2023 (3) TMI 786 - AAR - GST

Reverse charge mechanism or not - purchase of raw tobacco from farmer (including naturally broken tobacco known as 'tobacco leaves or tobacco bhukko') - rate of tax in case of coating process is done on unmanufactured tobacco, if the applicant carried out the process of coating on the tobacco belonging to other person (job work basis) whether registered or otherwise. HELD THAT - The entire process undertaken at the fanners end and at the applicant's end is discussed supra and is not being repeated for the sake of brevity. Of the two questions posed in Sr. No. 14, in Form GST ARA-01, we find that the first question is whether the applicant is liable to discharge GST under reverse charge mechanism RCM , in case of purchase of raw tobacco tobacco leaves or bhukko from farmer. The applicant in his summary clearly states that according to them they are liable for GST under RCM @ 5% - in terms of Notification No. 4/2017-Central Tax (Rate), in case of intra state supply of tobacco leaves, falling under 2401 by an agriculturist to a registered person, GST is to be paid under RCM by the recipient. Now agriculturist is defined under section 2(7) of the CGST Act, 2017 to mean an individual or a Hindu Undivided Family, who undertakes cultivation of land by own labour, or by the labour of family, or by servants on wages payable in cash or kind or by hired labour under personal supervision or the personal supervision of any member of the family. Therefore, in case of purchase of tobacco leaves/bhukko from the agriculturist, the applicant is liable to pay GST on RCM basis at 5% 2.5% CGST and 2.5% SGST in terms of notification No. 1/2017-Central Tax (Rate), Sr. No. 109 of Schedule 1. The applicant is liable to pay GST on forward charge basis at 5% 2.5% CGST and 2.5% SGST in terms of notification No. 1/2017-Central Tax (Rate), Sr. No. 109 of Schedule I, subject to the condition that they are engaged in trading of tobacco leaves/bhukko, procured from agriculturist, on as such basis i.e. without undertaking any further process on the same. Rate of GST in case of sale/supply of coated tobacco broken leaves in gunny bag - HELD THAT - The applicants case is that this coating of natural gum does not amount to manufacture as defined under Section 2(72) of the CGST Act, 2017. Under the CGST Act, 2017, it is found that manufacture is defined as processing of raw material/ inputs in any manner which results in emergence of a new product having a distinct name, character and use. The applicant has stated that no new product emerges post coating. The applicant has also relied upon case laws to substantiate his plea. Though the applicant has undertaken the above process of coating, consequent to the cleaning process, removal of unwanted substances thereafter cutting and grading of leaves procured from the agriculturist, in terms of the HSN notes, it still remains an unmanufactured tobacco. This is more so because even in terms of section 2(72) of the CGST Act, 2017, which defines manufacture, since no new product emerges post the coating process, we hold that the product is classifiable under CTH 2401 as ''unmanufactured raw tobacco leaves'. We further hold that the applicant is liable to pay GST at 28% 14 % CGST and 14 % SGST in terms of notification No. 1/2017-Central Tax (Rate), Sr. No. 13 of Schedule IV. The applicant has also sought a ruling in respect of job work of coating done on the tobacco leaves by them in respect of tobacco leaves supplied by other registered persons. CBEC vide its circular No. 126/45/2019-GST has already clarified that entry at item (id) covers only job work services as defined in section 2 (68) of CGST Act, 2017, that is, services by way of treatment or processing undertaken by a person on goods belonging to another registered person. In terms of the said clarification we hold that the applicant is liable for payment of GST at the rate of 12 % (6% CGST and 6% SGST) in terms of notification No. 20/2019-C.T. (Rate), dated 30-9-2019 on the job work process of coating done in respect of tobacco leaves supplied by other registered persons.

Summary

Issues Involved:

1. Applicability of Reverse Charge Mechanism (RCM) for purchase of raw tobacco from farmers.
2. Rate of tax on the coating process of unmanufactured tobacco.
3. Classification and tax rate for trading and supply of coated tobacco.
4. Tax rate on job work services for coating tobacco leaves supplied by other registered persons.

Summary:

1. Reverse Charge Mechanism (RCM) for Purchase of Raw Tobacco:
The applicant sought a ruling on whether the purchase of raw tobacco from farmers, including naturally broken tobacco known as 'tobacco leaves or tobacco bhukko', is covered under the reverse charge mechanism (RCM). The Authority ruled that in terms of Notification No. 4/2017-Central Tax (Rate), GST is to be paid under RCM by the recipient at 5% (2.5% CGST and 2.5% SGST) when purchasing from an agriculturist. The definition of "agriculturist" under section 2(7) of the CGST Act, 2017 was also considered.

2. Rate of Tax on Coating Process of Unmanufactured Tobacco:
The applicant queried the rate of tax applicable if they carried out the coating process on unmanufactured tobacco. The Authority concluded that the process of coating with natural edible gum does not amount to manufacture as defined under Section 2(72) of the CGST Act, 2017, as no new product emerges. The coated product remains classified under CTH 2401 as "unmanufactured raw tobacco leaves". The applicable GST rate was determined to be 28% (14% CGST and 14% SGST) in terms of notification No. 1/2017-Central Tax (Rate), Sr. No. 13 of Schedule IV.

3. Classification and Tax Rate for Trading and Supply of Coated Tobacco:
For trading of procured raw tobacco leaves in leaf form or broken form without any further process, the applicant is liable to pay GST at 5% (2.5% CGST and 2.5% SGST) on a forward charge basis. However, if the coated tobacco is supplied in gunny bags with the applicant's name printed on them, it would attract GST at 28% (14% CGST and 14% SGST) along with a 71% compensation cess as per notification No. 1/2017-Compensation Cess (Rate) dated 28.6.2017 (Sr. No. 5).

4. Tax Rate on Job Work Services for Coating Tobacco Leaves:
The applicant sought clarification on the tax rate for job work services involving the coating process on tobacco leaves supplied by other registered persons. The Authority referred to Circular No. 126/45/2019-GST and held that such job work services are liable for GST at the rate of 12% (6% CGST and 6% SGST) as per notification No. 20/2019-C.T. (Rate), dated 30-9-2019.

RULING:

1. RCM on Purchase from Agriculturist: GST at 5% (2.5% CGST and 2.5% SGST) under RCM.
2. Forward Charge on Trading of Raw Tobacco: GST at 5% (2.5% CGST and 2.5% SGST) if no further processing is done.
3. Supply of Coated Tobacco: GST at 28% (14% CGST and 14% SGST); if supplied in gunny bags with the applicant's name, an additional 71% compensation cess applies.
4. Job Work Services: GST at 12% (6% CGST and 6% SGST) for coating tobacco leaves supplied by other registered persons.