2019 (1) TMI 1489 - AAR - GST

Classification of services - Packing of tea bags - rate of GST - composite supply - principal supply - whether the Applicant s services to HUL are classifiable as packaging service or manufacturing service or both? - Held that - 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 - It is evident, therefore, that the Applicant s service to HUL for manufacturing tea bags is service for manufacturing a product classified under Tariff item 0902 40 40, where physical inputs are owned by the recipient - The supply is, therefore, to be classified under SAC 9988 and taxed under Sl No. 26(f) of the Rate Notification. The 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 (as may be ascertained from the invoices). 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. Ruling - The Applicant makes a composite supply to Hindustan Unilever Ltd, where the service of manufacturing tea bags from the 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. Applicability of this Ruling with respect to other recipients is subject to the specific nature of the contracts with them.

Summary

Issues:
Classification of services provided in the packing of tea bags and the rate of GST applicable.

Analysis:
1. The Applicant, a contract packer of tea bags, sought a ruling on the classification of services provided in packing tea bags and the applicable GST rate. The Advance Ruling Authority admitted the application under Section 97(2)(a) of the GST Act as the questions raised were not previously decided by any authority, and no objection was raised by the revenue officer.

2. The Applicant's services involved assembling materials, including blended tea leaves, and classifying it as packaging service under SAC 998540. However, a recipient, HUL, suggested taxing the service under Sl No. 26(f) of the Rate Notification, applicable to manufacturing services on physical inputs owned by others for food products. The ruling focused on the specific service provided to HUL, considering the Agreement and flow chart submitted by the Applicant.

3. The Agreement between the Applicant and HUL outlined that the Applicant would manufacture and pack tea bags using raw materials owned by HUL. The processes involved in manufacturing tea bags indicated that the physical inputs were owned by HUL, making it a manufacturing service. The Applicant's service included not only manufacturing tea bags but also packaging them, forming a composite supply where manufacturing tea bags was the principal supply.

4. The definition of manufacture under the GST Act involves processing raw materials resulting in a new product. Tea bags, being distinct from tea leaves and requiring no further processing for consumption, were classified as a new product under a specific tariff item. The Applicant's service to HUL for manufacturing tea bags from HUL's physical inputs was deemed a manufacturing service under SAC 9988 and taxed under Sl No. 26(f) of the Rate Notification.

5. The ruling concluded that the Applicant made a composite supply to HUL, where manufacturing tea bags from HUL's physical inputs was the principal supply. The service was classified under SAC 9988 and taxed at a 5% rate under the relevant Notification. The applicability of the ruling to other recipients depended on the specific nature of their contracts.

6. The ruling's validity was subject to the provisions under Section 103(2) of the GST Act unless declared void under Section 104(1).