DECEMBER 25, 2024

By Vijay Kumar

I wrote this story in DDT 1125 04 06 2009

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 pack it in 10 ml sachets and sell them in the Railway Station. 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 millilitres when packed in a sachet became taxable.

Is coconut oil packed in small containers simply coconut oil falling under heading 150300 or cosmetics falling under Chapter 33?

This was a major issue bothering our wise lawmakers for many years.

The Board had in Circular No. 145/56/95- CX, dated 31-8-1995, clarified that, coconut oil whether pure or refined and whether packed in small or large containers merits classification under heading No. 1503 as long as it satisfies the criteria of 'fixed vegetable oil' laid down in Chapter note 3 of Chapter 15. It was also clarified that if the containers bear labels/ literature etc. indicating that it is meant for application on hair or has undergone processes which make it a 'preparation for use on hair' then the coconut oil may merit classification under Chapter 33.

This Circular was issued after the issue was discussed in the Commissioners' Conference, after an enquiry by the Director General (Anti Evasion), after consultation with the Chief Chemist and after using the Board's abundant wisdom.

In spite of this clarification, as Board Circulars receive scant respect in the field, Show Cause Notices continued to be issued and were routinely confirmed.

But in 2009, fresh wisdom dawned on the Board and they realized that the amendments made to the Tariff in 2005 had made the 1995 Circular a little out of place. So, the Board withdrew the 1995 circular and clarified by a Section 37B Order in Circular No.890/10/2009 dated 3.6.2009 that coconut oil packed in small containers of sizes up to 200 ml shall be classified under heading 3305 (hair oil).

Now, the size of the container became the decisive factor. They came to this conclusion as it has been gathered that smaller packs up to the sizes of 200 ml are normally used as hair oil by the customers. It has also been reported that in small pack sizes up to 200 ml are stacked along with other hair oil care preparations/cosmetics and not in edible oil section in the retail shops. Enquiries also revealed that small packs of coconut oil displayed at the hair care shelves are used as hair oil only and the customer asks for the smaller packages or the sachets for using them as ‘hair oil'

While reporting the Circular in DDT 1125 04 06 2009, we had asked,

Since when is this 1995 Circular withdrawn? From Yesterday or from 1995?

If the amendment to the Tariff in 2005 changed the whole situation, why did it take the Board more than four years to react?

Who is responsible for the loss of Revenue for the last four years?

Will there be Show Cause Notices alleging that the assessee has suppressed the fact the Board was going to issue a Circular in June 2009?

What was the provocation to issue this Circular now?

We will not get answers to these questions in the near future!

Well, we got the answer after six years. They withdrew the 2009 Circular in 2015!

In 2009, Board's view was that coconut oil packed in small container of sizes up to 200 ml would be classified as hair oil. DDT had suggested that the manufacturers should put 201 ml in the packets and that 1 ml would take it out of the classification of hair oil!

After several judgements, the CBEC withdrew the 2009 Circular and the Section 37B order contained in it.

Now the field was free to classify the product taking into consideration the facts of the case read with the judicial pronouncements . NO BOARD CLARIFICATION.

To sum up this is what happened:

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. Board clarified that there is no clarification.

Who created all the confusion and litigation?

But the Board deserves our kudos for withdrawing that patently wrong and illogical order in Circular No.890/10/2009 dated 3.6.2009. We told them the order was wrong on 4.6.2009; it took them only six years to realize that.

Will coconut oil be dutiable depending on where you use it -food or head?

Coconut oil in Supreme Court

Last week, the Supreme Court passed an important order on coconut oil. And this is also a long story.

Commissioner found that "Shanti coconut oil", was advertised with a picture of actress Sreedevi prominently displaying her flowing hair; Cooking oil usually carried on the containers pictures of models engaged in cooking.

These circumstances triggered enquiry into the real end use of Shanti coconut oil and its correct classification. Commissioner determined the correct classification to be CSH 33059011 as unperfumed hair oil. He found that:

1. the coconut oil manufactured was extremely pure and expensive for use by most people in the country as a cooking medium.

2. The goods were packed in sachets ranging in volume from 5 ml onwards.

3. Majority of the people in the country used coconut oil not as a cooking medium.

4. The popular use of the product as hair oil was obvious also from the fact that the mouth/opening of lower capacity containers was not wide; some of them had only nozzles.

Commissioner decided that oil in packets, jars and cans of up to two litres was used as hair oil and demanded duty, interest and penalty as per law . And the assessee landed up in the Tribunal, which set aside the impugned order and allowed the appeal.

Aggrieved by the orders of the Tribunal (CESTAT) holding that the coconut oil manufactured and packed in "small containers" is classifiable under Heading 1513 and not under Heading 3305 of the Central Excise Tariff Act, the Revenue appealed to the supreme court. 2018-TIOL-139-SC-CX

In the Supreme Court, Justice Ranjan Gogoi, held,

the coconut oil in small packings is more appropriately classifiable under Chapter 15, Heading 1513 and not under Chapter 33, Heading 3305.

Justice R Banumathi held,

Tribunal is not right in holding that Chapter 15 covers all varieties of 'coconut oil' both edible and non-edible.

Because of the difference of opinion, the matter was referred to a Larger Bench which delivered its judgement last week on 18th December 2024. 2024-TIOL-123-SC-CX-LB

At the outset, the Court requested the Additional Solicitor General, to obtain instructions whether the issue would survive for consideration and whether the Revenue still wanted to press these appeals. The Additional Solicitor General averred that the matters required to be resolved on merits. The amount involved in these appeals, would aggregate to over Rs.159 crores. The issue remained relevant due to pendency of similar cases at various levels. In its written submissions also, the Revenue asserted that the issue is not rendered academic as on date as matters relating to this issue were still pending and show cause notices had also been issued in this regard under the GST regime.

The Supreme Court observed:

A well settled principle of interpretation of taxing statutes is that words therein must be construed in consonance with their commonly accepted meaning in the trade and their popular meaning. When a word is not explicitly defined or there is ambiguity as to its meaning, it must be interpreted for the purpose of classification in the popular sense, which is the sense attributed to it by those who are conversant with the subject matter that the statute is dealing with. This principle, known as the 'common parlance test', serves as good fiscal policy so as to not put people in doubt or quandary about their tax liability.

The mere fact that coconut oil is also capable of being put to use as a cosmetic or toilet preparation, by itself, would not be sufficient to exclude such oil from the ambit of 'coconut oil' and subject it to classification as 'hair oil' as 'coconut oil' is name specific.

Stress was also laid by the Revenue on the fact that Shanti Coconut Oil was marketed in containers depicting a popular film actress with flowing tresses and it was contended that in the light of such marketing, the oil sold was obviously meant for use as 'hair oil' and not as 'edible oil'. However, such an advertisement is not conclusive, in itself, to classify the oil as 'hair oil'

One may choose to buy one's cooking oil in small quantities, be it for economic or for health reasons or due to the inclination to use fresh oil in one's food preparation, and the smaller size of the packaging of such oil cannot be taken to mean that it is to be used as 'hair oil'.

Further, registration of the trademark 'Parachute' by M/s. Marico Ltd. for 'hair oil' is not sufficient to classify the coconut oil sold by it, in its entirety, as hair oil.

The Supreme Court held that pure coconut oil sold in small quantities as 'edible oil' would be classifiable under Heading 1513. The appeals being bereft of merit were accordingly dismissed.

Whether you're cooking or styling, there's no substitute for clarity—especially when money and coconut oil are on the line!

Until next week