INTRODUCTION
“Skincare is healthcare, your skin is a sign of a healthy mind and body”, businesses often echo these words on advertisement banners to attract people to develop self-care routines and buy their product from the market. Skin is one of the largest organs in the human body, so is the product market for health and skin care. Though the quote seems motivational, it is not so motivational for the purpose of taxation. Healthcare and skincare are not viewed as something which is interconnected. Under indirect tax regime healthcare is mutually exclusive of skin care. The products can either be medicaments, used to cure medical ailments and promote healthcare or could be classified as a ‘cosmetic’ used for care of skin and wellness.[1]
METHOD OF CLASSIFICATION
The widely accepted way of classification is based on HSN and this is done only by the consignor. The supplier should classify the goods using the titles of Sections and Chapters of Tariff Act as a guide, the product fits the ambit of the heading then its final, no further steps need to be taken. If this isn’t possible, then look at how the particular product is looked in the trade practice, to further accomplish the aim of classification, use dictionary meanings and technical standards like BIS.[2]
Tariff classification of medicament and cosmetic are as follow[3]
| Tariff Item | Description of Goods | Rate of Duty |
| Chapter 30 3003 | MEDICAMENTS (EXCLUDING GOODS OF HEADING 3002, 3005 OR 3006) CONSISTING OF TWO OR MORE CONSTITUENTS WHICH HAVE BEEN MIXED TOGETHER FOR THERAPEUTIC OR PROPHYLACTIC USES, NOT PUT UP IN MEASURED DOSES OR IN FORMS OR PACKINGS FOR RETAIL SALE | 10%-12% |
| Chapter 33 3304 | BEAUTY OR MAKE-UP PREPARATIONS AND PREPARATIONS FOR THE CARE OF THE SKIN (OTHER THAN MEDICAMENTS), INCLUDING SUNSCREEN OR SUNTAN PREPARATIONS; MANICURE OR PEDICURE PREPARATIONS | 20% |
For the products to be categorised as ‘medicament’ the description of product should match description given under Chapter 3003 and same is true for cosmetics, where the description has to match as provided under Chapter 3304. Most of the herbal cosmetic products usually end up matching the description of both the above-mentioned chapters. Hence, it would be hard to classify the products just on the basis of section or chapter titles and notes. To accomplish the aim of classification, courts take aid of multiple parlance and utility tests.
Judicial precedents are very ambiguous in this regard, the saga of Westinghouse Saxby Farmer Ltd. still continues dispersing its impact across various business sectors. Few products which weren’t labelled or sold as medicated products are still classified under ‘medicaments’ whereas few products that have medical properties are still not accepted as ‘medicaments’ by the courts Every judgement which is passed with respect to classification, leads to more legal complexity, classification of fast evolving beauty industry is often badly caught in this intriguing discussion of differential classification and inconsistent tax rates. To aid in developing a fair and predictable business and tax models, this article attempts to analyse the evolution of testing criteria used to classify beauty products as ‘medicaments’ and ‘cosmetics ‘additionally, to evaluate whether such tests stand the test of canon of taxation.
WHETHER THE GOODS SHOULD BE CLASSIFIED BASED ON THE POPULAR USAGE OR INTENDED USAGE?
There are two main types of tests which are used to determine the nature of the product. i.e ‘common parlance test’ and ‘functional utility test’. Under the former test, the product name will be construed as perceived by the common public,[4] where as in the latter the classification of the product is done based on its end usage.[5]
Consumer Perception and Central Excise Tariff 1985
In Puma Ayurvedic Herbal(P) Ltd vs Commissioner of Central Excise (2006)[6], Nagpur Supreme Court, classified Puma neem facial pack, hair tonic powder, anti-pimple herbal powder, anti-dandruff oil, Puma herbal Massage oil for women etc as Medicaments as under Chapter 30 of Central Excise Tariff Act.
The court used ‘Common Parlance Test’[7] for classification and held that, meaning and understanding should be prioritised in comparison to scientific or technical meaning of the terms used. The two tests applied by the court was
- Whether the commodity is normally understood as a medicament. i.e common parlance test
- Are ingredients used in the products are identified under the book on Ayurveda?[8]
The tariff classification should be construed according to the understanding of a common man, if the customers and the practitioners in Ayurveda Medicine perceive the particular product to be ayurvedic medicine, it would be classified as a medicament.[9]A product cannot be considered as cosmetic just because it lead to the enhancement of the appearance of a person as sometimes improvement in the medical condition will also lead to advance appearance.
As held in Wockhardt Life Sciences Ltd[10] case under the fiscal schedule like Central Excise Tariff the process of manufacturing and the end use of the product, cannot be determinative factor of classification, hence ‘ common parlance’ was emphasized under the central excise tariff.
But in the case of Commissioner of Central Excise, Chennai- IV V. Hindustan Lever Ltd(2015)[11]
Supreme Court held ‘Vaseline intensive care heel guard’ to be a medicament, stating it is meant to cure cracked heels and skin care is its subsidiary usage. Here functional utility and predominant and primary usage of the commodity was given precedence. The main feature which the court here considered was, not the percentage of the pharmaceutical ingredients in the product, but the product literature, label, character and the user to which the product is put to. People used it as a cure for some medical condition, this is the primary function of the product as market by the supplier and echoed by the customers. Here the court held that, functional utility and predominant usage of the commodity which is to be classified should be taken into account apart from understanding in the common parlance.
Beyond popular perceptions and GST
In the case of Akanksha Hair & Skin Care Herbal[12] the appellants had stated that products they used were for therapeutic or prophylactic use, they also cited ayurvedic ingredients from authoritative texts.
Nonetheless the court in this case retreated from the parameters used in Puma Ayurveda and Vaseline Heel Guard case. Disregarding both the court stated that, mere usage of the ingredients mentioned under the Ayurvedic text book isn’t sufficient, as its “curative or preventive value must be substantial, and product must be manufactured primarily to control or cure a skin-related disease” also added that, the consumers should use the product primarily for treatment of any injury or aliment for the product to be classified as medicament.
Likewise, in JAC oil case[13], though the applicant had made the submission asserting that the product is an ayurvedic patented medicine which is also clearly indicated in their product label. Court held that, the description of the product states, the product should be ‘used daily before or after bath all over the body’ it cannot be considered to cure the aliment. The court included the intended usage over just prioritizing the popular usage of the product as a criterion for classification.
We can see how the current philosophy has moved away from popular use and intended use. Now for a product to be classified as medicament it should not just have significant therapeutic or prophylactic value, primary purpose of manufacturing of that product should be to control or cure the spread of disease and consumers should use the product for the purpose of treatment, where in the usage of the product should aid in development of preventive characteristics inside the body.[14] A product to be classified under medicament or cosmetic, it should achieve both principle and intended use test.
When the priority for classification changes, can the category under which the product is taxed also be changed?
Re classification of beauty products under GST could lead to a violation of the principles of consistency and certainty in tax law.
The classification of goods under GST is done according to Customs Tariff Act 1975, so it has the same rules of interpretation as provided in the Customs Act, but at the same time it also has to harmonize with the classification as provided under the Central Excise Tax. However, once it is classified the rate of tax will be determined by the respective government notifications.[15]
Re classification under Excise Act
Re classification might seem as a recent concept which came along with the introduction of GST, in reality its not.
In the case of Commissioner of Central Excise Nagpur vs Baidyanth Ayurved Bhavan (2003)[16]
The applicant Shree Baidyanath Ayurved Bhavan Ltd claimed for re classification of their “ Danth Manjan Lal” tooth powder from cosmetic to medicament, as the new amendment under tariff had added Ayurveda Sara Samgraha, as a sub heading under 3003.31 product should be exclusively manufactured using ingredients mentioned in the book to be classified as medicament. Assessee claiming that DML is manufactured as mentioned in Ayurveda Sara Samgraha claims for categorization of it as medicament.
The courts declining the re classification stated that, the tribunal had applied common parlance test to classify tooth powder under cosmetics. Since then, the product has not undergone any change in its composition, character and use. There can’t be any justification to re classify the product as there is no change in the nature or use of the product. Only if the legislation has explicitly adopted a technical term, then it should be understood in technical scene, in or all scenarios common trade parlance prevails.[17] Similarly in Ashwini hair oil case, court declined re classification affirming that, since the re grouping which happened through the amendment did not have any impact on the character of the product in question.
Re classification under GST
In the case of Emami Ltd[18] (Boro plus antiseptic cream case) with respect to classification of BPAC as antiseptic cream and not as medicament ointment, the applicant the tax authority, sought for reclassification majorly on the grounds of “common parlance”, where in BPAC had ben primarily marketed as an antiseptic cream, used for preventing and treating minor skin infections. The court here upholding the stance taken by the tribunal held that, since drug license has been issued to Boroplus antiseptic cream, it is an ointment, also the ingredients used have more oil than water.
Moreover, the description under Entry 41[19] clearly states that, cream easily spreads, whereas oil is greasy and sticky, this is because oil is less than water in cream. Since BPAC contains medical properties and also fulfils the description given under Entry 41, it would be categorised as medical ointment.
In the earlier cases of Ashwini hair oil and Baidyanath case, the court had disallowed the re- classification stating that there was no change in the people’s perception and characteristic of the product i.e ‘common paralance test’ was upheld by the courts. But, in Boroplus case, the court demonstrated the irrelevance of ‘common parlance’, by stating that advertising of a product or consumer perception shouldn’t be the reason for tax classification. Similarly, it shifted the burden of applying sole and principal usage test, on the revenue department.
In just relying upon the technical definitions and functional utility, to decline the re classification, the court has created further ambiguity with regards to classification of products.
From the recent judgements on the classification of products under GST, there is some estimation with respect to the factors to be classified as medicaments and cosmetics. This is not true with instance of re- classification. Though the re classification has been disallowed by the courts in the above cases, the reasons for rejecting have been different. Which has resulted in the violation of the cannon of certainty.
In the road map, to achieve certainty. If the classification of products has evolved from simple ‘common parlance’ to more comprehensive ‘trade parlance of sole and principle use test’. Shouldn’t this evolution be reflected in the cases of re classification? Given the fact that, the classification of products under Tariff is not based on the nature of the products. The arguments of, changes in classification should be reflected as change in the composition of the character of the product, to be considered for re classification, seems somewhat irrational.
CONCLUSION
To support businesses and suppliers in aptly classifying their goods, under the new GST Tariff. The GST Council and CBIC should issue a new circular with updated guidelines for classifying products as medicaments or cosmetics. These guidelines would not only aid in classification of new products but also help in reinforcing consistency and certainty in cases of re classification.
REFERENCES:
- Akanksha Hair & Skin Care Herbal Unit (P.) Ltd. In re [2018] 96 taxmann.com 243/69 GST 456 (AAAR-West Bengal)
- C.E. v. E.P.C. Irrigation [(2002) 146 E.L.T. A88]
- C.E. vs. Richardson Hindustan Ltd. 1989 (42) ELT A100
- Shree Baidyanath Ayurved Bhavan Ltd (2009) 12Supreme Court Cases 419
- CE ChemPharamaceuticals (P.) Ltd., In re [2021] 129 taxmann.com 9/86 GST 814.
- Cellulose Products Ltd. v. CCE 1997 (93) ELT 646 (SC)
- Commissioner of Central Excise, Chennai- IV V.Hindustan Lever Ltd. 2024 SCC OnLine All 3965
- Commissioner of CentralExcise v. M/s Wockhardt Life Sciences Ltd.
- Commissioner, Commercial Tax Versus Emami Lt, 2024 SCC OnLine All 3965
- Gulati & Co. v. C.S.T., [(2014) 14 SCC 286]
- Puma Ayurvedic Herbal (P.) Ltd. v. CCE 2006 taxmann.com 1591/2006 (196) E.L.T. 3 (SC)
- THE CUSTOMS TARIFF ACT, 1975, Section VI, 08-05-2023 (India)
- Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act), section 58, Entry No. 41 of Schedule II Part (A).
- Deepali Mishra and Vineet Bhatia , Beauty and Make – up Preparations- Classification can turn Ugly, 116 Taxmann.com 82 (2020)
- CA Ashish Kumar Bansal, classification of Goods under GST Regime, THE CHARTERED ACCOUNTANT, June 2018.
[1] Deepali Mishra and Vineet Bhatia , Beauty and Make – up Preparations- Classification can turn Ugly, 116 Taxmann.com 82 (2020)
[2] Online taxman article
[3] THE CUSTOMS TARIFF ACT, 1975, Section VI, 08-05-2023 (India)
[4] Gulati & Co. v. C.S.T., [(2014) 14 SCC 286]
[5] C.C.E. v. E.P.C. Irrigation [(2002) 146 E.L.T. A88]
[6] Puma Ayurvedic Herbal (P.) Ltd. v. CCE 2006 taxmann.com 1591/2006 (196) E.L.T. 3 (SC)
[7] It is Common Man’s Perception about the commodity. In the case of Assistant Commissioner, Anti Evasion, Rajasthan-I Jaipur Vs. M/s Camlin Limited &Anr. Rajasthan HC, held that classification should be based on common mans understanding in accordance with normal usage.
[8] The tests are given by Central board of Excise and Customs vide letter dated 3rd October 1991.
[9] C.C.E. vs. Richardson Hindustan Ltd. 1989 (42) ELT A100
[10] Commissioner of CentralExcise v. M/s Wockhardt Life Sciences Ltd. [2012] 28 taxmann.com 431/2012 (277) E.L.T. 299 (SC);
[11] Commissioner of Central Excise, Chennai- IV V. Hindustan Lever Ltd. [2015] 60 taxmann.com 470 (SC)/[2015] 51 GST 818 (SC)
[12] Akanksha Hair & Skin Care Herbal Unit (P.) Ltd., In re [2018] 96 taxmann.com 243/69 GST 456 (AAAR-West Bengal)
[13] [2023] 154 taxmann.com 77 (AAR-WEST BENGAL)
[14] CE ChemPharamaceuticals (P.) Ltd., In re [2021] 129 taxmann.com 9/86 GST 814.
[15] CA Ashish Kumar Bansal, classification of Goods under GST Regime, THE CHARTERED ACCOUNTANT, June 2018, www.icai.org
[16] CCEv. Shree Baidyanath Ayurved Bhavan Ltd (2009) 12Supreme Court Cases 419
[17] Cellulose Products Ltd. v. CCE 1997 (93) ELT 646 (SC)
[18] Commissioner, Commercial Tax Versus Emami Lt, 2024 SCC OnLine All 3965
[19] Uttar Pradesh Value Added Tax Act, 2008 (UP VAT Act), section 58, Entry No. 41 of Schedule II Part (A)
Author: Aakanksha N Urs is 4th Year Law Student at Tamil Nadu National Law University, Trichy
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