Supreme Court settles classification of Coconut Oil: Edible Oil or Hair Oil? (18 December 2024)

Introduction

Date of the Judgment: 18 December 2024

Citation: 2024 INSC 1002

Judges: Sanjiv Khanna, CJI, Sanjay Kumar, J, R. Mahadevan, J

Can the same coconut oil be classified differently for tax purposes based on its packaging? The Supreme Court of India recently addressed this question, which has significant implications for manufacturers and consumers. The core issue revolves around whether pure coconut oil, packaged and sold in small quantities, should be classified as ‘edible oil’ or ‘hair oil’ for the purpose of excise duty under the Central Excise Tariff Act, 1985. The bench was composed of Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice R. Mahadevan. The judgment was authored by Justice Sanjay Kumar.

Case Background

The dispute arose from the classification of coconut oil manufactured and sold by M/s. Madhan Agro Industries (India) Private Ltd. and M/s. Marico Ltd., along with its job-workers. M/s. Madhan Agro Industries marketed coconut oil under the name ‘Shanti Coconut Oil’ in packages ranging from 5 ml to 2 liters, selling it as ‘edible oil’ between 01.04.2005 and 31.08.2007. Similarly, M/s. Marico Ltd. sold coconut oil as ‘edible oil’ under the brand ‘Parachute’, with its job-workers packaging and selling it in smaller containers from 50 ml to 2 litres, between 28.02.2005 to 28.02.2007. The Central Excise authorities issued show-cause notices to these companies, proposing to classify the coconut oil as ‘hair oil’ and levy excise duty accordingly.

Timeline:

Legal Framework

The core of the dispute lies in the interpretation of the Central Excise Tariff Act, 1985, specifically the classification of goods under Section III-Chapter 15 and Section VI-Chapter 33. Before 28.02.2005, coconut oil was classified as a ‘vegetable oil’ under Heading 15.03 of the Act. However, the Central Excise Tariff (Amendment) Act, 2004, effective from 28.02.2005, introduced significant changes.

Relevant Provisions:

• Section III, Chapter 15 of the Central Excise Tariff Act, 1985: Deals with “Animal or Vegetable Fats and Oils and their Cleavage Products; Prepared Edible Fats; Animal or Vegetable Waxes.”
• Chapter Note 1(e) of Chapter 15: Excludes “fatty acids, prepared waxes, medicaments, paints, varnishes, soap, perfumery, cosmetic or toilet preparations, sulphonated oils or other goods of Section VI” from Chapter 15.
• Heading 1513: Specifically covers “Coconut (copra), palm kernel or babassu oil and fractions thereof, whether or not refined, but not chemically modified.”
• Section VI, Chapter 33 of the Central Excise Tariff Act, 1985: Pertains to “Essential Oils and Resinoids; Perfumery, Cosmetic or Toilet Preparations.”
• Chapter Note 3 of Chapter 33: 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.
• Heading 3305: Covers “Preparations for use on the hair.”
• Rule 1 of the General Rules of Interpretation: States that classification of goods shall be determined according to the terms of the headings and any relative Section or Chapter Notes.

The Court also considered the Harmonized System of Nomenclature (HSN), an internationally accepted system for classifying products. The HSN is used to interpret the Central Excise Tariff Act, 1985, unless there is a clear contrary intention in the Act itself. The court noted that the Central Excise Tariff (Amendment) Act, 2004, was enacted to align the Central Excise Tariff with the HSN.

Arguments

Revenue’s Arguments:

• The Revenue contended that pure coconut oil is suitable for use as ‘hair oil’ and is commonly used as such.
• They argued that since the coconut oil is sold in small containers, it should be classified as ‘hair oil’ under Heading 3305.
• The Revenue relied on the ‘common parlance test’, arguing that the common understanding of coconut oil in small packaging is that it is used as hair oil.
• They pointed out that some products were marketed with images of a film actress with flowing hair, implying its use as hair oil.
• The Revenue argued that the registration of the trademark ‘Parachute’ by M/s. Marico Ltd. for ‘hair oil’ indicates that the coconut oil sold by it should be classified as hair oil.
• The Revenue also relied on the judgment of State of Haryana vs. Dalmia Dadri Cement Ltd. [AIR 1988 SC 342], to argue that the expression ‘for use’ can only mean ‘intended for use’ and not ‘actual use’.

Respondents’ Arguments:

• The respondents argued that the coconut oil they sold was marketed as edible oil and complied with all the requirements for edible oil packaging and standards.
• They contended that the specific heading for coconut oil (Heading 1513) should apply unless it meets all the criteria for classification as ‘hair oil’ under Chapter 33.
• The respondents emphasized that the size of the packaging should not be the sole determinant for classification.
• They argued that the General Notes in Chapter 33 of the HSN require that the product must not only be suitable for use as hair oil but also be packaged and labeled specifically for that purpose.
• They contended that the trademark ‘Parachute’ was also registered for other products, including edible oil, and therefore, could not be the sole basis for classification.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether pure coconut oil, packaged and sold in small quantities ranging from 5 ml to 2 litres, would be classifiable as ‘Edible oil’ under Heading 1513, titled ‘Coconut (Copra) oil, etc.’, in Section III-Chapter 15, or as ‘Hair oil’ under Heading 3305, titled ‘Preparations for use on the hair’, in Section VI-Chapter 33, of the First Schedule to the Central Excise Tariff Act, 1985.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered various authorities, including:

Cases:

• Commissioner of Customs and Central Excise, Amritsar (Punjab) vs. D.L. Steels etc. [2022 SCC OnLine SC 863] – This case highlighted the importance of the Harmonized System of Nomenclature (HSN) in resolving tariff classification disputes. The Court noted that the HSN reflects internationally accepted norms and is extensively used worldwide.
• Collector of Central Excise, Shillong vs. Wood Craft Products Ltd. [(1995) 3 SCC 454] – This case emphasized that the Central Excise Tariffs are based on the HSN, and any dispute relating to tariff classification should be resolved with reference to the HSN.
• O.K. Play (India) Ltd. vs. Commissioner of Central Excise, Delhi-III, Gurgaon [(2005) 2 SCC 460] – This case affirmed that the scheme of Central Excise Tariffs is based on the HSN and its Explanatory Notes, which provide a safe guide for interpretation.
• Camlin Ltd. v. Commissioner of Central Excise, Mumbai [(2008) 9 SCC 82] – This case clarified that reliance on the HSN is valid only when the entry in the HSN and the tariff description in the First Schedule to the Act of 1985 are aligned.
• B.P.L. Pharmaceuticals Ltd. vs. Collector of Central Excise, Vadodara [1995 Supp (3) SCC 1] – This case held that a product must be suitable for use as a cosmetic and be packaged with a label indicating its use as a cosmetic to be classified under Chapter 33.
• Commissioner of Central Excise, New Delhi vs. Connaught Plaza Restaurant Pvt. Ltd., New Delhi [(2012) 13 SCC 639] – This case discussed that classification should be based on headings and chapter notes, and if not clear, the common parlance understanding of the goods should be used.
• Alpine Industries vs. Collector of Central Excise, New Delhi [(2003) 3 SCC 111] – This case stated that tariff entries should be construed as per their popular meaning, i.e., the meaning that would be attached to them by those using the product.
• Indo International Industries vs. Commissioner of Sales Tax, Uttar Pradesh [(1981) 2 SCC 528] – This case held that a term defined in a taxing statute must be understood in light of the definitions in the Act, or as understood in common or commercial parlance.
• Meghdoot Gramodyog Sewa Sansthan, U.P. vs. Commissioner of Central Excise, Lucknow [(2005) 4 SCC 15] – This case clarified that a product’s classification is not solely based on its packaging or marketing.
• Dunlop India Ltd. vs. Union of India and others [(1976) 2 SCC 241] – This case emphasized that it is good fiscal policy to avoid putting people in doubt about their duty liability.
• State of Haryana vs. Dalmia Dadri Cement Ltd. [AIR 1988 SC 342] – The court distinguished this case, stating that its interpretation of ‘for use’ was specific to the Punjab General Sales Tax Act, 1948.
• HPL Chemicals Ltd. vs. Commissioner of Central Excise, Chandigarh [(2006) 5 SCC 208] – This case stated that the burden of proof is on the Revenue to classify goods under a different heading than claimed by the assessee.

Legal Provisions:

• Central Excise Tariff Act, 1985: The primary statute governing the classification of goods for excise duty.
• Section III, Chapter 15 of the Central Excise Tariff Act, 1985: Deals with animal or vegetable fats and oils.
• Section VI, Chapter 33 of the Central Excise Tariff Act, 1985: Pertains to essential oils and cosmetic preparations.
• Harmonized System of Nomenclature (HSN): An internationally standardized system for classifying products.
• Central Excise Tariff (Amendment) Act, 2004: Amended the First Schedule to the Central Excise Tariff Act, 1985.

Judgment

How each authority was viewed by the Court?

• Commissioner of Customs and Central Excise, Amritsar (Punjab) vs. D.L. Steels etc. [2022 SCC OnLine SC 863]*: The Court followed this case to emphasize the importance of the HSN in resolving tariff classification disputes.
• Collector of Central Excise, Shillong vs. Wood Craft Products Ltd. [(1995) 3 SCC 454]*: The Court followed this case, reiterating that Central Excise Tariffs are based on the HSN.
• O.K. Play (India) Ltd. vs. Commissioner of Central Excise, Delhi-III, Gurgaon [(2005) 2 SCC 460]*: The Court followed this case to affirm that the scheme of Central Excise Tariffs is based on the HSN and its Explanatory Notes.
• Camlin Ltd. v. Commissioner of Central Excise, Mumbai [(2008) 9 SCC 82]*: The Court followed this case, clarifying that reliance on the HSN is valid only when the HSN and the tariff description are aligned.
• B.P.L. Pharmaceuticals Ltd. vs. Collector of Central Excise, Vadodara [1995 Supp (3) SCC 1]*: The Court followed this case, stating that a product must be suitable for use as a cosmetic and be packaged with a label indicating its use as a cosmetic to be classified under Chapter 33.
• Commissioner of Central Excise, New Delhi vs. Connaught Plaza Restaurant Pvt. Ltd., New Delhi [(2012) 13 SCC 639]*: The Court followed this case, discussing that classification should be based on headings and chapter notes, and if not clear, the common parlance understanding should be used.
• Alpine Industries vs. Collector of Central Excise, New Delhi [(2003) 3 SCC 111]*: The Court followed this case, stating that tariff entries should be construed as per their popular meaning.
• Indo International Industries vs. Commissioner of Sales Tax, Uttar Pradesh [(1981) 2 SCC 528]*: The Court followed this case, holding that a term defined in a taxing statute must be understood in light of the definitions in the Act.
• Meghdoot Gramodyog Sewa Sansthan, U.P. vs. Commissioner of Central Excise, Lucknow [(2005) 4 SCC 15]*: The Court followed this case, clarifying that a product’s classification is not solely based on its packaging or marketing.
• Dunlop India Ltd. vs. Union of India and others [(1976) 2 SCC 241]*: The Court followed this case, emphasizing that it is good fiscal policy to avoid putting people in doubt about their duty liability.
• State of Haryana vs. Dalmia Dadri Cement Ltd. [AIR 1988 SC 342]*: The Court distinguished this case, stating that its interpretation of ‘for use’ was specific to the Punjab General Sales Tax Act, 1948.
• HPL Chemicals Ltd. vs. Commissioner of Central Excise, Chandigarh [(2006) 5 SCC 208]*: The Court followed this case, stating that the burden of proof is on the Revenue to classify goods under a different heading than claimed by the assessee.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear alignment between the headings in the First Schedule to the Central Excise Tariff Act, 1985, and the corresponding entries in the Harmonized System of Nomenclature (HSN). The Court emphasized that when such alignment exists, the Explanatory Notes in the HSN must be given due effect. The Court also focused on the fact that the coconut oil in question was marketed as ‘edible oil’ and met all the necessary standards for edible oil packaging and quality. The Court rejected the argument that the size of the packaging or the fact that coconut oil can also be used as hair oil should be the sole determinants for classification. Instead, it emphasized that to be classified as ‘hair oil’, the product must be specifically packaged and labeled for that purpose, in line with the General Notes in Chapter 33 of the HSN.

Ratio of Fact to Law

Final Ruling

The Supreme Court concluded that the coconut oil sold by M/s. Madhan Agro Industries (India) Private Ltd. and M/s. Marico Ltd. and its job-workers, which was marketed and sold as ‘edible oil’, is classifiable under Heading 1513 of the Central Excise Tariff Act, 1985, and not under Heading 3305. The Court held that the size of the packaging, or the fact that coconut oil can also be used as hair oil, is not sufficient to classify it as ‘hair oil’. The Court emphasized that to be classified under Chapter 33, the product must be specifically packaged and labeled for use as a cosmetic or toilet preparation. Therefore, the appeals filed by the Revenue were dismissed, and the orders of the Customs Excise and Service Tax Appellate Tribunal, Chennai, were upheld.

Flowchart of Decision Making

Key Takeaways

• Classification Based on Intended Use and Packaging: The Supreme Court clarified that the classification of goods, particularly coconut oil, should be based on the intended use and how it is packaged and labeled, rather than solely on the potential uses or size of the packaging.
• Alignment with HSN: The Court emphasized the importance of aligning the Central Excise Tariff with the Harmonized System of Nomenclature (HSN), particularly when there is a clear alignment between the headings and corresponding entries.
• Burden of Proof on Revenue: The judgment reiterated that the burden of proof lies on the Revenue to classify goods under a different heading than claimed by the assessee.
• ‘Common Parlance Test’ Limited Application: The ‘common parlance test’ is not applicable when the headings and HSN entries are clear and unambiguous.
• Trademark Registration Not Conclusive: Trademark registration alone is not a conclusive factor in determining the classification of a product.