Introduction
Classification has always been one of the most interesting as well most litigative issue in any tax jurisdiction. Classifying goods under the correct tariff item is the first, and arguably, most important step for a taxpayer as apart from determination of the applicable rate of tax, it can be used as a tool for unnecessary harassment by the tax authorities.
Recently, the issue of classification of milk beverages (flavored milk) had come for discussion before the Madras High Court in the case of Parle Agro Pvt. Ltd.[1]. The two competing entries being discussed were CTH 0402 as Milk and cream, concentrated or containing added sugar or other sweetening matter, including skimmed milk powder, milk food for babies, other than condensed milk and CTH 2202.99.30 as Beverages containing milk. The High Court held that the classification of flavored milk should be CTH 0402 instead of CTH 2202 and thus, the rate of GST on the same should be 5% instead of 12%. The reasoning adopted by the High Court for classification of the flavored milk under CTH 0402 not under CTH 2202 is two folds:
(A) The FSSAI Regulations, 2011 provide that the dairy products are to be grouped and classified together and such regulations do not include plant-based milk products in its ambit. However, CTH 2202 includes only those milk products which are derived from plants such as soya milk drink, almond milk etc. The said heading does not include the milk derived from milch animals; and
(B) Beverage containing milk under CTH 2202 is a subset of Other Non-Alcoholic beverage and thus, includes only those products wherein alcohol content of less than 0.5 vol is present. The impugned goods did not have any alcohol content present in it. Therefore, the flavored milk made from milk derived from milch animals would not merit classification under CTH 2202.
Relevance
The judgment is of great importance to the industry especially the dairy industry for the following reasons:(A) The judgment has deviated from the previously concluded classification of flavored milk. In various advance rulings[2] and judgments by the Tribunals and High Court[3], where it has been held that the flavored milk is to be classified under CTH 2202 as beverage containing milk.
(B) The above rulings and even the Appellate Authority for Advance Ruling in the case of Parle Agro relied upon the recommendations of GST Council to include flavored milk under CTH 2202. However, the High Court in the instant case held that the GST Council’s views are recommendatory in nature and not binding and it is for the Government to fix appropriate rates on the goods. Therefore, the said judgment has tethered the power of the GST Council.
Issues
While the instant judgment may look enticing for business to reclassify flavored milk under CTH 0402, however, before falling prey to the impulsive decision of changing the classification of flavored milk, it is important to understand the following interpretational issues.
(A) Being a member of WTO, India requires to follow HSN Explanatory Notes for classification of the product which hold a persuasive value for determination of classification under Customs and GST. In the instant case, it is to be noted that the General Explanatory Notes to Chapter 4 as well as Explanatory Notes to CTH 0402 prescribe specific additives which can be added to the milk and do not mention flavors as one of the permitted additives. In such a case, can it be argued that merely because flavors have not been specifically restricted under CTH 0402, they are covered within the scope of permitted additives for the purpose of CTH 0402.
(B) For the classification under GST and customs, it is essential to understand the scheme of classification. From the classification scheme adopted in the Customs Tariff, it can be seen that products in their natural state are classified in the initial chapters and value-added products manufactured using such natural products are classified in the later chapters. In the present case, flavored milk is not the natural form of milk but obtained after application of specific processes and additives in the milk.
(C) Furthermore, this judgment has relied upon the FSSAI regulations which provide that all the dairy products are to be classified together. Here, it is to be noted that the objective of FSSAI regulation is completely different, i.e., to ensure the uniformity in the practices and standards adopted for the edible milk products while the classification under tax statutes is to impose tax.
(D) There is no denial from the fact that the major component in flavored milk is milk. However, the process adopted in the form of adding sugar, flavors etc. alters the intrinsic character of the milk. Therefore, relying on other statutes with different objectives for the purpose of classification should not be a practice to be adopted for classification and thus rate determination. A typical example of the same is Monosodium Glutamate (MSG), commonly known as Ajino-moto, which is a food preservative and thus, covered by FSSAI regulations. However, for the purpose of classification under tax statutes, MSG is classified as monosodium glutamate under CTH 2922. The fact that MSG is dealt as food under FSSAI should not impact the classification for the rate determination purposes under the tax statutes.
(E) It is pertinent to note that the instant judgment not only deviates from the Indian jurisprudence but also challenges the international jurisprudence. There are multiple cross rulings[4] with respect to classification of flavored milk which classify it under CTH 2202 as milk-based drinks. Having a classification digressed from international classification is assailing to the very reason for existence of WTO whose main purpose is to ensure uniformity in classifications and tax rates across the borders.
(F) The instant judgment differentiates itself from and challenges the judgment of Apex Court in the case of Amrit Foods[5], by stating the product under consideration in said judgment is different from flavored milk and thus, ruling under Amrit Foods (Supra) should not be relied upon. However, it is to be noted that the Apex Court in Amrit Foods (Supra) held that a product remains classified under Chapter 04 as long as the additives do not alter the character of products to be classified. In the instant case, the addition of sugar & flavors to the milk changes the character as well as the perception of milk at the end of customers. Further, the usage and requirement by the consumer does not remain the same for an unflavored milk vis-a-vis flavored milk, which is more of a ready to drink beverage.
(G) Lastly, the instant judgment has brought a different perspective that only the plant-based milk beverages would be classified under CTH 2202. This would require a re-examination of all those beverages which use animal-based milk as one of the ingredients. Even if those beverages would continue to be outside the scope of Chapter 04, eight-digit classification under CTH 2202 would certainly undergo a change.
Parting remarks
On the basis of the above discussion, the authors are of the view that the judgment should not be thoughtlessly followed for the classification of milk-based drinks. Having deviated from the previously held understanding, it is to be seen whether the revenue would challenge the decision of the High Court in higher forums and what would be the outcome in that case. Also, would this prompt the revenue to amend the rate Notification under GST and cover flavored milk/ milk-based beverages falling under CTC 0404 or CTH 2202 at a higher rate, is also an area to be watched out.
However, at the same time, the authors are of the view that the most important take away from the instant judgment is that it is not oblivious to the increasing scope of power of GST council. In fact, said judgment has clarified the obscured principle that GST council recommendations are not mandatory and only recommendatory, which is a welcome move.
[The authors are Partner and Senior Associate, respectively, in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] 2023-VIL-789-MAD
[2] 2021 (8) TMI 193; 2020 (32) GSTL 206; 2021 (4) TMI 595; 2021 (4) TMI 616
[3] 2023 (7) TMI 873; 2009 (236) E.L.T. 329
[4] NY C86413; NY F81309; N241301
[5] 2015 (9) TMI 1269
