Referring to the definition of “manufacture” as per section 2(72) of the GST Act, the Gujarat High Court (Ahmedabad Bench) ruled that the small retail pouches of tobacco leaves sold by the petitioners would be classified under the category of chewing tobacco under Tariff Heading 2403 9910 in view of the description mentioned in Explanatory Note of HSN read with definition of “manufacture” in Section 2(72) of the GST Act as well as provisions of the ‘Copta’.
The High Court clarified that the Notification No. 1/2017-Central Tax (Rate) dated June 28, 2017, prescribing the GST rate based on Tariff Heading as specified in the First Schedule to the Customs Tariff Act, 1975, would have to align with the definition of “manufacture” as provided in the GST Act, and therefore, the petitioners would be liable to pay GST and Compensation Cess applicable as per Tariff Heading 2403 9910 and not as per Tariff Heading 24012090.
The Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi observed that the core of the issue lies in the change of the definition of “manufacture” from the Central Excise Act, 1944, to the GST Act, 2017, and applying the said definition under Section 2(72) of the GST Act, clarified that the processing undertaken by the petitioners (drying, cleaning, sieving, cutting, and packing) results in the emergence of a new product, which has a distinct name, character and use, as ‘chewing tobacco’.
Referring to the HSN Explanatory Notes, which do not mandate fermentation or liquoring for a product to be “chewing tobacco”, the Bench noted that the petitioners’ adherence to COPRA provisions for chewing tobacco reinforces the new classification. At the same time, the Bench emphasised that the petitioners’ classification under Heading 2401 was based on a bona fide belief stemming from the long-standing practice and clarifications under the erstwhile Central Excise regime. Therefore, no fraud, wilful misstatement, or suppression of facts to evade tax can be attached to it.
As far as the petitions related to the Central Excise regime are concerned, the Bench pointed out that the classification under Heading 2401 was correct at that time, given the then-applicable definition of “manufacture”. Thus, the Bench quashed the demand for differential excise duty.
Briefly, the petitioners, engaged in the business of supplying raw, unmanufactured, and unprocessed tobacco, which is packed into small retail pouches under various brand names, used to receive dried, cut tobacco leaves in bulk gunny bags, and the only process they undertake is cleaning, sieving, and repacking the tobacco into small retail pouches, without adding any other ingredients or flavours. For decades, since the Central Excise regime, the petitioners have consistently classified their product under Tariff Heading 2401 as “unmanufactured tobacco”, which was supported by a Certificate of Registration from the Central Excise Department and was in line with CBEC Circulars.
Later, upon the implementation of the GST Act, the petitioners continued to classify the product under Heading 2401, discharging GST at 28% and Compensation Cess at 71%. The Department was, however, of the opinion that the petitioner is engaged in the supply of “Chewing Tobacco” without lime and hence, shall be classified under HSN 24039910 as per the World Customs Organisation, attracting Compensation Cess rate at 160%.
Appearances:
Senior Advocate Mihir Joshi, along with Advocates Digant M. Popat, Anandodaya S. Mishra, and Anand Nainawati, for the Petitioners/ Taxpayer
Advocates Hetvi Sancheti, Ankit Shah, Maunil Yajnik, Tirth Nayak, Neel P. Pakhani, and C.B. Gupta, for the Respondent/ Revenue
