In a ruling that settles the classification debate over health drink powders, the Supreme Court has ruled that goods sold in powder or biscuit form cannot be squeezed into a ‘beverages’ entry meant for liquids, even where the consumer dilutes them with milk or water before consumption. The Court said that taxable event is the act of supply, and the incidence of taxation is determined by the nature of the good in the form in which it is sold, not by its subsequent end use.
The Court clarified that common parlance test, functional character test, and basic nature test cannot be invoked to import an end use concept where the statutory language is clear and unambiguous. The expression ‘beverages’ in Entry 20(ii) must be read in the context of the accompanying words, syrups, cordials, distilled juices, ark and essences, all of which are liquids, and cannot be stretched to cover goods in powder or biscuit form.
Goods that do not fit a specific entry must travel to the residuary entry and cannot be forced into an inapposite specific entry merely to attract a higher rate of tax, added the Court.
A Two-Judge Bench comprising Justice Manmohan and Justice Arun Palli observed that taxing statutes must be strictly construed, and nothing can be read into or implied from the plain language of the provision. It noted that the taxable event is the act of supply, and the incidence of taxation is determined by the nature of the good in the form in which it is sold, not by its end use.
The Court pointed out that the common thread running through the items enumerated in Entry 20(ii), i.e., syrups, cordials, distilled juices, ark and essences, is that they are all liquids capable of being bottled, stored and consumed in liquid form. It further observed that Entry 20(ii) makes no reference to the end use of goods, and classification must be based on physical characteristic and form at the time of sale.
Applying the rule of ejusdem generis, the Court held that the expression ‘beverages’ must be read in the context of the specific words accompanying it and cannot be interpreted to encompass goods of an altogether different physical form.
Briefly, the Supreme Court was asked to decide whether ‘GRD Powder’ and ‘GRD Mix’, manufactured and sold by Cadila Health Care Ltd., should be classified as ‘Non-Alcoholic Drinks and Beverages’ under Entry 20(ii), Part IV, Schedule II of the M.P. Commercial Tax Act, 1994 (attracting 10% tax), or under the residuary entry of Schedule II (attracting 8% tax) for Assessment Year 1997-1998. The Madhya Pradesh High Court had upheld the classification under the residuary entry at 8%.
The Revenue argued that since the packaging instructed consumers to dilute the product with milk or water, the goods were functionally beverages. The Respondent contended that the goods were sold across the counter in powder and biscuit form, and therefore could only be taxed under the residuary entry.
