CESTAT Chennai Holds Tobacco Processing Not Manpower Supply, Allows Service Tax Refund

The Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), on 28 April, held that processing unmanufactured tobacco for a client constitutes agricultural job work and not manpower supply service.

A Bench comprising Technical Member M. Ajit Kumar and Judicial Member Ajayan T.V. allowed the appeal filed by Updater Services Pvt. Ltd. and granted refund of service tax. It held:

“The appellant processes unmanufactured tobacco for or on behalf of their client which include incidental or auxiliary services related to agriculture. These services constitute an intermediate production process in relation to agriculture or agricultural produce. Consequently, the impugned services are eligible for exemption under the law discussed above, both pre and post the Negative List.”

The dispute arose from a refund claim of Rs. 42.13 lakh filed by the company for the period April 2012 to September 2013.

The appellant undertook activities such as decaking, packing, sampling, and material handling in relation to tobacco under a contract with ITC Ltd. The Department classified the services as manpower supply and denied the refund, a view the Commissioner (Appeals) upheld, while the appellant maintained that the services were exempt as they related to agriculture.

Before the Tribunal, the appellant argued that the contract required execution of specified processing work, not supply of labour. It contended that tobacco at the relevant stage qualified as agricultural produce and that the activities amounted to processing on behalf of the client, exempt under the applicable notifications both before and after the negative list regime.

The Revenue argued that deployment of workers at the client's premises, with payments linked to wages, indicated a manpower supply arrangement and made the services taxable.

The Tribunal rejected this classification and held that the agreement clearly established a service contract. It found that control, supervision, wage payment, and disciplinary authority over the workers remained with the contractor, not with ITC. The fact that work was carried out at the client's premises or aligned with its production schedule did not convert the arrangement into manpower supply.

On the issue of exemption, the Tribunal held that unmanufactured tobacco continues to be agricultural produce, and that the processing undertaken only made it marketable without altering its essential character. It held that such activities were incidental to agriculture and covered by the exemption provisions applicable during both the pre- and post-negative list periods.

The Bench also found that the Commissioner (Appeals) erred in recording that no agreement or supporting documents were produced despite their availability on record.

Accordingly, the CESTAT set it aside and allowed the appeal with consequential relief.

For Appellant: G. Shivakumar, Advocate

For Respondent: N. Satyanarayanan, Authorised Representative