Tax Classification Depends On Form Of Goods At Sale, Not End Use: Supreme Court

The Supreme Court has held that a product must be classified for tax purposes in the form in which it is sold, rather than on the basis of what a consumer may later turn it into.

“The tax authorities are bound to look at what is supplied and not at what is the 'end use' of the good,” a Bench of Justice Manmohan and Justice Arun Palli observed while dismissing the Madhya Pradesh Commercial Tax Department's appeals over the classification of Cadila Health Care Ltd.'s 'GRD Powder' and 'GRD Mix'.

"The tax authorities are bound to look at what is supplied and not at what is the 'end use' of the good. For instance, if a powder mix such as protein powder is sold, the tax applicable to powders alone can be levied. Conversely, if a ready-to-drink beverage such as bottled cold coffee or a packaged proteins shake is sold, the tax applicable to beverages must be imposed.....The subsequent use by the consumer in mixing the powder with water or milk to prepare a drink does not alter the taxable event, for liability is determined at the point of supply", the cour ruled.

The dispute concerned the tax treatment of the two products for the 1997-98 assessment year. The Revenue wanted them classified as “non-alcoholic drinks and beverages”, which attracted 10% tax under Entry 20(ii) of Part IV of Schedule II to the Madhya Pradesh Commercial Tax Act, 1994.'

Cadila contended that the products were sold across the counter in powder and biscuit form and therefore fell under the residuary entry, which covered goods not included in Schedule I or any other part of Schedule II and attracted 8% tax.

In simple terms, Entry 20(ii) was the specific tax entry for non-alcoholic drinks and beverages. It also covered syrups, cordials, distilled juices, ark and essences. The residuary entry covered other goods that were not included in Schedule I or another part of Schedule II. The difference meant the Revenue's classification attracted a higher 10% tax instead of 8%.

The Revenue argued that the packaging instructed consumers to mix the products with milk or water, while the imagery presented them as health drinks rather than health food. It also relied on the common-use, functional-character and common-parlance tests, pointing out that tea and coffee are treated as beverages even when sold in powder form.

The court, however, held that those tests could not be used to bring the products within the beverage entry by reference to their eventual use. It found that the taxable event was the act of supply, with the tax classification determined by the form in which the goods were sold.

The court noted that a powder could be mixed with milk or water and consumed as a drink. Protein powder, for instance, could also be used to prepare a solid food such as barfi. The consumer's subsequent choice could not change the classification of the product at the time of sale.

The court also examined the language of Entry 20(ii). The items listed alongside “beverages” are liquids or liquid preparations. Applying the rule of ejusdem generis, which requires a general expression to be understood in the context of the specific items listed with it, the court held that “beverages” could not be stretched to cover goods of an altogether different physical form.

It further held that the common-parlance, functional-character and basic-nature tests could not be used to introduce an end-use requirement when the language of the taxing entry was clear. Goods that did not fit a specific entry had to fall under the residuary entry and could not be forced into another category merely to attract a higher rate of tax.

The court distinguished the Revenue's reliance on Pioma Industries and S. Samuel M.D. In Pioma, the relevant statutory entry expressly covered powders, tablets and concentrates used to prepare non-alcoholic drinks. In S. Samuel, the issue was whether tea was a foodstuff, and the court did not decide whether tea leaves existing in granule or powder form could themselves be classified as a beverage.

The court ultimately found that the goods existed in powder and biscuit form at the time of the taxable event. While they could later be used to make a beverage or a solid preparation, that subsequent use did not bring them within the beverage entry.

The appeals were accordingly dismissed.    

For  Appellants (Commercial Tax Department): Akraj Kumar, Advocate.For Respondents (Cadila Health Care Ltd. & Anr.): Vivek Sarin, Senior Advocate.