Mixing tobacco with lime constitutes manufacture under CGST Act, creating new product with distinct character

AAR Gujarat ruled that mixing tobacco with lime constitutes manufacture under CGST Act, creating a new product with distinct name, character and use. The process transforms raw tobacco into chewing tobacco fit for direct consumption. The resultant product "sada tambaku pre-mixed with lime" is classifiable under HSN 24039910 as chewing tobacco, attracting 28% GST plus compensation cess at 0.56R per unit for products with declared retail price or 160% for others, as the mixing process amounts to manufacture rather than mere processing.

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Issues Presented and Considered

1. What is the correct classification of the goods described as 'sada tambaku pre-mixed with lime' proposed to be manufactured and supplied by the applicantRs.

2. What is the applicable rate of Goods and Services Tax (GST) and compensation cess on the said goodsRs.

Issue-wise Detailed Analysis

Issue 1: Classification of 'sada tambaku pre-mixed with lime'

Relevant Legal Framework and Precedents: The classification of goods under GST is governed by the Customs Tariff Act, 1975 and relevant notifications issued under the CGST Act, 2017. The Harmonized System of Nomenclature (HSN) chapters 24.01 and 24.03 are pertinent here. Chapter 24.01 covers unmanufactured tobacco and tobacco refuse, while Chapter 24.03 covers other manufactured tobacco and manufactured tobacco substitutes including chewing tobacco.

The definition of 'manufacture' is provided under Section 2(72) of the CGST Act, 2017, which states that manufacture means processing of raw materials or inputs in any manner resulting in the emergence of a new product having a distinct name, character, and use.

Relevant Supreme Court precedents include:

• M/s. Urmin Products P Ltd (2024): Discussed the nature of chewing tobacco and distinguished it from other tobacco products based on preparation, form, flavor, and use.
• Satnam Overseas Ltd (2015): Held that addition of ingredients that do not alter the essential character of raw rice does not amount to manufacture.
• Crane Betel Nut Powder Works (2007): Found that crushing and sweetening betel nuts did not result in manufacture of a new product.
• Pio Food Packers (1980): Held that preparing pineapple slices from pineapple did not amount to manufacture as the product retained its original identity.
• Lalji Godhoo & Company (2007), Technoweld Industries (2003), Meltex (I) P Ltd (2004), and S R Tissues P Ltd (2005): Emphasized that mere processing without change in essential character or use does not constitute manufacture.
• Yogesh Associates (2006): Held that treatment of raw tobacco leaf with tobacco solution and flavors did not cause irreversible change and thus remained unmanufactured tobacco.

Court's Interpretation and Reasoning: The applicant's product involves mixing raw tobacco leaves with lime paste in a mixer, followed by pouch packing for supply. The applicant contended that this product remains unmanufactured tobacco since the tobacco leaves remain in raw state and the addition of lime does not amount to manufacture.

The Revenue, however, argued that the mixing process renders the tobacco ready for direct consumption by the consumer, which constitutes manufacture, and thus the product should be classified as chewing tobacco under HSN 24039910.

The Court examined the HSN explanatory notes for chapters 24.01 and 24.03. It noted that unmanufactured tobacco includes cured or fermented leaves in natural form but not tobacco ready for smoking or chewing, while chewing tobacco is usually highly fermented and liquored tobacco ready for consumption.

The Court emphasized the CGST Act's definition of manufacture and found that the process of mixing tobacco with lime results in a new product with a distinct name, character, and use. The product is now fit for direct consumption, unlike raw tobacco leaves. This transformation aligns the product with the description of chewing tobacco under HSN 24039910.

Relevant precedents cited by the applicant on the non-manufacture of similar products were distinguished on facts. For example, the Yogesh Associates case involved treatment with flavoring solutions that did not make the product marketable as chewing tobacco, unlike the present case where the product is ready for consumption.

The Court also considered the applicant's reliance on earlier advance rulings classifying similar products as unmanufactured tobacco but found those rulings were based on investigations and facts not applicable here.

Key Evidence and Findings: The process flow chart, statutory requirements for packaging, and the nature of the product as ready for consumption were critical. The applicant admitted tobacco leaves are never used directly but only after mixing with lime. The product after processing is fit for chewing, which was decisive.

Application of Law to Facts: The Court applied the definition of manufacture and HSN explanatory notes to conclude that the product is a manufactured tobacco product, specifically chewing tobacco under HSN 24039910.

Treatment of Competing Arguments: The Court acknowledged the applicant's submissions and precedents but distinguished them based on the nature of the product and process. The Revenue's contention that the product is ready for consumption and thus manufactured was accepted.

Conclusion: The product 'sada tambaku pre-mixed with lime' is a manufactured tobacco product classifiable under HSN 24039910 as chewing tobacco.

Issue 2: Applicable GST and Compensation Cess Rates

Relevant Legal Framework: GST rates are prescribed under Notification No. 1/2017-Central Tax (Rate) and corresponding state notifications. Compensation cess rates are notified under Notification No. 1/2017-Compensation Cess (Rate) and subsequent amendments.

HSN 24039910 attracts GST at 28% (14% CGST + 14% SGST/UTGST) and compensation cess as per the applicable schedule. The compensation cess notification distinguishes between goods with declared retail sale price and others, with respective cess rates.

Court's Interpretation and Reasoning: Since the product is classified under HSN 24039910, the GST rate applicable is 28%. The applicant claimed no compensation cess is leviable as the product is unbranded. However, the Court noted that the compensation cess notification does not exempt unbranded products and applies the cess rates irrespective of branding.

Key Evidence and Findings: Notification entries and schedules indicate that chewing tobacco without lime tube attracts compensation cess at 0.56 rupees per unit if the retail sale price is declared, or 160% otherwise.

Application of Law to Facts: The product falls under the relevant tariff item attracting GST at 28% and compensation cess at the specified rates.

Treatment of Competing Arguments: The Court rejected the applicant's argument that absence of brand name exempts compensation cess liability.

Conclusion: GST is leviable at 28%, and compensation cess is leviable at 0.56 rupees per unit or 160% as per the applicable notification.

Significant Holdings

"The moment the tobacco is mixed with lime and subsequently supplied, it does not remain tobacco as such. It is the applicant's own say that tobacco leaves are never chewed/used directly. A new product i.e. tobacco mixed with lime, which can be directly chewed/used, emerges which is a new product having a distinct name, character and use."

"The product 'sada tambaku pre-mixed with lime' will fall under HSN 24039910 and leviable to GST at the rate of 28%."

"Compensation cess at the rate of 0.56 rupees per unit in respect of the product with declared retail sale price or at the rate of 160% in respect of products other than goods covered under serial No. 26 above, is leviable on the said product."

Core principles established include the application of the CGST Act's definition of manufacture to determine classification, the use of HSN explanatory notes to interpret tariff headings, and the principle that addition of lime resulting in a product fit for direct consumption constitutes manufacture.

Final determinations:

• The product 'sada tambaku pre-mixed with lime' is classified under HSN 24039910 (chewing tobacco).
• The GST rate applicable is 28% (14% CGST + 14% SGST/UTGST).
• Compensation cess is leviable at 0.56 rupees per unit or 160% as per the notification, regardless of branding.

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