Milk Chilling not ‘Agricultural Produce’, Liable for Service Tax: CESTAT [Read Order]

The New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) ruled that the chilling of milk is a taxable service under the Finance Act, 1994, and is not classified as "agricultural produce" under Section 65B(5) of the Finance Act.

Jai Durge Ice Factory, the appellant, chills milk for Sriganganagar Zila Dugdh Utpadak Sahakari Sangh Ltd. (SZDUS) and rents out godowns. A dispute arose regarding service tax liability for these activities.

The department determined that the appellant had provided taxable services amounting to Rs. 15,32,720, comprising Rs. 15,09,320 from chilling charges and Rs. 23,400 from godown rent. A show cause notice was issued demanding a service tax of Rs. 1,89,439 along with interest, penalty, and late fees. The Order dated January 15, 2015, confirmed the demand.

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The appellant did not challenge the tax liability on godown rent but challenged the imposition of service tax on milk chilling services. The appellant’s counsel argued that chilling of milk falls under the negative list of services under Section 66D(d)(iii) of the Finance Act, 1994, which exempts processes carried out at an agricultural farm that do not alter the essential characteristics of agricultural produce.

The appellant’s counsel relied on Notification No. 11/2017 dated June 28, 2017, which provided exemptions for services related to agriculture, and cited the Gujarat Co-operative Milk Marketing Federation Ltd. case, where the Gujarat High Court held that milk chilling and packing services were exempt under GST.

The revenue countered that the chilling of milk does not qualify as an agricultural activity under the Finance Act. The definition of “agricultural produce” under Section 65B(5) excludes milk, and chilling is not an operation conducted on an agricultural farm.

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The revenue further argued that the exemption under GST relied upon by the appellant was not applicable since service tax under the Finance Act, 1994, had a distinct legal framework.

The two-member bench comprising Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member) observed that the negative list under Section 66D(d)(iii) specifically applies to agricultural processes carried out on a farm and does not extend to milk chilling.

The tribunal further held that the Gujarat High Court ruling was inapplicable because it related to the GST regime and not the Finance Act, 1994. The tribunal confirmed that chilling of milk constitutes a service and is chargeable to service tax from July 1, 2012, onwards. The appellant’s appeal was dismissed.

To Read the full text of the Order CLICK HERE

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