GST| Tobacco In Small Retail Packs Classifiable As 'Chewing Tobacco': Gujarat High Court

In a recent judgment delivered by a Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi, rejected the Tobacco Manufacturers stance that Tobacco without being fermented or liquored ceases to be a “Chewing Tobacco”. It was held that processes such as drying cleaning, sieving, sizing, cutting, and packaging into retail pouches would satisfy three important parameters (i) distinct name (ii) distinct character and (iii) distinct use, resulted in 'Manufacture' under GST.

The Gujarat High Court instructed Tobacco Manufacturers to pay GST and Compensation Cess Rate as per Tariff Heading 2403 9910, attracting 160% Cess and not as per Tariff Heading 24012090, attracting 28% GST and 71% Compensation Cess

Petitioner supplied raw unmanufactured and unprocessed Tobacco without lime tube under the brand name 'Om Special Pandharpuri Tambakku No.1'. It migrated into the GST regime as supplier of Tobacco

Products classifiable under Chapter Heading 2401 with effect from July 01, 2017.

It cleared retail packs of unmanufactured Tobacco by classifying the same under CTH 2401 and discharged GST at the rate of 28% under Sr. No. 13 of Schedule IV of Notification No. 1/2017 Central Tax (Rate) dated June 28, 2017 along with Compensation Cess at 71% under Notification No. 01/2017-Compensation Cess (Rate) dated June 28, 2017.

An Audit report was issued wherein allegations of misdeclaration was levelled against the Petitioner. For the period July, 2017 to March, 2023 a Show Cause Notice was issued under Section 74 of the CGST Act, 2017 seeking to recover Compensation Cess at the rate of 160% to the tune of Rs.413,48,78,774 and GST of Rs.17,86,80,879. A final order was passed classifying unmanufactured and unprocessed Tobacco without lime tube under the Tariff Heading 24039910 instead of Tariff Heading No.24012090.

The differential duty demand running into hundreds of Crore was demanded from Petitioner whereby in one writ petition demand aggregated to Rs. 4,313+ crore. In another, Rs. 54+ crore Excise/ National

Calamity Contingent Duty and other connected petitions liabilities were fastened on Tobacco Manufacturers, ranging from Rs. 9.5 crore to Rs. 16+ crore.

The Gujarat High Court was called upon to decide whether non-fermented, non-liquored crushed tobacco leaves in small retail pouches sold by repacking of raw tobacco into branded retail pouches was to be considered as 'Chewing Tobacco'.

Classification & Usage

The Gujarat High Court opined that Raw Tobacco Leaves once Processed results in a distinct name, character and use namely, 'Chewing Tobacco'. Further, on a conjoint reading of definition of 'Production' under Section 3(k) of the COPTA and definition of 'Manufacture' under Section 2 (72) of the GST Act has clarified that 'Chewing Tobacco' was a Tobacco Product. It explained that Chewing Tobacco or any chewing material having tobacco as an ingredient

To comprehend classification, the Bench examined two competing entries viz. CTH No.2401 being “Unmanufactured tobacco; Tobacco Refuse” or CTH No.2403 “Chewing Tobacco” attracting different rates of duty under GST. They emphasized on the guidelines for Tobacco Products in terms of Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Administration) Act, 2003 [COPTA]. Thus, it was observed that retail packs mention what was sold was 'Chewing Tobacco' and merely because no ingredients are added, it would not be “unmanufactured tobacco” falling under CTH 2401.

Applying the Harmonized System alignment since Excise Tariff and Customs Tariff headings were identical and remained relevant under GST, it observed that Crushed/Sieved Tobacco sold in retail pouches after re-packing from bulk packages to retail packages would qualify as 'Chewing Tobacco' under CTH 2403.

Besides, the Gujarat High Court has clarified that Explanatory Note of HSN (2017 Edition) issued by the World Customs Organization indicating that Chewing Tobacco was not always highly fermented and

liquored, but could be without any fermentation and without Liquor or any addition to the raw tobacco, also supports its classification under CTH 2403.

As Tobacco leaves sold in retail pouches having a distinct name registered as its brand name with distinct usage and description would qualify as 'Chewing Tobacco', the Gujarat High Court opined. It also referred to registration of the product under the Trademark Act, 1999 under class 34 as Chewing

Tobacco.

Accordingly, the Gujarat High Court modified demand order passed under Section 74 of the CGST Act, 2017 and directed GST Authorities to issue an order under Section 73 of the CGST Act, 2017. Further, it was clarified that Petitioners could not be asked to pay Excise Duty for change of classification. It also instructed to recompute the amount payable without considering the extended period of limitation from July, 2017 onwards.

2026 LLBiz HC(Guj) 2

Case Detail: Patel Products vs. Union of India & Ors.

For Petitioner: Senior Advocate Mihir Joshi with Advocates Digant M Popat, Anandodaya S Mishra, MR Anand Nainawati

For Respondent: Advocates Hetvi H Sancheti, Ankit Shah, Maunil Yajnik, Tirth Nayak, Neel P Pakhani, C.B. Gupta

Click here to read the judgment.