Food company loses appeal as spiced flour mixes classified under HSN 2106 attracting 18% GST instead of lower rates

The AAAR Gujarat rejected an appeal by a food company seeking classification of various flour mixes under HSN 1102/1106 attracting lower GST rates. The authority held that 14 flour products including Gota Mix, Dhokla Mix, Idli Mix, and Dosa Mix should be classified under HSN 2106 90 attracting 18% GST. The products contained spices and ingredients like sugar, salt, chili powder, and garam masala in proportions exceeding "very small quantities" permitted under Chapter 11. Since these additives were substantial and not merely for improvement, the products were excluded from flour classification and properly classified as food preparations under the higher tax bracket.

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Issues Involved:

1. Classification of the appellant's products under the appropriate Harmonized System of Nomenclature (HSN) code.
2. Determination of the applicable Goods and Services Tax (GST) rate for the appellant's products.
3. Examination of whether the appellant's products are considered 'ready to cook' or 'ready to eat'.
4. Consideration of the applicability of previous VAT determinations and judicial precedents.
5. Evaluation of the appellant's reliance on CBIC circulars and common parlance test for classification.

Issue-wise Detailed Analysis:

1. Classification of Products:

The primary issue revolves around the classification of the appellant's fourteen instant mix flour products. The appellant argued that their products should be classified under HSN 1102 or 1106, which pertains to cereal flours and flours of dried leguminous vegetables, respectively. The GAAR, however, classified these products under HSN 2106 90 (Others), which covers "Food Preparations not elsewhere specified or included," attracting an 18% GST rate.

The GAAR's decision was based on the finding that the appellant's products contain spices and other ingredients in proportions ranging from 5% to 37%, which are not allowed under the explanatory notes for HSN 1102 and 1106. These notes specify that only very small quantities of certain substances can be added without changing the classification. Since the appellant's products include significant amounts of spices and other ingredients, they do not qualify for classification under these headings.

2. Determination of GST Rate:

The appellant contended that their products should attract a 5% GST rate under HSN 1102 or 1106. However, the GAAR's classification of the products under HSN 2106 90 (Others) results in an 18% GST rate. The appellate authority upheld this classification, agreeing with the GAAR's reasoning that the products are food preparations requiring further processing before consumption, thus fitting the description under HSN 2106.

3. 'Ready to Cook' vs. 'Ready to Eat':

The appellant argued that their products are in 'ready to cook' form, not 'ready to eat', and therefore should not be classified under HSN 2106. However, the appellate authority noted that Chapter Heading 21.06 is not limited to ready-to-eat products but includes food preparations requiring further processing. Therefore, the need for cooking does not exclude the products from this classification.

4. Applicability of Previous VAT Determinations and Judicial Precedents:

The appellant relied on previous VAT determinations and judicial precedents, arguing that similar products were classified under specific entries in the GVAT Act. However, the appellate authority found that GST classification is based on the Harmonized System of Nomenclature, which differs from the VAT system. Therefore, previous VAT determinations were not applicable.

5. Reliance on CBIC Circulars and Common Parlance Test:

The appellant cited CBIC circular No. 80/54/2018-GST, which classifies "Sattu" under HSN 1106. However, the appellate authority found that the circular was not applicable since the appellant's products contain spices and other ingredients in significant amounts, unlike "Sattu." Additionally, the appellant's reliance on the common parlance test was rejected due to a lack of substantial evidence showing that the products are commonly understood as flours.

Conclusion:

The appellate authority upheld the GAAR's ruling, classifying the appellant's products under HSN 2106 90 (Others) and subjecting them to an 18% GST rate. The appeal was rejected, as the appellant failed to provide compelling evidence to warrant a different classification.

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