COTTON SEED IS NOT AGRICULTURAL PRODUCE

[Mr. M. GOVINDARAJAN]

Agricultural produce

The expression ‘agricultural produce’ is defined under the Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017 as any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fiber, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market.

Sl. No. 21 of the said Notification provides exemption for the following services provided by a goods transport agency, by way of transport in a goods carriage, under heading 9965 or 9967-

1. agricultural produce;
2. goods, where consideration charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees; (omitted by Notification No.04/2022-Central Tax (Rate), dated 13.07.2022, with effect from 18.07.2022)
3. goods, where consideration charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred and fifty; (omitted by Notification No.04/2022-Central Tax (Rate), dated 13.07.2022, with effect from 18.07.2022)
4.  milk, salt and food grain including flour, pulses and rice;
5. organic manure;
6. newspaper or magazines registered with the Registrar of Newspapers;
7. relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap; or
8. defence or military equipments.

Cotton seed – Agricultural Produce?

IN RE: M/S. AHUJA INDUSTRIES - 2022 (10) TMI 776 - AUTHORITY FOR ADVANCE RULING, PUNJAB, the applicant is engaged in the business of receiving cotton seeds ‘Banaula’, after being transported by Goods Transport Agencies, classifiable under Chapter Heading 9965/9967 and the tax is payable by the recipient under reverse charge mechanism.  The applicant filed an application before the Authority for Advance Ruling seeking advance ruling on the following questions-

• Are cotton seeds ‘Banaula’ included in the list of agricultural produce for exemption in GTA services  under Notification No. 12/2017- Central Tax (Rate), dated 28.06.2017? (Tariff heading 9965/9967)
• It not, what is the rate applicable on the applicant for GTA services in respect of cotton seeds?

The applicant submitted the following before the Authority for Advance Ruling-

• The GTA Services in respect of agricultural produce is exempted under Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017.
• The expression ‘agricultural produce’ is defined under the said Notification as any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fiber, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market.
• As per the said Notification ‘Agricultural Marketing Produce Committee or Board’ was constituted under State law for the time being in force for the purpose of regulating the marketing of agricultural produce.
• Section 2(a) of ‘The Punjab Agricultural Produce Markets Act, 1961’ in its schedule includes the cotton seed ‘Banaula’ under Sl. No. 15 as an agricultural produce.
• Exemption has been given to the services by any Agricultural Produce Markets Committee or Board or services provided by a Commission agent for sale or purchase of said ‘agricultural produce’ vide Entry No. 54(g) of the said Notification.
• The definition of the expression ‘agricultural produce’ is common to both the entries – 21(a) and 54(g) even though they are different from one another.
• The said cotton seeds fall in the ambit of expression ‘for …… raw material’ as used in the definition of ‘agricultural produce’ as given in the said Notification.
• As per the information obtained through RTI, no person similarly situated in the entire country is paying GST on the cotton seed ‘Banaula’.

The Revenue did not agree with the contentions of the applicant and contended the following before the Authority for Advance Ruling-

• The traders are considering oil seeds as agricultural produce and not paying tax on the freight element under RCM.
• The tax payers are required to pay tax on the freight element of cotton seeds.
• The definition of the expression ‘agricultural produce’ is very restrictive in nature.
• Exemption is provided to only to those producers which are directly harvested from the farms or on which such processing is done by cultivator to make it marketable which does not change its basic characteristics.
• Cotton seed is obtained from seed cotton by way of industrial processing called ginning which debars it from the definition of agriculture produce as per the above said Notification.
• Cotton seed is interpreted as agriculture produce under other laws and not under GST laws since GST law is very particular in providing exemptions to certain items only.

The Authority for Advance Ruling considered the applications, the submissions made by the applicant and the submissions made by the Department.  The main issue to be decided by the Authority for Advance Ruling is as to whether the cotton seed ‘Banaula’ falls under the definition of Agricultural produce and qualifies exemption under Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017.

The Authority for Advance Ruling discussed the term ‘cotton seed and how is extracted.  The Authority for Advance Ruling observed that-

• Cotton seed is obtained from raw cotton, which is produced by cultivation of cotton plants.
• Raw cotton is plucked off from the plant and sold for primary market without further processing by the cultivator or the producer.
• The above said process is called as ginning. 
• Cotton seed so produced is then transported by the persons supplying services of GTA to the factories for extracting cotton seed oil.

The Authority for Advance Ruling analyzed the definition of the expression ‘agricultural produce’ in the Punjab Agricultural Produce Markets Act, 1961 and also the definition for the said expression in the Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017.  Under the Punjab Agricultural Produce Markets Act, 1961 the cotton seed is treated as agricultural produce.  However the GST law does not treat the cotton seed as agricultural produce. 

The Authority for Advance Ruling further observed that the farmers sell the cotton without any further processing to the owners of the mill for carrying out further processes.  This brings the cotton seed out of the definition of ‘agricultural produce’ under GST.  In the present case the cotton seed emerges after processing in mill.  Therefore the above condition is not fulfilled and the same cannot be said to be agricultural produce as per the notification.

The Authority for Advance Ruling is of the view that the exemption notification should be strictly construed and beneficiary must fall within the ambit of exemption and fulfill the conditions thereof.  In such conditions are not fulfilled the issue of application does not arise at all by implication. 

The Authority for Advance Ruling held that the applicant is not eligible to avail exemption in payment of GST on GTA services.  It is apparent from the definition of ‘agricultural produce’ that the Government intends to provide exemption to the produce occurring only at the first stage of cultivation or rearing and not to those which are processed in factories after they are sold by the cultivator.

The Authority for Advance Ruling further held that GST is chargeable @ 5% (CGST – 2.5% + SGST – 2.5%) on GTA services availed by the applicant for transporting cotton seed provided the credit of input tax charged on goods and services used in supplying the services has not been taken otherwise the GST rate is 12% (CGST – 6% + SGST – 6%) under Sl. No. 9 of the Notification No. 11/2017-Central Tax (Rate), dated 28.06.2017.