Classification of herbal smokes as tobacco substitute cigarettes under HSN 2402 determined the applicable GST and compensation cess.

Herbal smokes marketed as cigarette-like products without tobacco or nicotine were held to fall outside HSN 3004 because they were not established as ayurvedic medicaments under the statutory scheme and Chapter 30 excludes preparations intended to assist smokers to stop smoking. Applying the General Rules for Interpretation and the relevant section and chapter notes, the product was classified under HSN 2402 as cigarettes of tobacco substitutes. The prescribed GST and compensation cess treatment therefore applied, namely 28% IGST on inter-state supply with compensation cess, and 14% CGST plus 14% SGST on intra-state supply with compensation cess.

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Issues: Whether the product marketed as herbal smokes was classifiable as an ayurvedic medicament under HSN 3004 or as cigarettes of tobacco substitutes under HSN 2402, and the consequential GST and compensation cess liability.

Analysis: Chapter 30 of the Customs Tariff Act, 1975 covers pharmaceutical products, but Section Note 1(b) excludes preparations intended to assist smokers to stop smoking. The goods were not shown to be ayurvedic medicines manufactured in accordance with the authoritative books recognised under the Drugs and Cosmetics Act, 1940. The product was sold and understood in the market as cigarette-like goods without tobacco or nicotine, and the common parlance test therefore supported classification as tobacco substitute cigarettes. Rule 1 of the General Rules for the Interpretation of the Customs Tariff Act, 1975 required classification according to the terms of the headings and the relevant section and chapter notes. HSN 2402 specifically covers cigarettes of tobacco substitutes, and the relevant GST and compensation cess notifications prescribed the applicable tax rate.

Conclusion: The product was not classifiable under HSN 3004 and was correctly classifiable as cigarettes of tobacco substitutes under HSN 2402. The applicable levy was 28% IGST on inter-state supply with compensation cess, and 14% CGST plus 14% SGST on intra-state supply with compensation cess.

Final Conclusion: The ruling determined the tax treatment of the product in favour of the revenue authorities by rejecting the applicant's proposed medicament classification and applying the tariff entry for tobacco substitute cigarettes.

Ratio Decidendi: Where goods are marketed and understood as cigarette-like products without tobacco or nicotine, and are not established as ayurvedic medicines under the statutory scheme, classification must follow the specific tariff entry for tobacco substitute cigarettes rather than the general medicinal entry.

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