Coconut Oil Classifiable As 'Edible Oil' For Central Excise Tariff; If Sold As Cosmetic, Taxable As 'Hair Oil' : Supreme Court
The Supreme Court has held that pure coconut oil, packaged and sold in small quantities ranging from 5 ml to 2 litres, would be classifiable as 'Edible oil' for the purposes of the Central Excise Tariff Act, 1985. It will be classifiable as "hair oil" if it is packaged and sold as a cosmetic."we are of the opinion that pure coconut oil sold in small quantities as 'edible oil' would...
The Supreme Court has held that pure coconut oil, packaged and sold in small quantities ranging from 5 ml to 2 litres, would be classifiable as 'Edible oil' for the purposes of the Central Excise Tariff Act, 1985. It will be classifiable as "hair oil" if it is packaged and sold as a cosmetic.
"we are of the opinion that pure coconut oil sold in small quantities as 'edible oil' would be classifiable under Heading 1513 in Section III-Chapter 15 of the First Schedule to the Central Excise Tariff Act, 1985, unless the packaging thereof satisfies all the requirements set out in Chapter Note 3 in Section VI-Chapter 33 of the First Schedule to the Central Excise Tariff Act, 1985, read with the General/Explanatory Notes under the corresponding Chapter Note 3 in Chapter 33 of the Harmonized System of Nomenclature, whereupon it would be classifiable as 'hair oil' under Heading 3305 in Section VI- Chapter 33 thereof," the Court held.
The bench of CJI Sanjiv Khanna, Justice Sanjay Kumar and Justice R Mahadevan was considering the legal issue of whether pure coconut oil, packaged and sold in small quantities ranging from 5 ml to 2 litres, would be classifiable as 'Edible oil' or as 'Hair Oil' in terms of the First Schedule to Central Excise Tariff Act, 1985.
The 15-year-old dispute stems from a batch of appeals filed by Revenue Authorities challenging the decision of the Customs Excise and Service Tax Appellate Tribunal dated June 25, 2008. The present appeals deal with revenues and penalties totalling Rs. 159 Crores.
As per the facts, the revenue in 2009, filed eight appeals in the Supreme Court related to periods from February 2005 to February 2007. Four of these appeals were against M/s Marico Ltd, a company that makes and sells coconut oil under the brand name 'Parachute.' The other four appeals were against Marico's job-workers based in Puducherry M/s Aishwarya Industries, M/s Moreshwar Industries, M/s Shivam Enterprises, and M/s Sowparnika Enterprises who repacked the bulk coconut oil into smaller containers, ranging from 50 ml to 2 litres. In July 2007, the Central Excise authorities issued show-cause notices, on the basis that the coconut oil sold by these companies should be classified as 'hair oil.' In 2008, the authorities confirmed the charges and imposed excise duty, interest, and penalties on Marico and its job-workers. However, when the companies appealed to the Customs Excise and Service Tax Appellate Tribunal, the Tribunal ruled in their favor. As a result, the Revenue department took the case to the Supreme Court.
In 2018, a two-judge bench gave a split decision on the case, leading to a three-judge bench reference. In the split verdict, Justice Ranjan Gogoi opined that coconut oil in small packs should be classified as edible oil. However, Justice R. Banumathi held that coconut oil packed in small containers for use as hair oil should be classified as hair oil under Heading 3305.
The Test To Calssify Coconut Oil As Edible Oil
The Court noted that while pure coconut oil has multiple uses, the listing of the coconut oil is done specifically under Heading 1513 in Chapter 15 of the First Schedule, along with other oils. This classification means it cannot be automatically categorized as a cosmetic product under Heading 3305 in Chapter 33 unless certain conditions are met.
For coconut oil to be classified as 'hair oil' or a cosmetic product under Chapter 33, it should be used, packaged and sold exclusively for the purpose of being used as hair oil. This means the packaging should include labels or other indications showing the product is intended for cosmetic use. Just because the oil could also be used as hair oil was not enough to classify it as a cosmetic product. The Court arrived at this observation by noting that since Chapter 33 in Section VI after the 2005 amendment was brought in conformity with Chapter Note 3 in Chapter 33 of Harmonized System of Nomenclature (HSN).
Thus the conditions laid down in the Explanatory/General Notes in the HSN in relation to the said Chapter Note would have to be fully satisfied. As per this, “not only must the coconut oil be suitable for use as 'hair oil', but it must also be put in packaging sold in retail for such particular use, i.e., as hair oil. The phrase 'suitable for such use' under Headings 3303 to 3307 in Chapter Note 3 would have to be read in conjunction with the Explanatory Notes thereto, which categorically state that such packaging must be accompanied with labels, literature or other indications that the product is intended for use as a cosmetic or toilet preparation or it must be put in a form clearly specialized to such use - as in the case of acetone marketed in small bottles, along with an applicator brush, indicating its use as nail polish remover.”
The following indicators by the Court highlighted that coconut oil in the presence case was to be considered as edible oil under Chapter 15 : (1) It must be packed in containers using edible grade plastic; (2)It needs to comply with the Food Safety and Standards Act, 2006; (3) The packaging must conform to the Edible Oils Packaging (Regulations) Order, 1998; (4) Edible oil has a shorter shelf life compared to oil meant for cosmetic purposes; (5) It must meet specific Indian Standards Specifications for edible oil
“Edible coconut oil requires to be packed in containers using edible grade plastic. The coconut oil so sold must satisfy the requirements of the Food Safety and Standards Act, 2006, and be packaged in conformity with the Edible Oils Packaging (Regulations) Order, 1998. Further, edible oil would have a shorter shelf life than oil meant for cosmetic purposes and must meet the Indian Standards Specifications prescribed for edible oil which are different from the standards for hair oil. Significantly, the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, provide that 'edible oil' can be packed in specified sizes of 50 ml, 100 ml, 200 ml, 500 ml, 1 litre or 2 litres.”
The Court added that the 'Shanti Coconut oil' had received 'Agmark' certification, confirming its status as Grade-I coconut oil suitable for human consumption.
Packaging Size And Nature Of Marketing Not Conclusive To Establish Classification
The Court also held that the size of the packaging is not necessarily an indicator to establish the product's intended use. Several factors are there which may determine why a consumer may opt for a smaller pack of the oil - “ One may choose to buy one's cooking oil in small quantities, be it for economic or for health reasons or due to the inclination to use fresh oil in one's food preparation, and the smaller size of the packaging of such oil cannot be taken to mean that it is to be used as 'hair oil' without any pointer to that effect, be it by way of a label or literature or by any other indication that it is to be used as 'hair oil'.”
The bench also addressed the issue of product marketing. While the Revenue Department argued that the use of a popular film actress with flowing hair in advertisements suggested the oil was meant for hair care, the court found this argument inconclusive. In doing so, reliance was placed upon the decision in Meghdoot Gramodyog Sewa Sansthan, U.P. vs. Commissioner of Central Excise, Lucknow ((2005) 4 SCC 15 where this Court held that merely because the product, in that case, was sold in a packing depicting a lady with flowing hair was not determinative of such product being intended as a preparation for use on the hair. There, the Court considered the composition and curative properties of the product to ultimately conclude that the product was classifiable as a 'medicament' under Heading 3003 in Chapter 30 of the First Schedule.
The Court further rejected the argument of revenue that the registration of the "Parachute" trademark for hair oil was sufficient to classify the entire product as hair oil. It observed that Marico had also registered the trademark for other categories, including edible oil, coffee/tea, pharmaceuticals, and non-alcoholic beverages.
Further, the bench noted that Marico markets various coconut-based hair oils containing additional ingredients like perfumes. These products are manufactured under a separate license obtained under the Drugs and Cosmetics Act, 1940, and are classified as preparations for use on hair.
Thus it also rejected the argument to classify coconut oil as hair oil under heading 33.
Case : Commissioner of Central Excise, Salem v. M/s Madhan Agro Industries (Pvt) Ltd
Citation : 2024 LiveLaw (SC) 1014