MILK CHILLING: WHETHER MANUFACTURE ?

[Dr. Sanjiv Agarwal]

Meaning of Manufacture

Under Central Excise Act, 1944, ‘manufacture’ has been defined differently u/s 2(f) of the said Act. According to Section 2(f) of the Central Excise Act, 1944, “Manufacture” includes any process-

1. incidental or ancillary to the completion of a manufactured product;
2. which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; or
3. which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

The definition under section 2(f) of Central Excise Act, 1944 is an inclusive definition and it should be construed in its natural meaning and interpretation which will include any process incidental or ancillary to the completion of manufacture of a product. The manufacture should result in change of raw material and finished goods must be different from the goods that existed just before the process of manufacture. There must be transformation of a product and a new and different article must emerge having distinct characteristics.

This definition of manufacture also gets explained by some judicial decisions. In Union of India v. Parle Products 1993 (1) TMI 100 - SUPREME COURT OF INDIA, it was held that processes could not amount to manufacture unless at the end of it a commercially new and distinct article emerges. Supreme Court in Union of India v. DCM 1962 (10) TMI 1 - SUPREME COURT OF INDIA observed that manufacture used as a verb means to bring into existence a new substance and does not mean merely to produce some change in a substance. In other words, the produce which arises out of the process must be commercially a distinct commodity different from that out of which it is processed. Whether or not something results in manufacture would depend on the facts of the case. It is well settled that a question as to when a manufacture of product takes place within the meaning of Section 2(f) of the Act is a mixed question of law and fact. The nature and the extent of processes may vary from case to case. When a change takes place and a new and distinct article comes into existence known to the consumers and the commercial community as a commercial product, which can be no longer regarded as the original commodity, such a change constitutes manufacture.

Milk Chilling

The activity of milk chilling does not get covered under the definition of manufacture as defined under section 2(f) of the Central Excise Act, 1944. There are two reasons due to which the chilling activities are not covered under the scope of manufacture.

As the milk is highly perishable in nature and shelf life of the milk is very short, therefore, milk has a limitation of being transported to distant places. To overcome such situation and to prolong the shelf life of milk so as to transport it to distant places, the process of chilling of milk is inevitable as to make it marketable.

According to section 2(f) of Central Excise Act, 1944, any process which is required for any goods to make it marketable covered under the scope of manufacture. Without chilling of milk and its subsequent transportation for distribution, the milk is not marketable and therefore, the process of chilling is to be considered as an integral part.

Chilling of milk cannot be said to be processing of milk as there is nothing to establish that chilling is done for some purpose other than storage purpose. A process is carried out on some goods for the purpose of production / manufacture of some goods or at least to carry out some change in the goods. The chilling being done by dairies on their own milk, is not for the purpose of production of some goods or to carry out any change in the milk and thus chilling of the milk cannot be said as processing of milk.

In Mewar Foods Pvt. Ltd. v. CCE, Jaipur 2014 (1) TMI 355 - CESTAT NEW DELHI, it was held that, prima facie, the process of pasteurization is a process necessary to make milk marketable to the consumer and is covered by the Chapter 6 and Chapter 4 of the Central Excise Act, 1985, therefore, stay was granted.

In similar cases, at first appeal stage, it has been held by the Commissioner (Appeals), Jaipur in few cases that the chilling units provide facilities for chilling of milk. As per the contract, they provide only infrastructure (chilling plant). It cannot be said that the such unit has processed goods (milk) for, or on behalf of, the client in as much as no goods (milk) has been supplied by dairy but dairy has itself undertaken the chilling activities by utilizing the infrastructure/manpower provided by the chilling unit. It was thus held that the facilities/ services provided by the chilling units are not covered by sub-clause (v) of clause 19 of section 65 of the Finance Act, 1994 as business auxiliary services.

It may thus be inferred that chilling activities in relation to milk may not be subject to levy of Service Tax. However, taxability may differ on the basis of scope of agreement depending upon whether it is only chilling or processing/production of goods or only a cold storage facility.

Discussions to this article

[ravichandran karapattu subrahmanian]

In my opinion, if a person permits milk producers (farmers) to bring their milk to his chilling plant for keeping them chilled and charges a fee for the same without adding any value except allowing the milk to get spoiled, it prevents the milk from getting spoiled by an bacterial activity which would have otherwise happened as a natural activity depending upon climate. "Preventing the happening of something" is the other side of manufacture - like reverse charging; reverse of "manufacture" - leaving aside the lighter side, it will be liable to service tax.

[Gopalarathnam Muralidharan]

In my view, Milk chilling does not involve any manufacturing activity. Chilling is done to increase the shelf life of the Milk. It does not materially alter the characteristics of milk. For instance, preparation of Flavoured milk would undergo a process wherein some additives are added and commercially it gets new name as Flavoured Milk which would come within the ambit of Manufacture

[Dr. Sanjiv Agarwal]

Dear Sir ,

Yes , I agree. Milk chilling is not a manufacturing activity as it does not alter its size , shape , characteristics etc. Thus , chilling activities in relation to milk may not be subject to levy of service tax.

Thanks & Regards ,

CA Neha Somani