Classification dispute: Tea bag packing service under GST - 5% or 18%?

The case involved the classification of services provided in packing tea bags and the applicable GST rate. The West Bengal Authority for Advance Ruling initially classified the service under SAC 9988, taxable at 5%. One member upheld this classification, considering tea bags as a distinct product, while another member classified it as a packaging service, taxable at 18%. Due to the differing opinions, no Advance Ruling was issued, rendering the previous ruling not in operation.

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Issues Involved:
1. Classification of the services provided in packing of tea bags.
2. Rate of GST on the said service.

Detailed Analysis:

Issue 1: Classification of the services provided in packing of tea bags

The West Bengal Authority for Advance Ruling (WBAAR) initially ruled that the respondent provides a composite supply to Hindusthan Unilever Ltd. (HUL), where the principal supply is the manufacturing of tea bags from physical inputs owned by HUL. This service was classified under SAC 9988 and deemed taxable at 5% under Sl. No. 26(f) of Notification No. 11/2017-CT (Rate) dated 28.06.2017.

The appellant argued that the WBAAR erroneously classified the transaction as a composite supply. According to the appellant, the respondent merely provides a single service of packaging, as HUL retains ownership of all materials. The appellant emphasized that the respondent's activity does not result in a new product with a distinct name, character, and use, thus it should not be classified as manufacturing.

The respondent countered by stating that their service involves assembling materials on machines, including blended tea leaves and other inputs received from HUL. They initially classified it as packaging service under SAC 998540 and charged GST at 18%. However, based on HUL's communication, they later classified it under Sl. No. 26(f) of the Rate Notification, taxable at 5%.

Issue 2: Rate of GST on the said service

The WBAAR's ruling classified the service under SAC 9988, taxable at 5% under Sl. No. 26(f) of the Rate Notification. The appellant contested this, arguing that the service should be classified under SAC 9985 as packaging service, taxable at 18% under Sl. No. 23(iii) of the Rate Notification.

Separate Judgments by Members:

Ms. Smaraki Mahapatra's Judgment:

Ms. Mahapatra opined that the process of making tea bags involves putting blended tea leaves into special porous pouches, which are then stitched. This process results in a new product with a distinct name, character, and use. She argued that tea bags are a distinct commercial product from loose tea and should be classified under Tariff item 0902 40 40. Therefore, she upheld the WBAAR's ruling that the service is classifiable under Sl. No. 26 (i) (f) of Notification No. 11/2017-CT (Rate) and taxable at 5%.

Mr. A.P.S Suri's Judgment:

Mr. Suri disagreed, stating that the activity of filling tea into tea bags does not change the basic nature of tea but only makes it more suitable for handling and retailing. He argued that the process does not result in a new product with a distinct name, character, and use. He classified the service under SAC 9985 41 as packaging service, taxable at 18% under Sl. No. 23(iii) of Notification No. 11/2017-CT (Rate).

Conclusion:

Due to the differing opinions of the members, no Advance Ruling could be issued. As per section 101 sub-section (3) of the GST Act, the Advance Ruling No. 36/WBAAR/2018-19 dated 28.01.2019 is deemed to be not in operation. Copies of the order were sent to both the appellant and the respondent for their information.

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