2026 (1) TMI 779 - HC - Central Excise

Crushed non-fermented tobacco leaves repacked into retail pouches held chewing tobacco under 2403 9910, GST/cess payable; prior excise demand invalidated

Dominant issue: whether non-fermented, non-liquored crushed tobacco leaves repacked into small retail pouches amount to a manufactured product ... Classification of goods - non fermented non liquored crushed tobacco leaves packed in small retail pouches as Chewing tobacco - to be classified under Customs Tariff heading No. 2401 unmanufactured tobacco, Tobacco Refuse or Custom Tariff Heading No. 24039910 as chewing tobacco or not - different rates of duty under the provisions of Goods and Services Tax Act, 2017? - HELD THAT:- If the definition of term “manufacture” provided in section 2(72) of the GST Act is applied for levy of GST on the product sold by the petitioners in small retail pouches containing non fermented non liquored crushed tobacco leaves, it would have to be analysed as to whether such processing of tobacco leaves in gunny bags would result in emergence of new product having a distinct name, character and use or not. Admittedly, the tobacco leaves in the gunny bags cannot be used for chewing purpose unless the same is processed for the purpose of making it suitable for “chewing” by packing in small retail pouches. The petitioners are also branding such small retail pouches of the non-fermented non liquored crushed tobacco leaves for chewing purpose. Thus, the small retail pouches prepared by the petitioners would have a distinct name, character and use, partaking the character of “chewing tobacco”. It is true that the petitioners are not adding any material to the tobacco leaves which are sold in small retail pouches after undergoing the process such as drying, cleaning, sieving, sizing, cutting and thereafter packing into retail pouches and accordingly, the petitioners have classified such product as unmanufactured tobacco under Tariff Heading 2401 during the excise regime and the authorities under the Central Excise Act has also considered it as a valid classification in view of clarification issued by CBEC in circular dated 23.06.1987 - the definition of “manufacture” in section 2(72) of the GST Act refers to processing of raw materials or inputs in any manner which means that the tobacco leaves in gunny bags procured by the petitioners which is a raw material is processed by drying, cleaning, sieving, sizing, cutting which results in emergence of “chewable tobacco” having a distinct name and character and use. Therefore, small retail pouches containing the tobacco leaves processed as “chewing tobacco” would fall within the Chapter Heading 2403 9910 under the sub-heading “chewing tobacco” of Tariff heading 2403. In view of settled legal position under the Central Excise Act, the product of small retail pouches have been rightly classified under Tariff Heading 2401 as unmanufactured tobacco in view of definition of “manufacture” under the Central Excise Act and in view of change of definition of “manufacture” as contained in section 2(72) of the GST Act, in view of the fact that small retail pouches as produced by the petitioners results in emergence of new product having a distinct name, character and use namely “chewing tobacco” under Tariff Heading 24039910. ‘Copta’ as well as Explanatory Note of HSN (2017 Edition) issued by the World Customs Organization read with definition of “manufacture” as per section 2(72) of the GST Act, it is opined that the chewing tobacco manufactured by the petitioners sold in retail pouches after re-packing from bulk packages to retail packages would fall within the Tariff Heading No. 2403 9910 as “chewing tobacco’ and not under Tariff Heading 24012090 as “unmanufactured tobacco”. Reliance placed by the petitioners on the classification of the product as unmanufactured tobacco under Tariff Heading 2401 in the Central Excise regime would have to be now changed to classification of Tariff Heading 2403 9910 and the petitioners would be liable to pay GST and Compensation Cess applicable as per Tariff Heading 2403 9910 and not as per Tariff Heading 24012090. Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017 prescribing the GST rate on the basis of Tariff Heading as specified in First Schedule to Customs Tariff Act, 1975 and the Rules made thereunder would have to be in consonance with the definition of “manufacture” as provided in the GST Act. The respondent authorities, therefore, have rightly classified the product of the petitioners as “chewing tobacco” under Tariff Heading 2403 9910. The demand raised under the provisions of Central Excise Act as discussed here-in-above, cannot be sustained as the provisions of Central Excise Act could not have been invoked to levy of any duty on the chewing tobacco manufactured by the petitioners as, in view of the definition of “manufacture” under section 2(f) of the Central Excise Act and in view of the circulars, notifications and clarifications issued by the Board prior to coming into force of GST Act, the products cannot be said to have not been rightly classified under Tariff Heading 2401 under the excise regime by the respondent authorities at the relevant point of time. Petition allowed. 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.