Dilemma of manufacturers of carbonated fruit drinks

Disha Bhandari/Samyak Jain | Updated on January 24, 2021

GST officials, based on an incorrect understanding that FSSAI governs the principles of classification in GST, have developed a view that minimum 5% fruit juice is required in a drink to be referred to as a fruit juice-based drink

The non-alcoholic carbonated beverage manufacturers across the nation are having regular visitors in the form of DGGI (Directorate General of GST Intelligence) officials over the last year and a half. The reason for this sudden ‘congeniality’ of the officials is their understanding that the drinks manufactured by such manufacturers are classifiable as sweetened and/or flavoured aerated waters — provided for at Sl. No. 12 of Schedule IV of the Notification 01/2017-Central Tax (Rate), dated June 28, 2017 — and taxable at 40 per cent (28 per cent GST and 12 per cent Compensation Cess).

Whereas, the industry has been classifying the fruit drinks manufactured by it as ‘fruit pulp or fruit juice-based drinks’ — provided for at Sl. No. 48 of Schedule II of the Rate Notification — and is paying GST at 12 per cent from the inception of the GST regime.

On exchange of thoughts, the manufacturers were informed by the Department officials that, according to them, for a drink to be classified as a fruit juice-based drink, it must have at least 5 per cent lime/lemon juice or 10 per cent of any other fruit juice. On further inquiry, the manufacturers were informed that the said understanding has been borrowed from FSSAI rules and regulations.

At this stage, it becomes pertinent to highlight that no reference has been made to the FSSAI regulations in the GST Act or Rules made thereunder for the purpose of interpretation of any entry in the earlier referred Notification.

Investigation proceedings

Acting on the presumption of correctness of its understanding, the Department has initiated investigation proceedings including frequent visits to factories, summons for statements, etc., against these manufacturers. Interrogations for days have culminated in the manufacturers paying huge sums to the Department. Needless to say, the intention behind such payment is to buy peace.

Small and mid-scale manufacturers with turnover of a few crores are being asked to pay huge sums in the name of differential duty during the investigation itself and that too at a time when the market and the economy as a whole are facing turbulent times, which have been nothing short of a death blow for these small-scale manufacturers.

These manufacturers started adding fruit juice content in their drinks to help Indian farmers thrive. As a matter of fact, the subsequent requests and representation of these manufacturers regarding relaxation of FSSAI norms and tax rate from the Government also contributed partly in increased manufacturing of these drinks.

In view of representations made by the beverage manufacturers, a new clause, Clause (3A), was inserted under Regulation 2.3.30 of the Food Safety and Standards (Food Products Standards and Food Additives) Regulations, 2011 which provides for ‘Carbonated fruit beverages or fruit drinks’ which includes drinks in which the quantity of fruit juice is below 10 per cent, but not less than 5 per cent (2.5 per cent in the case of lime or lemon).

Thus, the recognition of this category of drinks with fruit juice under FSSAI enabled and entitled the manufacturers to project the drinks rightfully as fruit juice-based drinks. The market also started perceiving these drinks as fruit juice-based drinks as against mere carbonated beverages with flavouring agents. Consequently, the increased cost of production in the form of costs of procurement, handling and storing etc. of the fruit juice was balanced by the reduced rate of 12 per cent GST as against 40 per cent for merely flavoured/sweetened carbonated water with no fruit juice.

In this background, everything was in place till the GST officials, based on an incorrect understanding that FSSAI governs the principles of classification in GST, developed a view that the minimum 5 per cent fruit juice is required in a drink to be referred to as a fruit juice-based drink.

Needless to say, such understanding is in disregard to the already settled judicial precedents, Explanatory notes to Harmonised System of Nomenclature and settled principles of classification such as trade parlance. It is pertinent to highlight that no such threshold with respect to minimum per cent of fruit juice has ever been provided under the relevant entries in GST Notification.

Apex court ruling

The issue of classification of fruit juice-based drinks has been analysed by the Supreme Court in the Parle Agro (P) Ltd case, wherein the common parlance test, expert opinions and the un-amended portion of Regulation 2.3.30 of the Food Products Standards and Food Additives regulations were considered to determine the classification of Appy Fiz. However, the department officials, at this point of time, seem to have ignored this judgment and have formed their view only on FSSAI rules and regulations.

Thus, with no guiding light as to whether FSSAI rules and regulations, enacted with an entirely different objective than a taxing statute, can be used as the sole source to interpret an entry in GST, the uncertainty still persists and is likely to give birth to various litigation proceedings and possibly force various small-scale players to put the shutters of their factory down.

Disha Bhandari is Joint Partner and Samyak Jain is Senior Associate, Lakshmikumaran & Sridharan Attorneys

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Published on January 24, 2021
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