2024 (12) TMI 207 - AAAR - GST

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

In Re: M/s. Gajanand Foods Pvt. Ltd.,

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 ... Classification and determination of rate of tax - to be classified under HSN 2106 90 (Others) attracting 18% GST or not - Gota Mix Flour - Dakor Gota Mix Flour - Methi Gota Mix Flour - Khaman Mix Flour - Dhokla Mix Flour - Idli Mix Flour - Rava Idli Mix Flour - Dosa Mix Flour - Upma Mix Flour - Dahiwada Mix Flour - Dalwada Mix Flour - Menduvada Mix Flour - Handvo Mix Flour - Khichu Mix Flour - to be classified under HSN 2106 90 (Others) attracting 18% GST or not? - HELD THAT:- The flours remain classified under chapter heading 1102 even if the flour has been improved by the addition of very small quantities of specified substances. However, if substances (other than specified substances) are added to the flours with a view to use as ‘food preparations’, then the same gets excluded from the Chapter Heading 11.02. A glance at paragraph 6, which mentions the percentage-wise break-up of the flours and other ingredients, depict that the various products supplied by the appellant, contain spices and other ingredients apart from flour of dried leguminous vegetables, rice and wheat, in different proportions. The spices and other ingredients contained in these products include sugar, semolina, iodised salt, sesame seed, red chili powder. garam masala, black pepper, coriander, sodium bicarbonate, garam masala, etc.. These spices and ingredients are other than those substances mentioned in the explanatory notes of HSN for Chapter Heading 1102 which could be added in very small quantities to improve or enrich the flours for the resultant product to still remain classified in those Chapter Headings - The HSN notes pertaining to chapter heading 1102 also clearly states that the heading covers flours (ie, the pulverised products obtained by milling the cereals of chapter 10) other than flours of wheat or meslin. It is found that Gota mix flour, Dakor Gota mix flour, Dos mix flour, Methi Gota mix flour, Handavo mix flour, Menduwada mix flour, contains wheat flour. Thus, in view of the explanatory notes of the HSN, all the fourteen products are excluded from the Chapter Heading 11.02. The next averment of the appellant is that under the VAT determination order, different varieties of flour have been held to be ‘flours’ falling under entry 12 in Schedule I to GVAT Act & that since there is no substantial change in schedule entries, classification and interpretation adopted needs to be followed. The applicant has also relied on the judgement in the case of West Coast Waterbase P Ltd and Samsung India Electronics P Ltd, ibid, to substantiate the averment. It is noted that the averment stands addressed in paragraph 12 of the impugned order dated 19.7.2021. Further the said findings of GAAR agreed upon. Even otherwise, there is nothing produced on record before us by the appellant, compelling us to interfere with the said findings. What Rule 3(b) ibid, encapsulates is that mixtures consisting of different material which cannot be classified by reference to 3(a) shall be classified as if they consisted of the material or component which gives them their essential character. The argument put forth is that as the essential character of the instant flour mixes is given by the Flour, so in terms of Rule 3(b) of the GRI, it would fall under chapter heading 1102 or 1106. The argument is not legally tenable owing to the fact that it is already held that on account of the composition, etc. the product gets excluded from falling under chapter headings 1102 and 1106. Therefore, the question of relying on Rule 3(b) of the GRI to classify the goods based on the essential character, does not arise. It is owing to this finding, that the averment of the appellant that entry most beneficial to the appellant needs to be preferred, also stands rejected. The CBIC has clarified in circular No. 80/54/2018-GST dated 31.12.2018 that the flour of ground pulses and cereals, improved by the addition of very small amounts of additives continues to be classified under HSN Code 1106. However, the said clarification is not applicable in the present case as the products being supplied by the appellant contain spices and other ingredients in proportions which cannot be held to be in very small amounts, which is not the case with the ‘Chhatua or Sattu’. Thus, none of the products of the appellant merit classification under Chapter 11 of the Customs Tariff Act, 1975 and specifically under Chapter Headings 1102 or 1106 of the Customs Tariff Act, 1975. The appeal filed by appellant M/s. Gajanand Foods P Ltd against Advance Ruling No. Guj/GAAR/R/28/2021 dated 19.7.2021, passed by the Gujarat Authority for Advance Ruling is rejected. 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.