2022 (11) TMI 82 - AAAR - GST

Agricultural seed processor denied GST exemption as chemical treatment alters essential characteristics beyond primary market preparation

The AAAR-Telangana ruled against an appellant engaged in agricultural seed production and sale. The appellant sought exemption under GST notifications for ... Agricultural produce - exemption under Notification No. 11/2017-CT(R) and Notification No. 12/2017-CT(R) - processing as usually done by a cultivator which does not alter essential characteristics - services by job-worker (cleaning, drying, grading, packing) and exemption - chemical treatment of seed and its effect on exemption - transportation of agricultural produce and exemption - supply to self and exemptionAgricultural produce - exemption under Notification No. 11/2017-CT(R) and Notification No. 12/2017-CT(R) - processing as usually done by a cultivator which does not alter essential characteristics - Whether seeds produced/procured and processed, packed and sold by the appellant qualify as 'agricultural produce' for the purpose of the cited notifications and thereby attract the exemption - HELD THAT: - Both notifications define 'agriculture produce' as produce out of cultivation of plants on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market. The appellant harvests produce and segregates items for seed on the basis of quality and germination strength, and carries out preservation processes including cleaning, drying, grading and chemical processing to make seed fit for sowing and to improve shelf life. The authority finds that where only cleaning, drying and grading (without chemical processing) are undertaken such activities would fall within processes usually done by a cultivator and exemption would be available; however, on the facts before it the appellant has not proved that its activities are limited to such non-altering processes. The presence of chemical processing and the failure of the appellant to establish that processing does not alter essential characteristics leads to the conclusion that the produce does not qualify as 'agricultural produce' under the notifications for the purposes of exemption. [Paras 11, 13, 14]Seed produced/processed by the appellant does not qualify as 'agricultural produce' under the cited notifications and is not entitled to exemption on the case made out before the authority.Services by job-worker (cleaning, drying, grading, packing) and exemption - exemption under Notification No. 11/2017-CT(R) and Notification No. 12/2017-CT(R) - Whether storage, loading, unloading, packing and processes (cleaning, drying, grading, chemical treatment) carried out by job-workers for the appellant are exempt from GST under the cited notifications - HELD THAT: - The notifications exempt services related to agricultural produce where the produce qualifies as such. Given the authority's finding that the appellant's seeds do not, on the material before it, qualify as 'agricultural produce', the services performed by job-workers in relation to those seeds do not attract the exemption. The authority nevertheless records the legal position that if the appellant's processes were confined to cleaning, drying and grading without chemical processing and thereby fell within processes usually done by a cultivator, exemption would be available; that factual predicate, however, was not established in this case. [Paras 11, 14]Services by job-workers in respect of the appellant's seeds are not exempt under the cited notifications on the facts presented; exemption would be available only if processing were confined to non-altering operations usually done by a cultivator, which was not proved.Transportation of agricultural produce and exemption - exemption under Notification No. 12/2017-CT(R) - Whether transportation of seeds (farm to storage, inter-godown, to distributors and sales-returns) is exempt under Sl. No. 21(a) of Notification No. 12/2017 - HELD THAT: - Exemption for transportation services under the notification applies to transportation of agricultural produce. Since the authority has concluded on the material before it that the appellant's seeds do not qualify as 'agricultural produce', the transportation services in relation to those seeds do not attract the exemption. [Paras 11, 14]Transport of the appellant's seeds is not exempt under the cited entry on the facts of this case.Supply to self and exemption - Whether processes undertaken by the appellant for itself (cleaning, drying, grading, treatment and packing) constitute a taxable supply to self - HELD THAT: - The lower authority had observed that where processing is undertaken by the applicant for in-house seed production, there is no supply and hence exemption applies. The appellate authority does not disturb that legal proposition in principle and records that supply to self is exempt in that circumstance; however, the broader exemption questions depend on whether the produce qualifies as 'agricultural produce' under the notifications. [Paras 5, 15]Processing by the appellant for its own in-house seed production does not amount to a taxable supply to self and is exempt, subject to the qualifying conditions of the notifications.Limitation and filing of appeal - Whether the appeal was filed within time - HELD THAT: - The impugned order dated 18.2.2022 and the appeal filed on 4.3.2022 show the appeal was filed within the statutory period; the authority records the appeal as timely. [Paras 7]The appeal is filed in time.Final Conclusion: The Appellate Authority upholds the order of the Telangana State Authority for Advance Ruling and dismisses the appellant's contentions: on the material before it the seeds do not qualify as 'agricultural produce' under the cited notifications, services by job-workers and transportation in relation to those seeds are not exempt, supply-to-self processing remains non-taxable where the processing is truly in-house, and the appeal was filed within time. The lower authority's order is upheld and the appeal is disposed of. Issues Involved:1. Definition and taxability of seeds as agricultural produce.2. Exemption applicability for storage, loading, unloading, and packing services.3. Exemption applicability for cleaning, drying, grading, and chemical treatment services.4. Exemption applicability for transportation of seeds.5. Taxability of self-processing activities.Issue-wise Detailed Analysis:1. Definition and Taxability of Seeds as Agricultural Produce:The lower authority ruled that seeds produced, procured, processed, packed, and sold by the applicant do not qualify as agricultural produce under Notification No. 12/2017-Central Tax (Rate) and 11/2017-Central Tax (Rate). The authority highlighted that seeds are distinct from grains and do not fulfill the criteria of agricultural produce since they are not meant for food, fiber, fuel, or raw material for further processing.2. Exemption Applicability for Storage, Loading, Unloading, and Packing Services:The lower authority determined that services related to the storage of seeds in leased facilities, and the loading, unloading, and packing of seeds by job workers are not exempt from GST. This conclusion is based on the interpretation that the exemptions under Sl.No.54(e) of Notification No. 12/2017 and Sl.No.24(1)(e) of Notification No. 11/2017 apply to services engaged by a cultivator or agriculturist, not by a seed company.3. Exemption Applicability for Cleaning, Drying, Grading, and Chemical Treatment Services:The lower authority ruled that services such as cleaning, drying, grading, and chemical treatment carried out by job workers are not exempt from GST. The exemptions under Sl.No.54(c), (h) of Notification No. 12/2017 and Sl.No.24(1)(c), (h) of Notification No. 11/2017 pertain to support services to agriculture engaged by a cultivator, not by a seed company.4. Exemption Applicability for Transportation of Seeds:The lower authority concluded that the transportation of seeds from farm to storage facilities, between storage facilities, and from storage facilities to distributors is not exempt under Sl.No. 21(a) of Notification No. 12/2017. This entry provides exemption on transportation services to agricultural produce, which does not include seeds processed by the applicant.5. Taxability of Self-Processing Activities:The lower authority ruled that if the applicant undertakes processing activities such as cleaning, drying, grading, and chemical treatment for in-house seed production, there is no supply involved, and hence, it is exempt from GST.Appellant's Grounds of Appeal:The appellant argued that all produce resulting from cultivation, including seeds, should be considered agricultural produce. They cited the Hon'ble Apex Court's decision in The State Of Rajasthan Etc vs Rajasthan Agriculture Input Dealers Association, which stated that chemically treated seeds, though distinct from food grains, do not lose their character as agricultural produce. The appellant contended that the exemption should apply to their activities, as the language of the exemption notifications refers to the cultivation of plants and not exclusively to individual farmers. They also argued that the lower authority's interpretation discriminates against seed companies.Appellate Authority's Findings:The appellate authority upheld the lower authority's decision, emphasizing that to qualify as agricultural produce for exemption, the produce must either undergo no processing or only such processing as is usually done by a cultivator or producer without altering its essential characteristics. The authority found that the appellant's activities involve chemical processing, which disqualifies them from the exemption. The case law cited by the appellant was deemed inapplicable as it pertained to milk supply, not seed services.Order:The appellate authority upheld the lower authority's order, dismissing the appeal.