2017 (3) TMI 1409 - AT - Central Excise

Tribunal classifies 'NIDO Nutritious milk for kids' under favorable duty rate, citing essential characteristics.

The Tribunal ruled in favor of the appellant, classifying the product 'NIDO Nutritious milk for growing kids' under Tariff Item 0404 90 00, attracting a ... Classification of goods - NIDO Nutritious milk for growing kids - classified under CTH 0404 90 90 attracting ‘nil’ rate of duty or under CTH 1901 90 90, attracting 16% rate of duty? - the adjudicating authority held that the item which is added (Maltodextrine) is in the nature of sweetening matter whose addition is permissible under 0404. However, he held that addition of artificial flavouring substance is an item which is not permitted to be added to natural milk constituent in 0404 - Held that: - The disputed product, ‘NIDO Nutritious milk for growing kids’ is made up of milk predominantly but is added with a few additional ingredients - addition of stabilizer while making the aforesaid preparation would not take it out from Heading 04.01. Thus, it needs to be determined as to whether the addition of artificial flavour would make it a food preparation and therefore, it would no more remain diary produce and would be covered under heading 19.01. Where flavouring agent of 0.03% of the total composition is added, which does not change the basic characteristic of the product and the product remains a nutritious milk drink only - the appropriate classification for the impugned product will be under Chapter tariff item 0404 90 00 of the Central Excise Tariff Act, 1985, as contended by the appellant - appeal allowed - decided in favor of appellant. ISSUES PRESENTED AND CONSIDERED 1. Whether the product described as 'Nutritious milk for growing kids' is classifiable under Tariff Item 0404 (products consisting of natural milk constituents, whether or not containing added sugar or other sweetening matter) or under Tariff Item 1901 (food preparations of goods of heading 0401 to 0404) when it contains added maltodextrine and an artificial flavouring substance. 2. Whether the addition of maltodextrine and/or artificial flavouring substance (in de minimis quantity) converts a dairy product under Chapter 04 into a 'food preparation' under Chapter 19, having regard to HSN/Explanatory Notes and the deletion of the word 'flavouring' from the Chapter 04 description. 3. The legal relevance of quantity and function of added ingredients (sweetening/stabilizing/flavouring agents) in determining the essential character of a product for classification purposes under Chapter 04 vis-à-vis Chapter 19. 4. The applicability and precedential weight of earlier tribunal and appellate decisions holding milk mixes with additives classifiable under Chapter 04 (e.g., decisions treating stabilizers or similar additives as permissible under heading 0404). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: Chapter 04 (0404) v. Chapter 19 (1901) Legal framework: Classification is guided by the Central Excise Tariff headings and HSN/Explanatory Notes. Heading 0404 covers 'products consisting of natural milk constituents, whether or not containing added sugar or other sweetening matter.' Heading 1901 covers 'food preparations of goods of heading 0401 to 0404' and includes preparations containing, in addition to natural milk constituents, other ingredients not permitted in the earlier headings. Precedent Treatment: Tribunal decisions have held that milk mixes containing stabilizers/sweeteners may remain under 0404 where additives do not change the essential character of the milk product; such decisions have been affirmed by the Supreme Court in relation to analogous products. Interpretation and reasoning: The Court examined the HSN/Explanatory Notes for both chapters. Chapter 04 notes explicitly permit small quantities of stabilizing agents, anticaking agents, vitamins or antioxidants necessary for processing, and refer to products consisting of natural milk constituents possibly with added sugar or sweeteners. Chapter 19 notes distinguish preparations of heading 19.01 by reference to the presence of 'other ingredients not permitted in the products of those earlier headings' (e.g., cereal groats, yeast) or replacement of milk constituents by other substances. Ratio vs. Obiter: Ratio - Where additives are limited in quantity and do not change the essential nature of a milk product, such products remain within heading 0404. Obiter - General observations on the ordinary meaning of 'food preparation' (i.e., not technical) and legislative amendment deleting the word 'flavouring' from a heading description were considered but do not displace the HSN-based classification principle. Conclusions: The product, predominantly milk solids with maltodextrine and a minute quantity of artificial flavouring, retains the essential character of a product consisting of natural milk constituents and is classifiable under Tariff Item 0404 90 00. There is no justification to reclassify it under 1901 on the basis of the ingredients described. Issue 2 - Effect of Addition of Maltodextrine and Artificial Flavouring (including legislative amendment arguments) Legal framework: Explanatory Notes to Chapter 04 permit added sugar or other sweetening matter and small quantities of stabilizing agents and processing chemicals; Chapter 19 is directed to preparations containing other non-permitted ingredients or substitutes for milk constituents. Precedent Treatment: Prior decisions (tribunal and affirmed higher court authority) held that stabilizers and similar additives do not remove a product from heading 0404 where they do not alter the basic characteristics of milk products. Interpretation and reasoning: Maltodextrine was treated as a sweetening matter (permitting its addition under 0404). The critical inquiry is whether artificial flavouring substance - present in a minuscule proportion (0.3% as pleaded) - is an ingredient that transforms the product into a 'food preparation' of heading 0401-0404 for classification under 1901. The Court found no express exclusion of 'flavouring' in the HSN Notes to Chapter 04 and no HSN example treating such minute flavouring as a prohibited ingredient. The addition of minor quantities of flavouring does not replace milk constituents nor introduce the types of secondary ingredients (cereals, groats, yeast, etc.) contemplated by heading 1901's examples. Ratio vs. Obiter: Ratio - De minimis additions of flavouring that do not affect essential character do not exclude a product from heading 0404. Obiter - Consideration of the legislature's deletion of the word 'flavouring' from an earlier heading text and the non-technical meaning of 'food preparation' are discussed but do not form the dispositive basis of the decision. Conclusions: Maltodextrine is permissible as sweetening matter under 0404; the trace quantity of artificial flavouring does not change the essential nature of the milk product and does not justify classification under 1901. Issue 3 - Role of Quantity and Function of Additives in Determining Essential Character Legal framework: Classification must consider the essential character of goods; HSN Notes permit certain small quantities of additives needed for processing, preservation or stability. The function and proportion of additives are relevant to whether they alter essential character. Precedent Treatment: Tribunal and Supreme Court authority accepted that stabilizers and process-aid additives, though not explicitly enumerated, do not alter the basic characteristics of milk products and therefore remain under 0404. Interpretation and reasoning: The Court applied the principle that additives which do not alter the product's essential milk character - especially where present in very small quantities and serving secondary roles (flavouring, sweetening, stabilizing) - should not displace classification under Chapter 04. The product at issue contained flavouring at a negligible percentage and maltodextrine functioning as sweetening matter; neither replaces milk constituents nor adds substantive non-dairy ingredients contemplated by Chapter 19. Ratio vs. Obiter: Ratio - Quantity and function of additives are determinative; de minimis additives that preserve essential character leave product in Chapter 04. Obiter - Broader comments on policy underlying tariff note distinctions. Conclusions: The small proportion and non-transformative function of the additives support classification under 0404; quantity and purpose of additives must be assessed and, on the facts, do not warrant reclassification. Issue 4 - Precedential Application of Tribunal/Supreme Court Decisions on Milk Mixes and Additives Legal framework: Prior judicial decisions interpreting HSN/Explanatory Notes and applying essential character tests are persuasive for like factual matrices. Precedent Treatment: Decisions finding milk shake mixes and certain milk preparations with stabilizers or similar additives classifiable under heading 0404 were relied upon by the appellant and treated as applicable. One such line of authority was noted to have been affirmed by the Supreme Court. Interpretation and reasoning: The Court considered those precedents and found them analogous: additives used for stability, sweetening or minor flavouring that do not affect the basic characteristics of the milk product should not lead to exclusion from Chapter 04. The precedent supporting classification under 0404 reinforces the conclusion on the present facts. Ratio vs. Obiter: Ratio - The precedents form binding persuasive authority in favour of treating non-transformative additives as consistent with heading 0404. Obiter - Particulars of factual distinctions in other cases may be noted but do not alter the applicable rule. Conclusions: The cited tribunal and higher court authority support classification under 0404 for the product in question; reliance on those decisions is appropriate and consistent with the HSN Notes and essential character analysis. Overall Disposition On the application of HSN/Explanatory Notes, the essential character test, assessment of quantity and function of additives, and relevant precedents, the product remains a product consisting of natural milk constituents within Tariff Item 0404 90 00. The reclassification to Tariff Item 1901 90 90 based on the presence of maltodextrine and a negligible quantity of artificial flavouring is not justified.