Service Tax Not Leviable On Tobacco Processing Job Work: CESTAT Hyderabad Dismisses Revenue Appeal

The Hyderabad Bench of CESTAT has dismissed the Revenue's appeal against Premier Tobacco Packers, holding that service tax cannot be levied on job work relating to threshing and redrying of tobacco leaves, as the issue is already settled by earlier Tribunal rulings treating such activity as processing of agricultural produce.

The bench of Judicial Member Angad Prasad and Technical Member A.K. Jyotishi dismissed the Department's appeal and upheld the Order-in-Appeal, which had set aside the service tax demand of Rs. 1,66,98,271 along with interest and penalties.

Premier Tobacco Packers was engaged in the trading of tobacco and was also carrying out the threshing and redrying of tobacco leaves on a job work basis for its customers. The department alleged that the job work charges received by the assessee were taxable under Business Auxiliary Service (BAS) and issued a show cause notice proposing a service tax demand along with interest and penalties.

The adjudicating authority confirmed the demand by order dated December 21, 2016. However, on appeal, the Commissioner (Appeals), Guntur, by order dated January 31, 2018, set aside the adjudication order, after which the Revenue challenged the appellate order before the Tribunal.

Before the tribunal, the Department argued that the respondent's activity had no direct nexus with cultivation or primary agricultural operations, as the tobacco had already been cured, auctioned through the Tobacco Board, and purchased by buyers or exporters before reaching the respondent's factory.

It was contended that the processing undertaken by the assessee involved machinery, labour and quality stabilization; enhanced the shelf life of tobacco; and formed part of the chain leading to cigarette manufacture. On that basis, the department claimed that the activity could not be treated as processing in relation to agricultural produce and should be taxed as Business Auxiliary Service.

The tribunal rejected the Department's stand and observed that the issue was squarely covered by its earlier decision in Green Leaf Tobacco Threshers Ltd. and others v. CCE & ST, Guntur, decided by common order dated February 22, 2017, where it had been held that processing and drying of tobacco leaves do not result in the manufacture of any new product and remain activities in relation to agricultural produce. The bench also noted that the said decision had attained finality after dismissal of the Revenue's appeal by the Supreme Court.

Relying on the binding precedent, the tribunal held that threshing, redrying, and packing of tobacco leaves do not bring into existence any new commodity, since tobacco continues to remain tobacco and its essential character remains unchanged. The activity merely stabilises and prepares the product for storage and export and therefore cannot be brought within the scope of Business Auxiliary Service.

The bench observed, "We also find that the processing undertaken by the respondents does not bring into existence any new distinct commodity. The tobacco continues to remain tobacco. The activity merely stabilizes and prepares it for storage and export. Therefore, the same cannot be brought under BAS."

Finding no distinguishing facts in the present case, the tribunal held that the Order-in-Appeal suffered from no infirmity. Accordingly, the Department's appeal was dismissed.

For Appellant: K. Sreenivasa Reddy, AR

For Respondent: C.S. Srinivas, Consultant