GST update No 321 on cotton seed is not an agriculture produce

It is well known fact that agriculture sector is one of the most sensitive sectors wherein the levy of GST is exposed to litigations as the ultimate intention of Government is to grant exemption to this sector from levy of GST. However, the availment of exemption in case of agriculture produce is debatable due to the definition stated in GST Laws. Recently, one case was reported before Punjab AAR in the case of M/S KAKA RAM HARI CHAND. The decision imparted in this case is subject matter of discussion of our present update.
The applicant is engaged in business of cotton seeds “banaula” for which they avail the services of GTA wherein GST is payable by the recipient under reverse charge mechanism. The applicant raised a question as regards to applicability of exemption notification in the present case wherein tax on GTA is exempted in relation to “agriculture produce” vide Entry No.21. It was observed that the query of applicant as regards to availability of exemption notification is squarely covered within ambit of Section 97 of CGST Act, 2017 on which appropriate ruling can be offered by the AAR.The applicant submitted that they are engaged in trading of cotton seeds for which they avail services of GTA wherein the tax is payable under reverse charge mechanism. The service of GTA with respect to agriculture produce is exempt. Further, as per the exemption entry, Punjab Agriculture Produce Markets Act in its Schedule at S.No. 15 incorporates cotton seeds “banaula” as an agriculture produce. Reference was drawn to decision of Delhi CESTAT in the case of R.K. & Sons v/s CCE Rohtak wherein it was stated that “ginned cotton” is covered under “agriculture produce”. Further, as per the survey, other suppliers were also having same practice as regards to applicability of GST on the transportation of said commodity.The authority submitted that S. No. 21 of exemption notification provides exemption for transportation of agriculture produce by GTA. The traders are considering oil seeds as agriculture produce and fail to pay tax on freight amount under RCM. However, the department disagrees with the opinion of taxpayers and states that they are required to pay tax on freight on purchase of cotton seeds. Further, the definition of agriculture produce is very restrictive in nature. The exemption is provided only to those producers which are directly harvested from the farms on which no processing is done to make it marketable. In the present case, the cotton seeds are derived from the cotton plant which consists of lint and seed together known as “seed cotton”. The seed cotton is ginned for extraction of fiber and cotton seed from it. In the process of ginning, cotton is first dried to remove moisture and then cleaned to remove any foreign particles and processed further. Therefore, cotton seed is obtained from seed cotton by way of industrial processing called ginning and hence, it is not an agriculture produce.
There had been instances wherein different statues are interpreted in different manner and the interpretation depends on objectives of particular statue with which it is enacted. Therefore, if cotton seeds are interpreted as agriculture produce under any other Acts and not under GST Law, due to the fact that GST Law has specific definition of agricultural produce for granting exemption.The above decision is a setback for the trade and industry wherein the cotton seeds cannot be termed as agriculture produce. Although it is well established that advance rulings are applicable only on the applicant who sought it and not on any other applicant. However, it is also well known that the advance ruling delivered are generally pro-revenue. The dispute as regards whether a particular commodity is agricultural produce or not was prevalent in Service Tax Regime too. To illustrate- there was lot of dispute as to whether rice is agricultural produce or not as it required lot of processing before it could be marketable. The government had resolved the dispute by granting specific exemption to transportation and storage services of rice. However, the ripples of erstwhile litigation can be observed in GST era too.

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GST update No 321 on cotton seed is not an agriculture produce

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