FEBRUARY 05, 2013

By Pritam Mahure, CA

CENTRAL Excise & Service Tax have many things in common and one of them is litigation.

One issue which can be the "seed" for future litigation is relating to making 'seeds for sowing' from raw grains/cereals. Typically, the persons who are engaged in this activity take raw wheat, bajra etc., then clean, sort, apply chemical and grade the grains/cereals. The final product is used as 'seeds for sowing'. Usually, the processor gets processing charges. The process can be visualised as under:

In this context, the question that arises is whether the consideration received for undertaking the said process on behalf of seed Companies would be liable for payment of Service Tax under the Negative List regime w.e.f. 1 July 2012?

At this juncture it is important to note that 'seeds for sowing' for wheat, jawar, bajra are covered under Central Excise Tariff Entry 10011100, 10082110 and 10082120 respectively. The rate of duty column for them is 'Blank'.

In the new regime of service tax, at the outset 'service' has been defined in clause (44) of Section 65B of the Finance Act, 1994 (Act). Section 66B specifies the charge of service tax which is essentially that service tax shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list. The negative list of services is contained in section 66D of the Act.

As per clause (f) of section 66D of the Act 'processes amounting to manufacture or production of goods' is a service covered under 'Negative list'. The phrase 'processes amounting to manufacture or production of goods' has been defined in section 65B (40) of the Act to inter-alia mean a process on which duties of excise are leviable under Section 3 of the Central Excise Act, 1944 (1 of 1944). It has been clarified in Education Guide (Para 4.6) that Section 66D (f) covers manufacturing activity carried out on contract or job work basis, which does not involve transfer of title in goods, provided duties of excise are leviable on such processes under the Central Excise Act, 1944 or any of the State Acts .

Thus, the 'processes on which duties of excise are leviable under section 3 of the Central Excise Act, 1944' are excluded from the purview of service tax.

It may be noted that the Apex Court in the judgment of Grasim Industries Ltd 2011-TIOL-100-SC-CX observed that "the charging Section 3 of the Act comes into play only when the goods are excisable goods under Section 2(d) of the Act falling under any of the tariff entry in the Schedule to the Tariff Act and are manufactured goods in the terms of Section 2(f) of the Act".

Given the above, if answer to both the following questions is in the affirmative, then Service Tax will not be leviable on the aforesaid process:

Q.1 Whether the process of making 'seeds for sowing' from raw grain / cereals amounts to 'manufacture'?

It can be observed that the definition of the expression 'manufacture' in the Act is only an inclusive definition. The definition of 'manufacture' shows that "any process incidental or ancillary to the completion of a manufactured product" is also manufacture. The manufacturing contemplated is not only the manufacturing process whereby a new article comes into existence but also any process incidental or ancillary to the completion of a manufactured product. In the case of Delhi Cloth and General Mill Company Ltd (2002-TIOL-12-SC-CX-LB) the Apex Court inter alia observed that there must be transformation; a new and different article must emerge having a distinctive name, character or use .

It is clear that the concept of 'manufacture' has been linked to processes whereby the finished / processed goods originating there from should be commercially different from the original commodity.

In the instant case, 'seeds for sowing' come into existence after the 'cereals' are processed. Given this, if 'seeds for sowing' and 'cereals' are commercially different products then it can be said that the process amounts to 'manufacture'.

The terms 'cereals' and 'seeds' are not defined in Central Excise Act. Therefore these terms should be understood and construed in its popular sense, i.e., the sense which people conversant with the subject-matter with which the statute is dealing would attribute to it. If so understood and interpreted and given the popular sense meaning, the following emerges [Please refer Halavapalli and Sons [1984] 57 STC 343 and Assam Seeds Corporation Ltd. vs. Commissioner of Sales Tax, Assam & Others 145 STC 274] :

From the aforesaid it can be appreciated that, in common parlance and commercially also, 'grains' and 'seeds for sowing' are understood as two distinct commercial commodities.

Based on aforesaid discussion it can be said that the process amounts to 'manufacture' within the meaning of Section 2(f) of the Central Excises Act, 1944 as after the process on 'cereals' a new product called as 'seeds for sowing' comes into existence.

Thus, answer to the first question is affirmative/ yes. Now let us analyse the second question.

Q.2 Whether the process amounts to manufacture of 'excisable goods'?

"Excisable goods" are defined in the Central Excise Act, 1944 [section 2(d)] as "goods" specified in the schedules to the Central Excise Tariff Act, 1985 which are subject to a duty of excise.

The first part lays down that excisable goods are those which are specified in the First Schedule. The second part is that such goods are subject to a duty of excise. [The term 'being subject to' has been defined in the Shorter English Oxford Dictionary as 'exposed or open to; prone to or liable to' under rule, government, jurisdiction, or control etc."].

A perusal of the First Schedule viz. Chapter 10 of Central Excise Tariff reveals that the rate of duty column is 'BLANK' all through out in the chapter. This prompts us to find an answer to the following - Whether the goods for which the rate column is 'BLANK' can be said to be goods 'subject to duty' and in turn 'excisable goods'?

In this regard, my analysis is as under:

Based on aforesaid discussion it can be said that the 'seeds for sowing' are not 'excisable goods'.

Thus, answer to the second question is in negative.

One can, therefore, conclude that although the process undertaken is "manufacture" as defined in section 2(f) of the CEA, 1944, it does not result into manufacture of 'excisable goods' as defined in section 2(d) of the CEA, 1944 on which duties of excise are leviable under section 3 of the Central Excise Act, 1944.

As the activity is not covered under the 'Negative List' the same is likely to be subject to service tax at the applicable rate. It would also be pertinent to note that the said process does not seem to be covered under Section 66D (d) [Services relating to agriculture or agricultural produce] and neither in Sr. No. 30 (a) [Carrying out an intermediate production process as job work in relation to agriculture]. The rationale for chemically processed 'seeds' not qualifying as 'agricultural produce' is that "agricultural produce" is defined to mean "any produce of agriculture 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". However, in the instant case, this processing is not done by cultivator and also essential characteristics is altered after the process (as 'cereals' can be eaten whereas chemically processed 'seeds' can't be).

CBEC may like to issue a clarification in this regard before the "seeds" of litigation are sown by the officers all over the country except, of course , Jammu & Kashmir.