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Would coconut oil packaged in “small containers” be classified as edible oil or hair oil for the purpose of taxation?
The Supreme Court Bench of Justice Ranjan Gogoi and R Banumati were unable to arrive at a consensus to put this issue to rest. After delivering a split verdict in the matter, the case has been directed to be placed before Chief Justice Dipak Misra for appropriate orders.
The Bench was dealing with an appeal made by the Revenue Department against an order of the Customs Excise and Service Tax Appellate Tribunal (CESTAT).
The order in question had held that, for the purpose of taxation, coconut oil packed in small containers would be classified as edible oil, under Heading 1513, Chapter 15 of the First Schedule to the Central Excise and Tariff Act, 1985 (CETA).
This was contrary to the Excise Commissioner’s finding that oil packed in small containers would be classified as hair oil under Heading 3305, Chapter 33 of the CETA.
The import of this distinction lies in the fact that edible oil is levied a duty of 8%, whereas the tax on hair oil is twice as much i.e. 16%.
Two assessees had objected to the Central Excise Commissioner’s finding. The first was M/S Madhan Agro Industries Pvt Ltd, which manufactured 100% coconut oil in containers up to 2 litres under the brand of “Shanthi.”
The other group of assessees comprised of four job-workers of the company M/S Marico Limited, which sells 100% coconut oil under the “Parachute” name. The four workers in question received coconut oil from Marico in bulk, packed the same in small packages up to 500 ml, and then supplied the same back to Marico as per dispatch schedules issued.
Both Shanthi and Parachute oil packs were marked as “edible oil“. All assessments were made after the 2004 amendment to the CETA, which came into force in 2005.
Following arguments made by Senior Advocate AK Panda for the Revenue Department and Senior Advocate SK Bagaria for the assessees, Justice Gogoi ruled in favour of the respondent-assessees, whereas Justice Banumathi ruled in favour of the Revenue department.
The broad reasons for the split verdict have been summed up below.
Justice Gogoi: Coconut oil would fall under the category of edible oil, regardless of the size of its packaging
Effect of the 2004 amendment: Coconut oil initially fell within the purview of Heading 1513 as a fixed vegetable oil. This was supported by a Central Excise Notification dated August 1995. This notification which clearly declares that coconut oil, being a fixed vegetable oil would not fall under Heading 3305, which covers oils for “preparations for use on the hair.”
Following the 2004 amendment, coconut oil was specifically incorporated under Heading 1513 as an edible oil. On the other hand, Justice Gogoi noted that there was no such mention under Heading 3305 covering hair oils.
“…coconut oil as a preparation for use as hair oil is not included in Heading 3305 or any of its Sub-Headings.”
Further, merit was found in the argument that the 2004 amendment did not involve revenue implication. The primary purpose for the amendment was to implement the Harmonised System of Nomenclature (HSN).
Hence, the position that emerged is that coconut oil was always classified as an edible oil under Heading 1513. After the 2004 amendment, this classification was recognised in express terms.
Rajasthan Oil Mills v Commissioner of Central Exercise: A 2009 circular of the Central Board of Excise and Customs (CBEC) had earlier intimated that if coconut oil is packed in containers up to 200 ml, it may be considered generally for use as hair oil.
However, this was followed by a contrary finding in Rajasthan Oil Mills v Commissioner of Central Excise. Appeals against the same was dismissed by the Supreme Court in a non-speaking order.
Following this, the 2009 circular was withdrawn. Instead direction was given in 2015 that the issue of classification may be decided by the field officers “taking into consideration the facts of the case read with the judicial pronouncements.“
The Court noted that the appeals against the case were dismissed on merits, even if it was by a non-speaking order.
The product is not labelled ‘hair oil’: Following the amendment, explanatory notes accompanying the HSN required that in order to classify a good as hair oil under Heading 3305,
“…the goods/packages must be put up with labels/literatures and other indications that they are meant for use as perfumery, cosmetic and toilet preparations or the goods must be put up in a form clearly specialised for such use…”
This provision was similar to Note 2 of Chapter 33 of CETA, as it stood before the 2004 amendment. However, after the amendment, the now corresponding Note 3 of Chapter 33 did not contain any such requirement.
Nevertheless, relying on the explanatory note to the HSN, Justice Gogoi observed
“There is no representation, declaration or advertisement in the packings that the same can be or is meant to be used as a hair oil.”
Instead, the products were clearly marked as being edible oil.
The Common Parlance test is not applicable since there is no dispute as to the identity of the product, which is “coconut oil.”
Rather, Justice Gogoi noted that the only issue was,
“…whether ‘coconut oil’ which otherwise is covered by Heading 1513 of Chapter 15, if packed in small containers and pouches/sachets, would cease to be ’coconut oil’ falling under Chapter Heading 1513 and would be covered by Heading ‘preparations for use on the hair’ covered by Entry 3305 of Chapter 33.”
On these, among grounds, Justice Gogoi has concluded,
“The legislative history behind Chapter 15; the words and expressions in Heading 1513 of the Tariff Act; the relevant Heading i.e. 1513 in the HSN and the conditions/requirements stipulated in Chapter Note 3 of Chapter 33 of the Central Excise Tariff read in the light of the relevant provisions of Chapter Note 3 along with the explanatory notes of Chapter 33 of the HSN, all, would lead to the irresistible conclusion that coconut oil is classifiable under Heading 1513 of Chapter 15 of the Central Excise Tariff Act.”
Justice Banumathi: When it is packaged in small containers, coconut oil would be classified as hair oil, regardless of whether it has been labelled as edible oil by the manufacturers
Coconut oil in small packages satisfy criteria in Note 3 to Chapter 3 of CETA: Justice Banumati found that coconut oil, when packed in small containers, satisfies all the following criteria to constitute hair oil, as laid down in Note 3 to Chapter 33 of the CETA:
“Chapter Note 3 to Chapter 33 envisages four key things, namely:
This Note is not phrased in an exclusive manner. This means that an item falling under another Heading, may also fall within the purview of Heading 3305 i.e. hair oils, if the above criteria are fulfilled.
On the other hand, Section Note 2 to Section VI (also falling under Chapter 33) lays down that once a good is classified under Heading 3305, it should not be classified in any other schedule.
Moreover, Section Note 1 (e) to Chapter 15 indicates that items falling under Section VI would be excluded from the purview of Chapter 15, and by extension Heading 1513.
The result that follows is that coconut oil in small packets would fall within the exclusive domain hair oil:
“Coconut Oil’ packed in small sachets/containers suitable for being used as ‘Hair Oil’ is classifiable under Chapter Tariff Item 3305. When a good is classifiable under tariff item 3305, by virtue of amended Section Note 2 to Section VI, no other classification is permissible.”
No requirement to label product ‘hair oil’: Justice Banumati found merit in the view that after the 2004 amendment, there is no requirement for oil to be advertised as hair oil in order for it to fall under Heading 3305.
Following the amendment, it is only the HSN explanatory notes which indicate that the packings/container should bear a label declaring that the goods are used on hair. There is no such corresponding provision under the current provisions of Chapter 33 governing hair oil in CETA.
In fact, earlier provisions requiring the product to be labelled as being for hair use were removed by the 2004 amendment.
Currently, as per Note 3 to Chapter 3 mentioned above, so long as the product is suitable for use as ‘Hair Oil’ and it is packed in such a way that it is useable for the purposes of ‘Hair Oil’, it has to be classified as ‘Hair Oil’ under Chapter 33, Heading 3305.
The HSN Chapter Note to the contrary cannot be relied upon to determine the classification, as per the holding in Camlin Ltd v Commissioner of Central Excise, Mumbai. Rather the CETA Tariff Chapter Note (i.e. Note 3) must be considered.
The Common Parlance Test indicates that coconut oil, as generally understood, is hair oil. In this regard, reliance was place, inter alia, on the case of Jain Exports Pvt Ltd v Union of India Delhi. Justice Banumati observed,
“No one will normally understand ‘Coconut Oil’ to mean only as edible oil because such is not the major use of ‘edible oil’. The moment we held that the impugned goods-coconut oil is suitable for use as ‘Hair Oil’ as discussed infra, it has to be classified only under Chapter 33.
Besides market impressions, online advertisement and newspaper reports also referred to the respondent-assessees as manufacturers of hair oil. In fact, even the Coconut Development Board has indicated that in smaller quantities, coconut oil is generally marketed as hair oil.
“… Coconut oil is marketed in bulk as well as in packs ranging from sachets containing 5 ml to 15 kg tins. The branded coconut oil in small packs is mainly marketed as hair oil and body oil.”
Rule 3 (c) of the General Rules of Interpretation: If a good cannot be classified under Rule 3 (a) and (b), as with the present case, the good is to be classified under the heading which occurs last in numerical order among those which equally merit classification. Going by this rule i.e. Rules 3 (c), small containers of coconut oil would fall under the subsequent Heading of 3305 covering hair oils.
Rajasthan Oil Mill case position not final: Justice Banumati noted that the appeal filed against the Rajasthan Oil Mills case was dismissed by a non-speaking order at the admission stage. Hence the “Doctrine of Merger” is not applicable. Justice Banumati held,
“When the order passed by the Supreme Court is not a speaking order, it is not correct to assume that the Supreme Court had decided implicitly all the questions in relation to the merits of the order. Now, the position (as per Circular dated 12.10.2015) is to decide the issue of classification by the field taking into consideration the facts of the case read with judicial pronouncements.”
Therefore, Justice Banumati was inclined to allow the Revenue department’s appeal against the CESTAT and the respondent-assessees.