APPELLATE ADVANCE RULING ON CLASSIFICATION AND RATE OF DE-OILED CAKE

[Dr. Sanjiv Agarwal]

Here is an appellate advance ruling pronounced by the Appellate Authority for Advance Ruling (AAAR), Uttar Pradesh), on the direction of Allahabad High Court.

In Re: Khandelwal Extraction Ltd. 2019 (7) TMI 1335 - APPELLATE AUTHORITY FOR ADVANCE RULING UTTAR PRADESH, the appellant was engaged in solvent extraction and manufacture of de-oiled mahua cake /de-oiled  rice bran. It sought advance ruling on the following issues:

1. Whether mahua de-oiled cake/ de-oiled rice bran being used as an ingredient of cattle feed, poultry feed and other animal feeds and is 'Waste generated' during the Solvent Extraction process?
2. Whether the applicant is eligible to get entire tax input credit of GST paid on purchase of mahua oil cake/ rice bran oil cake used in the manufacture of solvent extracted oil?

The AAR pronounced the following ruling vide Order dated 14.12.2018  M/S KHANDELWAL EXTRACTIONS LTD. VERSUS STATE OF U.P. AND 6 OTHERS 2018 (12) TMI 891 - ALLAHABAD HIGH COURT

1. Mahua De-oiled cake/ De-oiled Rice Bran is a by product occurred during the Solvent Extraction process, which is used as an ingredient of Cattle Feed, Poultry Feed and other animal feeds.
2. The Input credit of GST paid on purchase of Mahua Oil Cake/Rice Bran Oil cake used in the manufacture of solvent extracted oil is partially allowed as per process/ formula prescribed in the Chapter V (INPUT TAX CREDIT) of CST Rule, 2017, because, the applicant manufacturing both taxable and exempted goods by using raw materials viz. Mahua De-oiled cake and De-oiled Rice Bran. Further, if common inputs are used for both taxable and exempted supplies, the applicant is required to reverse die credit proportional to the amount of credit pertaining to the exempted supplies immediately.

Being aggrieved, applicant filed appeal before AAAR on the following grounds:

1. Advance Ruling Authority has wrongly denied the entire input tax credit and on the settled jurisprudence.
2. Advance Ruling Authority was bound by the judicial discipline laid down by the Hon'ble Apex Court.
3. Advance Ruling Authority has failed to discuss the fact if the emergence of 'waste' is to be treated as supply at all.
4. De-oil cake is generated as waste and cannot be treated as a 'supply by way of manufacture'.
5. Application of Section 17(2) CGST Act, 2017 does not extend to involuntary generation of 'Waste'.
6. Marketability is not a criterion to classify an item as 'waste'.

AAAR decided the appeal expartie and ruled as follows:

1. Input Credit attributable to the supply of de-oiled rice bran cake (exempted supply) is to be reversed by the appellant in terms of Section 17(2) of the CGST Act, 2017; and
2. GST @ 18% is payable on supply of de-oiled mahua cake with consequent allowing of input credit in terms of Section 16 of the CGST Act, 2017.

The ex parte order was challenged before Hon'ble High Court Allahabad, vide writ Tax No. 1605 of 2018, dated 14-12-2018 and the matter was remitted to the Appellate Authority to decide the petitioner's appeal afresh, as expeditiously as possible by the Court.

Appellant prayed for:

1. Setting aside/modifying the order of AAR.
2. The term waste is not defined in CGST Act, 2017 and therefore the case laws of Apex Court and higher courts are having binding value on the scope of the term.
3. The 'Waste' generated during the manufacturing process cannot be treated as 'supply' in light of judicial pronouncements since it is mere technological necessity.
4. The provisions of Section 17 and more specifically sub-section (2) of CGST Act, 2017 are inapplicable.
5. Entire Input Credit should be allowed since the whole of it is being used in the manufacture of solvent extract oil.

The AAAR noted the following issues to be addressed :

1. Whether de-oiled mahua cake would merit classification under Chapter 2306 90 11 of the CGST Tariff or under the head 2306 90 90 of the Tariff.
2. Whether in the first round of issue placed before the authority the chapter note to Chapter 23 of the GST Tariff shall have an overriding effect for exclusion of mahua de-oiled cake from Chapter 2309.
3. Whether the mahua de-oiled cake is an unintended generated waste/ solid residuesarising due to technical necessity.
4. Whether the product falling under the specific entry, can it be overridden by residual entry.
5. Whether the input tax credit of GST paid on purchase of mahua oil cake, shall be cohesively allowed, and
6. Whether the provision of Section 17(2) of the CGST Act, 2017 shall still apply when the classification under Chapter 2306 stands final.

After taking into account the tariff and submissions, the AAAR ruled as under:

1. Input Credit attributable to the supply of de-oiled rice bran cake (exempted supply) is to be reversed by the appellant in terms of Section 17(2) of the CGST Act, 2017; and
2. GST @ 5% is payable on supply of de-oiled mahua cake with consequently allowing the input credit in terms of Section 16 of the CGST Act, 2017.