2021 (1) TMI 175 - HC - GST

Court sets aside GST assessment on by-products retained by petitioner, deeming them compensation not subject to tax.

Shiridi Sainath Industries Versus Deputy Commissioner of Services Tax (International Taxation)

The court allowed the writ petition, setting aside the assessment order that levied GST on the value of by-products (broken rice, bran, and husk) retained ... Job Work - Consideration for Levy of GST - value of broken rice, bran and husk obtained by the petitioner on milling of the paddy of the respondent No. 4 - milling charges - compensation/exchange for the own rice supplied by the petitioner to the respondent No. 4 to make up the shortfall in the yield - by-products were left to the petitioner as compensation to replenish the shortfall of the rice to make 67% of yield on milling - According to Revenue, not only the milling charges @ ₹ 15/-per quintal but also the by-products received by the petitioner constitute the consideration, whereas, the contention of the petitioner is that by-products were just left by 4th respondent with the petitioner as they were not useful to it, for, their disposal was not economically viable. HELD THAT:- It is pertinent to mention here that in similar circumstances, in the case of FOOD CORPORATION OF INDIA VERSUS STATE OF AP [1997 (4) TMI 483 - ANDHRA PRADESH HIGH COURT], a Division Bench of the High Court of Andhra Pradesh held that when the terms between the parties are under an agreement, those terms are sacrosanct and cannot be explained otherwise by adducing oral evidence. The facts in that case briefly are that the FCI entered into agreements with different millers to whom it supplied paddy for the purpose of milling and paid hire charges and milling charges. As per the milling agreement, the FCI agreed to give the by-products such as broken rice, husk and bran to the millers. The Assessing Authority added the value of the by-products to the turnover of the FCI for the purpose of computation of Sales Tax, treating such by-products to have been sold by the FCI to the millers. The contention of the FCI was that it just allowed the millers to treat the by-products as their property but there was no sale between them and it did not receive any remuneration in that regard and therefore same cannot be added to its turnover - The Division Bench observed There is nothing to show that the transfer of property in the goods or the by-products to be by way of sale, but only indicates that the FCI does not concern or bother itself for the broken rice, etc., for which it has no use and does not want to be burdened with the clause would not lead to the proof of there having been a sale. The transfer of property in the goods might take place even when there is no sale, say where there is a voluntary transfer or gifting away of the goods in question. In the case on hand, the Assessment Order was passed 29-10-2018 and as per Section 107 of GST Act, an appeal shall be filed within three (3) months from the date of communication of the order. The Writ petition is filed on 17-12-2018 i.e., well within the period of limitation for filing appeal. Having regard to the dictum laid in Glaxo Smith's case (2 supra), this Court can either entertain the writ petition or refer the petitioner to Appellate authority. Since the impugned order was passed having no regard to the law laid down in the case of Food Corporation of India v. State of A.P, the writ was entertained. The objection raised by learned counsel for the 4th respondent that in view of the arbitration clause, the writ petition is not maintainable, has no teeth. It should be noted that there are no disputes between the petitioner and the 4th respondent with regard to the implementation of the terms of the agreement. On the other hand, the dispute is between the Revenue and the petitioner as to whether or not the by-products form part of the consideration. Since such a dispute cannot be referred to and resolved by the Arbitrator, the Writ Petition is very much maintainable. The impugned Assessment Order passed by the 1st respondent in so far as it relates to the levy of GST on the value of by-products i.e., broken rice, bran and husk treating them as part of the consideration paid to the petitioner for milling of the paddy, is set aside - Petition allowed. Issues Involved:1. Legality of the assessment order levying GST on the value of by-products (broken rice, bran, and husk) retained by the petitioner.2. Whether the by-products retained by the petitioner form part of the consideration for milling services.3. Applicability of GST on the custom milling of paddy.4. Maintainability of the writ petition in the presence of an alternative remedy and arbitration clause.Detailed Analysis:1. Legality of the Assessment Order:The petitioner challenged the assessment order dated 29-10-2018, which levied GST on the value of by-products obtained from milling paddy. The petitioner argued that these by-products were retained as compensation for the shortfall in rice yield and not as part of the consideration for milling services. The respondent contended that the by-products were part of the consideration for the milling services.2. By-Products as Part of Consideration:The petitioner claimed that the by-products were not part of the consideration but were retained to compensate for the shortfall in rice yield. The respondent argued that the by-products formed part of the consideration for the milling services, as per the agreement terms. The court referred to the agreement, particularly Clause 22, which stated that the miller shall retain all by-products and be responsible for taxes on their sale. The court emphasized that the terms of the agreement are sacrosanct and cannot be altered or explained otherwise. The court held that the by-products were not part of the consideration but were allowed to be retained by the petitioner as compensation for the shortfall in rice yield.3. Applicability of GST on Custom Milling:The court referred to the clarification issued by the Government of India, Ministry of Finance, which stated that milling of paddy into rice is not an intermediate production process in relation to cultivation and is liable to GST at the rate of 5% on the processing charges. The court noted that there was no controversy regarding the applicability of GST on custom milling of paddy.4. Maintainability of the Writ Petition:The respondent argued that the writ petition was not maintainable due to the availability of an alternative remedy under Section 107 of the GST Act and the presence of an arbitration clause in the agreement. The court acknowledged the general principle of not entertaining writ petitions when an efficacious alternative remedy is available. However, in this case, the court found that the assessment order was passed without considering the law laid down in the case of Food Corporation of India v. State of A.P. The court decided to entertain the writ petition to avoid driving the petitioner to the appellate authority. The court also held that the arbitration clause was not applicable as the dispute was between the Revenue and the petitioner regarding the consideration for GST purposes.Conclusion:The court allowed the writ petition and set aside the assessment order dated 29-10-2018, to the extent it levied GST on the value of by-products (broken rice, bran, and husk) treating them as part of the consideration for milling paddy. The court concluded that the by-products were retained by the petitioner as compensation for the shortfall in rice yield and not as part of the consideration for milling services. The court also held that the writ petition was maintainable despite the availability of an alternative remedy and the presence of an arbitration clause.