MILK CHILLING – WHETHER TAXABLE?

[Dr. Sanjiv Agarwal]

Cold storage and chilling plants generally enter into an Agreement with milk producers / dairies for chilling of milk on agreed rates and other terms and conditions as per Agreements between the parties.

Chilling Activity

Chilling plants or cold storages usually provide the following services:

1. Good office accommodation and rooms for testing laboratory.
2. Cattle feed store facility
3. Proper covered place for erecting milk chiller, milk storage tank, dump tank, weighing balance etc.
4. Milk reception dock for unloading milk cans, washing of cans, weighment etc.
5. Portable tube well, water facility for its various operations.
6. Drainage facility for various wastages at the chilling centre so that the cleanliness is maintained.
7. Motorable road or trouble free vehicle movements within chilling premises.

The obligations / work performed by the dairy (service recipient) at the chilling plant generally include -  

1. Receiving milk brought by various milk collection centre’s.
2. Examining fat and snf contents in the milk.
3. Making payment to milk transporting truck
4. Regulating the flow of milk through chilling plant provided for chilling of milk.
5. Storing the chilled milk in the insulated tank, so that the temperature of milk may be maintained.
6. Delivering the chilled milk to dairy tankers.

Relevant Statutory Provisions

1. The Central Excise Act, 1944

• Manufacture [Section 2(f)]

‘Manufacture’ includes any process –

1. Incidental or ancillary to the completion of a manufactured product; and
2. Which is specified in relation to any goods in the section or chapter notes of (the First Schedule) to the Central Excise Tariff Act, 1985 as amounting to manufacture or,
3. Which, in relation to goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

2. The Central Excise Tariff Act, 1985

• Chapter Note 6 to Chapter 4

In relation to products of this chapter, labeling or relabeling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture

3. The Finance Act, 1994

• Business Auxiliary Services [Section 65(19)]

    Business Auxiliary Service means any service in relation to -

1. promotion or marketing or sale of goods produced or provided by or belonging to the client or
2. promotion or marketing of service provided by the client or
3. Any customer care service provided on behalf of the client or
4. procurement of goods or services, which are inputs for the client or
5. production or processing of goods for, or on behalf of, the client
6. provision of service on behalf of the client
7. a service incidental or auxiliary to any activity specified in sub-clause (i) to (vi), such as billing, issue or collection or recovery of cheques, payments maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision.

and includes services as a commission agent, but does not include any activity that amounts to manufacture of excisable goods.

• Storage and Warehousing Services [Section 65(102)]

Storage and warehousing includes storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage.

Revenue's Contention

Department's contention in such cases is that the activity of milk chilling covered under the business auxiliary services defined under section 65(19)(v) of the Finance Act, 1994 , i.e., production or processing of goods for, on behalf of the client.

The activity of milk chilling does not get covered under the definition of manufacture as defined under section 2(f) of the Central Excise Act, 1944. There are two reasons due to which the chilling activities are not covered under the scope of manufacture. First, Chapter 4 and 6 to the Central Excise Act, 1985 includes labeling or relabeling of containers or repacking from bulk packs to retails packs and second one is adoption of any other treatment to render the product marketable to the consumer. Both labeling and relabeling was not done in this case. The milk is itself marketable, therefore, not covered under the scope of manufacture.

Department tend to classify chilling as business auxiliary service (Clause v) as the nature of services specified in the Agreement is treated as business auxiliary services.

Chilling Plant's View points

As the milk is highly perishable in nature and shelf life of the milk is very short, therefore, milk has a limitation of being transported to distant places. To overcome such situation and to prolong the shelf life of milk so as to transport it to distant places, the process of chilling of milk is inevitable as to make it marketable.

According to section 2(f) of Central Excise Act, 1944, any process which is required for any goods to make it marketable covered under the scope of manufacture. Without chilling of milk and its subsequent transportation for distribution, the milk is not marketable and therefore, the process of chilling is to be considered as an integral part.

Chapter Note 6 of Chapter 4 of CETA provides that “ In relation to products of this chapter, labeling or relabeling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture “

The activities of receipt , examination testing, chilling, storage and delivery of milk have been performed by the dairy's nominated staff only while the chilling facilities at the chilling plant has been provided by the Appellant. In these circumstances, it cannot be said that chilling unit has processed the milk for dairy. Since the element of processing is absent in the activities performed by the chilling unit, therefore, the provisions of Business Auxiliary Service as contained in section 65 (19) (v) of the Finance Act, 1994 are not applicable.

Chilling of milk cannot be said to be processing of milk as there is nothing to show that chilling is being done for some purpose other than storage purpose. A process is carried out on some goods for the purpose of production / manufacture of some goods or at least to carry out some change in the goods. The chilling being done by dairies on their own milk, is not for the purpose of production of some goods or to carry out any change in the milk and thus chilling of the milk cannot be said as processing of milk.

The most appropriate classification as per section 65A of the Finance Act, 1994 is ‘Storage and Warehousing Service’ and any service provided by a cold storage is specifically excluded from storage and warehousing service in the definition section 65(102) of the Finance Act, 1994.

Such chilling services would be covered under service provided by a cold storage and such services provided by the chilling unit would be exempt under specific exclusion provided to cold storage under section 65(102) of the Finance Act, 1994.

In Mewar Foods Pvt. Ltd. v CCE, Jaipur 2014 (1) TMI 355 - CESTAT NEW DELHI , it was held that, prima facie , the process of pasteurization is a process necessary to make milk marketable to the consumer and is covered by the Chapter 6 and Chapter 4 of the Central Excise Act, 1985, therefore, stay was granted.

In similar cases, at first appeal stage, it has been held by the Commissioner (Appeals) in few cases that the chilling units provide facilities for chilling of milk. As per the contract, they provide only infrastructure (chilling plant). It cannot be said that the such unit has processed goods (milk) for, or on behalf of, the client in as much as no goods (milk) has been supplied by dairy but dairy has itself undertaken the chilling activities by utilizing the infrastructure /manpower provided by the chilling unit. It was thus held that the facilities / services provided by the chilling units are not covered by sub-clause (v) of clause 19 of section 65 of the Finance act, 1994. Further chilling / cold storage is also excluded from Service Tax under Storage and Warehousing Services.

It may thus be inferred that chilling activities are not subject to Service Tax both as Business Auxiliary Services as well as Storage and Warehousing Services.