Fruit protection bags made from coated kraft paper classified under Tariff Code 48194000 not 4805

AAR Maharashtra ruled that fruit protection bags made from kraft paper coated with chemicals for anti-bacterial, anti-fungal, and protective properties should be classified under Tariff Code 48194000 (Other sacks and bags) rather than 4805 (uncoated paper). The bags are sealed on three sides with adhesive and designed to completely enclose fruits for protection from pests, rain, and birds. Since the product is manufactured from coated paper and functions as a bag rather than mere paper, it falls outside heading 4805 and properly classifies under 48194000, attracting 18% tax rate.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

(a) What is the correct classification of the product "Fruit Protection Bags" under the Harmonized System of Nomenclature (HSN) codes, specifically whether it falls under HSN 4805 or HSN 48194000 (subcategory 48195090 was also discussed)Rs.

(b) What is the applicable Goods and Services Tax (GST) rate on the said product based on its classificationRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Correct Classification of Fruit Protection Bags under HSN

Relevant Legal Framework and Precedents:

The classification of goods for GST purposes is governed by the Customs Tariff Act, 1975, and the GST Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017, which incorporates the HSN codes and specifies applicable tax rates. The rules for interpretation of the First Schedule to the Customs Tariff Act, including Section and Chapter Notes and General Explanatory Notes, apply to classification under GST notifications.

Chapter 48 of the Customs Tariff covers "Paper and paperboard; articles of paper pulp, of paper or of paperboard." Within this chapter:

• HSN 4805 covers "Other uncoated paper and paperboard, in rolls or sheets, not further worked or processed than as specified in Note 3 to this Chapter."
• HSN 4819 covers "Cartons, boxes, cases, bags and other packing containers of paper, paperboard, cellulose wadding or webs of cellulose fibres, box files, letter trays and similar articles."

Note 3 to Chapter 48 excludes paper that has been otherwise processed beyond calendaring, glazing, or similar finishing from classification under 4805.

Court's Interpretation and Reasoning:

The applicant's product is a "Fruit Protection Bag" made of kraft paper coated with chemicals imparting special properties such as anti-bacterial, anti-fungal, fly resistance, insect resistance, and sunburn protection. The bag is sealed on three sides using synthetic adhesive, with the fourth side left open and equipped with a galvanized wire to fasten the bag around the fruit.

The applicant initially classified the product under HSN 4805, which covers uncoated paper and paperboard. However, the jurisdictional officer and the Authority noted that since the product is coated and processed with chemical treatment, it does not fall under "uncoated paper" as per Note 3 to Chapter 48. Further, the product's physical form as a sealed bag distinguishes it from mere paper sheets or rolls.

HSN 4819, which includes bags and packing containers made of paper or paperboard, is more appropriate. Within 4819, the subheading 48194000 covers "Other sacks and bags, including cones." The Authority found that the product's design-a bag enclosing the fruit and sealed on three sides with a fastening mechanism-fits the description of a bag rather than a sleeve or simple sheet.

Key Evidence and Findings:

• The product brochure and samples showed the bag's construction and use.
• The chemical coating and sealing process imparted characteristics beyond uncoated paper.
• The product's use as a protective bag enclosing fruit fully, with fastening, distinguished it from mere paper sheets or sleeves.
• Comparison with peers' classification and customs import classifications was considered but found inconsistent with the product's actual nature.

Application of Law to Facts:

Applying the Customs Tariff Act's interpretation rules and the definitions in Chapter 48, the Authority concluded that the product is not "other uncoated paper" under 4805 but a "bag" under 4819. The coating and sealing processes remove it from the scope of uncoated paper, and the product's form and function align with packing containers classified under 48194000.

Treatment of Competing Arguments:

The applicant argued for classification under 48195090 based on competitor practices and customs import classifications, which would attract a 12% GST rate. The jurisdictional officer and Authority rejected this, emphasizing the product's coated nature and bag form, which excludes it from 4805 and supports classification under 48194000. The Authority also noted the competitor's import classification was not determinative and must align with the product's actual characteristics.

Conclusion:

The product "Fruit Protection Bag" is correctly classifiable under HSN 48194000 as "Other sacks and bags, including cones."

Issue 2: Applicable GST Rate on the Product

Relevant Legal Framework:

Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017 and its schedules specify GST rates for goods based on HSN classification. The rates vary from 0.125% to 18% depending on the schedule under which the goods fall.

Goods under Chapter 48 are generally covered under Schedule II of the said notification, attracting 12% GST (6% CGST + 6% SGST), except where otherwise specified.

Court's Interpretation and Reasoning:

The Authority noted that goods under Chapter 4819 fall under Schedule II at Sr. No. 122 of the Notification, attracting a 12% GST rate. However, the final order states the applicable rate as 18% (9% CGST + 9% SGST), which appears to be a correction or updated rate applicable to the product based on its classification and possibly the nature of use or other GST updates effective as of the date of the ruling.

Key Evidence and Findings:

• The Notification No. 01/2017-Central Tax (Rate) and its amendments as on the date of ruling.
• The classification under 48194000 as a bag, which falls under Schedule II.
• Updated GST rates applicable to the product category as per latest schedules.

Application of Law to Facts:

While Schedule II generally prescribes 12% GST for Chapter 4819 goods, the final determination by the Authority was that the product attracts 18% GST. This may be due to specific amendments or clarifications in the GST rates after the initial notification, or the product's characteristics placing it in a higher tax slab.

Treatment of Competing Arguments:

The applicant sought a 12% GST rate based on competitor practice and import classifications. The Authority, however, emphasized adherence to the official GST notifications and current tax schedules rather than market practice or customs classifications.

Conclusion:

The applicable GST rate on the product classified under HSN 48194000 is 18% (9% CGST + 9% SGST).

3. SIGNIFICANT HOLDINGS

"The product is manufactured out of coated kraft paper, sealed on three sides and provided with a tag/ galvanized wire to seal the fourth side after the fruit is inserted into the bag. We find that a bag is a product which covers the entire goods, completely enclosing them... Therefore, from the product design, it appears that the product in question is a bag and not a sleeve... Therefore, we find that the said product would be rightly classifiable under Tariff Heading 48194000 i.e. Other sacks and bags, including cones."

"In terms of Notification No.1/2017 CT (Rate) dated 28.6.2017, as amended, goods falling under Chapter 4819 falls under the Schedule II of the said notification at Sr.No.122, attracting tax at the rate of 6% CGST and 6% SGST i.e. total 12%. However, the final order holds the tax rate as 18% (9% CGST + 9% SGST) applicable on the product."

Core principles established include:

• The importance of product characteristics and processing in determining correct HSN classification rather than mere similarity to competitor classifications or customs import practices.
• Coated and processed paper products that are formed into bags are excluded from uncoated paper classifications and must be classified under packing containers (Chapter 4819).
• The GST rate is determined based on the correct classification and applicable Notification schedules, not market practice.

Final determinations on each issue:

• The Fruit Protection Bags are classifiable under HSN 48194000.
• The applicable GST rate on these bags is 18% (9% CGST + 9% SGST).

---