Coconut Oil Classification Under Excise Law: Supreme Court Divided on Edible vs. Hair Oil (13 April 2018)

Case Background

The case involves multiple appeals concerning the classification of coconut oil packaged in small containers. M/S Madhan Agro Industries (I) Pvt. Ltd. (MAIPL), the respondent in Civil Appeal No. 1766 of 2009, manufactured 100% pure coconut oil under the brand name “Shanthi.” The other respondents in Civil Appeal Nos. 6703-6710 of 2009 were job workers for M/S Marico Limited, who received bulk coconut oil and packed it into small packages under the brand name “Parachute.” These packages, including 5 ml pouches, were labeled as “edible oil.”

The core dispute arose because the revenue department contended that coconut oil in small packages should be classified as “hair oil” under Heading 3305 of the Central Excise Tariff Act, 1985, while the assessees argued for classification as coconut oil under Heading 1513. The revenue conceded that coconut oil in larger packings (beyond 2 kgs) should be classified under Heading 1513. The relevant period of assessment was after the amendment to the Central Excise Tariff Act, 1985, which came into force on 28.02.2005.

Timeline

Course of Proceedings

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) had ruled in favor of the assessees, holding that the coconut oil, even in small containers, should be classified under Heading 1513 as coconut oil. The revenue department appealed this decision, leading to the present case before the Supreme Court.

Legal Framework

The core of the dispute lies in the interpretation of the Central Excise Tariff Act, 1985, specifically:

• ✓ Heading 1513: This heading covers “Coconut (copra), palm kernel or babassu oil and fractions thereof, whether or not refined, but not chemically modified.”
• ✓ Heading 3305: This heading covers “Preparations for use on the hair,” including “Hair oil.”
• ✓ Chapter Note 3 to Chapter 33: This note states that headings 3303 to 3307 apply to products “suitable for use as goods of these headings and put up in packings of a kind sold by retail for such use.”
• ✓ Section Note 2 to Section VI: This note specifies that goods classifiable under headings 3303, 3304, 3305, 3306, and 3307 by reason of being put up in measured doses or for retail sale are to be classified in those headings and no other.

The dispute also involves the interpretation of the General Rules for the Interpretation of the Schedule to the Tariff Act, particularly Rule 1, which states that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes.

Arguments

Arguments on behalf of the Revenue:

• ✓ The Revenue argued that the coconut oil in small packages should be classified as “hair oil” under Heading 3305 based on the “common parlance test.” They claimed that market surveys indicated consumers primarily purchase small packs of coconut oil for hair application, not for edible purposes.
• ✓ They relied on Rule 1 of the General Rules for the Interpretation of the Schedule to the Tariff Act, Chapter Note 1(e) to Chapter 15, Section Note 2 to Section VI, and Chapter Note 3 to Chapter 33 to support their contention.
• ✓ The Revenue contended that the amendment to the Central Excise Tariff Act, effective from 28.02.2005, was to align the tariff with the Harmonized System of Nomenclature (HSN) and that the HSN supports their classification.
• ✓ They argued that the “Parachute” brand, owned by Marico, is a registered trademark for hair oil.

Arguments on behalf of the Assessees:

• ✓ The assessees argued that coconut oil, regardless of package size, should be classified under Chapter 15, specifically Heading 1513, which deals with coconut oil.
• ✓ They contended that the 2005 amendment was solely for fine-tuning the tariff with the HSN and did not intend to change the classification of coconut oil.
• ✓ They referred to the Statement of Objects and Reasons of the Amendment Bill, which stated that the proposed amendment does not make any change in the existing rates of the central excise duties.
• ✓ The assessees pointed out that all packages were labeled as “edible oil” and there was no advertisement or declaration that the oil was meant for use as hair oil.
• ✓ They relied on a 1995 CBEC circular clarifying that coconut oil, whether pure or refined and whether packed in small or large containers, merits classification under Heading 1503.
• ✓ They argued that the packing sizes conform to the Edible Oil packaging (Regulation) Order 1998 and the Standards of Weights and Measures (packaged commodities) Rules 1977.

Arguments Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the coconut oil manufactured and packed in small containers and sachets by the respondent(s) is classifiable under Chapter Heading 3305 (“Hair Oil”, “Other”) as claimed by the Revenue or under Chapter 15 Heading 1513: Coconut (Copra) oil as claimed by the respondent(s).

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The court considered the following cases and legal provisions:

Judgment

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

How each authority was viewed by the Court?

The Court’s view on the authorities is as follows:

• Collector of Central Excise, Shillong Vs. Wood Craft Products Ltd. [1995] 3 SCC 454*: Justice Ranjan Gogoi relied on this case to emphasize the importance of HSN in resolving classification disputes. Justice R. Banumathi relied on this case to state that the HSN is a safe guide for interpretation and is entitled to great consideration.
• Commissioner of Customs and Central Excise, Goa Vs. Phil Corporation Limited [2008] 17 SCC 569*: Justice Ranjan Gogoi relied on this case to emphasize the importance of the HSN in resolving classification disputes. Justice R. Banumathi relied on this case to state that the Central Excise Tariff Act is broadly based on the system of classification from the international convention called the Brussels Convention on the Harmonized Commodity Description and Coding System.
• O.K. Play (India) Ltd. Vs. Commissioner of Central Excise, Delhi-III, Gurgaon [2005] 2 SCC 460*: Justice Ranjan Gogoi relied on this case to support the view that the understanding of a product in the market has a limited role in classification. Justice R. Banumathi relied on this case to state that the functional utility and predominant or primary usage of the commodity which is being classified must be taken into account.
• Indo-International Industries vs. Commissioner of Sales Tax, U.P. [1981 (8) E.L.T. 325 (S.C.)]*: Justice Ranjan Gogoi cited this case as an example where the common parlance test was adopted to resolve a dispute of classification. Justice R. Banumathi cited this case to support the view that the goods should be classified according to their popular meaning.
• Asian Paints India Ltd. vs. Collector of Central Excise [1988 (35) E.L.T. 3 (S.C.)]*: Justice Ranjan Gogoi cited this case as an example where the common parlance test was adopted to resolve a dispute of classification. Justice R. Banumathi cited this case to support the view that when the definition of a word has not been given, it must be considered in its popular sense.
• Shree Baidyanath Ayurved Bhavan Ltd. vs. Collector of Central Excise, Nagpur [1996] 9 SCC 402*: Justice Ranjan Gogoi cited this case as an example where the common parlance test was adopted to resolve a dispute of classification. Justice R. Banumathi cited this case to support the view that the test was to see what the persons using the product understand it to be.
• Alpine Industries vs. Collector of Central Excise, New Delhi [2003] 3 SCC 111*: Justice Ranjan Gogoi cited this case to support the view that tariff entries are to be understood by their popular meaning. Justice R. Banumathi cited this case to support the view that in interpreting provisions of a statute like the Excise Act, the popular meaning as understood by the users should be applied and not the scientific or technical meaning.
• Camlin Limited Vs. Commissioner of Central Excise, Mumbai [2008] 9 SCC 823*: Justice Ranjan Gogoi cited this case to support the view that HSN can be ignored when the legislative intention to depart from HSN is clear. Justice R. Banumathi relied on this case to state 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 for the purposes of classification of goods under the Central Excise Tariff.
• V.M. Salgaocar & Bros. Pvt. Ltd. Vs. Commissioner of Income Tax [2000] 5 SCC 373*: Justice Ranjan Gogoi relied on this case to support the view that the order of the Tribunal merges with the decision of this Court. Justice R. Banumathi did not comment on this authority.
• Union of India and Ors. v. Pesticides Manufacturing and Formulators Association of India [2002] 8 SCC 410*: Justice R. Banumathi relied on this case to support the view that if there are two specific headings to which a product can be referred, the one occurring subsequently would prevail. Justice Ranjan Gogoi did not comment on this authority.
• Commissioner of Central Excise, Delhi v. Carrier Aircon Ltd. [2006] 5 SCC 596*: Justice R. Banumathi relied on this case to support the view that the end use of the product cannot be determinative of its classification. Justice Ranjan Gogoi did not comment on this authority.
• Commissioner of Central Excise, New Delhi v. Connaught Plaza Restaurant Private Ltd., New Delhi [2012] 13 SCC 639*: Justice R. Banumathi relied on this case to support the view that words in taxing statutes must be construed in terms of their commercial or trade understanding. Justice Ranjan Gogoi did not comment on this authority.
• Commissioner of Sales Tax, Madhya Pradesh, Indore v. Jaswant Singh Charan Singh AIR 1967 SC 1454*: Justice R. Banumathi relied on this case to support the view that ordinary terms should be given their meaning in common parlance. Justice Ranjan Gogoi did not comment on this authority.
• Commissioner of Central Excise v. Wockhardt Life Sciences Limited [2012] 5 SCC 585*: Justice R. Banumathi relied on this case to emphasize the “Common Parlance Test” or the “Commercial Usage Test”. Justice Ranjan Gogoi did not comment on this authority.
• Dabur Industries Ltd. v. Commissioner of Central Excise, Jamshedpur [2005] 4 SCC 9*: Justice R. Banumathi relied on this case to support the view that the test was to see what the persons using the product understand it to be. Justice Ranjan Gogoi did not comment on this authority.
• Plasmac Machine Manufacturing Co. (P) Ltd. v. Collector of Central Excise, Bombay 1991 Supp (1) SCC 57*: Justice R. Banumathi relied on this case to support the view that goods should be classified according to their popular meaning. Justice Ranjan Gogoi did not comment on this authority.
• Jain Exports Pvt. Ltd. v. Union of India 1987 (29) ELT 753 Del*: Justice R. Banumathi relied on this case to support the view that coconut oil is normally understood as hair oil. Justice Ranjan Gogoi did not comment on this authority.
• Assistant Commissioner v. Marico Industries Ltd. 2006 SCC online Raj 446*: Justice R. Banumathi relied on this case to support the view that small packings are done for convenience of consumers. Justice Ranjan Gogoi did not comment on this authority.
• Marico Limited v. Commissioner, Commercial Taxes, UP (2015) 78 VST 423*: Justice R. Banumathi relied on this case to support the view that small packings are done for convenience of consumers. Justice Ranjan Gogoi did not comment on this authority.

What weighed in the mind of the Court?

Sentiment Analysis:

The sentiment analysis of the reasons given by the Supreme Court shows a clear difference in the points emphasized by the two judges, leading to their divergent conclusions. Justice Ranjan Gogoi’s reasoning leaned more towards a strict interpretation of the tariff headings and the nature of the product itself, while Justice R. Banumathi focused on the market understanding and the suitability of the product for a particular use.

Fact:Law Ratio:

The ratio of fact to law that influenced the court to decide was also different. Justice Ranjan Gogoi was more influenced by the legal aspects of the case whereas Justice R. Banumathi was more influenced by the factual aspects of the case.

Decision

Due to the difference of opinion between the judges, the matter was referred to a third judge for a final decision.

Flowchart of Decision-Making Process