusive definition to merit classification under CTH 2401

2.6 The applicant has relied on a catena of decisions on the issue and to emphasis that the definition in the statute takes precedence over the commercial understanding. They have contended that the term “Chewing tobacco” has not been explicitly defined in the Tariff. Chapter notes to Chapter 2403 states that it covers chewing tobacco usually highly fermented and liquored. Phrases Fermented and liquored are referred to in respect of unmanufactured tobacco as well as chewing tobacco. They claim that even after adding of jaggery water the essential character of the tobacco leaves do not undergo any change.

3.1 The applicant was extended an opportunity to be heard in person and heard on 18.06.2019. The authorized representative appeared and gave a written submission. They stated that their product is cured natural tobacco leaves which are cut/minced with jaggery water and no other chemicals/preservatives are added. They stated that the product should be classified under 2401 1020. It is not manufactured tobacco. They submitted several case laws in this aspect. They submitted that their product is not, a food item and does not get covered under Food Safety Act as per Madras H.C. They stated that they will submit photographs of the product, manufacturing process. They submitted invoices of purchase from agriculture market agency and sale to petty shops. The packaging is upto 20 gms. They undertook to submit a test report of their product.

3.2 In the written submissions, it is inter-alia stated that

  • They are manufacturer of “Unmanufactured Chewing Tobacco Product” and own the brand “Kulavi Tobacco” for manufacture and sale of both manufactured and unmanufactured chewing tobacco products. Before the GST regime, they were manufacturing tobacco products with application of flavoring agents for chewing tobacco in the trade name of “Kulavi Tobacco Industries”.
  • As the product of chewing tobacco is under the regulation of FSSA and COPTA, the State Government of Tamil Nadu issue periodical yearly notification enforcing manufacture and sale of tobacco products.
  • Accordingly, the Govt. had issued notification on 23rd May 2017, banning the product of chewing tobacco with scented flavors along with the product of pan masala and gutkha. As a result of which the manufacturers and traders in Tamil Nadu had to restrict their trade of tobacco products by completely eliminating the chewing tobacco with flavoring contents.
  • As the result of chewing tobacco notification by TN FSSA and coupled with GST compensation cess notification No. 1/2017(bifurcating the chewing tobacco products under the umbrella of two categories such as “tobacco with lime tube and tobacco without lime tube”) in the GST regime, the GST compensation cess for the product of scented chewing tobacco (HSN 2403) is , comparatively high than that of unmanufactured chewing tobacco (I-ISN 2401), they were forced to close down the manufacture of chewing tobacco with application of flavoring contents.
  • During the financial year 2018-19, they commenced a new concern in the trade name of Kavi cut tobacco for manufacture of chewing tobacco without application of flavoring agents namely “Unmanufactured chewing tobacco” in order to comply with the Tamil Nadu State Food Safety Authorities and beneficial product’s production cost advantage in order to compete through cut throat competition in the market.
  • The basic differentiation of Manufactured and Unmanufactured Tobacco is not defined either in the Central Excise Act or Central Excise Rules. It is only through the Court citation, it is being observed that the tobacco product added with jaggery water either before or after cutting of tobacco leaves constitutes “Unmanufactured Tobacco” and such product being further added with flavoring essence, fragrances and foreign agents, it becomes the “Manufactured Chewing tobacco”. There are various court citations for determining the product of Unmanufactured Chewing Tobacco and the most appropriate court case being

A.V. Pachiappa Chettiar and Ors Vs. The State of Madras (22nd Sep 1961)-S.C. = 1961 (9) TMI 48 – MADRAS HIGH COURT

Damodar J. Malpani and Ors Vs. Collector of Central Excise (12th Sep’ 2002)-S.C. = 2002 (9) TMI 114 – SUPREME COURT

Bell Mark Tobacco Vs. Government of Madras (1961) 12 S.T.C. 123 = 1960 (7) TMI 60 – MADRAS HIGH COURT

  • Further, the product of chewing tobacco cultivated, harvested and processed in the State of Tamil Nadu being the wet form of tobacco and its usage is being entirely different from tobacco products in Northern part of India and it is called as dry of tobacco as per trade parlances.
  • They manufacture wet form of “Unmanufactured Chewing tobacco” and the product is devoid of chemical contents
  • Before implementation of GST, there were three rate of tariff applied for levy of duty for the product of “Unmanufactured Chewing Tobacco”. The first slab was applicable for wet form of tobacco products and packed through manual operation through labors and the second & third slab were being the Tate of duty applicable for dry form of tobacco products and packed through mechanized operations. The intention of the Govt. is being the levy of differential rate of duty for varieties of tobacco manufacturers; Machine (SME sectors) vs Manual (Village and Cottage industries). The central Excise duty for manual pack of tobacco products were levied comparatively lesser rate under Section 3 of Central Excise Act than that of machine pack of tobacco products levied under section 3A of Central Excise Act.
  • The GST Act being comprising of various Indirect tax Acts and the Central Excise Act one among it, the provisions of the C.E. Tariff are being copied in fixing the GST rate. Further in the 14th GST Council Meeting, it is being categorically mentioned by the GST officials that the existing central excise tariff are being followed in fixing up the GST Compensation cess rate for tobacco products
  • In GST there is no difference between the rate of duty for all forms of tobacco products either being Unmanufactured or Manufactured (all are subjected to 28% GST) and it is only at the levy of compensation cess, it has been differentiated
  • Since their product being Plain Unmanufactured tobacco (Wet form of nattu tobacco) and the concept of application of lime tube along with tobacco packets for manufacture and sale is not in usage as per the customs of trade and trade parlances, GST council has not determined any GST compensation cess.
  • Under GST, the goods are being classified under the Customs Tariff Act as per the International HSN code, the product of unmanufactured chewing tobacco is assigned with the HSN code of 2401.
  • As the GST Council has not assigned compensation cess for applicant’s varieties of tobacco product, they apply GST compensation cess rate applicable for “Unmanufactured tobacco without lime tube” category and paying cess at the rate of 71% on the value of product under self assessment basis.

3.3 The applicant vides their letter received on 05.07.2019 furnished the test report of the raw material and the finished product from Enviro Care India Private Limited, a NABL certified lab and also photographs of the manufacturing process as undertook by them during the hearing. The test report for the sample marked ‘Chewing Tobacco before processing’ and ‘Chewing Tobacco after processing’ are furnished. On perusal of the reports it is seen that the chemical parameters in both consists of Moisture, Total Ash, Acid Insoluble Ash and Nicotine. While the Nicotine content remains unchanged, the Moisture content is more than doubles and the content of Total Ash and Acid insoluble Ash are reduced. The photographs of the process undertaken shows the following process

  1. Raw Tobacco Leaves Stocked;
  2. Spread Out tobacco leaves sprayed with Water and Wet;
  3. Tobacco leaves sprinkled with water fed into cutting machine to be cut into desired shape;
  4. Cut tobacco out from the cutting machine;
  5. Cut tobacco is then dried in the sun to remove moisture content; and
  6. Dried tobacco is manually packed and sealed.

3.4 The Authorised representative made a further submission on 12.02.2020. They had enclosed an order from Madras High Court (Madurai Bench) in relation to classification of Tobacco Products-UNMANUFACTURED TOBACCO and claimed that their subject matter squarely falls under the said judgment and had requested to consider this aspect. They had also furnished the Advance Ruling rendered by Karnataka Authority for Advance Ruling in the case of M/s. Sringeri Yogis Pai = 2019 (10) TMI 1015 – AUTHORITY FOR ADVANCE RULING, KARNATAKAKerala Authority for Advance Ruling in the case of M/s. Govind Traders = 2019 (4) TMI 74 – AUTHORITY FOR ADVANCE RULINGS, KERALA and Delhi Authority for Advance Ruling in the case of Shri. Shalesh Kumar Singh = 2018 (5) TMI 529 – AUTHORITY FOR ADVANCE RULING – DELHI.

4.1 The applicant is under the administrative jurisdiction of Central Tax Authorities. The Commissioner of GST & Central Excise, Tiruchirapalli, the jurisdictional authority furnished the following:

  • In respect shri. Arumugam (M/s Kavi Cut Tobacco), correspondences have been made calling for particulars. However, as they claimed that effective from January 2018, they have changed their final products from chewing tobacco to ‘preparations containing chewing tobacco’ classifiable under heading 24039920, which contains various other ingredients like, lime, chilly, kasikatti, arisithippili, clove oil and menthol etc. the facts are being verified at this office. Now, as reported by the applicant, w.e.f. from November 2018, they have started manufacturing and clearing the preparation as mentioned in the AR application classifying the same under 24012090.
  • It is also informed that

(i) the taxpayer vide letter dated Nil received on 12.11.2018, stated that they had supplied branded chewing tobacco classifying it under Chapter sub-heading 24039910 paying GST Compensation Cess @ 160% in terms of Notification No.1/2017-Compensatin Cess (Rate) New Delhi dated 28.06.2017. From Jan,2018 to May, 2018 Cess has paid at the rate of 160%.

(ii) From June 2018 to September 2018 Cess has been paid at the rate of 72% and Chapter Head mentioned is 24039920 as per enclosure to the above letter.

(iii) The taxpayer vide letter dated 14.03.2019, has reiterated the classification as 24039920 for June,2018 to Oct,2018) and have paid Cess @ 72%; further the taxpayer has stated that NCCD has been paid in terms of Section 4A of Central Excise Act @ 10% on 45% of MRP; further it has been stated that from Nov,2018 onwards, they had changed the product manufactured from 24039920 to 24012090, stating that they were not required to pay NCCD under Central Excise Act and hence ER 1 Returns not filed; that however, GST returns filed with CGST, SGST and Cess.

  • Nov the applicant has requested for an advance ruling as to whether their product intended to be manufactured and supplied by them is rightly classifiable under Chapter heading 24012090 (Unmanufactured tobacco partly or wholly stemmed or tripped “others”) attracting 28% GST and 71% Compensation Cess. Under the above circumstances, it is opined that the product of the applicant, which is intended to be manufactured is not to be classified under 24012090 but only under 24039910.

4.2 The Central Tax authority on being asked specifically to furnish the details of action, if any initiated on the issue raised by the applicant, informed that:

(i) from the correspondences made by the applicant with the Superintendent of Central Excise, Thanjavur-I Range it is observed that the applicant seeks to classify their final product to HSN 24012090 only with effect from November’2018;

(ii) no action has either been initiated or pending for the period effective from November, 2018, as the assessee had already filed the Advance Ruling Application; and

(iii) verification is still pending in respect of the prior period.

It was further informed that no AE-II has been issued relating to subject verification.

  1. We have carefully examined the submissions of the applicant, the comments furnished by the Jurisdictional Officer and the related statutory provisions. The issue raised by the applicant is the classification of the product manufactured by them and the applicable Rate of Compensation cess.

6.1 The applicant is a proprietary concern engaged in the manufacture and supply of tobacco products with the brand name “Kavi cut tobacco”. From the submissions of the applicant, it is seen that the applicant during the financial year 2018-19, has commenced manufacture of chewing tobacco without application of flavoring agents namely “unmanufactured chewing tobacco” in order to comply with the Tamil Nadu State Food Safety Authorities. The manufacturing process of the applicant as elaborated in their application is that

(i) they procure dried tobacco leaves;

(ii) remove stems and dust particles;

(iii) cure the same in jaggery water;

(iv) the cured leaves are cut into small pieces in cutting machine; and

(v) then the cut tobacco is packed in small pouches for the purpose of retail sale in the shops.

6.2 Under GST, the applicable rates of CGST are notified by Notification No. 01/2017-C.T.(Rate) dated 28.06.2017 and in terms of explanation (iii) and (iv) to the said Notification,

(iii) “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

(iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification.

Thus for the purposes of classification under GST, the First Schedule to Customs Tariff Act is only applicable. Further the first schedule to the Customs Tariff Act, 1975, and the Rules of interpretation therein are to be followed for classifying a product, in terms of Explanation 1 and 2 to Notification No. 1/2017- Compensation Cess (Rate) dated 28.06.2017.

6.3 HSN Explanatory Notes to Chapter 24 states:

It is seen from the above that tobacco leaves after harvesting are cured in different ways either in open air (sun curing), air curing (in closed sheds with free circulation of air), flue curing (in hot air flues) or fire curing (with open fires).

The purpose of curing tobacco leaves can be understood by referring to information given for farmers by ICAR-CTRI Central Tobacco Research Institute available on their website https://ctri.icar.gov.in/for_curing.php

TOBACCO CURING

Curing is a process by which the harvested tobacco leaf is made ready for the market. It is a well standardized process especially in FCV tobacco to achieve the desirable qualities in the cured leaf along with the removal of moisture. The process of curing has an intimate bearing on the quality of cured leaf. A good quality leaf from the field can be made poor by an improper curing. The curing operations followed in India are dependent on type of tobacco, the mode of consumption. local preference, convenience, market value and production economics. Depending on the type of the tobacco principal methods of curing can be distinguished as i) flue-curing, ii) air-curing, iii) fire-curing and iv) sun-curing.

GENERAL

Tobacco is obtained from various cultivated varieties of the genus Nicotiana of the Solanaceae family. The size and shape of the leaves differ from one variety to another.

The harvesting method and curing process depend on the variety (type) of tobacco. The plant may be cut whole, at average maturity (stalk cutting), or the leaves may be picked separately. according to their state of maturity (priming). Thus, tobacco may be cured either as whole plants (on the stalk) or as separate leaves.

The various methods of curing are sun curing (in the open air), air curing (in closed sheds. with free circulation of air), flue curing (in hot air flues), or fire curing (with open fires)

Before packing for shipment. the dried leaves are treated in order to ensure their preservation This may be done by controlled natural fermentation (Java, Sumatra. Havana, Brazil, Orient, etc.) or by artificial re-drying. This treatment, and the curing, affect the flavour and aroma of tobacco, which undergoes spontaneous ageing after packing.

Tobacco so treated is packed in bundles, bales (of various shapes). in hogsheads or in crates. When so packed, the leaves are either aligned (Orient) or tied in hands (several leaves tied together with a band or with another tobacco leaf), or simply left as loose leaves. They are always tightly compressed in order to ensure preservation.

in some cases, in addition to (or instead of) fermentation, flavouring or moistening substances are added (casing) in order to improve the aroma or keeping qualities.

This Chapter covers not only unmanufactured and manufactured tobacco but also manufactured tobacco substitutes which do not contain tobacco.

It is seen that curing is a process of drying of the harvested leaves through various methods. Farmers do not sell green tobacco leaves but dried leaves or stalks. Curing happens at the farm level itself after harvest, before they are sold by the farmers in the market. It is seen from the applicant’s submissions that they buy dried tobacco leaves. This means that the tobacco procured by the applicant is already cured by any of the above methods. Further, as seen in the general notes above, before packing for shipment, the leaves can also be treated by natural fermentation. Thus, the claim of the applicant that the addition of jaggery water is for curing or for fermentation is not valid as the treatment process if any is a natural form of fermentation and not by addition of any liquids. Further, the curing and treatment process are carried out at the farm level before being sold in market. Only after these processes, the leaves are packed in bulk and sold. It is seen the product in question is not merely cured or treated tobacco.

Further, the website of ICAR-CTRI Central Tobacco Research Institute available at https://ctri.icar.gov.in/for_curing.php also gives the following information:

JAFFNA TOBACCO OF CEYLON AND CHEWING TOBACCO OF TAMIL NADU

Fire-curing: (Smoke curing)

Important type of tobacco that is fire-cured is Jaffna tobacco of Ceylon and Tamil Nadu used for chewing purpose. The leaf is harvested by either priming or stalk-cutting each leaf together with a portion of the stem.

The’ leaves are wilted for four hours in the field, tied into bundles and hung of laths in smoke huts. They are then smoked for 12 hours by burning coconut husks, leaf stalks and palmyrah nuts. stacked for 3 days and again smoked. Alteration of firing and stacking at an interval of few days helps in making the colour of leaf even. During smoke treatment the creosotic substances are deposited on leaf surface which gives it a peculiar taste. After smoking the leaves are bulked for 3-4 weeks and than given salt water/jaggery treatment prior to sale.

It is seen from the above that chewing tobacco is the tobacco which has been cured by smoking, stored and given jaggery water / salt water treatment. This is similar to the process described by the applicant in his production process. The product is universally known as Chewing Tobacco as acknowledged by the ICAR-CTRI Central Tobacco Research Institute. The final product sold by the applicant are in retail packets of up to 20 grins with brand name of the applicant. The purpose of the product is for the buyer to use it directly for chewing purpose. Therefore, it is seen that the product of the applicant is ‘Chewing Tobacco’ as universally understood and as it is being supplied.

6.4. The Customs Tariff Classification in respect of chapter 2401 are reproduced below for reference

24.01 Unmanufactured tobacco; tobacco refuse.
2401.10 Tobacco, not stemmed/stripped
2401.20 Tobacco, partly or wholly stemmed/stripped
2401.30 Tobacco refuse

This heading covers :

(1) Unmanufactured tobacco in the form of whole plants or leaves in the natural state or as cured or fermented leaves, whole or stemmed/stripped, trimmed or untrimmed, broken or cut (including pieces cut to shape, but not tobacco ready for smoking).

Tobacco leaves, blended, stemmed/stripped and “cased” (“sauced” or “liquored”) with a liquid of appropriate composition mainly in order to prevent mould and drying and also to preserve the flavour arc also covered in this heading.

2401 UNMANUFACTURED TOBACCO; TOBACCO REFUSE
240110 Tobacco , not stemmed or stripped :
24011010 Flue cured virginia tobacco
24011020 Sun cured country (natu ) tobacco
24011030 Sun cured virginia tobacco
24011040 Burley tobacco
24011050 Tobacco for manufacture of biris, not stemmed
24011060 Tobacco for manufacture of chewing tobacco
24011070 Tobacco for manufacture of cigar and cheroot
24011080 Tobacco for manufacture of hookah tobacco
24011090 Other
240120 Tobacco, partly or wholly stemmed or stripped :
24012010 Flue cured virginia tobacco
24012020 Sun cured country (natu ) tobacco
24012030 Sun cured virginia tobacco
24012040 Burley tobacco
24012050 Tobacco for manufacture of biris
24012060 Tobacco for manufacture of chewing tobacco
24012070 Tobacco for manufacture of cigar and cheroot
24012080 Tobacco for manufacture of hookah tobacco
24012090 Other
24013000 Tobacco refuse

Explanatory Notes to HSN 2401 is given as under:

From the above, it is evident that CTH 2401 covers unmanufactured tobacco. CTH 240110 covers Tobacco, not stemmed or stripped’ and CTH 240120 covers Tobacco, partly or wholly stemmed or stripped’.

The product is stated to be ‘wet form of tobacco’ and the applicant have stated in their submissions that the same is different from dry form of tobacco (with or without lime tube content) used in Northern Part of India called as dry of tobacco as per trade parlances. The applicant has furnished the manufacturing process of these two different types (as per their version and not substantiated through any literature/manual) and detailed the differences (again not substantiated with any test reports/ literature/ legal citations). The applicant’s argument for classifying the product under CTH 2401 is based on the HSN Chapter Notes for Heading 2401.

The applicants are of the view their process involves two activities that are referred to in the above notes, namely, (i) liquoring (soaking in jaggery water); and (ii) cutting (mincing into fine pieces) and therefore covered under this heading. On a

2403 OTHER MANUFACTURED TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES; “HOMOGENISED” OR “RECONSTITUTED” TOBACCO; TOBACCO EXTRACTS AND ESSENCES
Smoking tobacco, whether or not containing tobacco substitutes in any proportion :
240311 Water pipe tobacco specified in Sub-heading Note to this Chapter:
24031110 Hookah or gudaku tobacco
24031190 Other
240319 Other:
24031910 Smoking mixtures for pipes and cigarettes
Biris:
24031921 —- Other than paper rolled bins, manufactured without the aid of machine
24031929 —- Other
24031990 Other
Other:
24039100 “Homogenised” or “reconstituted ” tobacco
240399 Other :
24039910 Chewing tobacco
24039920 Preparations containing chewing tobacco
24039930 Jarda scented tobacco
24039940 Snuff
24039950 Preparations containing snuff
24039960 Tobacco extracts and essence
24039970 Cut -tobacco
24039990 Other

fine reading of the above, it is evident that the cutting process prescribed in this note is along with the remarks ‘but not tobacco ready for smoking’. This explanation of HSN clearly brings out the classification in the Customs tariff at 240120, which covers tobacco products for further manufacture and not for consumption as such as in the case of the applicant. From the explanation given by ICAR-CTRI Central Tobacco Research Institute and Explanatory General notes to chapter 24, it is seen that only tobacco which is cured at farm level for before supply to market would fall under this classification as ‘Unmanufactured tobacco’. The fermentation that the applicant claims is by adding jaggery water does not get covered under this. As seen in the the Explanatory General notes to chapter 24, only natural fermentation is covered. Therefor, the product of the applicant doesnot fall under CTH 2401.

6.5. CTH 2403 covers “Other manufactured tobacco and Manufactured Tobacco substitutes; “Homogenised” or “Reconstituted” Tobacco; Tobacco Extracts and Essences”. CTH 24039910- covers ‘Chewing Tobacco’.

Explanatory Notes to HSN 2403 is as below:

24.03 – Other manufactured tobacco and manufactured tobacco substitutes: “homogenized” or “reconstituted” tobacco: tobacco extracts and essences (+).

                – Smoking tobacco. whether or not containing tobacco Substitutes in any proportion :

                2403.11 – – Water pipe tobacco specified in Subheading Note 1 to this Chapter

                2403.19 – – Other

                – Other

                2403.91 – “Homogenised” or “reconstituted” tobacco

                2403.99 – – Other

This heading covers

(3) Smoking tobacco, whether or not containing tobacco substitutes in any proportion, for example, manufactured tobacco for use in pipes or for making cigarettes.

(2) Chewing tobacco, usually highly fermented and liquored.

As per the Explanatory notes, ‘Chewing tobacco’ falls under CTH 2403. It is seen from the information available on ICAR- CTRL Central Tobacco Research Institute website above that chewing tobacco is the tobacco which has been cured by smoking, stored and given jaggery water / salt water treatment. This is similar to the process described by the applicant in his production process. The product is universally known as Chewing Tobacco as acknowledged by the applicant. The final product sold by the applicant are in retail packets of up to 20 gms with brand name of the applicant. The purpose of the product is for the buyer to use it directly for chewing purpose. Hence, the product in question is ‘Chewing tobacco’.

The applicant relying on the Explanatory HSN, has stated that Chewing tobacco covered under 2403 is to highly fermented and liquored and theirs done only to a small extent. The notes above states that the heading covers ‘Chewing tobacco, usually highly fermented and liquored’. It doesn’t exclude the chewing tobacco which is not highly fermented and liquored. In other words, the degree of fermentation or liquoring is not the deciding factor to determine whether the product is “Chewing Tobacco” or not. Thus, going by the Explanation in HSN and the Customs Tariff Headings, it is evident that chewing tobacco supplied for consumption as ‘chewing tobacco’ merits to be classified under the specific heading under CTH 24039910.

The product in question is a processed one in as much as the same is cured in jaggery water, undergoes the process of stalking and semi-drying, then cut into small pieces in minced form which is stored in a separate area for a few hours/days on which some natural/agricultural preservatives for maintaining the product in wet form is applied, packed in pouches/pottlams for supply. Also, the test reports of the chewing tobacco- before processing and after processing furnished by the applicant shows that the chemical parameters Moisture, total ash and acid insoluble ash are different in % content, indicating the product has been subjected to processing. Therefore, the product of the applicant does not merit classification as “unmanufactured tobacco” under CTH 2401 but rightly classifiable under CTH 2403 9910 as “Chewing tobacco”.

6.6 The applicant has relied on various case laws pertaining to Sales Tax and Central Excise levy. In the case of A.V. Pachiappa Chettiar and… Vs. the State of Madras = 1961 (9) TMI 48 – MADRAS HIGH COURT, the question raised is, whether the goods sold by the assessee, which is described as tendu tobacco is “Chewing tobacco” and assessable as a manufactured product and do not have any relevance in the case at hand seeking classification of the product sold as “Chewing Tobacco”. In the case of State of Madras Vs. Bell Mark Tobacco company = 1966 (10) TMI 106 – SUPREME COURT, the question answered by the Hon’ble supreme court is Whether a dealer who pays excise duty on raw tobacco purchased by him is entitled to rebate of that duty in the computation of taxable turnover from the sale of chewing tobacco’ and therefore do not have application in the present case. In the central excise case referred though the issue raised is classification of chewing tobacco, the Hon’ble Supreme Court has remanded the case and the final classification is not spelt out and therefore has no application.

6.7 Further, the decision of the Madras High Court (Madurai Bench) said to squarely cover the issue at hand and relied upon by the applicant was perused. In the said case, the core issue involved whether purchasing minced tobacco in bulk quantity and re-packing the same with added flavour in small packs involve manufacturing process or not and the Hon’ble Court has held that there is no manufacturing process involved in the activities of the petitioners, in that case. As discussed in para supra, the product in hand has undergone processing other than that specified for the one to be classified under CTH 2401 and are also not used for further manufacture to merit classification under CTH 2401; is marketed as ‘Chewing Tobacco’ for the chewing needs of the customers; chewing tobacco finds a specific entry in the customs Tariff and specific entry is to be preferred; therefore we hold that the ratio of the judgment of the Hon’ble High Court of Madras(Madurai Bench) relied upon by the applicant do not find application in the case at hand.

6.8 Tlie applicant has also relied on the Advance Ruling rendered by authority for Advance Ruling, Karnataka, Kerala and Delhi on the application filed by M/s. Sringeri Yogis Pai = 2019 (10) TMI 1015 – AUTHORITY FOR ADVANCE RULING, KARNATAKAKerala Authority for Advance Ruling in the case of M/s. Govind Traders = 2019 (4) TMI 74 – AUTHORITY FOR ADVANCE RULINGS, KERALA and Delhi Authority for Advance Ruling in the case of Shri. Shalesh Kumar Singh = 2018 (5) TMI 529 – AUTHORITY FOR ADVANCE RULING – DELHI respectively. As per Section 103 of the Act. the Advance Ruling applies only to the applicant who sought the ruling, the Jurisdictional Authority or the Concerned Authority and do not find application in other cases and therefore the applicability of the same is not dealt with.

  1. The nest question raised is on the rate of Compensation cess applicable to the Product. The rate of Compensation cess is provided vide Notification no. 01/2017-Compensation Cess/rate) dated 28.06.2017 and Sl.No. 26 provides the Compensation Cess Rate as 160% for the product “chewing tobacco” which is supplied “without lime tube”.
  2. In view of the above, we rule us under.

RULING

  1. The pruduct intended to be manufactured by the applicant and supplied as ‘Chewing tobacco’ with the brand name ‘Kavi cut tobacco’ is classifiable under CTH 2403 9910- Chewing Tobacco.
  2. The applicable rate of Compensation Cass is provided under SI No. 26 of the Notification No 01/2017-Compensation cess dated 28.06.2017 @ 160%.