The Supreme Court on Wednesday held that Hamdard (Wakf) Laboratories’ popular drink concentrate “Sharbat Rooh Afza” is classifiable as a fruit drink/processed fruit product for taxation under the Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act) and will consequently attract only 4 percent VAT and not 12.5 percent [Hamdard (Wakf) Labs Vs Commissioner of Commercial Tax].
A Bench of Justices BV Nagarathna and R Mahadevan held that the consistent concessional classification of the product across several States strengthened Hamdard's position and showed that its interpretation was “neither artificial nor untenable, but a bona fide and commercially recognised interpretation”.
Accordingly, the Court ruled that the product is classifiable under Entry 103 of Schedule II of the Act as a fruit drink/processed fruit product and taxable at the concessional rate of 4 percent during the relevant assessment year.
Hence, it allowed the company’s appeals and set aside the Allahabad High Court judgment which had ruled that Rooh Afza is a non-fruit drink.
A copy of the detailed judgment is yet to be made available.
The dispute arose from the tax classification of Hamdard (Wakf) Laboratories’ popular drink concentrate “Sharbat Rooh Afza” under the Uttar Pradesh Value Added Tax Act, 2008.
The controversy pertained to whether the product should be treated as a “fruit drink/processed fruit” taxable at 4 percent under Entry 103 of Part A of Schedule II of UP VAT Act or as an unclassified commodity taxable at 12.5 percent under the residuary entry in Schedule V.
For the assessment years 2007–08 and 2008–09, Hamdard paid VAT at the lower rate of 4 percent on Rooh Afza sales, claiming that it fell within the entry covering processed or preserved fruits, fruit squash, fruit drink and fruit juice.
The tax authorities disagreed and treated the product as an unclassified item liable to higher VAT. Hamdard’s appeals before the first appellate authority and the Commercial Tax Tribunal failed with the tribunal holding that in common and commercial parlance, the product is understood as “sharbat” rather than a fruit drink.
In July 2018, the Allahabad High Court dismissed a batch of revisions filed by Hamdard and upheld the tribunal’s view.
The High Court relied heavily on the “common parlance test” and said that consumers asking for fruit juice or fruit drink would not be given Rooh Afza and vice-versa.
It also noted regulatory material indicating that the product contains about 10 percent fruit juice and had been described in licences as a “non-fruit syrup/sharbat”, reinforcing the conclusion that it does not qualify as fruit drink, fruit juice or processed fruit under the VAT schedules.
Hamdard subsequently challenged the ruling before the Supreme Court, bringing the long-running classification dispute to the apex court.
The Supreme Court rejected the reasoning of the tax authorities and the High Court, and held that the concurrent findings were not immune from appellate scrutiny. It found that those conclusions were vitiated by a clear misdirection in law and were based on an erroneous application of settled principles governing fiscal classification.
Hamdard was represented by Senior Advocate Arvind Datar with a team from King Stubb & Kasiva comprising Aditya Bhattachrya (Partner), Vipin Upadhyay (Partner), Simran Tandon (Associate Partner), Ritwik Tyagi (Senior Associate) and Akriti Sharma (Associate).
The Tax Department was represented by advocate Bhakti Vardhan Singh