Chilling pasteurising and packing of milk amounts to manufacture and not business auxiliary service

The CESTAT, New Delhi in the case of M/s. Shri Vardhman Milk Dairy Pvt. Ltd. Versus Commissioner of CGST & Central Excise, Jaipur-I, Rajasthan - 2025 (7) TMI 281 - CESTAT NEW DELHI held that the activity of chilling, pasteurisation, standardisation and pouch packing of milk amounts to 'manufacture' under Chapter Note 6 of Chapter 4 of the Central Excise Tariff Act, 1985, and therefore cannot be taxed as Business Auxiliary Service under Section 65(19) of the Finance Act, 1994.

Facts:

M/s Shri Vardhman Milk Dairy Pvt. Ltd. ('the Appellant') carried out activities on behalf of M/s Reliance Dairy Foods Ltd. under agreement, including chilling, cutting open bulk milk, pasteurisation, standardisation, and packaging of milk into pouches for retail sale. The Department issued a show cause notice dated October 24, 2013, alleging that these activities amounted to providing Business Auxiliary Service under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994, and demanded service tax of ₹43,64,774 invoking extended limitation along with interest and penalties.

During adjudication, it was held that only packing amounted to 'manufacture', but not the other processes. Consequently, the demand was partially reduced. On cross-appeals by both parties, the Commissioner (Appeals) rejected the Appellant’s appeal and upheld full demand. The Appellant then preferred appeals before the Tribunal.

Issues:

• Whether the activity of chilling, standardisation, pasteurisation and packing of milk into pouches amounts to 'manufacture' under the Central Excise Tariff?
• Whether the Appellant is liable to pay service tax under Business Auxiliary Service?

Held:

The CESTAT, New Delhi in M/s. Shri Vardhman Milk Dairy Pvt. Ltd. Versus Commissioner of CGST & Central Excise, Jaipur-I, Rajasthan - 2025 (7) TMI 281 - CESTAT NEW DELHIheld as under:

• Observed that, as per Chapter Note 6 of Chapter 4 of the Central Excise Tariff Act, 1985, even 'any treatment to render the product marketable to the consumer' amounts to manufacture.
• Held that, the Appellant’s activities, chilling, separation, standardisation, pasteurisation and retail packing, collectively render milk marketable and therefore amount to 'manufacture'.
• Held that, Section 65(19) of the Finance Act, 1994, specifically excludes any activity that amounts to manufacture. Hence, once ‘manufacture’ is established under Chapter Note and Section 2(f) of the Central Excise Act, 1944, service tax cannot be levied.
• Held that, since the activity qualifies as 'manufacture' and the demand raised under Business Auxiliary Service is unsustainable. The appeal was allowed, setting aside the impugned order.

Our Comments:

This Tribunal’s decision builds substantially upon the precedent set in M/s Shri Vrindavan Dairies Versus CCE & ST, Jaipur – I - 2018 (6) TMI 804 - CESTAT NEW DELHI, where the Tribunal held:

“The definition under Chapter 4 of the Central Excise Tariff Act, 1985 of manufacture is much wider and leaves no doubt that pasteurisation, packing from bulk pack to branded consumer packs undertaken by the appellant clearly amounts to manufacture as per Note 6 of Chapter.” As a consequence, such activities are excluded from the scope of business auxiliary service under Section 65(19) of the Finance Act.

Further, the Tribunal distinguishes the decision in M/s. Jai Durge Ice Factory Versus Commissioner of CGST & Central Excise, Udaipur - 2025 (3) TMI 848 - CESTAT NEW DELHI, noting that, the appellants only provided chilling facility and did not process the milk, hence the activity was rightly classified as service. This distinction clarifies that chilling alone does not amount to manufacture, whereas the addition of pasteurisation, standardisation, and repacking renders the process as ‘manufacturing’.

Relevant Provisions:

Section 65(19) – Business Auxiliary Service, Finance Act, 1994:

“business auxiliary service” means any service in relation to, —

i. promotion or marketing or sale of goods produced or provided by or belonging to the client; or

ii. promotion or marketing of service provided by the client; or

iii. any customer care service provided on behalf of the client; or

iv. procurement of goods or services, which are inputs for the client; or Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, ―inputs means all goods or services intended for use by the client;

 v. production or processing of goods for, or on behalf of the client; or

vi. provision of service on behalf of the client; or

vii. a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include any activity that amounts to “manufacture” of excisable goods”

Chapter Note 6 of Chapter 4, Central Excise Tariff Act, 1985:

“DAIRY PRODUCE; BIRD'S EGGS; NATURAL HONEY; EDIBLE PRODUCTS OF ANIMAL ORIGIN, NOT ELSEWHERE SPECIFIED OR INCLUDED NOTES:

“1. The expression 'milk' means full cream milk or partially or completely skimmed milk. ―

6. In relation to products of this Chapter, 1 [labelling or relabelling of containers or repacking] from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to ―manufacture.”

Section 66D(f) – Finance Act, 1994:

“(f) services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption;”

 (Author can be reached at [email protected])