New Delhi CESTAT Bars Reclassification Of Product To Zarda After Years Of Acceptance As Chewing Tobacco

The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 2 June held that the Department cannot reclassify a product after consistently accepting its classification for several years through departmental orders, and consequently set aside an excise duty demand arising from such reclassification.

President Justice Dilip Gupta and Technical Member Hemambika R. Priya allowed appeals filed by Rajasthan-based manufacturer Rajan Jhiriwal and its partners, and set aside the adjudication order confirming central excise duty, interest and penalties. The Bench held:

“..the appellant and the department have consistently classified the product as chewing tobacco falling under CETI 2403 99 10. The department cannot, therefore, contend that the product should be classified as zarda scented tobacco under CETI 2403 99 30."

The dispute concerned classification of the appellant's “MAMA” brand tobacco product. The manufacturer had classified the product under Tariff Item 2403 99 10 as “chewing tobacco” since 2012, and the Department had repeatedly accepted this classification in multiple orders under the excise framework.

Following a search in January 2016, the Department took a contrary view and alleged that the product constituted “zarda scented tobacco” falling under Tariff Item 2403 99 30. It relied on statements recorded during investigation, recovery of perfume bottles from the factory premises, and a Central Revenues Control Laboratory (CRCL) report indicating the presence of tobacco, lime, and flavouring compounds. On this basis, it alleged short payment of excise duty for the period March 2015 to February 2016.

A show-cause notice was issued seeking recovery of differential duty, interest, and penalties. The adjudicating authority confirmed the demand and also imposed penalties on the partners under Rule 26 of the Central Excise Rules, 2002.

Before the Tribunal, Rajan Jhiriwal contended that it had consistently disclosed the classification in its ER-1 returns and that the Department had never objected for several years. It argued that the Department could not adopt a contradictory position after long acceptance of the classification.

The Tribunal accepted this contention and noted that from August 2012 to March 2016, the product had consistently been classified under Tariff Item 2403 99 10 without any objection from the Department. It also observed that several departmental orders during the same period had accepted the same classification. It further held that since both parties had consistently treated the product as chewing tobacco, the Department could not later reclassify it as zarda scented tobacco to raise differential duty demands.

On penalties, the Bench held that Rule 26 penalties could not be sustained in the absence of a finding that the goods were liable to confiscation under the adjudication order.

Accordingly, the CESTAT allowed all four appeals and set aside the impugned order in its entirety, including the duty demand, interest, and penalties imposed on the manufacturer and its partners.

For Appellants: Gaurav Gupta and Saurabh Dahiya, Advocates

For Respondent: S.K. Ray, Authorized Representative