By TIOL News Service

NEW DELHI, APRIL 14, 2018: YESTERDAY, the Supreme Court, Division Bench, decided a bunch of Civil Appeals filed by the CCE, Salem and CCE, Pondicherry, in the matter of classification of Coconut oil, whether as Coconut oil under CH 1513 or under CH 3305 as Hair Oil.

Apparently, the Judges had a difference of opinion and, therefore, the matter is placed before the Hon'ble Chief Justice of India for further orders. We have reported this decision as - 2018-TIOL-139-SC-CX.

The Coconut oil story is more than two decades old.

We had over the years cracked the hard coconut through our DDT columns 1125, 2703, 2745, with unfailing regularity.

This is how it unfolds.

THERE used to be a small time enterprising businessman in a small town. He purchased a second hand sachet making machine for about Rs. 10,000/-. He used to buy some coconut oil from a mill and packed it in sachets of 10 mls and sold them at the Railway Station.

The Central Excise Intelligence caught up with him and they booked a case against him for manufacturing and clearing hair oil without payment of duty. His factory was a small room in a small house!

Lakhs of rupees of duty with equal penalty got confirmed and the poor fellow simply did not know what hit him. What he could not understand was that the coconut oil in the mill where thousands of kilolitres were 'manufactured' and sold, was not taxable, but his few kgs when packed in a sachet became taxable. With his rustic intelligence he asked, if the mighty river Ganga is not excisable, will a bottle of water from Ganga become excisable?

Now is coconut oil packed in small containers simply coconut oil falling under 1503 or cosmetics falling under Chapter 33?

The Board had in Circular No. 145/56/95-CX, dated 31-8-1995, clarified -

Later that year, the Board vide Circular No. 166/77/95-CX dated 29.12.1995 further clarified –

Nonetheless, Revenue formations were not too comfortable with this Circular and allowed the matter to travel to the Tribunal.

In AMARDEO PLASTICS INDUSTRIES vs UOI - 2007-TIOL-240-CESTAT-MUM, the Tribunal observed through the Third Member,

+ I also note that the Board vide its Circular dated 31/08/95 has examined the entire issue of classification including the report of the Chief Chemist CRCL and has clarified that the mere fact of packing the same in small containers will not shift the classification of the same from Chapter 15 to Chapter 33.

+ Revenue cannot be heard arguing against its own Board's Circular.

+ The said Board's Circular is binding on the revenue and the fact of engaging a Senior Counsel by the revenue to defend the proceedings before the Tribunal, (as observed by Member (T)) will not change the above position of law, which stands re-affirmed by the Court in a number of subsequent decisions.

+ I find that the issue stands decided by the Tribunal's decision in the case of Kothari Products Ltd., Vs. CCE , Shrikanth Sachets Pvt. Ltd., Vs. CCE , - 2004-TIOL-1021-CESTAT-BANG & CCE Vs. Essen Products (I) Ltd ., 2006-TIOL-580-CESTAT-MUM. It is not the revenue's case that the said decisions were appealed against by them before the higher appellate forum. Inasmuch as the same have attained finality, they are required to be allowed.

In the month of June 2009, the Board suddenly realized that it had nearly four years ago carried out amendments in the Central Excise Tariff by the Central Excise Tariff (Amendment) Act, 2005 w.e.f 28.02.2004 and through which amendment it had replaced the earlier 6 digit tariff with a new 8 digit tariff to align the Central Excise Tariff with the internationally accepted HSN and also carried out modifications in Chapter note 2 to chapter 33 and addition of new Section Note 2 to Section VI.

So, this realization resulted in the Board coming out with a new Circular 890/10/2009-CX on the subject of ‘Classification of Coconut oil packed in small containers'.

Drawing attention to the earlier Circular dated 31.08.1995 (supra), the Board said -

"4. Circular No.145/56/1995-CX-3, dt. 31.08.1995, clarified that for classification of coconut oil under chapter 33 (as hair oil), it must satisfy the requirements of chapter Note 2 and 6 of Chapter 33 (of erstwhile 6 digit tariff system). Though an oil may be capable of being used as hair oil, the product must satisfy the criteria of label/literature on packing of coconut oil showing its use as hair oil as per note 2 to Ch.33. The circular says that in the absence of any proof that the coconut oil was specifically prepared for use on the hair (or) any label/literature/indications on the containers to the effect, the subject goods cannot be classified under 3305.90 simply because they were packed in small containers and applied by some sections of the society on the hair and it would be classified under chapter 15 as coconut oil."

And the Board proceeded to topsy-turvy the earlier clarification by saying this –

++ The said Chapter Note 2 to Chapter 33 has been modified alongwith addition of a new Section Note 2 to Section VI w.e.f. 28.2.2005. The amendments were carried out while aligning the Central Excise Tariff with internationally accepted Harmonized System of Nomenclature (HSN). In view of these amendments, the clarification issued in 1995 requires modifications for classification of coconut oil packed in small containers.

5. The comparison of old and the new note brings out the following facts :-

(i) The erstwhile Chapter Note 2 prescribed a condition that Heading No.3305(which covers hair oil also) applies to products put up in packing with label, literature or other indications, showing that they are for use as cosmetics or which are put up in a form clearly specialized for such use. A plain reading of the Chapter Note would show that, in order to bring a product in the category of hair oil falling under Heading 3305, the packing of said product or it's label/literature must give an indication that is meant for use as hair oil.

(ii) The above mentioned wordings have been deleted in the new Chapter Note and they have been replaced by the words, namely, "put up in packing of a kind sold by retail for such use". The said amendment clearly shows that if a particular packing of coconut oil is generally sold in retail as hair oil, in that case, the said product would be classified under heading 3305. In other words, the strict conditionality like label, or literature of the product showing its use as hair oil or a specialized packing to show beyond doubt it's use as hair oil has been removed and the general condition as to how the said product is being generally sold in retail has been prescribed in the new Chapter Notes.

(iii) Further, the new Section Note also provides that goods classifiable in Heading 3305 by reason of being put up for retail sales are to be classified in the said heading and in no other heading of the schedule. This Section Note further supports the interpretation that though a product is capable of being classified under more than one heading, even then because of the nature of its retail packing, which is indicative of its use as hair oil, the classification under heading 3305 would get priority. The illustration given in the HSN also supports this view. HSN Explanatory Notes to Section 2 of Section VI provides that sulphur put up for retail sale for therapeutic purpose is classified under heading 3004 and not in heading 2503 or 2802. Therefore, by the same logic, if coconut oil is packed in retail packs of say 10 ml. pouch or 50 ml bottles, which are generally used by consumers as hair oil, the same would get classified in heading 3305 and not under Chapter 15. But, if the same coconut oil is packed in say 1 liter or 2 liter packages, which are generally used by consumers for edible purposes (even though some customers may use it as hair oil), it would be classified under chapter 15.

Hence, in view of the amendments/insertion of Chapter Note and Section Note, the classification of coconut oil would depend upon the fact as to how the majority of the customers use the said product. Therefore, if coconut oil is packed in packages which are generally meant for sale in retail as hair oil, in that case the said product would be classified as hair oil under heading 3305, even though few consumers may use it as edible oil.

Just for the record, the Board also informed that this Circular is an Order passed u/s 37B of the CEA, 1944.

More than six years later, the Board had a re-think on the whole issue.

And, this rethink led to the Board withdrawing its Section 37B order by Circular 1007/14/2015-CX on 12 October 2015.

In this Circular, the Board informed that the issue was re-examined since it was noticed that there are decisions on the issue by Hon'ble Tribunals/Courts wherein it had been held that just because the retail packs of Coconut Oil are in sizes of 200 ml or less, the same cannot be presumed to be meant for use as Hair oil and would not be classifiable under heading no. 3305.

Adverting to the decisions in –

+ Raj Oil Mills Ltd. vs. Commissioner, Central Excise - 2013-TI0L-1609-CESTAT-MUM,

+ Capital Technologies Ltd. & Ors vs CCE, Tirupati 2011-TIOL-775-CESTAT-BANG [Civil Appeal filed by the department against this order has been dismissed by the Hon'ble Supreme Court on facts only.],

the CBEC finally withdrew its earlier Circular/Section 37B order dated 03.06.2009 and left it to the field to decide the issue of classification taking into consideration the facts of the case read with the judicial pronouncements.

To sum up, this is all that had happened from 1995 till October 2015 -

1. Till 1995, there was no Board clarification

2. In 1995, CBEC clarified that it was not hair oil.

3. In 2009, the 1995 clarification was withdrawn and it was clarified that small packets of coconut oil would be treated as hair oil.

4. The issue went up to the Supreme Court at least twice.

5. Now (in October 2015) Board clarified that there is no clarification and left it to the field to exercise their wisdom.

Incidentally, the matter again came up in the Tariff Conference that was held by the Board on 28th and 29th October 2015 and when, in the words of the Board, several decisions regarding technical issues of assessment and applicability of law were taken.

Thankfully, the Minutes of this Tariff Conference were circulated by the Board as an Instruction on 7th December 2015.

Paragraph B-6 featured the "Coconut oil controversy" - it had to!

The same reads -

B.6 - Hyderabad Zone – Classification – Classification of Coconut Oil Packed in Packages up to Sizes of 200ml:

Issue: This issue relates to classification of Coconut Oil. There are two contending classifications of Coconut Oil under the Central Excise Tariff. Chapter 15 covers various types of Vegetable Oils including Coconut Oil and Chapter 33 covers Cosmetics including Hair Oil. The dispute with regard to classification of the product i.e. Coconut Oil arose after the Board's clarification vide Circular no. 145/56/1995-CX dated 12.10.1995, wherein the Board clarified that the Coconut Oil being marketed in small containers could not be a basis for classifying the product as Hair Oil. For classification under Chapter Heading 3305, product should be suitable for use on hair and the product should be put up in a packing of a kind sold in retail for such use. Further, the Central Board of Excise and Customs, New Delhi vide Circular no. 890/10/2009-CX, dated 3/6/2009 issued under Sec. 37 B clarified that the Coconut Oil packed in small containers up to 200 ml shall be classified under Chapter Heading No. 3305 by treating it as Hair Oil.

Discussion & Decision

The conference noted that the issue has been resolved by the Board by issue of Circular no. 1007/14/2015-CX dated 12.10.2015. The circular takes note of the judgments in case of In case of Raj Oil Mills Ltd. vs. Commissioner, Central Excise - 2013-TIOL-1609-CESTAT, where Hon'ble Tribunal held that edible Coconut Oil in retail packing of 200 ml or less is classifiable under Chapter 15 covering Animal or Vegetable Fats and Oils and not under Chapter 33 covering Cosmetics and Toilet Preparation. Similar view was taken by Tribunal in case of Capital Technologies Ltd. & Ors Vs CCE, Tirupati - 2011-TIOL-775-CESTAT. The issue of classification can now be decided by the field taking into consideration the facts of the case read with the judicial pronouncements. For further details the circular may be referred.

Leaving it to the field formations to decide classification perhaps resulted in the present appeal by the Department before the Supreme Court, which we have reported today.

The appeal came to be filed before the apex Court because the CESTAT held that the coconut oil manufactured and packed in "small containers" by the respondent(s)/assessee(s) is classifiable under Heading 1513 and not under Heading 3305 of the Central Excise Tariff Act, 1985.

The dispute is with regard to classification of coconut oil in packings upto 2 litres in case of M/s Madhan Agro Industries the respondent assessee in Civil Appeal No.1766 of 2009 and packings upto 500ml in case of the respondent(s) assessee (s) in the connected appeals i.e. Civil Appeal Nos.6703 - 6710 of 2009. The relevant period of assessment in all the appeals under consideration is subsequent to the amendment of the First Schedule to the Central Excise Tariff Act, 1985 by the Amendment Act of 2004 (5 of 2005) which came into force on 28.2.2005.

Justice Ranjan Gogoi concluded thus -

33. …The issue of registered trade mark and classification for the purpose of levy of Central Excise Tariff are unrelated and unconnected to each other. Registration of a trademark under any particular class cannot be determinative of the classification of the product for purposes of Central Excise Tariff…

34. The contents of Circular bearing No. No.145/56/95-CX dated 31.08.1995 at a point of time when Chapter Note II of Chapter 33 was in force has already been noticed and infact the relevant paragraphs 5 to 9 of the above Circular, extracted above, makes it clear that a product cannot be classified under Chapter 33 Heading 3305 in the absence of any proof that it is specially prepared "for use on the hair" and in the absence of any label/literature etc on the container to such effect. Merely because the product is packed in small containers and used by some sections of the customers as hair oil cannot be a valid basis for classification under Heading 3305. Only if the containers bear labels/literature indicating that it is meant for use on the hair that the coconut oil in dispute may merit classification under Chapter 33. The above position would continue to hold the field notwithstanding the substitution of Chapter Note II by Chapter Note 3 w.e.f. 28.02.2005 in view of the similar stipulations and conditions incorporated in Chapter No.3 of the HSN read with the Explanatory Note 3 thereto which the Court would be obliged to take into account.

35. The Order under Section 37B of the Central Excise Act dated 3.6.2009 discussed above is infact a virtual admission on the part of the Revenue that coconut oil packed in containers upto 200 ml alone would be classifiable under Chapter 33 and the larger packages even of 1/2 litres would fall under Chapter 15. In the absence of the essential stipulations under Chapter Note 3 of Chapter 33, discussed above, in respect of the product in question there can be no justification for the direction contained in the order/circular dated 3.6.2009. The learned Appellate Tribunal in Raj Oil Mills Vs. Commissioner of Central Excise (supra), therefore, took the view that even small packets of 200 ml or less would be more appropriately classifiable under chapter 15 as coconut oil and not as hair oil under Chapter 33. The said decision of the Tribunal has been affirmed by this Court and the appeals by the Revenue (Civil Appeal Nos.20232037 of 2014) have been dismissed on 7.12.2014. The dismissal of the appeals, though by a nonspeaking order, is one on merit and therefore the order of the Tribunal in Raj Oil Mills (supra) can be understood to have merged with the decision of this Court as held in V.M. Salgaocar & Bros. Pvt. Ltd. Vs. Commissioner of Income Tax - 2002-TIOL-655-SC-IT.

36. For the aforesaid reasons, we take the view that the coconut oil in small packings in respect of which the present dispute with regard to classification has arisen is more appropriately classifiable under Chapter 15, Heading 1513 and not under Chapter 33, Heading 3305.

Consequently, the Revenue appeals were dismissed.

However, the following differing view was taken by Justice R Banumathi while allowing the Revenue appeals –

i. Tribunal is not right in holding that Chapter 15 covers all varieties of 'coconut oil' both edible and non-edible. The judgments relied upon by the Tribunal and the Board's circular dated 31.08.1995 were prior to 2004 amendment. The Tribunal was not right in relying upon the earlier orders/circular dated 31.08.1995 prior to amendment to base its conclusion that coconut oil both edible and non-edible merits classification under Chapter 15. Hence the impugned orders of the Tribunal are liable to be set aside.

ii. After the amendment (w.e.f. 28.02.2005) what is relevant is 'suitability of the goods for being used as Hair Oil' for classifying the same under 33.05. '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.

iii. Rule 3(a) states that the most specific description will be preferred over the more general one. In the present case, when item description is read with the Chapter Notes, Section Notes and the tests for classification that is Tariff Item 1513.19.00 and 3305.90.19 are equally specific. Hence, as per Rule 3(c), when goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit classification. Hence, the coconut oil manufactured by the respondents could rightly be classified under heading 3305.90.19, as it occurs last in the numerical order of the tariff.

iv. By consideration of the materials placed on record and also applying the 'Common Parlance Test', coconut oil packed in small sachets/containers understood in the market by dealers/consumers as 'Hair Oil' is classifiable under Chapter 33, tariff item 33 05.

v. After the amendment to Central Excise Tariff Act (w.e.f. 28.02.2005), there is material difference between the relevant Explanatory Notes in the HSN as against those provided in the Tariff Schedule to Central Excise Tariff Act, 1985. As held in Camlin Ltd. v. Commissioner of Central Excise, Mumbai - 2008-TIOL-165-SC-CX, when the Explanatory Notes in the HSN and the Notes tariff schedule are not aligned, reliance cannot be placed upon HSN for the purpose of classification of goods.

vi. In the case of MAIPL, 'Coconut Oil' packed in small sachets/containers suitable for being used as 'Hair Oil' are classifiable under Chapter 3305. In case of 'Parachute', this is further fortified by various materials placed on record and also registration of its Trademark No.1033842 Class-3 Parachute associated with "Hair Oil, Hair lotion etc."

vii. Circular dated 03.06.2009 and dismissal of appeals preferred by the Revenue in CA Nos. 2023-37 of 2014 (dated 17.12.2014) at the admission stage by non-speaking order, the 'Doctrine of Merger' is not applicable.

And, therefore, in view of the difference in opinion, the Registry was directed to place the said appeals before the Hon'ble Chief Justice of India for appropriate orders.

Please See 2018-TIOL-139-SC-CX.

More on Coconut oil:

++ In the case of Shalimar Chemical Works(2008) 12 VST 485(WBTT) (2010) 28 VST 52(ORI HC DB) it has been held that except in southern states coconut oil cannot be treated as edible oil but has to be treated as hair oil. [GST Games: Foul in Classification and Penalty Passes]

++ Why Minnows have to pay more?

++ Dear FM, Please simplify 'simplified' Central Excise Tariff