Whether the activity of Packing of Tea bags can be classified as a Manufacturing service under SAC 9988 (Manufacturing services on physical inputs owned by others).

PJ/Case Law/2018-2019/3511

Case:Vedika Exports Tea Pvt Ltd
Citation:ARN: AD191218000038C, Order No. 36/WBAAR/2018-19
Issue:Whether the activity of Packing of Tea bags can be classified as a Manufacturing service.
Brief facts:The Applicant, Vedika Exports Tea Pvt Ltd is registered with the GSTN 19AAACV8586B1Z1, is a contract packer of tea bags. The process of service undertaken by the Applicant involves assembly of materials on machine, including blended tea leaves and other inputs received from the recipient of the service. The applicant classifies this activity as packaging service under SAC 9985 and charge GST under Sl. No. 23 (iii) of Notification No. 11/2017 – CT (Rate). The Applicant received a communication from one of the recipients of the services provided, namely, M/s Hindustan Unilever Ltd. HUL was of the view that the service should be taxed under Sl No. 26(f) of the Rate Notification. Sl. No. 26(f) of the Rate Notification applies to manufacturing service on physical inputs owned by others (SAC 9988) for food and food products.
Appellant’s contention:The appellant stated that as per its agreement with HUL, the Applicant shall manufacture and/or process and pack tea bags of Taj Mahal, Lipton and Brook Bond brands at his plants at 17 Taratala Road, Kolkata – and BBT Road, Kolkata.
Respondent’s Contention and Reasoning of Judgement: The Respondent has undergone an analysis of the appellant’s agreement with HUL. It observed that as per the Agreement, 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. The ownership and property in the materials so delivered shall at all times vests in and belong exclusively to HUL. The Applicant has no liberty to apply such materials for any purpose other than processing and packing of the products for HUL. 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. HUL will also bear the cost of waste disposal. It is, therefore, evident that the processes undertaken are on physical inputs owned by HUL. The flow chart of the processes undertaken at the appellant’s manufacturing unit show that the 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.
As per the de Section 2(72) of the GST Act manufacture refers to 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. Filling goods in pouches is usually a packaging activity because it enables delivery of the same goods to the consumer in the right quantity and quality, depending upon the market dynamics. Consumption of the goods so packed requires they be taken out of the pouches. However, 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.
Since the product is classifiable as a commercial item, it is now clear that the Applicant’s service to HUL for manufacturing tea bags is service for manufacturing a product classified under Tariff item 0902, where physical inputs are owned by the recipient. The supply is, therefore, to be classified under SAC 9988
(Manufacturing services on physical inputs owned by others) and taxed under Sl No. 26(f) of the Rate Notification. The Applicant also provides service of packaging the manufactured tea bags in cartons, wraps them up and put them in specially designed boxes. HUL owns and provides all such packaging materials also. These two services (service for manufacturing tea bags and the service for packaging of the manufactured tea bags) are supplied in terms of a single contract and at a single price. The agreement 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.
Decision: The activity of Packing of Tea bags will be classified as a Manufacturing service.
Comment: The gist of the case is that the activity of Packing of Tea Bags will be classified as a Manufacturing services on physical inputs owned by others (SAC 9988) since this activity results in the manufacture of a Commercial item i.e; the tea bag, which is absolutely different from the input which was used in manufacturing it, be it in terms of its Name, character and of course its use. However the appellant also further packs these Tea bags into cartons and wraps them up before it is supplied to HUL. This Service of packaging of tea bags in cartons and wrapping is ancillary to manufacturing tea bags. Thereby, the service that is provided by appellant to HUL is a composite supply consisting of two taxable services, where the service of manufacturing tea bags from the physical inputs owned by HUL is the principal supply.

Prepared by: Adit Gupta

Comments

PJ/Case Law/2018-2019/3511

Post a Comment

Query