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THE INSIGHT

Fruit based-drinks - facing a tax threat of 40% GST from DGGI
By K Srinivasan
Jan 14, 2021

THE classification of non-alcoholic beverage- fruit/fruit juice-based drinks coming under the FMCG sector is under the radar of the DGGI.

Background

As per the current rate structure, aerated drinks fall under Chapter Heading 2202 10 and attract GST @28% plus compensation cess @12% and non-aerated drinks (including fruit juice-based drinks) largely fall under Chapter Heading 2202 99 20 attracting GST @12% or some under Chapter Heading 2202 91 00 and 2202 99 90 attracting GST @ 18%.

The classification history of fruit juice-based drinks has a checkered taxation history

The issue of classification of various fruit juice based drinks was very much res-integra. The dispute over the classification was time and again raised under various state VAT laws and central excise laws and resolved many times over already.

The Courts while giving their verdicts have discussed in detail the classification of the products as per the Excise Tariff and the HSN explanatory notes.

In cases where a direct reference could not be made to the HSN explanatory notes, the Courts have resorted to other supporting legislations relevant for the classification of products, including application of the common parlance test as a last resort.

While determining the classification of carbonated fruit drinks like, ‘Minute Maid Nimbu Fresh' and ‘7UP Nimbooz', in the case of Brindavan Beverages Private Limited Vs CCE, Meerut, the Hon'ble Allahabad Tribunal had an occasion to refer to the General Explanatory Notes to the Tariff and The Food Safety and Standards Act, 2006" and related regulations (FSSAI Regulations) to understand their composition.

The FSSAI/Customs/Central Excise Tariff, HSN based classification decoded

As per the General Explanatory Notes, where the description of an article or group of articles is preceded by a triple dash, or four- dash, the said article or group of articles shall be taken to be a sub-classification of the immediately preceding description of the article or group of articles which has single or double dash.

Thus, unless the product in question is covered by the description above a single dash -, it cannot be classified under a triple dash ---.

The sub-heading ‘aerated waters' falling within Heading 22.02 will cover products that are basically aerated waters wherein natural fruit juices or essences are added as a flavoring agent but will not apply to products having fruit juices/essences forming the product base.

The tribunal held that for any article to be classified or covered under a triple dash, it has to first fall under the single dash immediately preceding it.

The Tribunal further relied on Clause 3A under Para 2.3.30 of the FSSAI as an adjunct to support the above inference.

The Tribunal added that as per the regulations in case the quantity of fruit juice is below 10%, but not less than 5% (2.5% in case of lime or lemon), the product shall be called ‘ carbonated beverage with fruit juice' and in such cases the requirement of TSS (Total soluble solids) shall not apply, and the quantity of fruit juice shall be declared on the product label.

As the products contained more than five percentage of fruit content, which was a determinant of fruit based drinks as per the FSSAI regulations, the products were not to be classifiable as aerated waters, is incontrovertible.

The Hon'ble Delhi Tribunal, in a similar case of CCE, Bhopal Vs Parle Agro Private Limited, held that ‘Appy Fizz' containing 23% of natural Apple Juice is fruit juice-based drink and merits classification under item heading 22.02 -

10

……….

-90(single dash)

……….

--20(double dash)

of the Central Excise Tariff. The above Tribunal decision was affirmed by the Hon'ble Supreme Court and the appeal filed by the department was duly dismissed.

Therefore, if fruit juice is added as an essential ingredient and not just as flavor, it is a fruit juice-based drink and would fall under the Chapter Heading 2202 99 20 and GST would be attracted @ 12%.

This is further supported by the preponderant percentage of the fruit juice giving it the base status of the fruit-based drink and not that of a mere flavoring agent.

In addition to the FSSAI regulations the Courts have also relied on the common parlance test to know how the drink is perceived by the public at large.

The above matter had well neigh attained finality based on the court's rulings till GST came into play.

Fruit based drinks under facing tax challenges before the AAR/AAAR's

Surprisingly the views of the GST authorities do not seem correspond with the earlier decisions of the Customs Tariff Act(CTA) or Central Excise Tariff Act(CETA)which is the basis for all the above debate.

The obvious reason for this divergence in thinking of the AAR/AAAR's could be due to lack of following of the history of classification of fruit-based fruit drinks Vs aerated drinks.

It is perhaps worthwhile to remind all concerned that the GST classification scheme is made in sync with the customs Tariff Act which in turn shaped the CETA which was progressively aligned with the CTA

Advance rulings by the AAR/AAAR's

1. In Kalis Sparkling Water Private Ltd Advance ruling, it was held by the Tamil Nadu AAR that the product 'K Juice Grape' falls under the category of "Others" under Chapter Heading 2202 10 90 and chargeable to 28% GST despite the fact that fruit juice content used in preparation of the product was 13%.

It clearly outweighed as you could see the tariff /FSSAI stipulation of respectively 5%/ 10% to merit classification rightfully as a fruit based drink under Chapter Heading 2202 99 20 to attract GST @ 12%.

2. Similarly, in the case of Hindustan Coca Cola Beverages Private Limited the Gujarat AAAR held that product "Fanta Fruity Orange" is classifiable under sub heading 2202 10 and liable to GST rate of 28% even though the fruit juice content in the product was more than 10% i.e 10.5% in the instant case.

The views of the Appellate Authority were based on the premise that they don't find any general finding that juice concentrate based product with specific minimum volume of juice concentrate may be covered under fruit pulp or fruit juice based drinks.

What does that mean, no one understands? Honestly!

3. The Tamil Nadu AAAR in the case of Rich Dairy Products Ltd,, also took a similar view while classifying the products in question.

It referred to the FSSAI regulations and carved out a difference between the ‘Carbonated Fruit Beverages or Fruit Drinks' and 'Carbonated beverage with Fruit Juice' and based on the composition of the product held that same will not qualify as fruit juice based drinks but will be treated as carbonated water based drinks with fruit juice added as flavoring agent. The authorities classified the products under Chapter Heading 2202 10 20 or 2202 10 90, taxable @28%.

Sum and substance of the AAR/AAAR rulings

According to the above rulings, these drinks are nothing but a flavored water and thus their classification should be done under Chapter Heading 2202 10 20 or 2020 10 90 with corresponding GST rate of 40% (28% plus 12% compensation cess).

These adverse rulings have further paved way for protracted litigations of the matter in the Post GST era.

Latest happening in the Legal field - an update

AJE India Pvt Ltd vs. UOI case will come up for hearing before the Bombay HC on March, 9, 2021 for a decision hopefully on the self-same issue of classification of carbonated fruit drinks, such as, Big Cola, Big Orange Cola, Big Lemon.

All fruit juice based drinks having more than 5% juice content in apple drink and 2.5% in respect of lemon drink, have been classified by the company as "fruit pulp or fruit juice based drinks" under Tariff Item 2202 99 20 of the Customs Tariff Act as per Central Government Notification No.1/2017-CTR dated 28.06. 2017 vide Serial No.48 @ 12% GST.

The Revenue, however, took a different view that assessee had misclassified its goods which led to short payment of GST due and initiated investigation. Based on such investigation, the Revenue directed for provisional attachment of assessee's bank account.

Aggrieved, the assessee filed a writ petition, for setting aside the attachment order and the legal Proceedings. The Bombay HC had already set aside the attachment order of their Bank account, as unconstitutional and in violation of Article 21 of the Constitution. The fate of the classification matter will come to be known too soon.

Department's misplaced view

Now the department has initiated investigations on this matter and has started raising disputes on the classification of fruit base or fruit juice based drinks adopted by the taxpayers. Presently, most of the taxpayers are classifying their products under Chapter Heading 2202 91, 2202 99 20 0r 2202 99 90 and discharging GST on the either @ 12% or 18% based on their composition.

However, the department is contending their classification as correct and issuing notices to the taxpayers demanding GST @ 28% plus compensation cess @12% totaling to a whopping 40% by treating them as aerated waters.

On ground, the sleuths are busy collecting data and drawing samples for testing the same to know whether they are fruit-based beverages or not.

To counter check the above outcomes by factual corroboration, they are digging their boots in to arrive at the amount of fruit pulp or fruit juices used for preparation of these non-alcoholic beverages and the ratio of their usage to other ingredients, from internal Lab reports.

On the basis of this information, they hope to determine whether the fruit juice is merely used as flavoring agent or is it actually the base material of these drinks and accordingly classification of these beverages adopted under the entry heads are correct and as also the rate of GST and the quantum of tax paid is in order or not.

The right route of classification to be followed by the Department

It is a settled principle, if the article is classifiable under the main heading denoted by a single dash, then only it can be classified under sub-headings denoted by a triple /four dash codification.

Since there are no clear parameters prescribed under the GST Tariff to determine the classification based on the composition, it would not be unsafe to take to the FSSAI regulations based on the various Court rulings passed in pre- GST era.

As per these regulations, in case the drink contains fruit content more than 10% then such drinks can be considered as fruit based beverages and qualify for the classification under 2202 99 20 taxable @ 12%.

Likewise, if the drinks contain fruit content less than 5 % as per the CTA read with the June, 2017 GST rate notification, then the same is likely to get classified under Chapter Heading 2202 10 as water based drink with flavoring attracting GST @ 28% plus compensation cess @ 12%.

As regards drinks having fruit content more than 5% but less than10%, the ambivalence whether to go by the CTA or the FSSAI continues!

Based on parameters laid down by the recent FSSAI regulation, it can be established that these drinks are not water and hence will not qualify for Chapter Heading 2202 itself so the question of these being classified under Chapter Heading 2202 10 20 or 2202 10 90 doesn't arise.

Lastly, in the absence of any other specific entry, such drinks are capable of being classified under residuary entry- "Other non-alcoholic beverages" attracting 18% GST.

Having said that, assesses who manufacture and supply carbonated fruit drinks, classifying their fruit juice having more than 5% juice content in apple drink and 2.5% juice content in lemon drink under Tariff Item 2202 99 20 as "fruit pulp or fruit juice based drinks" taxable at the rate of 12% as per the GST Notification No.1/2017-CTR dated 28.06.2017 Entry.No.48 is perfectly correct, as per the opinion of the Author.

Some Practical Tips to the Taxpayers

In order to avoid any disputes from the department in future, it is advisable for the taxpayers to get their products tested by the Government approved National Laboratories to get the exact composition of the drink certified, to vindicate their stand if impleaded by the department in future classification disputes of this kind.

If the department is insistent that the fruit juice is added only as a flavoring agent to the water, one should be in a position to clearly state with Test reports whether the fruit juice is merely added as a flavoring agent or to form the very base of the drink, before classifying the same as fruit juice based drink at 12% or 18% GST as the case may be.

Courts in the past have relied on the common parlance test to have a view of the public perception of these drinks going by the nomenclature given to such drinks, their labeling, marketing etc.

Therefore, packaging, labeling and marketing of these drinks also go a long way in the determination of the correct classification of these drinks.

Hence, it is worthwhile for the taxpayers to revisit the declarations made on the packaging to see if it is in sync with the classification adopted by them under GST.

(The Author is a Former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer GST, and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)