Should coconut oil in small packets be taxed as edible oil or hair oil? Supreme Court answers

Pure coconut oil packaged and sold in small quantities ranging from 5 ml to 2 litres would be classifiable as 'edible oil' for tax purposes under the Central Excise Tariff Act of 1985 and not hair oil, the Supreme Court recently held [Commissioner of Central Excise, Salem vs Madhan Agro industries]..Hence, it would attract the lower duty of 8% and not the higher tax of% on hair oil.The apex court reasoned that the mere fact that coconut oil is also capable of being used as a cosmetic or toiletry item is not sufficient to exclude it from classification as 'edible oil' and put it under the head of 'hair oil'."The mere fact that coconut oil is also capable of being put to use as a cosmetic or toilet preparation, by itself, would not be sufficient to exclude such oil from the ambit of ‘coconut oil’ and subject it to classification as ‘hair oil’ as ‘coconut oil’ is name-specific," the judgment dated December 18 said.A bench of Chief Justice of India Sanjiv Khanna, and Justices PV Sanjay Kumar and R Mahadevan said that for such oil to be classified as hair oil, all the requirements set out in Chapter Note 3 in Section VI-Chapter 33 of the First Schedule to the Central Excise Tariff Act have to be met.."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 12 Chapter 33 of the Harmonized System of Nomenclature, whereupon it would be classifiable as ‘hair oil’ under Heading 3305 in Section VI Chapter 33," the Bench said..The Court was hearing appeals filed by Commissioner of Central Excise challenging order passed by Customs Excise and Service Tax Appellate Tribunal (CESTAT) holding that coconut oil was classifiable as ‘edible oil’ under Heading 1513 in Chapter 15 of Section III of the First Schedule to the Act of 1985.The CESTAT had ruled against the Excise Commissioner’s finding that coconut oil packed in small containers would be classified as hair oil under the Heading 3305 of Chapter 33 of the CETA..When the matter initially came up before the Supreme Court, a Bench of Justices Ranjan Gogoi and R Bhanumathi (both retired) delivered a split verdict on the issue.Justice Ranjan Gogoi was of the view that such coconut oil in small packings was more appropriately classifiable as edible oil under Heading 1513. Justice R Banumathi, on the other hand, concluded that coconut oil, packed in small sachets/ containers suitable for being used as hair oil, was classifiable as such under Heading 3305. In view of their difference in opinion, the case was placed before the three-judge Bench. The three-judge Bench held that the argument of the Revenue that pure coconut oil should invariably be classified under Heading 3305 is liable to be rejected. The Court relied on the Harmonized System of Nomenclature (HSN) as well as various preceded to hold against Revenue."This argument (by Revenue) completely loses sight of the General/ Explanatory Notes in relation to Chapter Note 3 in Chapter 33 of the Harmonized System of Nomenclature (HSN) and the fact that the said Chapter Note 3 is identical to Chapter Note 3 in Chapter 33 of the First Schedule to the Act of 1985. It is for the Revenue to take a stand by way of legislative action in the event it chooses to treat pure coconut oil marketed in small quantities differently from ‘Coconut oil’ in Heading 1513. Having failed to do so and given the fact that the relevant headings in the First Schedule to the Act of 1985 are corresponding with the entries in the HSN, there can be no distinction drawn between the two and the Explanatory Notes in the HSN would have to be given due effect while interpreting Heading 1513 in the First Schedule to the Act of 1985," the Court said.Consequently, coconut oil marketed and sold by the respondents during the relevant period must necessarily be classified as edible oil.The argument of the Revenue that the fact that edible coconut oil marketed by the respondents could also be used as hair oil is not sufficient to classify the same under Heading 3305, the Court made it clear."It is not in dispute that the packaging of the coconut oil in the cases on hand clearly demonstrated that it was being sold as ‘edible oil’ and all parameters that had to be met in that regard were duly complied with. Edible coconut oil requires to be packed in containers using edible grade plastic ... edible oil would have a shorter shelf life than oil meant for cosmetic purposes ... Small-sized containers are a feature common to both ‘edible oils’ as well as ‘hair oils’," the Court said.Hence, it proceeded to dismiss the appeals..[Read Judgment]