Treated water from raw effluent processing constitutes sale of goods, classifiable under CTH 2201, no exemption applies

The AAR-TN ruled that the applicant's proposed operation of purchasing raw effluent, treating it, and selling resultant products constitutes sale of goods under the Sale of Goods Act. The treated water obtained through reverse osmosis demineralization process, reducing dissolved solids from 7932 mg/L to 148 mg/L for dyeing industry use, is classifiable under CTH 2201. The demineralized water does not qualify for exemption under Serial No. 99 of Notification No. 2/2017-CT (Rate) and falls under Schedule-III of Notification 01/2017-CT (Rate).

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Issues Involved:
1. Classification of the supply of outputs as the sale of goods.
2. Classification of treated water under the appropriate heading.

Detailed Analysis:

1. Classification of the Supply of Outputs as Sale of Goods:
The applicant, engaged in treating effluents from dyeing units, sought clarification on whether the supply of treated outputs could be classified as the sale of goods. According to Section 4 of The Sale of Goods Act, 1930, a contract of sale involves the transfer of property in goods from the seller to the buyer for a price. The Hon'ble Supreme Court in State of Madras Vs Gannon Dunkerley & Co. (Madras) emphasized that for a sale to occur, there must be an agreement, consideration, and transfer of property.

The applicant purchases effluents, processes them, and sells the resulting products. This mode of operation, if it follows the procedures in the Sale of Goods Act and the Supreme Court's rationale, qualifies as a sale of goods. Therefore, the classification of the supply of treated water, salt, and other products as the sale of goods is correct.

2. Classification of Treated Water:
The applicant contended that the classification of RO Permeate as per the Advance Ruling order under heading 2201 was incorrect. They argued that the treated water should be classified under Chapter 28 as 'Other Inorganic Compounds' or as 'Demineralised water' under heading 2201 due to its specific characteristics and usage in the dyeing industry.

Analysis of Techniques and Characteristics:
Various techniques for demineralization, such as distillation, ion-exchange, and reverse osmosis, were discussed. The applicant's process involves significant demineralization, reducing dissolved solids from 7932 mg/L to 148 mg/L, making the water fit for industrial use.

Comparison with Treated Sewage Water:
The Ministry of Finance's Circular No. 179/11/2022 clarified that treated sewage water attracts a nil rate of tax. However, the effluent from textile industries contains hazardous chemicals and requires extensive treatment, unlike sewage water. The treated water from the applicant's process retains minor minerals, making it distinct from treated sewage water.

Classification under Heading 2853:
If the treated water contained zero or minuscule dissolved solids, it could be classified under heading 2853 as distilled or conductivity water. However, the applicant's treated water retains some dissolved solids, disqualifying it from this category.

Classification under Heading 2201:
The applicant's treated water, being demineralized but not entirely free of impurities, falls under heading 2201 as 'Waters, including natural or artificial mineral waters and aerated waters, not containing added sugar or other sweetening matter nor flavoured.' This classification aligns with rulings in similar cases, such as M/s Hojwala Infrastructure Limited and Palsano Enviro, where treated water from CETP was classified under heading 2201 and taxed at 18%.

Ruling:
1. The classification of the supply of outputs as the sale of goods is correct.
2. The classification of treated water, which is demineralized for industrial use, falls under heading 2201 as described in S.No. 24 of Schedule-III of Notification No. 01/2017-C.T. (Rate) dated 28.06.2017, and is taxable at the rate of 18% GST.

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