FMCG fruit-based drink manufacturers fear having to pay highest GST at 40 per cent. The classification of non-alcoholic beverages — fruit/fruit juice-based drinks — has come under the radar of the CBIC’s investigation agency, DGGI (Directorate General of GST Intelligence).

According to the current tax structure, aerated drinks fall under Chapter Heading 2202 10 and attract GST at 28 per cent plus a compensation cess of 12 per cent and non-aerated drinks (including fruit juice-based drinks) largely fall under Chapter Heading 2202 99 20 attracting GST of 12 per cent or some under Chapter Heading 2202 91 00 and 2202 99 90 attracting GST at 18 per cent. However, the trouble arises on account of the blurring of lines between these two categories.

The classification history of fruit juice-based drinks is a chequered one. The dispute over the classification was time and again raised under various State VAT laws and Central excise laws.

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 had from the HSN explanatory notes, the courts have resorted to other supporting legislation relevant for the classification of products, including application of the common parlance test as a last resort.

The classifications decoded

According to 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 main group of articles which has single dash or a sub-group of the main group which has a double dash.

Thus, unless a product in question if covered by the description of a single dash(-), it cannot be classified under a triple dash (---), is the thumb rule of classification and explanatory notes thereto, which is part of the international classification protocol laid down by the Brussels trade nomenclature.

The sub-heading ‘aerated waters’ falling under Heading 22.02 cover products that are basically aerated waters wherein natural fruit juices or essences are added as a flavouring agent but not products having fruit juices/essences forming the product base.

Further, Clause 3A of Para 2.3.30 of the FSSAI, another adjunct to support the above inference as per which when the quantity of fruit juice is below 10 per cent, but not less than 5 per cent (2.5 per cent in case of lime or lemon), the like products shall be known as ‘carbonated beverage with fruit juices’ 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.

Therefore, products containing more than five percentage of fruit content, which is determinative of fruit based drinks as per FSSAI regulations as well, are not to be classifiable as aerated waters, is incontrovertible.

Thus, if fruit juice is added as an essential ingredient and not just as flavour, it is a fruit juice-based drink and would fall under the Chapter Heading 2202 99 20 and the applicable rate of GST would be 12 per cent and not 18 per cent or 40 per cent.

This is further supported by the dominant percentage of the fruit juice defining its role as forming of the base of the fruit-based drink and not a mere flavouring 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.

It is long since this matter had attained finality based on the court’s rulings till GST came into play, so why is this issue being raked up again?

CBIC’s googly

Surprisingly the views of the GST authorities also do not seem to correspond with the earlier decisions of the courts based on the Customs Tariff Act (CTA)/Central Excise Tariff Act (CETA), which form the basis for all of the above debates.

The obvious reason for this divergence in the thinking of the Authority for Advance Ruling could be due to the ignorance 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 CTA which was progressively aligned with the CETA.

Latest legal developments

It is common knowledge in legal circles that the AJE India Pvt Ltd vs UOI case will come up for hearing before the Bombay High Court on March, 9, 2021 for a decision hopefully on the issue of classification of carbonated fruit drinks.

The petitioner makes drinks such as Big Cola, Big Orange Cola, Big Lemon — all fruit juice based drinks (having more than 5 per cent juice content in apple drink and 2.5 per cent in respect of lemon drink).

They, therefore, classified them as ‘fruit pulp or fruit juice-based drinks’ under Tariff Item 2202 99 20 of the Customs Tariff Act as per Central Government Notification dated June 28, 2017.

(It is incidentally useful to know the GST Tariff borrows the CTA for all its product classifications.)

The Revenue, however, took the view that Petitioner Company had misclassified its goods which led to a lower payment of GST and initiated investigation. Based on such investigation, the Revenue ordered provisional attachment of the taxpayer’s bank account.

The Court, however, had already set aside the attachment order of their bank account, as unconstitutional as such powers have the potential to adversely affect property rights of persons and as well as life and liberty guaranteed under Article 21 of the Constitution.

On ground, DGGI sleuths are busy conducting research, drawing samples for testing on the one hand and digging into their accounts and issuing notices to the taxpayers demanding GST at 28 per cent plus compensation cess at 12 per cent totalling to a whopping 40 per cent on the other.

The way forward

In order to avoid any disputes from the department, it is advisable for the FMCG sector engaged in the manufacture and marketing fruit juice-based beverages to get their products tested by government approved national laboratories.

This will shed light on the exact composition of the drink as certified by the labs coupled with the old precedents the FMCG sector can hope to vindicate their stand, if impleaded by the department in future classification disputes of fruit juice based beverages.

The writer is an Advocate with Chennai-based Law firm RANK Associates.

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