Coconut Oil Classification: Supreme Court Divided on Excise Duty for Small Packaging (April 13, 2018)

Arguments of the Revenue

• The Revenue argued that the classification should be based on the “Common Parlance Test,” meaning how the product is understood in the market. They claimed that coconut oil in small packages is generally perceived and purchased as “hair oil” rather than “edible oil.”

• They relied on Rule 1 of the General Rules for the Interpretation of the Schedule to the Tariff Act, along with Chapter Note 1(e) to Chapter 15, Section Note 2 to Section VI, and Chapter Note 3 to Chapter 33, to support their contention that the product should be classified under Chapter 33.

• The Revenue presented a market survey indicating that consumers primarily purchase coconut oil in smaller packages for use as hair oil.

• They argued that the products are “suitable for use” as hair oil and are “put up in packings of a kind sold by retail for such use,” thus meeting the criteria for classification under Chapter 33.

Arguments of the Assessees

• The Assessees argued that the provisions relied upon by the Revenue were not applicable and that coconut oil, regardless of packaging size, should be classified under Chapter 15, specifically Heading 1513, which deals with “Coconut (copra) oil.”

• They contended that the 2005 amendment to the Central Excise Tariff Act was solely for fine-tuning the tariff with the Harmonized System of Nomenclature (HSN) and did not intend to change the classification of coconut oil.

• They highlighted that all packages were clearly marked as “edible oil” and there was no advertisement or declaration that the oil was meant for use as hair oil.

• The Assessees relied on a CBEC circular from 1995, which stated that coconut oil should be classified under Chapter 15 unless it is specifically prepared for use on hair or labeled as such.

• They argued that the size of the packaging should not determine the classification, and that the product remains “coconut oil” regardless of the container size.

Submissions Table

Cases Relied Upon

Legal Provisions

Treatment of Authorities

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Collector of Central Excise, Shillong Vs. Wood Craft Products Ltd. [1995] 3 SCC 454*: Both judges agreed that this case established that the Central excise tariffs are based on the HSN.
• Commissioner of Customs and Central Excise, Goa Vs. Phil Corporation Limited [2008] 17 SCC 569*: Both judges agreed that this case established that the Central Excise Tariff Act is broadly based on the HSN.
• O.K. Play (India) Ltd. Vs. Commissioner of Central Excise, Delhi­III, Gurgaon [2005] 2 SCC 460*: Justice Gogoi followed this case to emphasize that the understanding of a product in the market has a limited role in classification.
• Indo-International Industries vs. Commissioner of Sales Tax, U.P. [1981] 8 E.L.T. 325 (S.C.)*: Justice Gogoi discussed this case to explain the common parlance test. Justice Banumathi discussed to explain the common parlance test.
• Asian Paints India Ltd. vs. Collector of Central Excise [1988] 35 E.L.T. 3 (S.C.)*: Justice Gogoi discussed this case to explain the common parlance test. Justice Banumathi discussed to explain the common parlance test.
• Shree Baidyanath Ayurved Bhavan Ltd. vs. Collector of Central Excise, Nagpur [1996] 9 SCC 402*: Justice Gogoi discussed this case to explain the common parlance test. Justice Banumathi discussed to explain thecommon parlance test.
• Alpine Industries vs. Collector of Central Excise, New Delhi [2003] 3 SCC 111*: Justice Gogoi discussed this case to explain the common parlance test. Justice Banumathi discussed to explain the common parlance test.
• Camlin Limited Vs. Commissioner of Central Excise, Mumbai [2008] 9 SCC 82*: Justice Gogoi followed this case to emphasize that if the entries under HSN and the entries under the Central Excise Tariff Act are different then reliance cannot be placed upon HSN Notes.
• V.M. Salgaocar & Bros. Pvt. Ltd. Vs. Commissioner of Income Tax [2000] 5 SCC 373*: Justice Gogoi followed this case to explain the doctrine of merger.
• Union of India and Ors. v. Pesticides Manufacturing and Formulators Association of India [2002] 8 SCC 410*: Justice Gogoi followed this case to emphasize that if there are two specific headings to which a product can be referred, the one occurring subsequently would prevail.
• Commissioner of Central Excise, Delhi v. Carrier Aircon Ltd. [2006] 5 SCC 596*: Justice Gogoi followed this case to emphasize that end use to which the product is put to by itself cannot be determinative of the classification of the product.
• Commissioner of Central Excise, New Delhi v. Connaught Plaza Restaurant Private Ltd., New Delhi [2012] 13 SCC 639*: Justice Gogoi followed this case to emphasize that in the absence of a statutory definition, words in taxing statutes must be construed in terms of their commercial or trade understanding.
• Commissioner of Sales Tax, Madhya Pradesh, Indore v. Jaswant Singh Charan Singh [AIR 1967 SC 1454]*: Justice Gogoi followed this case to emphasize that a sales tax statute must be presumed to have used an ordinary term according to the meaning ascribed to it in common parlance.
• Commissioner of Central Excise v. Wockhardt Life Sciences Limited [2012] 5 SCC 585*: Justice Banumathi followed this case to emphasize “Common Parlance Test” or the “Commercial Usage Test”.
• Plasmac Machine Manufacturing Co. (P) Ltd. v. Collector of Central Excise, Bombay [1991] Supp (1) SCC 57*: Justice Banumathi followed this case to emphasize that goods should be classified according to their popular meaning or as they are understood in their commercial sense.
• Dabur Industries Ltd. v. Commissioner of Central Excise, Jamshedpur [2005] 4 SCC 9*: Justice Banumathi followed this case to emphasize that in classifying a product, the test was to see what the persons using the product understand it to be.
• Jain Exports Pvt. Ltd. v. Union of India [1987] 29 ELT 753 Del*: Justice Gogoi discussed this case to show that coconut oil is not at all used as an edible oil in a very large part of our country.
• Assistant Commissioner v. Marico Industries Ltd. [2006 SCC online Raj 446]*: Justice Gogoi discussed this case to show that small packings being done for convenience of consumers to cater to different sections of consumers at the different economic levels, it would not make the ‘edible coconut oil’ to be “Hair Oil”. Justice Banumathi discussed this case to show that the Rajasthan High Court had held that small packings being done for convenience of consumers to cater to different sections of consumers at the different economic levels, it would not make the ‘edible coconut oil’ to be “Hair Oil”.
• Marico Limited v. Commissioner, Commercial Taxes, UP [2015] 78 VST 423*: Justice Gogoi discussed this case related to the classification of coconut oil. Justice Banumathi discussed this case related to the classification of coconut oil.
• Raj Oil Mills Ltd. v. Commissioner, Central Excise [2014] 314 ELT 541 (Tri. – Mumbai)*: Justice Gogoi discussed this case. Justice Banumathi discussed this case but did not follow it.
• Circular No.145/56/95-CX dated 31.08.1995*: Justice Gogoi noted that the circular was issued when Chapter Note 2 was in force. Justice Banumathi noted that the circular was issued when Chapter Note 2 was in force and was withdrawn by subsequent circular.
• Circular No.102/05/2006-CX-3 dated 03.06.2009*: Justice Gogoi noted that the circular was withdrawn. Justice Banumathi noted that the circular was withdrawn.

Judgment by Justice Ranjan Gogoi

Justice Ranjan Gogoi held that the coconut oil in question is classifiable under Chapter 15, Heading 1513, as “Coconut (copra) oil.” He reasoned that the product is “coconut oil” irrespective of its packaging size. He emphasized that the common parlance test is not applicable when the product is clearly defined in the tariff. He relied on the Harmonized System of Nomenclature (HSN) and its explanatory notes to support his conclusion. Justice Gogoi also noted that the 2005 amendment to the Central Excise Tariff Act was solely for fine-tuning the tariff with the HSN and did not intend to change the classification of coconut oil.

He further stated that the size of the packaging should not determine the classification and that the product remains “coconut oil” regardless of the container size. He also noted that the CBEC circular from 1995 stated that coconut oil should be classified under Chapter 15 unless it is specifically prepared for use on hair or labeled as such.

Judgment by Justice R. Banumathi

Justice R. Banumathi held that the coconut oil in question is classifiable under Chapter 33, Heading 3305, as “Preparations for use on the hair,” which includes “Hair oil.” She reasoned that the product is “suitable for use” as hair oil and is “put up in packings of a kind sold by retail for such use,” thus meeting the criteria for classification under Chapter 33. She relied on Section Note 2 to Section VI and Chapter Note 3 to Chapter 33 of the Central Excise Tariff Act.

She also relied on the common parlance test and the market survey, which indicated that consumers primarily purchase coconut oil in smaller packages for use as hair oil. She noted that the 2005 amendment brought in significant changes in Chapter Note 3 to Chapter 33 and Section Note 2 to Section VI.

Justice Banumathi also considered the fact that “Parachute” is a registered trademark for “Hair Oil” and that the product is predominantly understood by the users namely dealers/consumers only as ‘Hair Oil’ and not as ‘edible oil’.