1999 (5) TMI 371 - AT - Central Excise

Product 'KIT-KAT' classified under Heading 19.05, not 18.03. Appellant not liable for penalty.

The Tribunal determined that the product 'KIT-KAT' should be classified under Heading 19.05 of the tariff, rejecting the Commissioner's classification ... Classification of composite food product under Chapter headings - Interpretative Rule 3(a) and 3(b) - Use of Harmonized System Explanatory Notes in tariff interpretation - Dominant character test (essential character) versus specific heading preference - Effect of postenactment subheading creation as indication of prior classifiability - Interaction between Prevention of Food Adulteration standards and tariff classificationClassification of composite food product under Chapter headings - Use of Harmonized System Explanatory Notes in tariff interpretation - Dominant character test (essential character) versus specific heading preference - Goods marketed as 'KIT-KAT' are classifiable under Heading 19.05 (biscuits; waffles and wafers) and not under Heading 18.03 (chocolates). - HELD THAT: - The Tribunal held that the Central Excise Tariff headings and the HSN Explanatory Notes are closely aligned and, where identical or materially corresponding, the Explanatory Notes are a permissible and necessary aid to define the scope of tariff headings. The Explanatory Notes expressly include waffles and wafers that may be chocolatecovered within Heading 19.05, and thus such goods fall within Chapter 19 notwithstanding the presence, and even predominance by weight or value, of chocolate. Application of Interpretative Rule 3 is required only if a plain reading of the headings and notes does not resolve classification; here the chapter notes and specific heading language supply the most specific description (Rule 3(a)) and therefore there is no occasion to apply Rule 3(b) to attribute 'essential character' to the chocolate component. Reliance on commercial or trade perception that the product is 'chocolate' is inappropriate where the statutory scheme and explanatory notes indicate a contrary classification; statutory and technical definitions (including PFA/ISI indications that wafers may be chocolatecovered) support classification under Heading 19.05. Accordingly, the product is classifiable as wafers/biscuits under Heading 19.05. [Paras 10, 11, 13, 16, 21]Classification under Heading 19.05 was accepted and the classification under Heading 18.03 was rejected.Effect of postenactment subheading creation as indication of prior classifiability - The 1998 creation of a subheading specifically for wafers and waffles coated with or containing chocolate within Heading 19.05 corroborates that such products were classifiable under Heading 19.05 even before the amendment. - HELD THAT: - The Tribunal noted that the 1998 budget introduced subheadings carving out waffles and wafers coated with or containing chocolate into a specific subheading within Heading 19.05 without altering the wording of the principal headings or relevant chapter notes. The absence of any change in the main heading or notes indicates that the amendment only created a separate niche within the same heading and therefore confirms that the products in question were always within the scope of Heading 19.05. [Paras 17, 18]The postamendment subheading confirms that wafers/waffles coated with or containing chocolate were classifiable under Heading 19.05 even prior to the amendment.Limitation - availability of extended period - The Tribunal did not decide the question of limitation; it was held unnecessary to decide limitation in view of the primary classification finding. - HELD THAT: - Because the appeal was decided on classification, the Tribunal expressly stated that it was not necessary to examine whether the notices for recovery were barred by limitation or whether the proviso to Section 11A (extended period) applied. That issue therefore remains unadjudicated by this order. [Paras 22]Limitation issue not decided.Penalty liability consequent to classification - In consequence of allowing the appeal on classification, the penalty confirmed in the impugned order cannot stand. - HELD THAT: - The Tribunal observed that having set aside the classification and demand confirmed by the Commissioner, the corollary is that the penalty which was imposed on the basis of that classification could not be sustained. The appeal was allowed with consequential relief, which includes invalidation of the penalty imposed in the impugned order. [Paras 22]Penalty set aside as consequential relief to the successful classification challenge.Final Conclusion: Appeal allowed: impugned order set aside. The product 'KITKAT' is classifiable under Heading 19.05 and not under Chapter 18; the Tribunal relied on the tariff headings, chapter notes and HSN Explanatory Notes (preferring the specific heading under Rule 3(a) rather than applying Rule 3(b)), and consequent demand and penalty confirmed by the Commissioner cannot be sustained; the limitation issue was not decided. Issues Involved:1. Classification of the product 'KIT-KAT'.2. Limitation on notices issued for recovery of duty.3. Liability of the appellant to penalty.Summary:1. Classification of the Product 'KIT-KAT':The principal question in this appeal is the classification of the product marketed under the label 'KIT-KAT' manufactured by the appellant. The appellant claimed classification under Heading 19.05 of the tariff, which was initially approved by the Assistant Commissioner. However, four notices were issued alleging short payment of duty, proposing classification under Heading 18.04, and later under Heading 18.03 by the Commissioner. The Commissioner confirmed classification under Heading 18.03, stating that the product is predominantly chocolate, comprising 68 to 72% by weight and value, and is perceived as chocolate by dealers and customers. The appellant argued that the product should be classified under Heading 19.05, citing the presence of words 'whether or not containing cocoa' and various references, including the Explanatory Notes to the Harmonized System of Nomenclature and Supreme Court judgments, which support classification under Heading 19.05. The Tribunal concluded that the product is classifiable under Heading 19.05, noting that the Explanatory Notes and the scheme of classification in the Central Excise tariff support this classification. The Tribunal also referred to the amendment in the 1998 budget, which introduced sub-headings for wafers and waffles coated with or containing chocolate under Heading 19.05, indicating that such products were always classifiable under this heading.2. Limitation on Notices Issued for Recovery of Duty:The appellant contended that the notices issued for recovery of duty are barred by limitation, as the extended period in the proviso to Section 11A of the Act is not available, given that the department was aware of the relevant facts. The Tribunal, having concluded the classification under Heading 19.05, did not find it necessary to go into the aspect of limitation.3. Liability of the Appellant to Penalty:The Tribunal concluded that since the product is classifiable under Heading 19.05, the penalty ordered cannot be imposed. The appeal was allowed, and the impugned order was set aside with consequential relief.