Classification of non-fermented crushed tobacco leaves as chewing tobacco under GST leads to higher duty and cess liability.

Application of the GST definition of "manufacture" to non-fermented, non-liquored crushed tobacco leaves processed and packed into retail pouches produces a product with a distinct name, character and use as chewing tobacco, thereby attracting classification under Tariff Heading 2403 9910 as chewing tobacco; consequence: GST and Compensation Cess applicable under that heading. Prior classification as unmanufactured tobacco under Tariff Heading 2401 was correct under the Central Excise regime at the relevant time, and Central Excise demands cannot be sustained retrospectively.

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Issues: (i) Whether non-fermented, non-liquored crushed tobacco leaves repacked into small retail pouches are classifiable under Tariff Heading 2403 99 10 as "chewing tobacco" or under Tariff Heading 2401 as "unmanufactured tobacco" for levy under the GST Act; (ii) Whether the adjudicating authority validly invoked the extended period of limitation under section 74 of the CGST Act for demands arising from re-classification; (iii) Whether demands raised under provisions of the Central Excise Act could be sustained for the products in question.

Issue (i): Classification of non-fermented, non-liquored crushed tobacco leaves repacked in retail pouches under CTH 2403 99 10 (chewing tobacco) or CTH 2401 (unmanufactured tobacco).

Analysis: The Court examined the GST definition of "manufacture" in section 2(72) of the CGST Act, HSN explanatory notes for Chapter 24, the COPTA definitions and pre-GST circulars. It distinguished the Central Excise process-focused test from the GST end-use and emergence-of-new-product test. Photographic and packaging evidence showing branded retail pouches with statutory health warnings and the manner of repacking were considered along with the HSN note stating chewing tobacco is "usually highly fermented and liquored" (word "usually" indicating it is not an absolute requirement). The Court held that processing steps (drying, cleaning, sieving, sizing, cutting and repacking into retail pouches) resulting in a product with a distinct name, character and use satisfy section 2(72) and bring the goods within CTH 2403 99 10.

Conclusion: The product is classifiable under Tariff Heading 2403 99 10 as "chewing tobacco" (against the petitioners).

Issue (ii): Validity of invoking the extended limitation period under section 74 of the CGST Act for demands based on re-classification.

Analysis: The Court accepted that classification under the GST definition of "manufacture" entitles the authority to make demands, but observed section 74(1) extended limitation applies only where there is fraud, willful misstatement or suppression of facts. Petitioners had bona fide classified their goods under pre-GST excise practice. The authority had invoked section 74 in the impugned orders; the Court held that while classification under CTH 2403 99 10 is correct, the extended period under section 74 was not made out on the facts and the demands must be recomputed within the ordinary limitation under section 73(10).

Conclusion: The impugned orders are to be treated as passed under section 73 (not section 74); extended period cannot be invoked (in favour of petitioners on limitation issue).

Issue (iii): Sustainment of demands raised under the Central Excise Act for the goods in question.

Analysis: The Court reviewed the pre-GST statutory and circular framework under the Central Excise Act, including the Fourth Schedule notes and CBEC circulars which recognised that unmanufactured tobacco merely broken and packed in retail pouches was classifiable under CTH 2401 in the excise regime. Given those provisions and clarifications applicable during the excise era, the Court held demands raised under section 11A(10) of the Central Excise Act could not be sustained where classification under the excise regime had been validly accepted at the relevant time.

Conclusion: Demands under the Central Excise Act (section 11A(10)) set aside (in favour of petitioners).

Final Conclusion: The Court upheld classification of the subject retail pouches as "chewing tobacco" under Tariff Heading 2403 99 10 for GST purposes, but directed that the impugned orders be treated as issued under section 73 of the CGST Act (ordinary limitation) and recomputed accordingly; separate demands under the Central Excise Act were quashed.

Ratio Decidendi: For GST classification purposes the statutory definition of "manufacture" in section 2(72) CGST Act requiring emergence of a product with a distinct name, character and use governs classification; repacking and processes rendering tobacco suitable and branded for chewing can convert unprocessed tobacco into a taxable "manufactured" chewing tobacco under CTH 2403 99 10, but invocation of the extended limitation under section 74 requires fraud or willful suppression and cannot be applied where prior excise classification was bona fide.

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