TAXABILITY OF MILK CHILLING UNITS

[Dr. Sanjiv Agarwal]

Now a days, fresh milk is not available to consumers and most of us consume milk which is a packaged supply from units like Amul, Parag, Mother Dairy etc. This milk before coming to us for human consumption is subjected to a chilling process (akin to cold storage).

The raw milk is supplied by dairies at chilling plants or centres which provide the services of chilling and storage of milk. The service provider provides chilling facilities, brine/ chilled water, milk reception, chilling and re chilling, milk storage equipment, along with necessary power supply/ back-up, water supply, milk testing lab, milk reception facilities, milk weighing system, milk dispatch facilities, a separate DG set to run all the above equipment during power failure, apart from main DG for operating the ice factory refrigeration system, etc. The issue confronting various chilling units is whether such services are taxable under storage and warehousing services or cargo handling services.

Classification Norms

Under which category a taxable service would be classified is governed by the provisions of section 65 A of the Finance Act, 1994 and any service ought to be appropriately classified into one taxable service using the guiding principles set out therein. Classification of services thus, shall be done as per section 65A of the Finance Act, 1994.  Section 65A was inserted by Finance Act, 2003 to specify the norms for classification of taxable services under section 65 of the Finance Act, 1994. The basic principles of classification of a taxable service, prima facie, are as follows -

(i)         A taxable service would be classified in the category which gives the most specific description of the service provided.

(ii)        In case the taxable service is a service consisting of combination of services, such taxable service will be classified in the category which gives such service its essential character.

(iii)       Where a taxable service can not be classified in any of the above two ways, such taxable service will be classified in the category which occurs first in subsection (105) among those categories which equally merit consideration.

In view of the above provisions and clarifications, one ought to classify the services into the most appropriate taxable service. In the instant case, the nature of transaction is to provide access to trading platform for power which is based on the agreement, substance and character of transaction and accounting treatment acceptable to regulator and auditors. The agreement and the actual transaction smells a service, which is discussed subsequently and ought to be appropriately classified

Storage & Warehousing Services   

According to Section 65(102) of Finance Act, 1994 storage and warehousing is an inclusive definition. The term storage and warehousing includes storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage. It includes storage and warehousing for all types of—

(i)  goods

(ii)  liquids, and

(iii)  gases

but it excludes storage and warehousing for—

(i)  agricultural produces, and

(ii)  cold storage.

Storage or warehouse keeper is a person who is an owner or manager of storage house or warehouse. It does not cover the employees. Storage implies placing, accommodation, reservation or safe keeping in store. Store is a place or space for storing warehousing implies depositing goods, etc., in a warehouse or keeping goods etc at a place for storage. It will cover public and private warehouses, railways, airports, ICDs, container freight stations, storage godowns etc. The services under this category would not include cold storage, i.e., storage and preservation of goods in refrigerated chambers, warehouses used for storing agricultural produce, agencies giving cylinder on hire, port trusts collecting demurrage, mere renting of premises or cloak room services.

Services provided in relation to agricultural produce and service provided by cold storage are outside the ambit of levy of service tax.

Agricultural produce

Agricultural produce has been defined as per Order No. 1/2002-Service Tax, dated `1-8-2002 which means any produce resulting from cultivation or plantation, on which either no further processing is done or such processing is done by the cultivator like tending, pruning, cutting, harvesting, drying which does not alter its essential characteristics but make it only marketable and includes all cereals, pulses, fruits, nuts and vegetables, spices, copra, sugarcane, jaggery, raw vegetable fibres such as cotton, flax, jute, etc., indigo, unmanufactured tobacco, betel leaves, tendu leaves, rice, coffee and tea but does not include manufactured products such as sugar, edible oils, processed food, processed tobacco.

Thus milk is not an agricultural produce for the purpose of service tax under storage and warehousing services.

Meaning of Cold Storage / Chilling

Meaning of Cold Storage has not been provided anywhere in the Finance Act, 1994. As such, we shall rely on its literal and general meaning as provided elsewhere.

As per definition provided in Wikipedia, a cold storagemay to refer to –

• A form of refrigerated storage.
• Refrigerated storage for preservation
• A refrigerated storage space usually with  temperatures under 7° C

The storage of perishables at low temperatures, usually above freezing, by the use of refrigeration is done to increase the storage life. In general, the lower the temperature, the longer the storage life. If temperatures are maintained below the freezing point of the product stored, it is called freezer storage.

Cold-storage plant is a large insulated building, with its attendant refrigeration equipment, for storage of commodities at low temperatures. Facilities are often included for quick-freezing fruits, vegetables, meats, and a variety of precooked foods and bakery products for the consumer convenience market.

‘Cold’ means having a low temperature or feeling a sensation of coldness or having been made cold by ice or refrigeration or cold room etc. On the other hand, ‘chill’ means a moderate but penetrating coldness , to lower in temperature.

Taxability under storage and warehousing service

To determine taxability under taxable category of ‘storage and warehousing service’, the following test would apply –

(a Goods stored are an agricultural produce – Exempt

(b) Service provided by a cold storage– Exempt

The produce/ goods which is generally stored / warehoused in chilling centre is “raw milk” which does  not  qualify as  agricultural produce and therefore, is not exempt from levy of service tax under the  Storage and Warehouse Service category as an agricultural produce.

Services of chilling of raw milk are provided at  chilling centre.  Chilling of milk means rapid cooling of raw milk to sufficiently low temperature so that the growth of micro-organisms present in milk is checked. In chilling process the temperature of milk should be reduced to less than 10° C, preferably 3° C - 4° C. Milk inside the udder is almost sterile and as soon as it leaves the udder, it is exposed to atmosphere. The microorganisms gain entry into the milk, the moment it comes to atmosphere. Various sources which contribute to the microflora in milk are containers, udder of the animal, dust and dirt particles, fodder, leaves, atmospheric air, the milker and the animal itself.

If milk has to be transported to longer distances, considerable time is involved between production and heating process. During this period, milk must be protected from spoilage by the action of microorganisms. Chilling , therefore, is considered necessary soon after it is received at the chilling centres. The most effective means of controlling the growth of microorganisms without affecting the physic-chemical properties and nutritive value of milk is to chill it. Lower temperatures inhibit the growth of most of the microorganism. It should be clearly understood that chilling process does neither kills microorganisms nor it renders milk safe for human consumption.

From the above discussion,  it  emerges that chilling centre is necessarily  a cold storage and as such, the services provided by the chilling units such as, storing and chilling  (keeping cold) of raw milk at its Milk Chilling Centre are  excluded  from scope  of service tax under the  Storage and Warehouse Service category by way of specific exclusion in the definition itself.

Cargo Handling Service

As per Section 65(23), cargo handling service means loading, unloading, packing or unpacking of cargo and includes cargo handling services provided for freight in special containers or for non-containerized freight, services provided by a container freight terminal or any other freight terminal, for all modes of transport and cargo handling services incidental to freight, but does not include handling of export cargo or passenger baggage or mere transportation of goods.

Cargo handling service in relation to agricultural produce or for goods meant to be stored in a cold storage have been exemptedVide Notification No 10/2002 ST dated 1.8.2002. Thus, milk chilling being in the nature of cold storage is covered by exemption notification so far as cargo handling services is concerned.  Cargo handling service provided in relation to storage of agricultural produce or for goods meant to be stored in cold storage have been also exempted from the levy of service tax.

Milk is not a cargo for the purpose of cargo handling activities as no such handling activities are carried out. The only activity is chilling of milk and no freight or transportation is involved. Milk is not a cargo in this case as cargo essentially means goods to be transported or shipped. It indicates goods transported on a ship or aircraft , goods shipped on a carriage, the entire load of the ship. According to Oxford English Dictionary, cargo means ‘to load’, goods carried on a ship, aircraft or a motor vehicle.

Although the services provided by the chilling units such as, storing and chilling of raw milk at its Milk Chilling Centre do not qualify for being taxed under the Cargo handling service, even assuming as  if it is qualifies , the  goods meant to be stored in a cold storage have been exempted.

Conclusion

The services may not be covered under Cargo Handling Service   as services of the chilling units do not fit in the scope of definition under section and nature of milk not being ‘cargo’. [Section 65(23)].

The services, however, may fall under “storage and warehousing services” but shall not be a taxable  service in light of the specific exclusion provided in relation to services provided by a cold storage in the definition itself. 

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