Shirdi Sainath Industries VS Deputy Commissioner Of Services Tax

The petitioner is seeking a writ of mandamus to challenge an Assessment Order, dated 29th October 2018, issued by the first respondent, which imposed GST on the value of broken rice, bran, and husk obtained during the milling of paddy supplied by the fourth respondent. The petitioner, a registered rice miller, procures paddy from the Andhra Pradesh Civil Supplies Corporation (APCSC), the fourth respondent, for milling and public distribution. In return for milling services, the APCSC pays charges based on a percentage of the paddy milled, with the understanding that rice equivalent to 67% of the paddy provided must be supplied irrespective of yield, leaving a balance of 5% to 6% to be compensated by the petitioner from their own stock. As compensation, the APCSC allows the petitioner to retain broken rice, bran, and husk obtained during milling, which are then sold by the petitioner. While broken rice and husk are exempt from GST, the petitioner pays GST on bran at a rate of 5%.

Following an inspection, the first respondent issued a show cause notice, leading to the Assessment Order, which imposed GST not only on milling charges but also on the value of the by-products retained by the petitioner, treating them as part of the consideration. The petitioner argues that neither they nor the APCSC anticipated GST liability on these transactions and assumed any tax obligations would be borne by the APCSC. Consequently, the petitioner did not collect GST from the APCSC. They contend that the broken rice, bran, and husk were provided by the APCSC in exchange for rice given by the petitioner to compensate for yield shortfalls, and therefore, should not be subject to GST. Even if GST were applicable, the petitioner argues it should be the responsibility of the APCSC as the service recipient. They challenge the assessment order’s inclusion of GST on the value of these by-products, asserting it is legally unsustainable.

In response to the petitioner’s claims, the first respondent has filed a counter argument presenting several points:

(a) The first respondent argues that according to the agreement between the petitioner and the fourth respondent, the petitioner is entitled to retain by-products as part of the consideration for custom milling services. Both parties agreed upon a rate of Rs. 15/- per quintal after considering the fact that the petitioner would retain these by-products. Furthermore, the agreement stipulates that the petitioner is responsible for paying taxes on the by-products.

(b) The first respondent asserts that in the transaction at hand, the rice miller provides a service of converting paddy into rice, which constitutes a taxable service. As per GST regulations, the prescribed rate for such a service is 5%. They argue that under the GST Act, consideration for supply can be in forms other than money, including goods or services. Therefore, the value of the by-products retained by the petitioner forms part of the consideration and is subject to taxation.

(c) Rule 27 of the CGST/SGST Rules states that when the supply of goods or services involves consideration not wholly in money, the value of the supply shall be the open market value. The first respondent contends that normative milling charges, determined by the Tariff Commission of India, consider the value of by-products to prevent loss to the government. However, they claim that the Commission has failed to revise these values, leading to underestimation of the government’s revenue.

(d) While acknowledging that some by-products may be exempted from GST, such as husk, the first respondent argues that their value must still be considered for calculation purposes. They distinguish between supply and consideration, asserting that the milling by the petitioner establishes their primary responsibility for GST payment, rather than the fourth respondent.

(e) The first respondent argues that despite the petitioner’s filing of returns disclosing turnover, they failed to pay the corresponding tax, prompting the assessment of tax liability. They state that since the petitioner disputed the levy of tax but disclosed the turnover, it was a non-wilful mistake, invoking Section 73 rather than Section 74 of the APGST Act, 2017. They justify the assessment based on existing market prices and information obtained from the Civil Supplies Department for the milling year 2017-18, stating that the amounts received were taxed in accordance with GST regulations. Finally, they contend that the writ petition is not maintainable as alternative remedies are available to the petitioner, and thus request its dismissal.

In response to the writ petition, Respondent No.4 has submitted a counter argument with the following points:

(a) Respondent No.4 explains its role as a procuring entity for Custom Mill Rice (CMR) under Minimum Support Price (MSP) operations, acting as a nodal agency to procure paddy through various channels. Designated rice mills receive the paddy and are obligated to deliver resultant rice at specific percentages to APSCSCL/FCI at designated locations.

(b) According to clause 22 of the agreement between the petitioner and Respondent No.4, the mill is entitled to retain all by-products such as broken rice, bran, and husk generated during milling. The income from selling these by-products, along with the responsibility for expenses and tax payments, falls upon the miller, as stipulated in the agreement. Clause 9 mandates the delivery of specified percentages of raw and boiled rice to APSCSCL/FCI, disputing the petitioner’s objection regarding the yield percentage.

(c) Clause 31 of the agreement provides for arbitration in case of disputes, with the arbitrator appointed by the Vice Chairman & Managing Director of the Corporation.

(d) Respondent No.4 argues that the petitioner should have pursued appeal options before the appellate authority instead of directly filing a writ petition, and therefore, the petition should be dismissed outright.

(e) Respondent No.4 asserts that it is not liable to pay any taxes to the first respondent. According to Clause 22 of the agreement, it is the petitioner’s responsibility to pay all taxes owed to the first respondent. Therefore, the petition lacks merit and should be dismissed.

In summary, Respondent No.4 contends that the petitioner’s objections are unfounded, citing contractual agreements regarding by-products, dispute resolution mechanisms, and appeal processes. They argue that the petitioner bears the responsibility for tax payments as per the agreement, and thus, the writ petition should be dismissed.

During the hearing, Senior Counsel Sri S. Ravi, representing the petitioner, vehemently contested the impugned Assessment Order, arguing that the assessing authority, the first respondent, misapplied provisions of the GST Act to the Custom Mill Rice (CMR) agreement between the petitioner and the fourth respondent. He criticized the inclusion of the value of by-products in the total consideration for GST assessment. Referring to Clause No.22 of the agreement, Ravi emphasized that the by-products obtained during milling, such as brokens, bran, and husk, were explicitly stated to be retained by the petitioner without forming part of the consideration.

Ravi pointed out that while the clause mentions the petitioner’s responsibility for expenses and taxes on the sale of by-products, it does not imply that the by-products themselves constitute consideration for milling. He argued that this clause simply mandates the petitioner’s liability to pay GST on the sale of taxable by-products, such as bran, while brokens and husk are exempt from GST.

Moreover, Ravi highlighted the purpose behind the fourth respondent allowing the petitioner to retain by-products. He explained that the petitioner is obligated to deliver a certain percentage of Custom Milled Rice (CMR) regardless of the actual yield, leading to potential losses for the petitioner. To compensate for these losses, the fourth respondent permits the petitioner to retain and sell the by-products. Ravi emphasized that this arrangement serves as compensation rather than consideration under the GST Act.

Ravi lamented that the first respondent failed to grasp these factual intricacies and erroneously treated the by-products as part of the consideration. He argued that proper appreciation of the agreement’s terms and the purpose behind permitting the retention of by-products would reveal that they do not constitute consideration for milling.

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