Why in news?

For over 15 years, the classification of coconut oil as an edible oil or a haircare product under India’s tax regime remained unresolved.

The Supreme Court, on December 18, 2024, ruled that coconut oil should be classified as an edible oil and taxed at a lower GST rate of 5% instead of 18% for haircare products. The court based its decision on the predominant use of coconut oil as a cooking medium, particularly when packaged in small quantities. This ruling resolves a long-standing ambiguity and aligns taxation with the product's primary usage.

What’s in today’s article?

• Coconut Oil Taxation in India
• Summary of Coconut Oil Tax Disputes
• Supreme Court's Decision on Coconut Oil Taxation

Coconut Oil Taxation in India

• Taxation Under the CET Act, 1985
  • Prior to GST, coconut oil was taxed under the Central Excise Tariff Act, 1985 (CET Act).
  • In 2005, the CET Act classified coconut oil under Section III as “Animal or Vegetable Fats and Oils” with an 8% excise duty, distinguishing it from haircare products under Section VI, which carried a 16% excise duty.
  • These classifications followed international norms set by the Harmonised System of Nomenclature (HSN) by the World Customs Organisation (1988).
• 2009 Circular and Subsequent Developments
  • In June 2009, the Central Board of Excise and Customs issued a circular to classify coconut oil sold in containers under 200 ml as hair oil and taxed it at 16%.
  • However, this circular was withdrawn in October 2015, following tribunal and court rulings that retail packaging size alone does not define coconut oil as hair oil.
• Taxation Under the GST Regime (2017 Onwards)
  • With the introduction of GST in 2017, coconut oil was categorized under edible oils, attracting a 5% tax.
  • Haircare products under the category “Preparations for use on the hair” continued to attract a higher tax rate of 18%.
• Conclusion
  • The rulings and decisions have consistently leaned towards classifying coconut oil based on its predominant use rather than packaging size or presumed purpose.

Summary of Coconut Oil Tax Disputes

• 2007 Show-Cause Notices to Madhan Agro Industries
  • Central Excise authorities issued show-cause notices to Madhan Agro Industries (India) Pvt. Ltd., proposing a higher tax rate by classifying coconut oil as a haircare product.
  • Madhan Agro, selling coconut oil in packets ranging from 5 ml to 2 litres, challenged the notices before the Customs Excise and Service Tax Appellate Tribunal (CESTAT) in Chennai.
• CESTAT Ruling on Coconut Oil
  • The CESTAT ruled that coconut oil should be classified as an edible oil, not a haircare product, in line with the 2005 amendment to the CET Act.
  • The decision was based on the product's predominant use as an edible oil, irrespective of packaging size.
• Similar Cases and Appeals
  • Similar rulings were passed by the CESTAT in challenges to show-cause notices issued to other enterprises, all based in Puducherry and producing coconut oil in small containers.
  • The Commissioner of Central Excise, Salem, challenged these orders before the Supreme Court, escalating the matter to the highest judicial level.

Supreme Court's Decision on Coconut Oil Taxation

• 2018 Split Verdict
  • Justice Ranjan Gogoi held that coconut oil should be classified as edible oil, regardless of packaging size.
  • Justice R Banumathi applied the “Common Parlance Test”, ruling that coconut oil sold in small packages is perceived as hair oil in the market and should be taxed accordingly.
• 2024 Final Verdict
  • A bench comprising Chief Justice of India Sanjiv Khanna, Justice Sanjay Kumar, and Justice R Mahadevan provided clarity on the matter:
  • Rejection of Common Parlance Test
    • The court ruled that the Common Parlance Test can only be applied if the product is not clearly defined or addressed under the law.
    • Since coconut oil is explicitly defined under legal and international HSN norms, the test is unnecessary.
  • Classification Based on Specific Legal Headings
    • The court emphasized that legal headings and international HSN norms cannot be ignored when classifying goods.
    • Coconut oil's ability to serve as a cosmetic or hair product does not exclude it from the category of edible oil.
  • Container Size Not a Decisive Factor
    • Small container sizes are common for both edible oils and hair oils, and container size alone is insufficient for classification.
    • The court referred to the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, which specify permissible sizes for edible oils (e.g., 50 ml, 100 ml, 200 ml, 1 litre, etc.).
• Conclusion
  • The court classified coconut oil as edible oil for taxation purposes, ensuring consistency with HSN norms and rejecting subjective market perceptions or packaging size as criteria.