2026 (2) TMI 1265 - SC - VAT / Sales Tax

Common Parlance Test and Essential Character Test govern beverage classification; product held a fruit drink attracting concessional VAT.

Classification of a packaged beverage turned on the common parlance test and supporting commercial evidence, and on the essential character test for ... Classification of goods for fiscal purposes - common parlance test - essential character test - inclusive construction of an 'including' clause - burden on the Revenue to establish residuary classification - resort to residuary entry impermissible where a specific entry reasonably applies - regulatory or licensing classification not determinative for tax classification - HELD THAT:- In Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. [1987 (1) TMI 452 - SUPREME COURT] approving Dilworth, this Court elucidated the scope and function of ‘inclusive definitions’ in statutory interpretation. Applying the above principle, the expression “fruit drink” occurring in Entry 103 cannot be confined solely to ready-to-consume bottled beverages. In common trade understanding, fruit squashes, concentrates and sharbat preparations intended for dilution are all capable of being understood as fruit drink preparations. The nomenclature “sharbat” does not strip the product of its essential character as a fruit-based beverage concentrate, particularly where its composition and intended use align with that understanding. Once it is demonstrated that the product is a fruit-based beverage preparation intended for dilution and consumption, it bears a reasonable and substantial claim to classification as a “fruit drink” within Entry 103. It cannot be relegated to the residuary entry merely because it is marketed as a “sharbat”. The nomenclature adopted by the parties, or the description of the product as a “non-fruit syrup” under the licensing statute, is not determinative for the purposes of classification under a taxing statute. What is decisive is the nature, composition and commercial identity of the product. If, on a proper application of the common parlance and essential character tests, the product reasonably answers the description of a “fruit drink”, the same cannot be denied merely on account of its label or regulatory categorization. The material placed on record, including tax invoices evidencing payment of VAT at 5% in several States namely Delhi, Gujarat, West Bengal, Madhya Pradesh, and Andhra Pradesh demonstrates that the trade and tax authorities in those jurisdictions have consistently treated the product as falling within fruit-based beverage entries. It is no doubt true that VAT is a State subject under Entry 54 of List II of the Seventh Schedule to the Constitution and classifications adopted by one State are not binding upon another. However, they are not wholly irrelevant. Where similarly worded entries across multiple jurisdictions have been construed in a particular manner, such uniformity assumes evidentiary value in determining commercial understanding of the product, and whether the assessee’s interpretation is at least a reasonably plausible view. The consistent concessional classification adopted across several States therefore fortifies the appellant’s case that its view is neither artificial nor untenable but a bona fide and commercially recognised interpretation. The concurrent findings recorded by the authorities and affirmed by the High Court cannot therefore be regarded as pure findings of fact so as to be insulated from appellate interference. They are conclusions arrived at upon an erroneous application of settled principles governing fiscal classification and are vitiated by a clear misdirection in law. Consequently, such findings warrant interference by this Court. Accordingly, it is held that “Sharbat Rooh Afza” is classifiable under Entry 103 of Schedule II, Part A of the UPVAT Act as a fruit drink / processed fruit product and is exigible to VAT at the concessional rate of 4% during the relevant assessment years. The impugned judgment(s) affirming classification under the residuary entry and levy at 12.5% are set aside. In fine, the appeals are allowed. The respondent authorities shall grant consequential relief including refund or adjustment of excess tax paid in accordance with law. There shall be no order as to costs. Issues: Whether the product 'Sharbat Rooh Afza' is classifiable as a 'fruit drink' under Entry 103 of Schedule II, Part A of the Uttar Pradesh Value Added Tax Act, 2008 attracting VAT at 4%, or whether it falls under the residuary Entry 1 of Schedule V of the Uttar Pradesh Value Added Tax Act, 2008 attracting VAT at 12.5%.Analysis: Entry 103 is inclusive in language and contains no quantitative threshold of fruit content; classification must be determined by commercial and popular understanding (common parlance test) supported by tangible material such as composition, product literature and market treatment. Regulatory classifications under the Fruit Products Order, 1955 and related food standards are relevant but not determinative for fiscal classification unless expressly adopted by the taxing statute. Where a product is a composite good, the component that imparts the essential beverage character must be identified (essential character test); quantitative predominance of a carrier or preservative does not automatically govern classification. The Revenue asserting classification under a residuary entry bears the evidentiary burden to show the product cannot reasonably fall within a specific entry; uniform concessional treatment in other States and market evidence support a plausible claim that the product is a fruit-based beverage preparation.Conclusion: 'Sharbat Rooh Afza' is classifiable under Entry 103 of Schedule II, Part A of the Uttar Pradesh Value Added Tax Act, 2008 as a fruit drink / processed fruit product and is exigible to VAT at the concessional rate of 4% for the relevant period; the impugned findings classifying it under the residuary entry and levying tax at 12.5% are set aside and consequential relief including refund or adjustment of excess tax paid is to be granted.Ratio Decidendi: Where a fiscal entry is undefined, an inclusive entry like 'fruit drink' must be interpreted by common parlance supported by evidence of commercial understanding and, for composite products, by the essential character test; the Revenue must discharge the burden to justify consigning goods to a residuary entry and cannot rely solely on regulatory labelling to override commercial identity.