Chewing Tobacco Packed In High-Density Polyethylene Bags Are 'Wholesale Package'; Cannot Be Taxed As Retail Product Under Excise Act : Supreme Court

The Supreme Court recently held that pouches of chewing tobacco packed in High-Density Polyethylene (HDPE) bags would be considered a 'wholesale package' and could not be considered for imposing excise duty as per the provisions relating to retail sale price in the Central Excise Act, 1944.

The bench of Justices AS Oka and Pankaj Mithal upheld the decision of the Central Excise Appellate Tribunal which observed that chewing tobacco in HDPEs qualified as wholesale packages as they were sold only to intermediaries like distributors and dealers under Standards of Weight & Measures (Packaged Commodity) Rules, 1977 (Rules of 1977). Thus the HDPEs cannot be taxed as a retail product.

As per the facts, show cause notices were issued to the respondent-assessee, a chewing tobacco manufacturer. The notices challenged the packaging and pricing strategy employed by the respondent. According to the notice, the respondent was packaging 33 small pouches of 6 grams each and one larger pouch of 15 grams in a single larger poly pack(HDPE), with different maximum retail prices (MRP) marked on different pouches- Rs 1 for the smaller pouches and Rs. 3 for the large pouch.

It was alleged that the HDPEs containing 33 small and 1 large poly pack are group packages as defined in Rule 2(g) of the Rules of 1977 and therefore intended for retail sale. As per Rule 2(g), a group package would mean a package of two or more single packages intended for retail sale. Since the weight of each such package exceeded 10 gms it was not covered under the exemption of Rule 34(b) which excludes duty on packaged commodities under 10 grams. Thus the respondent was considered liable to pay duty on the larger poly packs under S. 4A of the Central Excise Act 1944 (Act of 1944). S.4A deals with the valuation procedure for excisable goods sold on retail sale price. It may be noted that chewable tobacco has been notified under sub-section (1) of S.4A. As the provision reads as follows-

“Section 4A. Valuation of excisable goods with reference to retail sale price. – (1) The Central Government may, by notification in the Official Gazette, specify any goods, in relation to which it is required, under the provisions of the Standards of Weights and Measure (PC) Rules, 1976 (60 of 1976) or the rules made thereunder or under any other law for the time being in force, to declare on the package thereof the retail sale price of such goods, to which the provisions of sub-section (2) shall apply.”

The respondent replied that they were packing 100 poly packs in 1 HDPE bag. It was argued that the HDPEs not intended for direct retail sale but were instead meant to be sold to distributors. The respondent claimed that these were wholesale and not retail packages, thus not subject to the same tax rules as individual retail packages. The main contention was that the 33 small pouches of 6 gm come under the definition of 'wholesale packages as defined in Rule 2(x) under the 1977 Rules. Under Rule 2(x) any retail packages which are intended for sale, distribution or delivery to an intermediary and not directly to a single consumer are qualified as wholesale packaging.

In the original order dated July 19, 2005, the Commissioner initially rejected the respondent's arguments, stating that the packaging indicated an intention for retail sale and not wholesale, which necessitated a different tax treatment. The order noted that (1) the retail sale price was mentioned on the poly packs contrary to Rule 29- a declaration made on wholesale packages; (2) it was irrelevant whether the poly packs were sold in retail but whether goods were intended to be sold in retail; (3) additionally, it was observed that the assessee's HDPE bags, which contain 100 larger poly pack packages and do not declare the sale price, would be wholesale packages.

However, this decision was overturned by the Appellate Tribunal. The tribunal relied upon the Supreme Court decision in the case of the Commissioner of Central Excise, Vapi v. Kraftech Products Inc. The said decision dealt with the interpretation of Rule 34 of 1977 Rules in the context of packaging of hair dye.

The Excise authorities (appellants) had challenged the Tribunal's order before the Apex Court.

Before the Supreme Court bench, the debate centred on whether the packaging in question was intended for retail sale, which would determine the applicable taxing provision under the Excise Act. The bench analysed whether the HDPEs would fall under retail packaging and sale or wholesale packaging.

Arguments Before The Bench

The appellant argued that the decision of Kraftech Products didn't apply to their case as the products involved were different. In the said case, the product was a pack of hair dye weighing 9 grams, which was exempt from Rule 34(b). However, in the current case, the products are poly packs and HDPE bags, each weighing more than 10 grams, so the exemption doesn't apply as they are considered as 'group packages'.

The appellant also mentioned that the products sold by the respondent were packaged for individual sale, which justifies the application of S.4A of the Excise Act. Additionally, it was pointed out that these products are not sold by weight, so Rule 34(b) does not apply.

It was stressed that the Tribunal previously did not consider all the facts, that the Commissioner had examined in detail. They also noted that the respondent was already paying the required duty under S. 4A on the 15-gram pouch of chewable tobacco included in the packages.

On the other hand, the counsel for the respondent supported the existing judgment, arguing that the ratio from the Kraftech Products case about hair dye does apply here. It was argued that the HDPE bags, which contain 100 poly packs of 34 pouches each, are not intended for individual sales but for wholesale, so they should not be considered packaged for retail.

Understanding What Constitutes As 'Retail Sale' v. 'Whole Sale'

The bench observed that the larger poly packs and the HDPE bags used to distribute them did not meet the criteria for retail sale under Rule 2(q) and therefore are not retail packaging. As per Rule 2(q) of 1977 Rules, 'Retail Sale' means -

“(q) “retail sale” in relation to a commodity, means the sale, distribution or delivery of such commodity through retail sales agencies or other instrumentalities for consumption by an individual or group of individuals or any other consumer;”

The Court noted that the respondent's packaging strategy did not aim at selling directly to consumers but to intermediaries like distributors, which aligns with the definition of wholesale packaging under Rule 2(x) of the 1977 Rules.

As per the definition under Rule 2(x), a wholesale package means a package that is not sold directly to individual consumers but rather to intermediaries like stores or distributors. It can be: (1) A package that contains multiple smaller, retail packages, meant to be sold or given only to an intermediary; (2) A large quantity of a product sold to an intermediary, who then divides it into smaller amounts to sell to consumers and (3) A package that includes ten or more retail packages, with each smaller package properly labelled according to regulations.

Consequently, the Supreme Court concluded that the Tribunal was correct in its judgment. The Court further placed reliance on the fact the commissioner's order admitted that the respondent was putting 100 large poly pack packages in one HDPE and that this HDPE bag would be considered a wholesale package as it does not contain a declaration of sale price- a requirement under Rule 29 of 1977 Rules.

Rule 29 Provides -

Declarations applicable to be made on every wholesale package

Every wholesale package shall bear thereon a legible, definite, plain and conspicuous declaration as to –

The name and address of the manufacturer or where the manufacturer is not the packer, of the packer; the identity of the commodity contained in the package; and

The total number of retail package contained in such wholesale package or the net quantity in terms of standard units of weights, measures or number of the commodity contained in wholesale package;

Provided that nothing in this rule shall apply in relation to a wholesale package if a declaration similar to the declarations specified in this rule, is required to be made on such wholesale packages by or under any other law for the time being in force.

The bench held that nowhere in the 1977 Rules was it mandated that these HDPEs include the display price. Further, even if it assumed that the 100 poly packs were retail packages, since they are pouched together in HDPE bags, it will covered under the definition of 'wholesale packages as they were being sold only to distributors and dealers. Thus the HDPE bags are not group packages under S.2(g) and cannot be taxed on the basis of retail sales.

“17…the Commissioner held that an HDPE bag containing 100 poly packs does not contain a declaration of selling price and therefore, it would be a wholesale package. There is no finding recorded that what is distributed or sold by the respondent is a poly pack containing 33 plus one small pack. The respondent's case that 100 poly pack packages are being put in one HDPE bag has been accepted by the Commissioner. Therefore, the respondent is selling HDPE bags containing 100 poly packs each to the distributors and dealers. The said Rules do not require the display of price on such HDPE bags. Even assuming that 100 poly packs were retail packages, HDPE bags would be covered by the definition of 'wholesale package' as defined in clause (iii) of Rule 2(x) of the said Rules. Thus, the HDPE bags are not group packages within the meaning of Rule 2(g).”

The Court therefore upheld the impugned order and reiterated the duty imposed as per S.4A of the 1944 Act was not applicable to the HDPE bags.

“18. Though the impugned judgment is not satisfactorily worded, for the reasons which were recorded above, the ultimate conclusion recorded in the impugned judgment that Section 4A(1) of the Excise Act was not applicable to the goods subject matter of the show cause notices, cannot be faulted with. Hence, there is no reason to interfere with the impugned judgment.”

The bench proceeded to dismiss the appeals being devoid of merit.