Excise Duty Dispute: Supreme Court Clarifies Classification of Chewing Tobacco and Zarda Scented Tobacco

The Supreme Court of India recently delivered a judgment that significantly impacts excise duty calculations for tobacco manufacturers. The case revolved around the classification of chewing tobacco versus zarda/jarda scented tobacco and how these classifications affect tax liabilities under the Central Excise Tariff Act (CETA).

Background of the Case

The dispute primarily involved multiple appeals filed by the Commissioner of Central Excise against various tobacco manufacturers, including M/s Urmin Products Pvt. Ltd., M/s Dharampal Premchand Ltd., M/s Tej Ram Dharam Paul, and others. The central question was whether the products manufactured by these companies should be classified under CET SH 2403 9910 (chewing tobacco) or CET SH 2403 9930 (zarda/jarda scented tobacco).

Petitioner’s Arguments (Revenue/Excise Department)

The Revenue argued that manufacturers were misclassifying their products to evade higher excise duty.
They claimed that zarda/jarda scented tobacco was being marketed as chewing tobacco to benefit from a lower tax rate.
The Revenue highlighted that the flavoring and scenting process of the tobacco products clearly categorized them as zarda/jarda scented tobacco.
They also relied on chemical test reports that indicated the presence of perfume or other additives, suggesting the products were not merely chewing tobacco.
The Revenue invoked Section 11A of the Central Excise Act, arguing that these manufacturers had suppressed facts and willfully misclassified their products to evade duty.

Respondent’s Arguments (Tobacco Manufacturers)

The manufacturers contended that their products fell under the chewing tobacco category.
They argued that minor additives, including mild scents, did not transform the nature of their products into zarda/jarda scented tobacco.
They cited industry standards, historical classifications, and ISI specifications, which supported their claim that their products were chewing tobacco rather than scented tobacco.
Some manufacturers pointed out that they had followed due process, declaring their classification to the Excise Department, which had been previously accepted.

Key Observations by the Supreme Court

The Supreme Court divided the appeals into multiple groups and addressed the cases separately. The key takeaways from the judgment include:

1. Classification Disputes Must Follow Commercial Understanding

The Court reiterated that when there is no precise definition in the statute, common trade parlance should guide classification. If a product is commonly recognized as chewing tobacco in the market, then it should not be arbitrarily classified as zarda/jarda scented tobacco.

2. Misclassification for Tax Evasion Not Allowed

For cases where manufacturers deliberately changed classification to benefit from lower tax rates, the Court upheld the Revenue’s stance. The Court noted instances where manufacturers had reclassified products inconsistently to avoid higher excise duties.

3. Role of Chemical Reports and Manufacturing Process

The Court relied on chemical test reports, but with caution. If a product was found to contain strong perfumes and additives, it could be classified as zarda/jarda scented tobacco. However, mild flavoring agents alone did not justify such a classification.

4. Previous Declarations and Approvals

In cases where the Excise Department had previously approved the classification of a product as chewing tobacco, the Court ruled that subsequent reclassification required strong justification.

Final Ruling

The Supreme Court delivered a mixed verdict, ruling in favor of the Revenue in some cases and in favor of the manufacturers in others.

Appeals filed by the Revenue against Urmin Products and Kaipan Masala were allowed. The Court found that these manufacturers had wrongfully classified their products as chewing tobacco when they should have been classified as zarda/jarda scented tobacco.
Appeals in favor of Dharampal Premchand and Tej Ram Dharam Paul were dismissed. The Court found that their products were correctly classified as chewing tobacco and that the Revenue failed to establish misclassification.
The Court ruled that past approvals by the Excise Department regarding product classification could not be overturned arbitrarily.

Implications of the Judgment

The ruling will have a direct impact on tobacco manufacturers and their tax obligations.
It sets a precedent for classification disputes in other industries where product definitions are ambiguous.
Manufacturers will now need to justify their classifications with trade standards and consumer perception.
The ruling strengthens the Excise Department’s ability to challenge misclassification if tax evasion is suspected.

Conclusion

The Supreme Court’s ruling provides clarity on the classification of chewing tobacco versus zarda/jarda scented tobacco. While some manufacturers were found guilty of misclassification, others were able to justify their claims successfully. This case underscores the importance of adhering to tax laws while also ensuring fair classification based on industry norms and consumer understanding.

Petitioner Name: Commissioner of Central Excise Ahmedabad.
Respondent Name: M/s Urmin Products Pvt. Ltd. and Others.
Judgment By: Justice S. Ravindra Bhat, Justice Aravind Kumar.
Place Of Incident: India.
Judgment Date: 20-10-2023.

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