Storage Of Un-Manufactured Tobacco Is Outside Scope Of Taxable Service : CESTAT

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the storage of un-manufactured tobacco is outside the scope of taxable service, so no service tax is payable. The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that the Board performs statutory and regulatory functions and therefore the service tax demand raised against it was unsustainable. The statutory fees collected by the Tobacco Board for conducting tobacco auctions cannot be treated as consideration for taxable services under the Finance Act, 1994. A batch of appeals filed by the Tobacco Board as well as the Department challenging an Order-in-Original passed by the Commissioner of Central Excise and Service Tax, Guntur. The demand related to the period from May 2006 to March 2008 and concerned service tax liability on auction fees, storage charges, and demurrage collected by the Board. The dispute arose after the department issued a show cause notice alleging that the Board’s activity of auctioning tobacco leaves through its auction platforms amounted to “auction of property” service under the Finance Act, 1994. The authorities contended that the Board was providing infrastructure and auction services to growers and buyers and collecting fees, which constituted consideration for taxable services. The Tobacco Board challenged the demand, arguing that it is a statutory body established under the Tobacco Board Act, 1975 to regulate the production and marketing of Virginia tobacco. According to the Board, the auction platforms were created to protect growers from exploitation and facilitate transparent sale of tobacco. The Board collects a statutory auction fee of 2 percent—shared equally between buyer and seller—only as mandated by law to support regulatory functions. The Tribunal accepted the Board’s argument that the auction fee is a statutory levy and not consideration for a commercial service. It relied on precedents including the decision of the Supreme Court of India in Commissioner of Central Excise and Service Tax vs. Gujarat Industrial Development Corporation and Krishi Upaj Mandi Samiti vs. CCE & ST, which held that statutory levies collected by public authorities in discharge of statutory obligations cannot be treated as taxable consideration unless there is a clear commercial element. Applying this principle, the Tribunal observed that the Tobacco Board performs regulatory functions such as grading tobacco, conducting auctions, and facilitating marketing under statutory provisions. The fee collected for such activities is a compulsory levy prescribed by law and therefore cannot be taxed as a service. The Tribunal also examined whether storage and warehousing charges collected by the Board were liable to service tax. It noted that the tobacco stored in the Board’s facilities was unmanufactured tobacco, which qualifies as “agricultural produce.” Since the definition of storage and warehousing service under the Finance Act excludes storage of agricultural produce, the Tribunal held that no service tax could be levied on such storage services. Similarly, demurrage charges collected from traders for delayed lifting of tobacco stocks were found to be penal in nature rather than consideration for a service. The Tribunal observed that such charges are imposed to discourage delay and cannot be treated as payment for a taxable activity. Consequently, the demurrage charges were also held to be outside the scope of service tax. The Tribunal further observed that the issue of taxability of statutory authorities was subject to considerable legal uncertainty during the relevant period. Therefore, even on the question of limitation, the extended period for raising tax demands could not be invoked because the Board had acted under a bona fide belief that its activities were not taxable. In its final order, the Tribunal allowed the appeals filed by the Tobacco Board and set aside the service tax demand, interest and penalties. The appeal filed by the Department seeking imposition of additional penalties was dismissed. Case Details Case Title: The Regional Manager, Tobacco Board Versus Commissioner of Central Excise And Service Tax Guntur Citation: JURISHOUR-369-CES-2026(HYD) Case No.: Service Tax Appeal No. 251 of 2012 Date: 13.03.2026 Counsel For Appellant: B. Venugopal, Advocate Counsel For Respondent: A. Rangadham, Authorized Representative Click Here To Read Order Read More: Shahnaz Ayurvedics Products Are Ayurvedic Medicaments, Not Cosmetics; CESTAT Quashes Excise Duty

Storage Of Un-Manufactured Tobacco Is Outside Scope Of Taxable Service : CESTAT

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