2025 (1) TMI 394 - AAAR - GST

Appeal dismissed: product classified as tobacco substitute under HSN 24029010, not medicinal under HSN 3004

AAAR dismissed the appellant's appeal, holding the product is classifiable under HSN 24029010 as a tobacco substitute, not as a medicinal product under ... Classification of goods - Aorom Herbal Smokes - to be classified under HSN 24029010 (tobacco substitutes) or HSN 3004 (medicinal products)? - rate of GST to be paid by appellant on sales of Aorom Herbal Smokes - whether the product is a medicinal cigarettes? - HELD THAT:- In para 10.2 of the impugned ruling, GAAR reproduced section 3 (a) of the Drugs and Cosmetics Act, 1940, which states that Ayurvedic, Siddha or Unnai Drug, includes all medicines intended for internal or external use for or in the diagnosis, treatment, mitigation or prevention of disease or disorder in human beings or animals, and manufactured exclusively in accordance with the formulae described in the authoritative books of Ayurved, Siddha and Unani Tibb systems of medicine, specified in the First Schedule. GAAR, further goes on record that the appellant was not in a position to substantiate/pin point the authoritative books of Ayurved, according to which the subject goods have been manufactured. On being specifically asked during the course of personal hearing, the appellant failed to inform the name of the authoritative book of Ayurved. Further, during the course of personal hearing it was also informed that they do not hold any license permitting them to manufacture the said goods. This being the fact, leads us to a conclusion the appellant has failed in making out a case of their product falling under the category of ‘medicinal cigarettes’. Whether the cigarettes manufactured by the appellant, containing certain types of products are specifically formulated to discourage the habit of smoking? - HELD THAT:- The product of the appellant is a substitute of cigarette and is also manufactured and marketed with the said aim in mind. Therefore, the averment of the appellant in para 13 to the effect that “It is submitted that such understanding is factually incorrect as the herbal smokes manufactured by the appellant are not intended to assist the smokers to stop smoking”, belics fact - the product is classifiable under HSN 24029010 more so since it is not a medicinal cigarette and secondly since the appellant himself, in his brochure claims that the product in question, is a substitute to cigarette and is also intended to addicts who really want to quit the smoking habit. Conclusion - The product of the appellant is a substitute of cigarette and is also manufactured and marketed with the said aim in mind. The appeal filed by appellant M/s Aorom Herbotech is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:What is the correct classification of 'Aorom Herbal Smokes' under the Harmonized System of Nomenclature (HSN) for GST purposesRs. Specifically, should it be classified under HSN 24029010 (tobacco substitutes) or HSN 3004 (medicinal products)Rs.What is the applicable GST rate for 'Aorom Herbal Smokes'Rs.Is the appeal filed by the appellant within the permissible limitation periodRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Classification of 'Aorom Herbal Smokes'Relevant legal framework and precedents: The classification hinges on the Customs Tariff Act and the Explanatory Notes of the HSN, particularly Chapters 24 and 30. Chapter 24 covers tobacco and tobacco substitutes, while Chapter 30 pertains to pharmaceutical products.Court's interpretation and reasoning: The court examined whether 'Aorom Herbal Smokes' could be considered a medicinal cigarette. The court noted that the appellant failed to demonstrate that the product was manufactured according to authoritative Ayurvedic texts or that it held any medicinal licenses.Key evidence and findings: The appellant's brochure indicated that the product was intended as a substitute for cigarettes and was marketed to help individuals quit smoking, which aligns with Chapter 24's description of tobacco substitutes.Application of law to facts: The court found that the product did not meet the criteria for classification under Chapter 30 as a medicinal product, as it lacked substantiation of medicinal properties and necessary licenses.Treatment of competing arguments: The appellant argued that the product should be classified under Chapter 30 due to its herbal nature and claimed medicinal benefits. However, the court found these claims unsubstantiated.Conclusions: The product was correctly classified under HSN 24029010 as a tobacco substitute.Issue 2: Applicable GST RateRelevant legal framework and precedents: The GST rate is determined based on the classification under the HSN. Products under HSN 24029010 attract a GST rate of 28% along with a compensation cess.Court's interpretation and reasoning: Given the classification under HSN 24029010, the applicable GST rate was affirmed as 28% IGST for interstate supply and 14% CGST plus 14% SGST for intrastate supply, along with a compensation cess of Rs. 4006 per thousand units.Key evidence and findings: The classification directly influenced the GST rate determination.Application of law to facts: The court applied the GST rate as per the classification under HSN 24029010.Treatment of competing arguments: The appellant's arguments for a lower GST rate under Chapter 30 were dismissed due to the product's classification under Chapter 24.Conclusions: The GST rate of 28% with compensation cess was upheld.Issue 3: Limitation Period for Filing the AppealRelevant legal framework and precedents: Section 100 of the CGST Act, 2017, outlines the limitation period for filing appeals, with a provision for extension due to the COVID-19 pandemic as per the Supreme Court's order.Court's interpretation and reasoning: The court acknowledged the Supreme Court's direction to exclude the period from 15.03.2020 to 28.02.2022 from the limitation period due to the pandemic.Key evidence and findings: The appeal was filed within the extended limitation period granted by the Supreme Court.Application of law to facts: The court found the appeal was timely filed within the extended period.Treatment of competing arguments: The appellant's reliance on the Supreme Court's order was accepted.Conclusions: The appeal was considered timely and within the permissible limitation period.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The product of the appellant is a substitute of cigarette and is also manufactured and marketed with the said aim in mind.'Core principles established: The classification of products under GST is determined by their intended use and marketing, not merely their composition. Products marketed as substitutes for cigarettes fall under tobacco substitutes, not medicinal products.Final determinations on each issue: The appeal was rejected, affirming the classification under HSN 24029010 and the corresponding GST rate of 28% with a compensation cess. The appeal was filed within the permissible limitation period.