The Customs, Excise & Service Tax Appellate Tribunal, Chennai Bench has allowed the appeal holding that services rendered in relation to processing of unmanufactured tobacco qualify as Business Auxiliary Service (BAS) and are exempt from service tax as agriculture-related activities.
The bench of Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member) has observed that the relationship between the parties was that of a contractor and principal under a “contract for service,” and not an employer-employee relationship. Consequently, the services were correctly classifiable under Business Auxiliary Service and not manpower supply service.
The dispute arose from a refund claim of Rs. 42.13 lakh filed by the appellant for service tax paid during the period April 2012 to September 2013. The appellant had entered into a contract with ITC Ltd. for carrying out activities such as processing, packing, and handling of unmanufactured tobacco. The Department, however, rejected the refund on the ground that the services were in the nature of manpower supply, which is taxable and not eligible for exemption. This view was upheld by the Commissioner (Appeals), leading to the present appeal.
Before the Tribunal, the core issue was whether the services provided by the appellant were classifiable as manpower supply services or as job work/processing services falling under Business Auxiliary Service.
The department argued that the appellant merely supplied labour, with consideration linked to wages and manpower deployed. In contrast, the appellant maintained that it was undertaking independent processing of agricultural produce, which qualifies for exemption under the service tax law.
The Tribunal undertook a detailed examination of the contractual terms and applied the legal tests laid down by the Supreme Court of India to determine the true nature of the arrangement. It observed that the contractor retained full control and supervision over its workers, including disciplinary authority, payment of wages, and statutory compliance. ITC did not exercise employer-like control over the workforce. The agreement also explicitly clarified that the arrangement was for carrying out specified jobs and not for supply of manpower.
The Tribunal further examined whether the services qualified for exemption as agriculture-related activities. It observed that tobacco, in its unmanufactured form, is an agricultural produce, and the activities undertaken—such as threshing, packing, and handling—are incidental processes that do not alter its essential characteristics. These activities were held to be part of an intermediate production process in relation to agriculture.
Referring to the applicable exemption provisions under Notification No. 14/2004-ST (pre-negative list regime) and Mega Exemption Notification No. 25/2012-ST (post-negative list regime), the Tribunal held that such services are exempt from service tax. It emphasised that both regimes consistently provide exemption to services relating to processing of agricultural produce.
The Tribunal also criticised the findings of the Commissioner (Appeals), noting that relevant documents, including the agreement, were not properly considered. It held that the conclusions drawn were superficial and failed to appreciate the nature of the activities and their connection with agriculture.
Relying on earlier decisions of coordinate benches on similar issues involving tobacco processing, which had also been affirmed by higher courts, the Tribunal reinforced its conclusion that such activities are not liable to service tax when they relate to agricultural produce.
The Tribunal set aside the impugned order and allowed the appeal, holding that the appellant is entitled to the claimed refund along with consequential relief.
Case Details
Case Title: Updater Services Pvt. Ltd. Versus Commissioner of GST & Central Excise
Citation: JURISHOUR-1039-CES-2026(CHE)
Case No.: Service Tax Appeal No. 42414 of 2016
Date: 28.04.2026
Counsel For Appellant: G. Shivakumar, Advocate
Counsel For Respondent: N. Satyanarayanan, Authorised Representative
