#GSTCase-44-Service of Manufacturing Tea Bags and filling Tea Leaves into the Tea Bags is a Manufacturing Service and Classifiable in SAC 9988
Vedika Exports Tea (P.) Ltd  101 taxmann.com 478 (AAR-WEST BENGAL)
Whether contract packing services rendered by applicant are classifiable under manufacturing service on physical inputs owned by others (SAC 9988) for food and food products falling under chapters 1 to 22 in the First Schedule to the Customs Tariff Act, 1975 (hereinafter the Tariff Act).
Applicant is a contract packer of tea bags. The Applicant used to classify it as packaging service under SAC 998540 and charge GST under Sl. No. 23 (iii) of Notification No. 11/2017 – CT (Rate) @ 18%.
- Observation by AAR
a) Terms of the agreement
- Clause 5.3:- HUL shall procure, transport and deliver to the Applicant’s manufacturing units all the raw materials, packing materials and other materials required for such activities.
- Clause 5.6:-The ownership and property in the materials so delivered shall at all times vests in and belong exclusively to HUL.
- Clause 5.12:-The Applicant has no liberty to apply such materials for any purpose other than processing and packing of the products for HUL.
- Clause 13.2:- HUL shall provide insurance cover against fire, spontaneous combustion, explosion and other risks, presuming the Applicant ensures reasonable precaution to safeguard HUL’s materials, work in progress and finished goods while in his custody.
- Clause 12:-HUL will also bear the cost of waste disposal (clause 12 of the Agreement). It is, therefore, evident that the processes undertaken are on physical inputs owned by HUL.
b) Process undertaken by the Applicant
Flow chart of processes undertaken by the applicant shows that blended tea received from HUL, after quality control procedure, is passed through hoppers, magnetic grill and mesh, and ends with filling tea leaves into the tea bag pouches and stitching. The tea bags are then subjected to quality control before being packed in cartons, wrapped and put into boxes, stored and delivered to HUL after sample testing.
Thus, two types of services are being provided by the applicant i.e. manufacturing tea bags and second is of packaging the manufactured tea bags in cartons, wrapping them up and put them in specially designed boxes. HUL owns and provides all such packaging materials also.
c) Tea Bags containing Tea Leaves are a different product from Tea Leaves
Section 2(72) of CGST Act defines manufacture as the processing of raw materials or inputs in any manner that results in the emergence of a new product having a distinct name, character and use. Packaging activity, on the other hand, makes the same product more suitable for handling, delivery, preservation, retailing etc.
Consuming tea contained in a tea bag does not require the tea leaves to be taken out of the bag. The tea bag itself is dipped in water, as the bag is porous and is filled with tea leaves. Tea bags, therefore, are distinct from tea leaves, offering a user- friendly way of making the beverage.
Tea bag pouch is, therefore, not a packaging material, but an input required for manufacturing tea bag as a commercial item separate from blended tea leaves. It is a new product having a distinct name, character and use, and classified as such under Tariff item 0902 40 40.
d) Composite Supply of manufacturing tea bags and service for packaging of the manufactured tea bags
The two services i.e. service for manufacturing tea bags and service for packaging of manufactured tea bags are being supplied in terms of a single contract and at a single price. The flow chart shows that the services are supplied as processes in a continuous assembly line, where packaging of tea bags in cartons and wrapping is ancillary to manufacturing tea bags. The tea bags, of course, cannot be delivered unless they are suitably packed. The Applicant is, therefore, making a composite supply to HUL where the service of manufacturing tea bags from the physical inputs owned by HUL is the principal supply.
Composite supply made by the Applicant to Hindustan Unilever Ltd, where service of manufacturing tea bags from physical inputs owned by the latter is the principal supply. It is classifiable under SAC 9988 and taxable at 5% rate under Sl No. 26(f) of Notification No. 11/2017 – CT (Rate) dated 28/06/2017, as amended from time to time.
AAR has held that Tea bag pouch is, therefore, not a packaging material, but an input required for manufacturing tea bag as a commercial item separate from blended tea leaves. The judgement touches the cornerstone of the controversy i.e. whether lose tea and tea contained in Tea Bags are different commodities and can packing of lose lea into tea bags can be held to be manufacturing service.
- Why it is important to differentiate whether the service supplied by the applicant is a manufacturing service or otherwise:
The said differentiation is key to analysing whether activity of the applicant falls under 9988 or 9985 as 9988 provides SAC for (Manufacturing services on physical inputs (goods) owned by others). Therefore, to fall under 9988, service of the applicant must fall under Manufacturing service otherwise such service would not fall under 9988.
- Lose Tea and Tea contained in Tea Bags are two different commodities
Although not exactly tea contained in tea bags, but lose tea and packed tea have been held to be two different commodities. Going back into the legislative history wherein excise duty was levied through a separate entry on packaged tea, Hon’ble Gujrat High Court in the matter of Brooke Bond India Ltd. vs Union Of India on 3 September, 1991 observed that
“The classification between loose tea and package tea is intelligible and real as taste of the consumers who purchase the same is different.”
The Hon’ble Court held that package tea had its own market and, is considered by all concerned to be of different variety. It was pointed out by the Gujarat High Court that classification between loose tea and package tea is reasonable and with the specific object of affording relief to the tea growers and to the consumers of loose tea and the.
Therefore, like lose tea and packed tea have been held to be two different commodities; on similar lines lose tea and tea contained in tea bags can also be treated as two separate commodities.
- Whether activity of filling tea into tea bags can be held to be manufacturing service
The fact that lose tea and tea contained in tea bags might be two different commodities but then question is whether activity of applicant i.e. supplying tea bags and packing the tea into tea bags can be categorized as a manufacturing activity. The question is not free from ambiguity and might result in differing interpretations.
Taking the difference between lose tea and packaged tea ahead, Hon’ble Andhra Pradesh High Court in the matter of V.R. Industries vs. Superintendent of Central Excise, Vijayawada, 2001 (133) ELT 306 (AP) was faced with this question and the legislative history of the case would help us in understanding the matter better:
This case has a checkered history. By order dated 15-10-1987, a Division Bench of this Court held that the act of packaging by the petitioner does not involve any manufacturing activity and as such, is not exigible to excise duty. Against this judgment, the Excise authorities carried the matter to the Supreme Court in Civil Appeal Nos.2212-14 of 1988 and along with similar appeals, the Supreme Court has decided the matter on 19-4-1995. The supreme Court has directed the disposal of the matter by taking the evidence on the following questions:
(i) Whether ‘package tea’ is a distinct variety of tea, different from other varieties and is commercially known as such?
(ii) Is blending tea a manufacturing activity? If yes, what is its effect?
(iii) Is there any reason for making a distinction between packages weighing 27 Kgs. or less and those weighing in excess thereof?
Hon’ble High Court held that package tea is a distinct variety of tea from other verities and is commercially known as such. However, when the question came up whether the person who is packing the tea can be held to be carrying out manufacturing activity, Hon’ble High Court held that
In the instant case, the package which is wrapped by the petitioner does not change the nature or character of tea. As already stated above, the blended tea in loose is sent to the petitioner, who packs the same in different packages and sends it back to the manufacturer who in turn sells in the market, be it wholesale or retail. By this act, the petitioner is not indulging in any manufacturing activity relating to tea even though package tea is excisable item. The act/kind of package done by the petitioner is not excisable.
The Hon’ble High Court further clarified the purpose of the entry as follows:
But, if the manufacturer himself packs the tea in packages before clearance by the excise officials at the place of manufacturing, then the said package tea is chargeable to excise duty. To say, more clearly, that if the manufacturer of the tea seeks a clearance of the excise authorities as a loose tea, then it is exigible to the tax as leviable for loose tea. On the other hand, if the manufacturer seeks clearance of the package tea, the package tea is leviable with duty as distinct commodity than loose tea and like-wise, the instant tea also. But, such levies on distinct, items of tea as loose tea, package tea and instant tea had to emerge from the original manufacturing process and brought before the excise authorities at the factory premises for clearance and only at that point the said items of tea are chargeable distinctly and differently.
Applying the same ratio, in case of lose tea and tea packed into tea bags, it can also be contended that lose tea and tea packed into tea bags are definitely very much different commercial commodities in trade parlance and have been accorded two different HSN in the nomenclature. That different nomenclature is from the point of view of the supplier whether he is supplying tea as lose tea or tea in tea bags.
However, act of the applicant wherein he is supplying tea bags and stuffing the tea into tea bags cannot be said to be an act of manufacturing as the applicant is not changing the nature and character of tea.The fact is lose tea and tea in tea bags are different commodities but the activity of applicant for manufacturing tea bags and filling tea into tea bags does not changes the basic nature of tea but only makes it classifiable into different heading on the basis of its packing but not on account of nature of tea packed therein.
Conclusion: There might be differing interpretations, as merely because after the activity carried out by the supplier of service, product has fallen into a different HSN might not be sufficient for holding an activity as manufacturing as there are entries in GST wherein different tax rates have been accorded to packed and unpacked commodities, branded and unbranded commodities, goods being sold below or above a particular price. The matter is not free from litigation and might have differing views.