Threshing and Redrying of Tobacco Leaves Is Agricultural Processing, Not Taxable as BAS: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Bench has held that threshing, drying and packing of tobacco leaves undertaken on a job-work basis is a process related to agricultural produce and therefore cannot be subjected to service tax under the category of Business Auxiliary Service (BAS). The Bench of Angad Prasad (Member–Judicial) and A.K. Jyotishi (Member–Technical) dismissed the appeal filed by the Commissioner of Central Tax, Guntur, thereby upholding the order of the Commissioner (Appeals) which had earlier set aside the service tax demand of ₹1.66 crore against M/s Premier Tobacco Packers. The respondent/assessee, M/s Premier Tobacco Packers is engaged in the trading of tobacco and also undertakes threshing and redrying of tobacco leaves on a job-work basis for buyers and exporters. The Department alleged that the job-work charges received for these activities amounted to “Business Auxiliary Service” and therefore attracted service tax liability. A show cause notice was issued demanding service tax of ₹1,66,98,271 along with interest and penalties. The adjudicating authority confirmed the demand through an order dated December 21, 2016. However, the Commissioner (Appeals) later set aside the order, prompting the Department to file an appeal before the Tribunal. The department contended that the respondent had no connection with the cultivation or harvesting of tobacco and that the activities carried out in the factory occurred after the tobacco was auctioned through platforms managed by the Tobacco Board of India. The processes undertaken by the company involved machinery and labour, added value to the tobacco, enhanced its shelf life and prepared it for cigarette manufacturing. Therefore, it argued that such activities should not be treated as agricultural operations but as taxable services under BAS. The department also asserted that cured tobacco brought to the processing units could not be treated as “primary agricultural produce” and therefore did not qualify for exemption under the relevant service tax notifications. The respondent argued that the issue had already been settled by an earlier Tribunal decision in Green Leaf Tobacco Threshers Ltd. vs CCE & ST, Guntur, where identical activities were held to be processing related to agriculture and therefore exempt from service tax. Importantly, the appeals filed by the Department against that decision had been dismissed by the Supreme Court of India, making the ruling binding precedent. The Tribunal observed that the core issue was whether further processing, drying and packing of tobacco leaves on job-work basis amounted to Business Auxiliary Service or merely constituted processing of agricultural produce. Referring to the definition of “agricultural produce” under the Service Tax (Removal of Difficulty) Order, 2002, the Bench noted that produce resulting from cultivation remains agricultural produce as long as the processing does not alter its essential characteristics and merely makes it marketable. The Tribunal emphasized that threshing and drying of tobacco leaves do not result in the manufacture of a new product. The essential character of tobacco remains unchanged, and the process only stabilizes the leaves and prepares them for storage or export. The Bench also noted that a previous Tribunal ruling had already clarified that such activities fall within the expression “processing of goods for or on behalf of the client in relation to agriculture,” which is exempt from service tax under the relevant notifications. The Tribunal further held that once a coordinate Bench has decided an identical issue and the ruling has been affirmed by the Supreme Court, judicial discipline requires the same view to be followed unless there are distinguishing facts. Since the Department failed to demonstrate any such distinction, the Tribunal concluded that the processing undertaken by the respondent cannot be taxed under Business Auxiliary Service. Holding that the activity remains related to agricultural produce and does not create a new commodity, the Tribunal found no merit in the Department’s appeal. Accordingly, the appeal was dismissed and the relief granted to the assessee was upheld. Case Details Case Title: Commissioner of Central Tax Guntur - GST Versus M/s Premier Tobacco Packers Citation: JURISHOUR-376-CES-2026(HYD) Case No.: Service Tax Appeal No. 30423 of 2018 Date: 13.03.2026 Counsel For Appellant: K. Sreenivasa Reddy, AR Counsel For Respondent: C.S. Srinivas, Consultant Click Here To Read Order Read More: CESTAT Allows CENVAT Credit on CVD/SAD Paid Through DEPB Scrips

Threshing and Redrying of Tobacco Leaves Is Agricultural Processing, Not Taxable as BAS: CESTAT

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