2020 (6) TMI 486 - AAR - GST

Supplies for dairy plant not eligible for lower GST rate

The authority ruled that the supplies made or to be made by the applicant do not qualify for the lower GST rate of 12% under the specified notification. ... Composite supply - works contract - original works - agricultural produce - units processing agricultural produce as food stuff - mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff - immovable propertyComposite supply - works contract - original works - immovable property - Whether the civil and electro mechanical supplies under the work order qualify as a composite supply of works contract by way of construction, erection, commissioning or installation of original works so as to fall under Entry No. (v)(f) of Sr. No. 3 of the table under Notification No. 11/2017 as amended by Notification No. 20/2017. - HELD THAT: - The work order separates civil work (turn key civil construction) from electro mechanical work and within electro mechanical work it separately identifies a supply part and an installation part with item wise price break up to be submitted. The civil works do not involve supply of machinery or equipment and therefore do not meet the description in Entry No. (v)(f). The electro mechanical component centres on an individually identifiable item - the Pouch Filling Machine - which is a movable, marketable machine in existence prior to supply and capable of being sold separately. It is supplied from a manufacturer and is not brought into existence by on site construction. The work order treats supply and installation as distinct; consequently the supply of that individual machine is not a naturally bundled composite supply dominated by a principal supply as envisaged in the definition of composite supply. Further, an essential ingredient of a works contract is coming into existence of an immovable property by virtue of the works; the individual machine does not become immovable merely by subsequent fixing and does not satisfy the tests of permanency and creation of immovable property. For these reasons the supplies (civil work, other electro mechanical supplies and the Pouch Filling Machine) cannot be characterised as supply of a composite supply constituting a works contract by way of original works within Entry No. (v)(f). [Paras 11, 12, 13, 14, 15]The civil work and the electro mechanical supplies (including the Pouch Filling Machine) do not qualify as a composite supply constituting a works contract supplied by way of original works for the purposes of Entry No. (v)(f).Agricultural produce - units processing agricultural produce as food stuff - mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff - Whether the Pouch Filling Machine (and related supplies) pertains to machinery or equipment for a unit processing agricultural produce as food stuff so as to attract Entry No. (v)(f). - HELD THAT: - The definition of agricultural produce excludes produce that has undergone further processing other than that ordinarily done by a cultivator/producer which does not alter essential characteristics. The Pouch Filling Machine is used for packing milk after the milk has already undergone multiple processing steps (filtration, chilling, pasteurisation, standardisation, cream processing etc.) at the dairy. At the stage when the machine operates the milk's essential characteristics have been altered by prior processing carried out by the unit (i.e., not merely primary marketable processing by a cultivator/producer). Consequently the machine is not used for processing agricultural produce as defined and does not fall within machinery or equipment for units processing agricultural produce as food stuff under Entry No. (v)(f). [Paras 14, 15]The Pouch Filling Machine is not machinery for processing agricultural produce as food stuff within the meaning of Entry No. (v)(f) and therefore the entry does not apply to that supply.Final Conclusion: The Authority rules that Notification No. 20/2017 (amending Notification No. 11/2017) does not cover the supplies made or to be made by the applicant under the cited work order; the civil works, the electro mechanical supplies and the Pouch Filling Machine do not fall within Entry No. (v)(f) and the concessional rate under that entry is therefore not applicable to the applicant's supplies. Issues Involved:1. Applicability of Notification No. 20/2017-Central Tax (Rate) dated 22nd August 2017.2. Definition and scope of 'agricultural produce' under the CGST Act, 2017.3. Classification of the contract as a 'composite supply of works contract.'4. Eligibility of the dairy plant setup under the specified notification.Issue-wise Detailed Analysis:1. Applicability of Notification No. 20/2017-Central Tax (Rate):The applicant sought clarification on whether the composite supply of works contract for setting up a dairy plant falls under the purview of Notification No. 20/2017-Central Tax (Rate), which amends Notification No. 11/2017-Central Tax (Rate). This notification pertains to the construction, erection, commissioning, or installation of original works related to mechanized food grains handling systems, machinery, or equipment for units processing agricultural produce as foodstuff, excluding alcoholic beverages.2. Definition and Scope of 'Agricultural Produce':The applicant argued that 'agricultural produce' includes milk, as it is a product of rearing animals for food. The definition under Notification No. 12/2017-Central Tax (Rate) was cited, which includes produce from the rearing of animals for food, provided no further processing is done that alters its essential characteristics. The applicant contended that since raw milk is obtained from farmers and processed into pasteurized milk and milk products, it should be considered agricultural produce.3. Classification of the Contract as a 'Composite Supply of Works Contract':The applicant claimed that the contract is a composite supply of works contract, encompassing both civil and electro-mechanical works. The civil work involves constructing the dairy plant building and related structures, while the electro-mechanical work includes designing, supplying, installing, and commissioning dairy equipment. The applicant argued that both parts of the contract meet the definition of 'works contract' under Section 2(119) of the CGST Act, 2017, as they involve constructing immovable property and transferring property in goods.4. Eligibility of the Dairy Plant Setup under the Specified Notification:The applicant contended that the dairy plant setup meets the conditions specified in Entry No. 3(v)(f) of Notification No. 11/2017-Central Tax (Rate), as amended by Notification No. 20/2017-Central Tax (Rate). They argued that:- The contract is a composite supply of works contract.- The supply involves constructing, erecting, commissioning, or installing original works.- The dairy plant processes agricultural produce (milk) into foodstuff.Discussion and Findings:The authority examined the submissions and found that the civil work component does not involve supplying machinery or equipment, thus not falling under Entry No. 3(v)(f) of Notification No. 11/2017-Central Tax (Rate). The electro-mechanical work includes the supply and installation of various dairy equipment, with the primary product being pouch milk. However, the authority noted that the supply of the Pouch Filling Machine with online pouch coding machine does not constitute a composite supply of works contract, as it is a movable item and not an immovable property.The authority also observed that the definition of 'agricultural produce' excludes further processed products unless the processing is done by a cultivator or producer without altering the essential characteristics. Since the milk undergoes various processes before being packed, it does not qualify as agricultural produce under the specified notification.Conclusion:The authority ruled that the supplies made or to be made by the applicant under the work order issued by the Bihar State Milk Cooperative Federation Ltd. do not fall under Entry No. 3(v)(f) of Notification No. 11/2017-Central Tax (Rate), as amended by Notification No. 20/2017-Central Tax (Rate). Therefore, the lower GST rate of 12% is not applicable to the works contracts pertaining to the dairy industry in this case.