Supreme Court settles classification of Chewing Tobacco and Zarda for Excise Duty: Commr. Of Cen. Exc. Ahmedabad vs. M/S Urmin Products & Ors. (2023) INSC 951 (20 October 2023)

Date of the Judgment: 20 October 2023
Citation: 2023 INSC 951
Judges: S. Ravindra Bhat, J., Aravind Kumar, J.
Can a product labeled as “flavored chewing tobacco” be classified differently for excise duty purposes if it contains similar ingredients to “zarda/jarda scented tobacco”? The Supreme Court recently addressed this complex issue, clarifying the classification of chewing tobacco and zarda/jarda scented tobacco for excise duty. This judgment involved multiple appeals concerning the correct classification of these tobacco products under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. The bench comprised Justices S. Ravindra Bhat and Aravind Kumar, with the majority opinion authored by Justice Aravind Kumar.

Case Background

The case involves a series of appeals where the central issue was the classification of tobacco products, specifically “chewing tobacco” and “zarda/jarda scented tobacco,” for the purpose of excise duty under the Central Excise Act, 1944 (CE Act) and the Central Excise Tariff Act, 1985 (CETA). The dispute arose because different excise duty rates applied to these categories, particularly after the introduction of the 8-digit tariff classification. Several manufacturers were accused of misclassifying their products to avail lower duty rates. The core of the dispute is whether products labeled as “chewing tobacco” but containing similar ingredients to “zarda/jarda scented tobacco” should be classified as the latter, thus attracting a higher duty.

Timeline

Course of Proceedings

The judgment consolidates appeals from various CESTAT (Customs, Excise and Service Tax Appellate Tribunal) benches. In several cases, manufacturers initially classified their products as ‘zarda/jarda scented tobacco’ but later claimed it to be ‘chewing tobacco’ to avail of lower duty rates. The Revenue challenged these reclassifications, leading to multiple rounds of litigation. The CESTAT often sided with the manufacturers, leading to the current appeals before the Supreme Court.

Legal Framework

The core legal provisions and rules discussed in the judgment include:

• Central Excise Act, 1944 (CE Act): Governs the levy and collection of excise duties in India.
• Central Excise Tariff Act, 1985 (CETA): Provides the classification of goods for excise duty purposes.
• Section 4A of the CE Act: Allows for the valuation of goods based on their retail sale price (MRP).
• Section 11A of the CE Act: Deals with the recovery of duties not levied or short-paid.
• Chewing Tobacco and Unmanufactured Tobacco Packing Machines (Capacity Determination and Collection of Duty) Rules, 2010 (CTPM Rules): Specifies the rules for determining the capacity of packing machines and the collection of duty.
• CET SH 2403 9910: Central Excise Tariff Sub-Heading for ‘chewing tobacco’.
• CET SH 2403 9930: Central Excise Tariff Sub-Heading for ‘zarda/jarda scented tobacco’.

The judgment emphasizes that neither the CE Act nor the CETA defines “chewing tobacco” or “zarda/jarda scented tobacco,” leading to disputes over classification. The court also discusses the amendments to Section 11A of the CE Act, particularly those made in 2000 and 2011, which altered the limitation periods for issuing show cause notices for duty recovery.

The Court also referred to various notifications issued under the CE Act, particularly those related to the assessment of goods under Section 4A, and the introduction of 8-digit tariff classifications.

Arguments

Revenue’s Arguments:

• The Revenue argued that manufacturers misclassified their products as ‘chewing tobacco’ to avail lower duty rates under Section 4A of the CE Act.
• They contended that ‘zarda/jarda scented tobacco’ was deliberately excluded from the purview of MRP-based assessment under Section 4A between 01.03.2006 and 10.07.2006, and therefore, should be assessed under Section 4 of the CE Act.
• The Revenue argued that products containing added scents or flavors should be classified as ‘zarda/jarda scented tobacco’ (CET SH 2403 9930) and not ‘chewing tobacco’ (CET SH 2403 9910).
• They emphasized that the extended period of limitation under Section 11A of the CE Act should be invoked due to the deliberate misclassification and suppression of facts by the manufacturers.
• The Revenue relied on statements from factory personnel and CRCL (Central Revenue Control Laboratory) reports to support their claim that the products were indeed ‘zarda/jarda scented tobacco’.

Assessee’s Arguments:

• The assessees argued that their products were essentially ‘chewing tobacco’ and that the addition of flavors did not change the fundamental nature of the product.
• They contended that the intention of the government was to levy duty on their products under Section 4A of the CE Act only, and that the omission of ‘zarda/jarda scented tobacco’ from the notification was an oversight.
• They argued that the extended period of limitation should not apply as they had informed the department about the change in classification and there was no suppression of facts.
• The assessees relied on the common trade parlance test, asserting that their products were known and sold as ‘chewing tobacco’ in the market.
• They also argued that the burden of proof lies on the Revenue to demonstrate misclassification.

Issues Framed by the Supreme Court

1. Whether the authorities below were correct and justified in invoking the proviso to Section 11A of the CE Act?
2. Whether the product manufactured and cleared by the assessee for the period 01.03.2006 to 10.07.2006 was required to be classified under the CET SH 2403 9910 as ‘chewing tobacco’ or to be classified under CET SH 2403 9930 as ‘zarda/jarda scented tobacco’?
3. What is the purpose of the declaration filed under Rule 6 of CTPM Rules?
4. What are the parameters which are required to be examined, determined, and adjudicated under Rule 6 by the Prescribed Authority?
5. Whether the Prescribed Authority have the power and jurisdiction to determine the classification or specific entry within which the declared product is to be classified? OR Whether the issue of classification of a product can be the subject matter of adjudication/decision under Rule 6(2) of CTPM Rules?
6. Whether a declaration made under Rule 6 has any nexus to the classification of the product and on account of the classification of such declaration, would preclude the Department from issuing a Notice under Section 11A or 11AC of CE Act, 1944?

Treatment of the Issue by the Court

Authorities

Judgment

The Supreme Court analyzed each case separately, considering the specific facts, arguments, and evidence presented. The court emphasized the importance of considering the manufacturing process, ingredients, market understanding, and CRCL reports in determining the correct classification. The court also looked into the intent of the assessees and whether there was a deliberate attempt to evade higher duty. The court’s analysis of each case is summarized below:

How each authority was viewed by the Court?

• The Supreme Court distinguished CCE Vs. Cotspun [CITATION], clarifying that it applies only when the product is the same, not when there is a misclassification or change in the product.
• The Court followed HPL Chemical Ltd. v. CCE [CITATION], reiterating that the burden of proof lies on the Revenue in classification matters.
• The Court followed Mauri Yeast India Pvt. Ltd. v. State of U.P. [CITATION], emphasizing the importance of common parlance understanding in classification.
• The Court followed Commissioner of Central Excise, Nagpur v. Shree Baidyanath Ayurved Bhawan Ltd. [CITATION], highlighting that popular meaning and user perception are key factors.
• The Court followed Continental Foundation Jt. Venture v. Commissioner of Central Excise [CITATION], defining suppression as failure to disclose full information to evade duty.
• The Court followed Westinghouse Saxby Farmer Ltd. v. Commissioner of Central Excise, Calcutta [CITATION], regarding the interpretation of rules for classification under CETA.
• The Court referred to A. Nagaraju Bros. v. State of A.P. [CITATION], acknowledging that there is no single universal test for classification.
• The Court followed CCE vs. Damnet Chemicals Private Ltd [CITATION], stating that misstatement or suppression must be wilful to invoke Section 11A(1) proviso.
• The Court distinguished CCE V. Srivallabh Glass Works Ltd [CITATION], stating that Cotspun’s case applies only when the product is the same.
• The Court followed CCE vs. Tata Tech Ltd [CITATION], stating that demand cannot be raised without undoing the classification in the registration certificate.
• The Court followed Damodar J. Malpani Vs. CCE [CITATION], stating that there should be uniformity in classification for similar products.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors, including:

• Factual Analysis: The court meticulously examined the specific facts of each case, including the manufacturing process, ingredients, and market perception of the products.
• Intent of the Assessee: The court considered whether there was a deliberate attempt to misclassify products to evade higher duty rates.
• CRCL Reports: The court relied on CRCL reports to determine the composition of the products, but also noted the limitations of such reports.
• Trade Parlance: The court applied the common trade parlance test, emphasizing how the products were understood and sold in the market.
• Statutory Interpretation: The court interpreted the relevant sections and rules of the CE Act, CETA, and CTPM Rules.

Logical Reasoning:

The Court considered alternative interpretations, but rejected them if they were not supported by evidence or if they contradicted the common parlance understanding of the products. The Court’s final decision was based on a holistic assessment of all available evidence and legal provisions.

The Court’s reasoning was based on:

• Statutory Interpretation: The court interpreted the relevant sections and rules of the CE Act, CETA, and CTPM Rules.
• Factual Analysis: The court meticulously examined the specific facts of each case, including the manufacturing process, ingredients, and market perception of the products.
• Intent of the Assessee: The court considered whether there was a deliberate attempt to misclassify products to evade higher duty rates.
• Evidence: The court relied on CRCL reports, statements from factory personnel, and other evidence to support its conclusions.
• Common Parlance: The court applied the common trade parlance test, emphasizing how the products were understood and sold in the market.

The court’s final decision was based on a holistic assessment of all available evidence and legal provisions. The court also considered the principle that the burden of proof lies on the revenue to prove that a product is taxable in the manner claimed by them.

The court quoted the following from the judgment:

• “The levy of excise duty on the basis of an approved classification list is the correct levy, at least until such time as to the correctness of the approval is questioned by the issuance to the assessee of a show -cause notice. It is only when the correctness of the approval is challenged that an approved classification list ceases to be such.”
• “The expression ‘suppression’ has been used in the proviso to Section 11A of the Act accompanied by very strong words as ‘fraud’ or ‘collusion’ and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty.”
• “The primary object of the Excise Act is to raise revenue for which various products are differently classified in the new Tariff Act. Resort should, in the circumstances, be had to popular meaning and understanding attached to such products by those using the product and not to be had to the scientific and technical meaning of the terms and expressions used.”

In cases with differing opinions, the court highlighted the points of disagreement and the rationale behind each position. The majority opinion was authored by Justice Aravind Kumar.

The court did not introduce any new doctrines but clarified the application of existing legal principles to the facts of the cases.

Key Takeaways

• The classification of tobacco products for excise duty purposes depends on a holistic assessment of manufacturing process, ingredients, market understanding, and CRCL reports.
• The burden of proof lies on the Revenue to demonstrate misclassification.
• The extended period of limitation under Section 11A of the CE Act applies only in cases of deliberate misclassification and suppression of facts.
• The common trade parlance test is a key factor in determining the classification of products, especially when there is no statutory definition.
• Declarations made under Rule 6 of CTPM Rules are subject to scrutiny and can be modified by the authorities.
• The intent to evade duty is a crucial element for invoking the extended period of limitation.

This judgment provides clarity on the classification of tobacco products for excise duty purposes and emphasizes the need for a thorough and fact-based approach in such matters. It also serves as a reminder to manufacturers to accurately classify their products and to the Revenue to provide sufficient evidence when challenging classifications.

Directions

Civil Appeal No. _ _____ of 2023 arising out of Diary No. 3487 of 2020 stands remitted to the Tribunal for adjudication afresh in light of observations made in paragraph no. 110 and 113 of group number – 4 appeals ( i.e., Dharampal Premchand group ).

Development of Law

The ratio decidendi of this case is that the classification of goods for excise duty purposes must be determined based on a holistic assessment of the manufacturing process, ingredients, market understanding, and CRCL reports. The judgment also clarified that the burden of proof lies on the revenue to demonstrate misclassification, and the extended period of limitation under Section 11A of the CE Act applies only in cases of deliberate misclassification and suppression of facts. There is no change in the previous position of law, but a clarification of the application of the law.

Conclusion

The Supreme Court’s judgment in the case of Commr. Of Cen. Exc. Ahmedabad vs. M/S Urmin Products & Ors. provides a detailed analysis of the complex issues surrounding the classification of ‘chewing tobacco’ and ‘zarda/jarda scented tobacco’ for excise duty purposes. The court emphasized the need for a fact-based approach and a holistic assessment of all relevant factors. The judgment also clarified the powers of the authorities under the CTPM Rules and the applicability of the extended period of limitation under Section 11A of the CE Act. The court’s decision underscores the importance of accurate classification and the need for both manufacturers and the Revenue to act with transparency and diligence.

Category:

• Central Excise
  • Classification of Goods
  • Excise Duty
  • Section 4A, Central Excise Act, 1944
  • Section 11A, Central Excise Act, 1944
  • Chewing Tobacco
  • Zarda/Jarda Scented Tobacco
  • Central Excise Act, 1944
  • Central Excise Tariff Act, 1985
  • Chewing Tobacco and Unmanufactured Tobacco Packing Machines (Capacity Determination and Collection of Duty) Rules, 2010