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Classification of Fruit juice based drinks - Bracing up for another round of litigation

JULY 09, 2020

By Rahul Tangri, Joint Partner & Udita Saraf, Associate, Lakshmikumaran & Sridharan 

THE classification of the carbonated fruit drinks such as Minute Maid, Appy Fizz, Nimbooz etc. was a bone of contention between the Revenue and the assesses for a long time in pre-GST regime, with disputes under both VAT as well as Excise Laws. In these drinks, the water pre-dominates by weight, ranging from 70% to 90% (and even beyond at times). Higher rate of duty on carbonated waters based flavoured drinks enticed the department to classify the same as carbonated waters (tariff heading 2202 10) whereas the assessees classified the same as fruit juice based drinks (tariff item 2202 99 20).

After extensive rounds of litigation, the debate with respect to classification of such carbonated fruit drinks was brought to rest during pre-GST regime by various judgments 1 passed by the Apex Court as well as the Larger Bench of Hon'ble Tribunal. The said judgments clearly held that such drinks comprising of minimum 10% fruit juice/5% lemon juice, categorized as 'Carbonated Fruit Beverages' as per Regulation 2.3.30 of the Food Safety and Standards (Food Products Standards and Food Additives) Regulations, 2011 ("FSS Regulations") would be classifiable under the tariff item 2202 99 20 as "fruit pulp or fruit juice based drinks". It was also observed that where the tariff item contained technical description of the products without defining the same (viz. fruit juice based drinks), then going beyond the common parlance test, resort must be had to its technical/ scientific meaning. Thus, the provisions of the FSS Regulations were relied on to understand the scope of the said term.

The judgments were welcome relief of the entire industry, which settled more than a decade long dispute in favour of the assessees. However, a recent ruling of the Hon'ble Authority for Advance Ruling in the case of Rich Dairy Products (India) Pvt. Ltd. - 2019-TIOL-424-AAR-GST, classifying similar carbonated fruit beverages under CTH 2202 10 20 (as carbonated water based flavoured drink), affirmed by Hon'ble Appellate Authority, - 2020-TIOL-25-AAAR-GST, has opened floodgates for fresh round of litigation on the very same issue 2. The rate difference between the carbonated water based flavoured drinks and the fruit juice based drinks under the GST regime is massive 28%.

The present article delves into the conundrum created by decision of Rich Dairy Products (supra) and its probability of prompting a fresh round of litigation under the GST Regime.

Amendment to FSS Regulations in 2016 and its mis-interpretation by the Authority

In October 2016, on account of Government's policy 3 to minimize wastage of fruits due to lack of adequate storage and processing facilities, clause 3A was added to Regulation 2.3.30 of FSS Regulations (covering Carbonated Fruit Beverages) to introduce a new sub-set of the product to be called 'Carbonated Beverage with Fruit Juice' with minimum fruit juice content of 5% and not exceeding 10% (2.5% and not exceeding 5% in case of lemon juice). It is a fair assertion that the products falling under clause 3A of Regulation 2.3.30 of FSS Regulations, would still derive their essential character and market from their fruit juice content.

It is a settled position of law that if a judicial precedent has been laid down on an issue, the ratio decidendi thereof should be applied unequivocally for subsequent identical issues. However, in the case of Rich Dairy Products (supra), departure has been made from settled principles of law by way of assuming the characteristics of a product beyond:

- the description of the said product and way the same is marketed;

- what is contemplated under the law (Customs Tariff Act as well as the Food Laws);

- the intent with which the same was brought into the statute.

The Hon'ble Authority for Advance Ruling shied away from the fact that the product is a sub-set of the Regulation 2.3.30, which regulation was relied upon by the Hon'ble Apex Court as well as the Larger Bench of the Hon'ble CESTAT to hold Appy Fizz and Nimbooz as 'fruit juice based drinks'. On the contrary, undue weight was given to the water content being pre-dominant in the product (to classify the product as carbonated water based flavoured drink), which was also the case in Appy Fizz and Nimbooz. Thus, the ruling intends to draw a line of distinction between two products falling under the same regulation and having identical base i.e. fruit juice, but grouped under different sub-sets thereof.

On the other hand, the decision seeks to treat the products containing 5% to 10% fruit juice (vis. those falling under the clause 3A to Regulation 2.3.30) at par with the products containing mere essence/ flavours of fruits and negligible fruit content like (Mirinda/ Fanta/ Coca-Cola etc.) for the purpose of classification. These products are neither identical in their costing nor in the market values. As already stated, the rate difference between the competing classification entries is massive, inasmuch as the carbonated water based flavoured drinks attract highest rate of GST. This would make the products falling under clause 3A to the Regulation 2.3.30 commercially unviable for production inasmuch as inclusion of fruit content in a beverage itself escalates the production cost for such goods. In a nutshell, classification of 'Carbonated Beverages with fruit juice' under tariff sub-heading 2202 10, defeats the key purpose of the legislature to insert such a category of product under Regulation 2.3.30 in the first place. This shows two separate Ministries of the Government, viz. Ministry of Food Processing Industry and the Ministry of Finance pulling in different directions. The object sought to be achieved by introduction of clause 3A to Carbonated Fruit Beverages in the FSS Regulations gets frustrated when the same is classified as carbonated water based flavoured drink, for the purposes of taxation. Such an interpretation should be avoided when Carbonated Fruit Beverages have already been analyzed/ examined through judicial lenses and decided in favour of the industry.

Other fallacies in the advance ruling:

Further, reliance placed by the Hon'ble Authority for Advance Ruling on the HSN Explanatory Notes to tariff heading 2202 is contrary to the decision 4 of the Hon'ble Tribunal, as affirmed by the Apex Court. The Hon'ble Tribunal did not rely upon the HSN Notes since the tariff heading 2202 under the HSN Notes is not pari materia to the same under the domestic law, due to absence of the entry relating to 'fruit pulp or fruit juice based drinks' therein.

The Authority has shunned a specific description of the product which matches the nomenclature under the tariff item 2202 99 20, and proceeded to classify the products under the residuary tariff sub-heading of 2202 10, which is against the settled principles of classification.

Authors' view:

- Though the advance rulings are binding only on the applicant and the jurisdictional authorities, however, the department would rely on the same to raise demands against the similarly placed assessees. This would have serious ramifications for the industry, which must again tighten its belts for a long legal battle similar to the one in which they succeeded in pre-GST regime.

- The Government should ensure better co-ordination among various laws and ministries, to ensure that the objects of one are not frustrated by the other. Such lack of coordination hinders the ease of doing business and causes unnecessary bottlenecks for genuine businesses.

- To save the industry from the needless litigation, government/ GST council may issue appropriate clarification/ notification to settle the dispute and nip the problem in the bud. This would be a much anticipated relief in the present tough economic time.

[The views expressed are strictly personal.]

1Parle Agro (P) Ltd. v. Commissioner of Commercial Taxes, Trivandrum, - 2017-TIOL-221-SC-VAT Brindavan Beverages Pvt. Ltd. v. Commr. of Cus., CX & ST 2019 (29) GSTL 418 (Tri-LB) CCE, Bhopal v. Parle Agro Pvt. Ltd., 2008 (226) ELT 194 (Tri.) affirmed by Supreme Court in Commissioner v. Parle Agro Pvt. Ltd. 2010 (254) ELT A13 (SC)

2 Similar rulings have been passed in other matters as well viz. Hindustan Coca-Cola Beverages Pvt. Ltd., - 2020-TIOL-21-AAAR-GST and Kalis Sparkling Water Pvt. Ltd., 2020 (32) G.S.T.L. 421 (A.A.R.-GST-T. N.)

3 As evident from the Hon'ble Prime Minister Narendra Modi's speech on September 24, 2014 while inaugurating a Food Park in Karnataka.

4CCE, Bhopal v. Parle Agro Pvt. Ltd., 2008 (226) ELT 194 (Tri.) affirmed by Supreme Court in Commissioner v. Parle Agro Pvt. Ltd. 2010 (254) ELT A13 (SC)

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