Taxability solubles Taxability of dried distilled grains with solubles (DDGS)

[Navjot Singh]

What is DDGS?

1. Distillers grains are a cereal byproduct of the distillation process. Brewer's spent grain usually refers to barley produced as a byproduct of brewing, while distillers grains are a mix of corn, rice, and other grains.
2. There are two main sources of these grains. The traditional sources were from brewers. More recently, ethanol biofuel plants are a growing source. It is created in distilleries by drying mash and is subsequently sold for a variety of purposes, usually as fodder for livestock (especially ruminants). Corn-based distillers grains from the ethanol industry are commonly sold as a high protein livestock feed that increases efficiency and lowers the risk of subacute acidosis in beef cattle.
3. Recently, studies indicate that dried distillers grains with solubles (DDGS) as a food source for human consumption may have some benefit in reducing heart disease risk.
4. The mash leftover from the process contains nutrients, such as protein, fiber, germ, vitamins, and minerals, and research suggests that the flour made from DDG will work well with cookies and flatbread. The texture and taste of food-grade DDG, especially corn, has been compared to breakfast cereal.

What's the Problem?

1. CBIC  has issued  Circular  No.  80/54  /2018-GST  clarifying GST rates & classification of various goods i.e Applicable GST rate on Fish meal and other raw materials used for making cattle/poultry/aquatic feed.
2. In 2020, the Intelligence Wing of GST (DGGST) inspected Ethanol Manufactures and found that various companies engaged in the manufacture of Ethanol from grains are evading payment of GST leviable on the supply of Distilled Grains with Soluble (DGS) by misclassification them under the Heading 2309 as a prepared animal feed supplement. As per DGGST, In the central excise period "brewing or distilling dregs and waste" were classified under Tariff Head 2303, where the rate of Central Excise Duty was nil. Presently in GST, the supply of goods falling within the Heading 2303 attracts 5% GST. But the items under 2309 including prepared animal feed supplements are nil rated in the GST regime.
3. Press Release of 45th GST Council contained a point wherein, it was mentioned Distillers’ 'Brewers' Spent Grain (BSG), Dried Grains with Soluble [DDGS] and other such residues, falling under HS code 2303 attract GST at the rate of 5%.
4. Now, it is worthwhile to mention that, the said line is under the 'Clarification' tab in the Press Release, which means, the council wishes to clarify the HSN Code of the product. Just to legalize the proceedings of DGGST.
5. Interestingly, The Larger Bench of the Hon’ble Supreme Court in the COMMISSIONER OF CUSTOMS (IMPORT) , MUMBAI VERSUS M/S. DILIP KUMAR AND COMPANY & ORS. [2018 (7) TMI 1826 - SUPREME COURT]  held that has laid down that inputs for animal feed are different from the animal feed.

Let's Understand whether DDGS is a 'Prepared Animal Feed' or Raw Material for the 'Prepared Animal Feed'?

1. The chemical formula for ethyl ethanol is C₂H₅OH and its calorific value equals 19.6 MJ/L. There exist two technological processes for obtaining ethanol from corn: the wet and the dry ones.
2. The processes are alike, but they result in different byproducts. Dry grinding allows for a greater volume of bioethanol, but the only other product in the animal feed (WDGS, DDGS).
3. When the wet technology is used, apart from ethanol and animal feed corn oil, corn syrup, and gluten are obtained. The production of ethanol requires a two-stage fermentation of starch: the first stage is the decomposition of starch into glucose and maltose, the second stage is yeast fermentation during which disaccharides and monosaccharides are converted into ethanol. The polymeric structure of starch is destroyed by enzymes and temperature. Two enzymes are used in the industrial process. The first one is α-amylase, whose function is to hydrolyze polymers to produce shorter chains (dextrins), which remain in the solution: this is the condensation stage. Then, due to the activity of glucoamylase in the saccharification stage, dextrins convert to simple sugars, glucose, and maltose (dimer of α-1–4 glucose).
4. The obtained solution undergoes yeast fermentation (Saccharomyces cerevisiae): one molecule of glucose is converted to two molecules of carbon dioxide. Post-fermentation liquid is then distilled and the decoction is separated into the solid and liquid phases with the use of decanters.
5. The liquid phase is then evaporated and condensed into syrup, which is mixed with the solid phase from the decanters. The resulting decoction is centrifuged, dried, and finally granulated.
6. DDGS is sticky. It has very low amylase content and high protein content. It is relatively easy to digest and has high nutritional value. The moisture content in DDGS at the maximum is 10%. It has a higher biological value than other gluten. It has an above-average amino acid profile and has great health benefits for your livestock.
7. Now, as per the process laid down, the DDGS is a processed by-product and can be directly fed to Livestock.
8. Also, Cattle Feed manufacturers mix the DDGS along with other substances to form a mixture.
9. The twin test of common parlance and the ingredients contained in the product were succinctly summed up by the Hon'ble Supreme Court for classification of products enumerated in tariff schedules in NATURALLE HEALTH PRODUCTS (P) LTD. VERSUS COLLR. OF C. EX., HYDERABAD [2003 (11) TMI 69 - SUPREME COURT].
10. The twin test method evolved by the Hon'ble Supreme Court was applied to determine the classification of a product as a cosmetic or medicament in PUMA AYURVEDIC HERBAL (P) LTD. VERSUS COMMISSIONER OF C. EX., NAGPUR [2006 (3) TMI 141 - SUPREME COURT].
11. Henceforth, the judgment of the Supreme Court fits rightly here to prove the fact that, the DDGS is not a Raw Material but in itself a 'Cattle Feed' and that's why should be classified rightly under 2309 rather than 2303.

Our View

Now, the manufacturers should take care of this classification dispute and Trade associations can bring the issues with Policy Wing.

Further, they should start levying the tax, but the press release mentioned the DDGS as per HSN 2303. Now, one should levy the tax on their supplies but they should not change the HS i.e. mention 2309 only.

Business houses should continue their fight if any Show Cause Notices/Summons are being served. 

Navjot Singh

Partner - Indirect Tax