Facts- Assesse [civil appeal no. 1766 of 2009] manufactured edible coconut oil and packed it in smaller packages of 5 ml., 10 ml. upto 200 ml. etc. and sold them under a brand name “Shanti”. In civil appeal nos 6703-10 of 2009, four job workers received coconut oil in bulk and packed it in smaller packs. In both cases, respondents claimed such 100% pure coconut oil as covered by HSN code 15.13. Department classified it as “hair oil” covered by HSN code 33.05 when sold in smaller packs below 2 kg. though it conceded that pack beyond 2Kg merited the classification under HSN 15.13. Amendment Act 2004 brought in significant change in Note 2 of Chapter 33 and introduction of Note 2 to Sch VI inviting reclassification of the impugned goods. The two judges on the Bench held different views on the issue and matter had to be referred to the Larger Bench.

First view of Justice R. Gogoi–The Court noted that the classification issues have to be resolved on the basis of Chapter Notes, supplementary Notes and Rules for Interpretation. The Court examined the changes brought about by an amendment under Central Excise Tariff Heading Act, 1985 w. e. f. 28-02-2005 which realigned Harmonized System of Nomenclature (HSN) with the excise tariff headings. The pre-amendment and post-amendment position of Chapter 15 and 33 was examined closely and it was observed that common parlance test is not applicable when the identity of the product is not disputed. There is no doubt that coconut oil in question is edible oil. The consumer perception in such case is not important. Coconut oil covered by CET 15.13 does not change its identity just because it is packed in smaller quantity. It does not become hair oil covered by CET 33.05.

After amendment effective from 28-02-2005, Chapter Note 3 which replaced earlier Chapter Note 2 specifically made it clear that chapter 33 would apply to products “which are suitable for use mentioned in the Heading and if they are put up in packings of a kind sold by retail for such use”. The small packings of coconut oil always had inscription on them as “edible oil”. There is no representation, declaration or advertisement on the packing that they are meant to be considered as hair oil.

It was observed that Explanatory note 3 to HSN makes the contents of chapter note 3 more clear. In order to fall under Chapter 33, the product will have to satisfy clauses (a) and (b) of the aforesaid Explanatory Note. The goods and packages should be put up with labels, literatures and other indications that they are meant for use as cosmetics, toiletries or perfumery or the goods must be put up in a form clearly specialized for such use. The absence of Explanatory Note under amended Chapter 33 of the CET Act, as in HSN would not make any difference in conclusion. The structure of the Central Excise Tariff is based on the internationally accepted system of classification namely, HSN and, therefore, any dispute relating to tariff classification must be resolved, as far as possible, with respect to HSN unless there is express different intention indicated by CET Act. This was not the case with coconut oil and therefore, the conditions in Explanatory Note ought to be followed. Thus, it was held that coconut oil in small packs also qualifies as edible oil covered by CETH 15.13 even after amendment. 

Per Smt. Bhanumathi J.-(disagreeing)-The amendment dated 28-02-2005 brought about significant changes in classification under CET Act. The Chapter Note 3 in CET 33.05 only required “suitability of the goods for being used as hair oil” and the small packs were just suitable for that purpose. Further, as per the provisions to Section VI, if the conditions specified in Chapter Note 3 for classification as “hair oil” under heading 33.05 are satisfied, then the product has to be classified under heading 33.05 and no other classification is permissible. This note also needs to be given effect to and the product has to be classified as “hair oil”.

Further, Rule 3(a) of the Rules for Interpretation in the First Schedule to 1985 Act prescribes that most specific description of the goods will be preferred over general one. In the present case, both tariff headings namely, 1513.19.00 and 3305.19.90 are equally specific considering Notes to Chapters, section Notes, tests for classification etc. Further, Rule 3(c) stipulates that when goods cannot be classified under clauses (a) and (b), they will be classified under the heading which occurs last in numerical order among those which equally merit classification. Therefore, coconut oil in small packs is classifiable under CET 3305.19.90. UOI v. Pesticides Mfg. & Formulations Asson. of  India (2002) 8 SCC 410(SC)

Further, the amendment dated 28-02-2005 sought to realign HSN codes with tariff headings under 1985 Act. However, there is material difference between relevant Explanatory Notes under HSN and Chapter/ Section Notes under 1985 Act even after amendment. In that case, reliance cannot be placed on HSN Notes as laid down in Camlin Ltd v. CCE . (2008) 9 SCC 82(SC). Therefore, the impugned goods are covered by CET no. 3305.19.90 as hair oil.

Common parlance test is important and it is necessary to know how the product is known by common man. The coconut oil in small packs is perceived as hair oil by common man and hence, classification under CET 3305.19.90 is right. (CA Nos  1766 of 2009 with 6703-710 of 2009  dt . 13-04-2018)

Editorial: In view of difference of opinion amongst the judges of the Division Bench, the matter is referred to Larger Bench. The common ratio is while classifying the goods under CET Act, 1985, the Chapter Note, Section Notes, clarifications from the authorities like CBEC are to be examined first and if the classification is not possible, then alone Rules for Interpretation to be invoked. GST law has also adopted classification of goods on the basis of HSN and the Chapter Note, Section Notes, General Explanatory Notes of the First Schedule of the Customs Tariff Heading Act, 1975 apply for the purpose of interpreting the entries. If the explanatory notes under HSN which may not be included in Customs Tariff Heading Act, 1975 have different view, then a similar question may arise as in this judgment.

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