Supreme Court Affirms Penalty On 'Zarda' Manufacturers For Misclassifying Product As 'Chewing Tobacco' For Central Excise Duty

The Supreme Court while adjudicating a matter wherein the Assesssee deliberately misclassified the ‘Zarda’ produced by it as ‘Chewing Tobacco’ for evading payment of a high duty as applicable to ‘Zarda’, has affirmed the imposition of penalty and demand for payment of differential duty raised by the Central Excise Department from the Assessee.

The Bench comprising Justice S. Ravindra Bhat and Justice Aravind Kumar, has held that, “The assessee being aware that there being no change in the nature of the products, its ingredients and also the manufacturing process had changed and misclassified the product as ‘chewing tobacco’ from ‘zarda/jarda scented’ tobacco. Had the assessee continued its classification as ‘zarda/jarda scented tobacco’, the duty payable as per transaction value under Section 4 of the CE Act would have been much more than the determination under Section 4A of CE Act after 50% abatement. It is for this precise reason for avoiding and evading payment of the higher duty, the classification was deliberately changed from ‘zarda/jarda scented tobacco’ to ‘chewing tobacco’”

BACKGROUND FACTS

The expressions ‘chewing tobacco’ and ‘zarda/jarda scented tobacco’ are nowhere defined under the Central Excise Act, 1944 (“CE Act”) or Central Excise Tariff Act, 1985 (“CETA”).

A Notification No.13 of 2002 dated 01.03.2002 was issued under CE Act, whereunder the goods/products were chargeable to a duty of excise with reference to value, notwithstanding anything contained in Section 4 of CE Act, to be deemed to be the retail sale price declared on such goods, else such amount of abatement, if any, from such retail sale price by classifying the product manufactured as ‘chewing tobacco’.

Thereafter, a Notification dated 24.02.2005 was issued, which re-organized the Central Excise Tariff Sub-Heading (“CET SH”) 2403 9910 as ‘chewing tobacco’ and CET SH 2403 9930 as ‘zarda/jarda scented tobacco’, which attracted duty of 34% on both the products at the time.

Subsequently, Notification No.2 of 2006 dated 01.03.2006 was issued in supersession of Notification dated 01.03.2002. The Notification dated 01.03.2006 specified that the goods covered under Section 4A of CE Act was for MRP-based assessment. The same 2006 Notification covered goods falling under CET SH 2403 9910 i.e. ‘chewing tobacco’, but did not include CET SH 2403 9930 i.e. ‘zarda/jarda scented tobacco’.

On 11.07.2006, Notification No.16 of 2006 was issued which amended Notification No.2 of 2006 dated 01.03.2006. Now CET SH 2403 9930 was included within Notification No.2 of 2006 dated 01.03.2006, thereby including ‘jarda/ zarda scented tobacco’ within the scope of ‘notified goods’ under Section 4A of CE Act.

M/S Urmin Products P. Ltd. (“Assessee”) is a manufacturer of ‘zarda’. The Revenue alleged that the Assessee cleared its manufactured product of ‘zarda/jarda scented tobacco’ under the guise of ‘chewing tobacco’ during the period of 01.03.2006 to 10.07.2006. The Assessee misclassified its product from ‘zarda/jarda scented tobacco’ (CET SH 2403 9930) to ‘chewing tobacco’ (CET SH 2403 9910), to evade payment of duty under Section 4 of the CE Act despite there being no change in the nature of the products.

Accordingly, the Revenue invoked its extended period of limitation under proviso to Section 11A(1) of CE Act. A Show Cause Notice to the Assessee, to justify as to why its product should not be assessed to duty as per Section 4 of the CE Act, for the period 01.03.2006 to 10.07.2006. The Revenue demanded the payment of differential duty from the Assessee and a penalty was also imposed.

The Factory-in-Charge of Assessee admitted in its statement that the Assessee’s product is classifiable as ‘jarda/zarda scented tobacco,’ they still continued to pay duty as per MRP-based assessment prescribed under Section 4A of the CE Act.

In Order in Original (“OIO”), the Show Cause Notice and the demand made thereunder was upheld. An appeal was filed before the CESTAT against the OIO. The CESTAT accepted the Assessee’s contention that duty is to be paid on “flavoured chewing tobacco” under CET SH 2403 9910 and not as ‘zarda/jarda scented tobacco’ falling under CET SH 2403 9930 of CETA. The penalty and demand for differential duty was set aside by CESTAT.

The Revenue filed an appeal before the Supreme Court against the CESTAT order.

CONTENTIONS OF REVENUE

The Revenue contended that despite being ineligible for valuation under Section 4A of CE Act, the Assessee continued to avail the benefit of the same till 11.07.2006. The abatement provided to the goods classifiable under ‘chewing tobacco’ was 50%, therefore, if the goods are cleared as ‘chewing tobacco’ the duty has to be paid on lower value. Which results in payment of duty as per the value determined under Section 4A of CE Act, after 50% abatement, which was much less as compared to transaction value under Section 4 of CE Act.

Further, ‘zarda/jarda scented tobacco’ was brought into the ambit of Section 4A of CE Act vide amendment to Notification No.16 dated 11.07.2006. Thus, the product ‘zarda/jarda scented tobacco’ was not specified for assessment under Section 4A of the CE Act for the period of 01.03.2006 to 10.07.2006.

In view of the deliberate misclassification, the Assessee was liable to pay differential duty and penalty.

ISSUE

Whether the Assessee’s product for the period 01.03.2006 to 10.07.2006 was required to be classified as ‘chewing tobacco’ (CET SH 2403 9910) or as ‘zarda/jarda scented tobacco’ (CET SH 2403 9930)?

SUPREME COURT VERDICT

The Bench took the view that ‘zarda scented tobacco’ could not be determined under MRP assessment scheme, since this classification did not find a place in the Notification No.2 of 2006 dated 01.03.2006, wherein the goods covered under Section 4A of the CE Act for MRP based assessment were categorically specified.

The Bench opined that there being no change in nature, ingredient and manufacturing process of the Assessee’s product, the change in classification of product was deliberately done to evade payment of a higher duty, as applicable to chewing tobacco.

“The assessee being aware that there being no change in the nature of the products, its ingredients and also the manufacturing process had changed and misclassified the product as ‘chewing tobacco’ from ‘zarda/jarda scented’ tobacco. Had the assessee continued its classification as ‘zarda/jarda scented tobacco’, the duty payable as per transaction value under Section 4 of the CE Act would have been much more than the determination under Section 4A of CE Act after 50% abatement. It is for this precise reason for avoiding and evading payment of the higher duty, the classification was deliberately changed from ‘zarda/jarda scented tobacco’to ‘chewing tobacco’.”

It was further observed that when a specific entry is found in a fiscal statute, the same would prevail over any general entry. If there are two or more sub-headings, the heading which provides the most specific description will be preferred over the heading providing a general description.

The Bench set aside the CESTAT order and upheld the imposition of penalty and demand for payment of differential duty.

The appeal has been allowed.

Case Title: Commr. Of Cen. Exc. Ahmedabad v M/S Urmin Products P. Ltd. And Others

Citation:  2023 LiveLaw (SC) 949

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