GST Caselaw

#GSTCase-78-Meaning of “agriculture produce” under GST-: One of the most comprehensive decision on the issue by AAR Rajasthan (upheld by AAAR)

#GSTCase-78-Meaning of agriculture produce under GST-: One of the most comprehensive decision on the issue by AAR Rajasthan (upheld by AAAR)

By CA Arpit Haldia  

 

Sardar Mal Cold Storage & Ice Factory [2018] 95 taxmann.com 122 (AAR- RAJASTHAN) (Upheld by AAAR in Sardar Mal Cold Storage & Ice Factory [2019] 103 taxmann.com 218 (AAAR-RAJASTHAN))

 

 

  1. Query

Whether goods which comes for storage will come under the definition of agricultural produce or not & whether the supply of Cold Storage services by the applicant firm to various products as mentioned herein below attracts Nil rate of duty or not.

 

  1. Facts

That the applicant is the owner of the cold storage house and, therefore, provides storage and warehousing facilities to variety of agriculture produce.

 

  1. Observation by AAR

 

  • Relevant Entry

Entry No. 54 of Notification No. 12/2017-CT(Rate), dated 28.06.2017 exempts Services relating to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products or agricultural produce by way of— 

(e)          loading, unloading, packing, storage or warehousing of agricultural produce;

 

  • Meaning of Agriculture Produce

Agricultural Produce’ as per the definition given in above the Notifications should necessarily have three essential elements:

 a) It must be a produce out of cultivation of plant and rearing of all life forms of animals.

b) On which no further processing is done or such processing is done as usually done by a cultivator or producer which does not alter its essential characteristics i.e. produce must broadly retain its physical and chemical form/constitution.

c) Most importantly the processing done should be such as is usually done by a cultivator or producer which should only help it to attain marketability at primary market i.e. the definition limits the scope of processing and allows only those activities which helps the produces to attain the condition of its first marketability in primary market. After it attains the condition of first marketability the definition restricts all other further processes on the produce for further sale to be termed as “Agricultural Produce”. Once the products attains its first marketability for the primary market all other subsequent processes on produce leading to value addition and subsequent sale belong to the realm of secondary market thereon refraining the produce to fall under the category of ‘Agricultural Produce’ as defined in Notification.

 

  • Questions basis upon which decision was made by AAR

Whether goods fall under category of agricultural produce or not were analyzed on basis of the following points:

a) Are the goods mentioned in Annexure A are those goods which are being sold by farmers/cultivators in Primary Market.

b) Are the activities/processing done on these goods as mentioned in Annexure A are of those nature which are usually done by the farmers/Cultivators at farm level or instead are being done by skilled labour by help of certain tools or machines following specific procedures.

c) Is there a considerable value addition brought about by the processing of goods.

 

  • Whether Following products are Agriculture produce or Not

 

Group A:

Name of the Commodity: Fennel (Saunf), Coriander (Dhaniya), Cumin Seeds (Jeera), Carom Seeds (Ajwain), Fenugreek Seeds (Kasoori Methi), Mustard Seeds (Sarson), Brown Mustard Seeds (Rai), Nigella Seeds (Kalonji), Poppy Seeds (Posara Dana)

Contention of the Applicant:

Being product of agriculture, it contains certain small pieces of stones. Dust, mud and other impurities etc. Produce are required to be clean therefore aforementioned impurities are removed by cleaning which is either done by the cultivator or traders before it comes for storage purpose.

The products which are sold by cultivator and stored at the applicant’s cold storage, remains the same agriculture product except the difference that farmers sold the goods with small pieces of stones, dust., mud., impurities etc. and the trader who bought the goods and arranges for the cold storage of the goods gets it cleaned prior to storage so that unnecessary storage of waste product should not be done.

Observation by AAR:

If no further processing is done on above mentioned goods or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes marketable for primary market then the same would fall in the definition of agricultural produce given in aforesaid Notification and exemption would be available. However if any processing is done on above products as is not usually done by a cultivator or producer at farm level such as cleaning, sorting, Colour-sorting, grading, cutting, splitting, drying, packing etc. using specialized machine or equipment as is not usually done by a cultivator or producer at farm level, then it will fall outside the definition of agricultural produce as given in the aforesaid Notification.

Observation by AAAR:

We find that the process of cleaning adds to the value for farmer when the product is taken for sale in the primary market. And this process can be undertaken at the farm level also. Hence Services of storage or warehousing of such produce would remain exempt under the above said notifications No. 11/2017-Ccntral Tax (Rate) and 12/2017- Central Tax (Rate) both, dated 28.06.2017. However if any processing is done on above products as is not usually done by a cultivator or producer at farm level, then these would fall outside the definition of agricultural produce as given in the aforesaid Notification No. 11/2017-Central Tax (Rate).

 

Group B:

Name of the Commodity: Turmeric (Haldi), Dried Ginger (South), Dates (Khajoor), Dry Dates (Chhuhara) 

Contention by the Applicant

In order to make these goods marketable both cultivator or farmer undertakes process of preserving by way of polishing or drying of the product which doesn’t change the essential character of the products in question but makes it sustainable& marketable. The traders buy these goods and make them available for cold storage. Sometimes traders purchase raw form from farmers and get it polished to make it marketable and get it stored. 

Observation by AAR:

After harvesting from fields the produce is brought to primary market (mandis) as fresh green/raw turmeric and ginger where it is sold by farmers/cultivators. Further drying and polishing of them is a specialized process not usually carried out by cultivator which converts them into dry haldi (masala) and into dried ginger (Sonth. kirana item) hence changing the essential characteristic. Similarly dates and dry dates also after being sold in primary market go under specific process of sorting, cleaning, drying and polishing which is not usually done by cultivator himself. Hence processed goods mentioned in Group B do not belong to produce which are being sold in primary market and processes involved lead to considerable value addition indicating change in essential characteristics. Hence, goods mentioned in Group B do not fall under the definition of “Agricultural Produce’.

Observation by AAAR:

We find that the cultivator brings green/raw turmeric and ginger to the mandis. further drying and polishing of them is a specialized process not carried out by cultivator which converts them into dry haldi (masala) and into dried ginger (sonth). These processes adds to the marketability and value of these products and makes them suitable for sale directly to the consumer. Similarly dates and dry dates also after being sold in primary market go under specific process of sorting, cleaning, drying and polishing which is not done by the cultivator. Hence processed turmeric, Ginger. Dates and Dry dates all fall outside the definition of agriculture produce. Hence Services of storage or warehousing of such produce would not remain exempt under the above said notifications No. 11/2017-Central Tax (Rate) and 12/2017-Central Tax (Rate) both, dated 28.06.2017.

 

Group C:

Name of the Commodity:  Tamarind (Imli)

Contention of the Applicant:

Tamarind are primarily produced or cultivated by small farmers who remove the shell or the upper part and bring the inner part (which is the consumable part ofTamarind) for sale.
The Tamarind may or may not come for storage with seeds.

Observation by AAR:

Tamarind when harvested from tree consists of brittle outer shell which encapsulates the pulp and enclosed seed which in turn are sold by farmer in primary market. Shelling and removal of seeds to obtain the pulp is usually done by specially designed machines. Hence inner pulp without shell and seeds do not fall under the definition of Agricultural Produce’ as it loses its essential characteristics.

Observation by AAAR:

We find that in case of tamarind, the tamarind pod is cracked open, string (fibre) are removed and kernel is taken out. Thus, the resultant tamarind (ambali foal) also do not fall under the definition of agriculture produce as the shelling and removal of seeds to obtain the pulp is usually done by specially designed machines. Hence inner pulp without shell and/or seeds do not fall under the definition of ‘Agricultural Produce’ as it loses its essential characteristics. Therefore, services of storage or warehousing of such produce would not remain exempt under the above said notifications No. 11/2017-Central Tax (Rate) and 12/2017- Central Tax (Rate) both, dated 28.06.2017.

 

Group D:

Name of the Commodity: Dry Mango (Amchur), Kathodi, Dry Gooseberry (Dry Amla), Dry Water -Caltrop/Water Cashewnut (SukhaSingadha), Dry Peas (SukhaMatar)

Contention of the Applicant:

The products that come for cold storage purpose are in a dry form. The cultivator or farmer who produces or grows the product does certain essential processing like washing, drying, cutting so that products become marketable at the end of the farmers.

The cultivators bring these goods in a dry/cut form to the Mandis and thereafter goods are bought by the traders in the same form and shape as it is bought by the farmers to the Mandi. The traders who bought the goods don’t process it any further before bringing the goods for storing the goods at cold storage.

Observation by AAR:

Dry mango (Sukha Amchur) is obtained after processing green/raw mango (Kacchi Karrie). Kathodi (Sukhi Kathodi) is obtain after processing green kathodi, Dry Gooseberiy (Sukha Amla) is obtained from processing of green Gooseberry (Kucha Amla). Dry Water Caltrop/Water Cashewnut (dry Singadha) is processed into Sukha Singadha from Hara/Gila Singhda , Dry Peas (Sukha Matar) is obtain from processing of green peas (Hara matar).

Green/raw mango, green kathodi. kachha amla. gila Singhada. hara Matar are harvested by farmer fresh and brought to primary market(mandis) from where its bought by traders/processors who intern under take certain specific processes such as washing, cutting, shelling, cleaning, drying, packing etc. These processes lead to a considerable value addition as compared to that of product sold in primary market which is in itself reflection of change in there essential characteristic hence the above cannot be characterized as Agricultural produce.

Observation by AAAR:

We find that all the above-mentioned produces are obtained from processing of their green counterparts. Farmers bring green or raw produce in the market which in turn is purchased by the Traders who then undertake certain processes such as washing, cutting, shelling, cleaning, drying, packing etc. These processes lead to a considerable value addition as compared to that of product sold in primary market which is in itself reflection of change in there essential characteristic hence the above cannot be characterized as Agricultural produce and Services of storage or warehousing of such produce would not remain exempt under the above said notifications No. 11/2017-Central Tax (Rate) and 12/2017- Central Tax (Rate) both, dated 28.06.2017.

 

Group E

Name of the Commodity: Cinnamon (Dalchini), Gum(Gond, Arjuna Chhal

Contention of the Applicant:

The products in a question are bark (Outer most layer of the wood) of the trees. The product always retains its natural shape as the bark is outermost part of the trees and without any processing it is ready to use or consume. It comes to market for sale and in a same shape/form as it is obtained by the farmers and also comes to storage houses in a same form as it is purchased from farmer as no processing is require. There is no intermediary process is ever done or require right from the point of peeling of the skin till the point of consuming.

Observation by AAR:

Cinnamon (Species) is obtained from the inner bark of a tree, species Genus CINNANOMUN. Immediately after harvesting the bark has to undergo a specific process involving hammering scrapping, drying, cutting, fumigation,packing etc. These processes are done by skilled labour and nearly accounts for 60% costs of the final product. After harvesting these process are not done by farmers but arc being done by skilled labour at specific plants set up to extract bark from the branches harvested..

Gum (Gond) :- Raw gum is collected by farmers or gum collectors from outer bark of Acacia tree which after collection is sold in primary market. Later in industrial plants raw gum is cleaned, refined, powered and made in granular form fit to be consumed in foods industries.

Arjuna Chaal (Arjun Chaal):- Arjuna Chaal is got from tree, Arjun Arminalia. The bark also goes under certain processing before it is fit to be used in Ayurvedic Industries.Hence as per definition they too don’t fall under the category of Agricultural Produce.

Observation by AAAR:

We find that the affairs are not so simple as has been described by the Appellant. Cinnamon (Dalchini) is obtained from the inner bark of the tree of species Genus CINNANOMUN. It undergoes a specific process involving hammering, scrapping, drying, cutting, fumigation, packing etc. After harvesting these processes are not done by farmers but are being done by skilled labour at specific plants set up to extract bark from the branches harvested. Raw gum is collected by the farmers or gum collectors from outer bark of Acacia tree. It is not sold as such to the consumer. In industrial plants raw gum is cleaned, refined. powered and made in granular form. fit to be consumed by the consumers. Arjuna Chaal is got from the tree. Arjun Trminalia. The bark also undergoes certain processing before it is fit to be used in Ayurvedic Industries. This processing can’t be undertaken at the farm level. Hence the above products don’t fall under the category of Agricultural Produce and Services of storage or warehousing of such produce would not remain exempt under the above said Notifications No. 11/2017-Central Tax (Rate) and 12/2017- Central Tax (Rate) both, dated 28.06.2017.

 

Group F-

Name of the Commodity: Groundnuts (Mungphali), Copra Gola (Coconut)

Contention of the Applicant:

Groundnut and coconut as globally known are products with outer shell which has no use. The farmers bring the entire product which includes nut. and its outer shell to the market. The trader only gets the outer shell remove for the convenience of storage of the goods but it can be easily appreciated that the Groundnut and coconut are always known purchase, grown for the nut and its outer shell has no use whatsoever. So. removal of outer shell either at the hands of cultivator or at the hands of the trader will never bring any change in its essential character or marketability of the Groundnut and coconut The goods are always stored in its form without any processing ever done right from the stage of cultivator till storage.

The removal of outer shell can never be categorised by any stretch of imagination as a process as it never contributes either to marketability or changing the essential character of the agriculture produce of Groundnut and Coconut.

Observation by AAR:

Groundnuts (Mungfalli) is harvested from the farms and sold with outer shells in primary market. Later by help of machines outer shell is removed and groundnut seeds are separated.

Same is the case with coconut(copra gola) which is sold in Primary market by the cultivator as commonly known as Nariyal with outer fibrous husk or coir covering. Specialized plants are set up to remove the outer coir (dehusking) and inner hard shell (deshelling).

Hence in both the cases farmers are not usually involved in processing of product. Thus groundnuts without shell commonly called as Singhdana (ground mil seeds) and coconut without shell known as Copra gola do not fall into catogary of Agricultural Produce.

Observation by AAAR:

We can’t appreciate the stand taken by the Appellant. There is no need of removing outer shell for selling the groundnut or coconut in the primary market. Removal of outer shell makes these capable for sell in the secondary market also further this process is not undertaken at the farm. Only by help of machines or specialized plants, outer shell is removed. Thus, the above produce without shell do not fall into the category of Agricultural Produce and Services of storage or warehousing of such produce would not remain exempt under the above said Notifications No. 11/2017-Central Tax (Rate) and 12/2017- Central Tax (Rate), both dated 28.06.2017

 

Group G

Name of the Commodity: Dry fruits such as Fig (Anjeer), Almond (Badaam). Walnuts (Akhrot), Pistachio (Pista) . Lotus Seeds Pop (Phool Makhana) etc.

Contention of the Applicant

The product in a question is product with outer shell which has no use. So, removal of outer shell either at the hands of cultivator or at the hands of the trader will never bring any change in its essential character or marketability of the product. The goods are always stored in its form without any processing ever done right from the stage of cultivator till storage. The removal of outer shell can never be categorised by any stretch of imagination as a process as its never contributes either to marketability or changing the essential character of the agriculture produce.

Observation by AAR:

Dry fruits as the name suggests, is obtained by drying of fresh fruits or other plant products. All of them are harvested and sold in primary market by Cultivator as raw and green. These are then purchased by traders and processors who undertake a very specific time-consuming process such as cleaning, deshelling, specialized drying, sorting, grading, packing etc.

Products mentioned in Group G are processed by which the loose their essential characteristics Hence do not fall under category of Agricultural Produce.

Observation by AAAR:

We can’t subscribe to the theory advanced by the Appellant. These products arc sold in primary market by Cultivator as raw and green. Various processes like cleaning, deshelling. specialized drying, sorting, grading, packing etc. are then undertaken before these goods become ready for consumption by the consumer. These are not the processes which can be undertaken at the farm. These processes substantially add to the value of the produce. Hence the above produce do not fall under category of Agricultural Produce and Services of storage or warehousing of such produce would not remain exempt under the above said notifications No. 11/2017-Central Tax (Rate) and 12/2017-Central Tax (Rate) both, dated 28.06.2017.

 

  1. Held:

Taxability of the supply of Cold Storage services in respect of goods as mentioned under Group A to Group G is as follows :-

a) Goods mentioned under Group A fall under the definition of Agricultural Produce in terms of the aforesaid notification and so supply of cold storage service in relation to these is exempt from the levy of GST . However if and processing is done on these products as is not usually done by a cultivator or producer at farm level , then these would fall outside the definition of agricultural produce as given in the aforesaid Notification and in that cast-supply of cold storage service in relation to these would remain chargeable to GST.

b) Goods mentioned under Group B to G are not Agricultural produce in terms of the aforesaid notification and so the supply of cold storage service in relation to these would remain chargeable to GST.

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