2019 (6) TMI 620 - AAAR - GST

Classification of services - services provided in packing of tea bags - rate of GST - composite services or not - challenge to AAR decision - HELD THAT - The activity of M/s. Vedica Exports Tea Pvt Ltd that is stuffing tea in pouches and supplying the said tea bags cannot be said to be an act of manufacturing as it has not changed the nature and character of tea. Manufacturing involves change or changes brought about by application of processes whereby the emerging product is a new and distinct commodity and commercially it can no longer be regarded as the original one, The activity of Respondent of filling tea into tea bags does not change the basic nature of tea but only makes it classifiable under a different heading on the basis of its packaging and not on account of the nature of tea packed therein. Actually. in tea bags blended tea leaves are put into special porous pouches and then stitched so that for making tea the bags need to be dipped in hot only. Tea bags offer a quick and user friendly way of making the beverage. First member opinion - Packing of tea bags in cartons is an ancillary service to the main service of making tea bags. Tea and tea bags are distinct and separate commercial products. Manufacturing of tea leaves and manufacturing of tea bags are completely separate processes. Processes like plucking, withering, wilting, disruption, oxidation, fixation, kill-green, rolling, shaping, drying, aging, curing or tea sorting are processes associated with manufacturing of tea and not tea bags. Tea bags have distinct character and use and rightly classified under Tariff item 0902 40 40. In view of above discussion it is held that the service offered by the Respondent to M/s. Hindusthan Unilever Ltd. is classifiable under Sl. No. 26 (i) (f) of the Notification No. 11/2017-CT(Rate) dated 28.06.2017, as amended vide Notification No. 31/2017-CT (Rate) dated 13.10.2017. and taxable @5% Second member opinion - Para 3 of Schedule II (Section 7) of CGST Act, 2017 sated that Any treatment or process which is applied to another person's goods is a supply of services and SAC sub-heading No. 9985 41 clearly includes that packaging of goods (in this case tea, a food product filled in pouches) for others and should be treated as Packaging Service classifiable under SAC 998541 taxable under Sl. No. 23 (iii) of Notification No. 11/2017 - CT (Rate) as amended. Thus the service offered by the Respondent to M/s. Hindusthan Unilever Ltd. is classifiable under SAC 9985 41 and taxable @ 18% under Sl. No. 23(iii) of the Notification No. 11/2017-CT(Rate) dated 28.06.2017. as amended. As the members of the West Bengal Appellate Authority for Advance ruling differ on the classification of the service supplied by the Respondent to M/s. Hindusthan Unilever Ltd.. it is deemed that no Advance Ruling can be issued in respect of the questions under Appeal as per provisions of section 101 sub-section (3) of the GST Act. Thus The Advance Ruling No. 36/WBAAR/2018-19 dated 28.01.2019 2019 (1) TMI 1489 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL is deemed to be not in operation.

Summary

Issues Involved:
1. Classification of the services provided in packing of tea bags.
2. Rate of GST on the said service.

Detailed Analysis:

Issue 1: Classification of the services provided in packing of tea bags

The West Bengal Authority for Advance Ruling (WBAAR) initially ruled that the respondent provides a composite supply to Hindusthan Unilever Ltd. (HUL), where the principal supply is the manufacturing of tea bags from physical inputs owned by HUL. This service was classified under SAC 9988 and deemed taxable at 5% under Sl. No. 26(f) of Notification No. 11/2017-CT (Rate) dated 28.06.2017.

The appellant argued that the WBAAR erroneously classified the transaction as a composite supply. According to the appellant, the respondent merely provides a single service of packaging, as HUL retains ownership of all materials. The appellant emphasized that the respondent's activity does not result in a new product with a distinct name, character, and use, thus it should not be classified as manufacturing.

The respondent countered by stating that their service involves assembling materials on machines, including blended tea leaves and other inputs received from HUL. They initially classified it as packaging service under SAC 998540 and charged GST at 18%. However, based on HUL's communication, they later classified it under Sl. No. 26(f) of the Rate Notification, taxable at 5%.

Issue 2: Rate of GST on the said service

The WBAAR's ruling classified the service under SAC 9988, taxable at 5% under Sl. No. 26(f) of the Rate Notification. The appellant contested this, arguing that the service should be classified under SAC 9985 as packaging service, taxable at 18% under Sl. No. 23(iii) of the Rate Notification.

Separate Judgments by Members:

Ms. Smaraki Mahapatra's Judgment:

Ms. Mahapatra opined that the process of making tea bags involves putting blended tea leaves into special porous pouches, which are then stitched. This process results in a new product with a distinct name, character, and use. She argued that tea bags are a distinct commercial product from loose tea and should be classified under Tariff item 0902 40 40. Therefore, she upheld the WBAAR's ruling that the service is classifiable under Sl. No. 26 (i) (f) of Notification No. 11/2017-CT (Rate) and taxable at 5%.

Mr. A.P.S Suri's Judgment:

Mr. Suri disagreed, stating that the activity of filling tea into tea bags does not change the basic nature of tea but only makes it more suitable for handling and retailing. He argued that the process does not result in a new product with a distinct name, character, and use. He classified the service under SAC 9985 41 as packaging service, taxable at 18% under Sl. No. 23(iii) of Notification No. 11/2017-CT (Rate).

Conclusion:

Due to the differing opinions of the members, no Advance Ruling could be issued. As per section 101 sub-section (3) of the GST Act, the Advance Ruling No. 36/WBAAR/2018-19 dated 28.01.2019 is deemed to be not in operation. Copies of the order were sent to both the appellant and the respondent for their information.