In re Kavi Cut Tobacco (ARUMUGAM) (GST AAR Tamilnadu)
The product intended to be manufactured by the applicant and supplied as ‘Chewing tobacco’ with the brand name ‘Kavi cut tobacco’ is classifiable under CTH 2403 9910- Chewing Tobacco.
AAAR Order in this case: Marketable/consumable/Manufactured Chewing tobacco classifiable under CTH 24039910
Read Madras HC Judgment in this case: Jaggery-Water Curing Does Not Make Tobacco “Manufactured”: Madras HC
FULL TEXT OF ORDER OF BEFORE THE AUTHORITY OF ADVANCE RULING, TAMILNADU
Note : Any Appeal against the Advance Ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated.
At the outset, we would like to make it clear that the provisions of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.
Shri. Arumugam, (Prop: M/s. Kavi Cut Tobacco) No.2, RS No. 239 Abiramapuram, Thanjavur, 613007, are registered under GST Act with Registration No. 33AABPA9979P3Z2. The applicant has sought advance ruling on the
“Classification of the product intended for manufacture and applicable rate of Compensation Cess.”
The applicant has submitted the copy of application in Form GST ARA – 01 and also submitted copy of Challan evidencing payment of application fees of Rs.5,000/- each under sub-rule (1) of Rule 104 of CGST rules 2017 and TNSGST Rules 2017.
2.1 The applicant has stated that after introduction of compensation cess which varies for different products, it had become imperative to go into the nuances of the actual nature of the product before determining the correct classification; during the pre GST period the tax structure on chewing tobacco that was packed manually did not pose much problem in the marketing side as the tariff description was simply chewing tobacco and the variation in the tax structure was solely on the basis of machine packed chewing tobacco with or without lime tube. However in the GST Period after introduction of compensation cess department has gone to the conclusion that even manually packed chewing tobacco without lime tube is classifiable only under chapter 24039910. The presence or absence of lime tube was nowhere in the earlier tariff classification. Therefore tobacco manufacturers especially in South India, which manufactured chewing tobacco manually could not vie in the competitive market with the abnormally high tax structure. Therefore, there was necessity to switch over to marketing simple alternate tobacco products to cater to the demands of the lower sector in the market.
2.2 The applicant has stated that they intend to manufacture and supply the following product: Raw dried tobapco leaves are purchased from wholesale dealers/growers; Stems and dust particles are removed; then cured using jaggery-water for the purpose preventing it from moulding or further decaying; after this it is cut into small pieces in a cutting machine, which is packed in pouches/pottalams for the purpose of retail sale in the shops and sold under the brand name Kulavi’s Kavi cut tobacco.
2.3 The applicant has stated that the product which doesn’t undergo any change in the essential character and remains in its original nature is claimed as rightly classifiable under Chapter sub heading 24012090(“Unmanufactured tobacco partly or wholly stemmed or stripped -Others”)
2.4 The applicant has claimed the above classification on the basis of the HSN chapter notes. They have stated that the product manufactured by them involves two activities that are referred in the Chapter Notes- First one is liquoring, the dried tobacco leaves are cured using jaggery water which is a preservative that prevents moulding/decaying of the tobacco leaves; Secondly, this is cut using a cutting machine to facilitate easy manual packing, this cutting to shape is also covered under the above chapter notes. They have further stated that the product is not one ready for smoking. The applicant has contended that their product therefore rightly falls within the ambit of the inclusive definition of unmanufactured tobacco of the HSN chapter notes to Chapter 2401 and since it is wholly stemmed and stripped they claim that it falls under Chapter 240120 and under the category “others” 24012090 as it is sold to the ultimate consumer for consumption as such.
2.5 The applicant has further contended that
> The fact that the resultant product is intended for chewing cannot be a basis for concluding it as chewing tobacco, when the end use is applicable equally to two different varieties of the same product. The term “Chewing tobacco” has not been explicitly defined in the Tariff. Chapter notes to Chapter 2403 states that it covers chewing tobacco usually highly fermented and liquored. Raw tobacco as such is also consumed by chewing without addition of any other material thereto. Raw unpacked tobacco is purchased from vendors by the consumers and is consumed for chewing without any additives and at times in admixture with lime and other additives. The mixing of lime and tobacco is done by the individual consumer at the point of consumption and yet the raw tobacco un-mixed with any additives qualifies to be a chewing tobacco. Their product which is raw chewing tobacco without any additives catering to the demands of such consumers would therefore, qualify to be unmanufactured tobacco,
> Considering the technical details of the processes referred to in the chapter notes, the activities fermentation and liquoring finds a place in both headings 2401 as well as in 2403. The only difference noted is that of the usage of the phrase “Highly”. The conclusion to be arrived at is whether the liquoring activity of adding jaggery’ water in their product is for the purpose of prevention of moulding and decay as referred to in chapter 2401 or high fermentation and liquoring as referred to in chapter 2403.
> The consumers of this product are poor labourers and their product caters to their chewing needs and therefore unmanufactured tobacco leaves are sold to them as it is, by simply adding jaggery water to prevent it from any fungal / mould infection and cut into smaller sizes to facilitate easy manual packing
> The product do not undergo any change in its essential nature and character and the above activities are also specifically included in the inclusive definition to merit classification under CTH 2401
2.6 The applicant has relied on a catena of decisions on the issue and to emphasis that the definition in the statute takes precedence over the commercial understanding. They have contended that the term “Chewing tobacco” has not been explicitly defined in the Tariff. Chapter notes to Chapter 2403 states that it covers chewing tobacco usually highly fermented and liquored. Phrases Fermented and liquored are referred to in respect of unmanufactured tobacco as well as chewing tobacco. They claim that even after adding of jaggery water the essential character of the tobacco leaves do not undergo any change.
3.1 The applicant was extended an opportunity to be heard in person and heard on 18.06.2019. The authorized representative appeared and gave a written submission. They stated that their product is cured natural tobacco leaves which are cut/minced with jaggery water and no other chemicals/preservatives are added. They stated that the product should be classified under 2401 1020. It is not manufactured tobacco. They submitted several case laws in this aspect. They submitted that their product is not .a food item and does not get covered under Food Safety Act as per Madras H.C. They stated that they will submit photographs of the product, manufacturing process. They submitted invoices of purchase from agriculture market agency and sale to petty shops. The packaging is upto 20 gms. They undertook to submit a test report of their product.
3.2 In the written submissions, it is inter-alia stated that
> They are manufacturer of “Unmanufactured Chewing Tobacco Product” and own the brand “Kulavi Tobacco” for manufacture and sale of both manufactured and unmanufactured chewing tobacco products. Before the GST regime, they were manufacturing tobacco products with application of flavoring agents for chewing tobacco in the trade name of “Kulavi Tobacco Industries”.
> As the product of chewing tobacco is under the regulation of FSSA and COPTA, the State Government of Tamil Nadu issue periodical yearly notification enforcing manufacture and sale of tobacco products. Accordingly, the Govt, had issued notification on 23r(l May 2017, banning the product of chewing tobacco with scented flavors along with the product of pan masala and gutkha. As a result of which the manufacturers and traders in Tamil Nadu had to restrict their trade of tobacco products by completely eliminating the chewing tobacco with flavoring contents.
> As the result of chewing tobacco notification by TN FSSA and coupled with GST compensation cess notification No. 1/2017(bifurcating the chewing tobacco products under the umbrella of two categories such as “tobacco with lime tube and tobacco without lime tube”) in the GST regime, the GST compensation cess for the product of scented chewing tobacco (HSN 2403) is comparatively high than that of unmanufactured chewing tobacco (HSN 2401), they were forced to close down the manufacture of chewing tobacco with application of flavoring contents.
> During the financial year 2018-19, they commenced a new concern in the trade name of Kavi cut tobacco for manufacture of chewing tobacco without application of flavoring agents namely “Unmanufactured chewing tobacco” in order to comply with the Tamil Nadu State Food Safety Authorities and beneficial product’s production cost advantage in order to compete through cut throat competition in the market.
> The basic differentiation of Manufactured and Unmanufactured Tobacco is not defined either in the Central Excise Act or Central Excise Rules. It is only through the Court citation, it is being observed that the tobacco product added with jaggery water either before or after cutting of tobacco leaves constitutes “Unmanufactured Tobacco” and such product being further added with flavoring essence, fragrances and foreign agents, it becomes the “Manufactured Chewing tobacco”. There are various court citations for determining the product of Unmanufactured Chewing Tobacco and the most appropriate court case being
