GST is applicable on rejected/damaged paddy

The AAAR, Chhattisgarh, in the case of Dongarmal Jain, In re [Order No. /STC/CG/AAAR/01/2022 dated April 26, 2024] held that the Rejected/Damaged paddy is one that can't be consumed by human beings as it is not fit for human consumption. Therefore, it would not fall under seed quality and should be placed under HSN 1006 10 90. Further, it is quite clear from the explanation of pre-packaged/labelled food items vis-a-vis S. No. 70 of Notification No. 2/2017-Central Tax (Rate), dated June 28, 2017("the Exemption Notification"), that Rice (Other than pre-packaged labelled) should be of food quality and it must be fit for human consumption for being exempt. In the instant case, "Rejected/Damaged Paddy" fails to fulfil these basic characteristics of being fit for human consumption. As per Assessee, 'rejected/damaged paddy' is to be used in Industrial Usage, and cattle feed. Therefore, 'Rejected/Damaged Paddy' doesn't fall under the Exemption Notification.

Facts

Mr. Dongarmal Jain ("the Appellant") was engaged in the business of running a rice mill. He had filed an application for an advance ruling regarding the classification and applicability of GST on the sale of rejected paddy seeds, which were not fit for human consumption and could be used for industrial usage, Cattle Feed Production, Manure Production, etc.

The Appellant had forwarded the tender by Chhattisgarh State Cooperative Marketing Federation for the purchase of rejected paddy, and out of the said purchase, certain portion could be sold as such. The Appellant in the present case was planning to sell rejected paddy in bags that had a quantity of more than 25 kg.

The Advance Ruling Authority passed an Order dated October 31, 2022 ("the Impugned Order") as under:

• Rejected paddy seed would merit classification under chapter heading 100610, subject to the compliance of the stipulations and conditions as mentioned in the section note and chapter note specified therein.
• The exemption from the whole of tax as provided under the Exemption Notification and amended vide Notification No. 07/2022-Central Tax (Rate) dated July 13, 2022 is not eligible for supply of "Rejected paddy/ Damaged paddy".
• 'Rejected paddy/damaged paddy' per se supplied by the Appellant procured by them although merits classification under chapter 1006 10 subject to adherence of the conditions as stipulated under chapter note and section note would be leviable to tax @2.5% CGST+2.5% CGST.
• Regarding categorization of rejected paddy based on its usage such as animal feed, cattle feed poultry feed, industrial use manure etc. The want of adequate details regarding the process undertaken by the Appellant through which such rejected paddy would be converted to animal feed, cattle feed, manure etc., No conclusive ruling regarding classification from the GST perspective based on HSN could be delivered.

Hence, aggrieved by the Impugned Order, the Appellant filed the present appeal.

Issue

Whether classification of rejected/damaged paddy seed is exempt from GST?

Held

The AAAR, Chhattisgarh, in Order No. /STC/CG/AAAR/01/2022 held as under:

Opined that, for being a seed-quality cereal crop, some basic characteristics must be there, such as:

a. Seed purity

b. Sprouting capacity

c. It must be free from seed-borne diseases and pests.

Hence, the rejected/damaged paddy as name suggests, is much less likely to be of seed quality cereal crop as it won't have sprouting capacity. The rejected/damaged paddy is devoid of all characteristic of a seed quality cereal crop.

Observed that, AAR place the rejected/ damaged paddy under HSN 1006 10 i.e. Rice in the Husk (Paddy or Rough). Paddy becomes rice after the removal of husk by threshing. Thus, rice is a part of paddy. This classification is suitable for regular rice which is fit for human consumption, which is to be understood in common parlance. Rejected/Damaged paddy is altogether a different class. This would not fall under the seed quality. Therefore, it should be placed under HSN 1006 10 90.

Noted that, the goods placed under the Exemption Notification are wholly exempt from GST. The Exemption Notification, it is "1006 Rice (other than Pre-packaged and labelled)". For proper understanding of the term labelled/pre-packed, the FAQ released by Tax Research Unit dated July 17, 2022 states that clarification at S. No. 2 of Table under Para 2 of FAQ dated July 17, 2022 deals with "What is the scope of 'pre-packaged and labelled' for the purpose of GST levy on food items like pulses, cereals and flours" wherein exemption from tax has been clarified specifically on rice, which in general parlance means that such rice is fit for human consumption. Hence, such rice must be of food quality. The question of whether rejected paddy is pre-packed and labelled and other than pre-packed and labelled should be checked only after it is established that the rejected paddy is of food quality or not.

Held that, it is clear from the explanation of pre-packed/ labelled food items vis-à-vis the Exemption Notification, that Rice (other than pre-packed/labelled) should be of food quality and it must be fit for human consumption for being exempt. But Rejected/ Damaged Paddy, in the instant case, fails to fulfil these basic characteristics of being fit for human consumption for being exempt. Rejected/damaged paddy has lost its food quality and human consumption value. As per the Appellant, the rejected/damaged paddy is to be used for industrial use, cattle feed, etc. Thus, the Rejected/damaged paddy does not fall under the Exemption Notification.

Our Comments

In a Pari Materia case of Shiridi Sainath Industries v. Deputy Commissioner of Services Tax (International Taxation) [W.P.No.45971 of 2018], wherein the Hon'ble High Court of Andhra Pradesh held that the by-products kept by the supplier during milling of paddy can't be referred to as consideration. Hence, no GST will be applicable. The Hon'ble High Court of Andhra Pradesh found that by-products formed part of compensation but not consideration. The Corporation had permitted assessee to retain broken rice, bran and husk obtained in course of milling of paddy as compensation towards shortfall in yield which assessee had to replenish by incurring expenditure out of its own pocket. The department erroneously concluded that miller was allowed to retain by-products towards consideration. Hence, it was held that the order assessing tax was legally unsustainable.

The Hon'ble Andhra Pradesh High Court in the case of Chandra Sekhara Rice Merchant v. Assistant Commissioner (State Taxes) [W.P. No. 1632 of 2024 dated February 07, 2024] relied on the M/s Shiridi Sainath Industries (Supra) where in similar circumstances it was found that assessee was allowed to retain broken rice as part of compensation in lieu of shortfall in yield replenished by assessee by incurring expenditure out of its own pocket.

However, as per the amendment in Entry 51 of Schedule I of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017, which was further amended by Notification No. 06/2022-Central Tax (Rate) dated 13th July 2022, GST at 5% (CGST 2.5% + SGST 2.5%) was applicable on the supply of pre-packaged and labelled rice effective from July 18, 2022. This was based on the definition of 'pre-packaged and labelled' under the Legal Metrology Act, 2009, which requires such packages to bear declarations under the said Act and its rules.

On June 22, 2024, the GST Council at its meeting in its 53rd meeting, recommended imposing 5% GST on pre-packed and pre-labelled rice of 25 kg bags and less. This has led to an increase in the price of the commodity.

In this regard, CBIC issued Circular No. 229/23/2024-GST dated July 15, 2024 which clarified the scope of expression 'pre-packaged and labelled' for supply of agricultural farm produce in view of the amendment made in Legal Metrology (Packaged Commodities) Rules, 2011.

In the said Circular, the definition of 'pre-packaged and labelled' in Notification No. 1/2017-Central Tax (Rate) dated June 28, 2017 and Notification No. 2/2017-Central Tax (Rate),dated June 28, 2017, was amended vide Notification No. 2/2024-Central Tax (Rate) dated July 12, 2024 and Notification No. 3/2024-Central Tax (Rate) dated July 12, 2024, respectively, to exclude the supply of agricultural farm produce in package(s) of commodities containing quantity of more than 25 kilograms or 25 litre from the scope of 'pre-packaged and labelled'. Consequently, the supply of agricultural farm produce in package (s) containing quantity of more than 25 kilograms or 25 litre will not attract a GST levy of 5%.

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED