In Civil Appeal No. 10159-10161 of 2010 -SC- Supreme Court finds M/s Urmin Products deliberately misclassified product to evade higher duty; Affirms department's classification of 'Baghban Zafrani Zarda' as 'Zarda/Jarda Scented Tobacco'
Justice S. Ravindra Bhat & Justice Aravind Kumar [20-10-2023]

Read Order: Commr. of Cen. Exc. Ahmedabad V. M/s Urmin Products P. Ltd. and Others

Chahat Varma

New Delhi, October 30, 2023: The Supreme Court has upheld the Revenue Department's classification of the product 'Baghban Zafrani Zarda' as 'zarda/jarda scented tobacco', and not 'chewing tobacco'. The Court found that M/s Urmin Products (assessee), the manufacturer of the product, had deliberately misclassified it to evade payment of higher duty.

In the present appeal, the Revenue had challenged the order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), whereunder the classification given by the assessee was accepted as ‘flavoured chewing tobacco’ falling under CET SH 2403 9910 and not as ‘zarda/jarda scented tobacco’ falling under CET SH 2403 9930 of CETA.

In summary, the assessee had received a show cause notice, wherein it was alleged that they had misclassified their product as 'chewing tobacco' instead of 'zarda/jarda scented tobacco' to evade paying higher duty. The Department observed the manufacturing process of 'zarda/jarda scented tobacco' during a factory visit and recorded statements from the production manager and factory in charge to support their claim of misclassification. Using the extended limitation period, the Department asked the assessee to explain why the product should not be reclassified as 'zarda/jarda scented tobacco' and assessed accordingly under Section 4 of the Central Excise Act, 1944 (CE Act). The matter was adjudicated in an OIO, upholding the demand. However, the decision was appealed, and the CESTAT ruled in favour the assessee, affirming their classification.

The Revenue contended that the assessee had changed and misclassified the product from 'zarda/jarda scented tobacco' to 'chewing tobacco' with the intention of evading payment of duty under Section 4 of the CE Act, 1944, despite there being no change in the nature of the products. The Revenue further argued that 'zarda/jarda scented tobacco' had been brought into the ambit of Section 4A of the CE Act through an amendment to Notification No.16 dated 11.07.2006, and thus, the product 'zarda/jarda scented tobacco' was not specified for assessment under Section 4A of the CE Act for the period from 01.03.2006 to 10.07.2006. As a result, the Revenue sought to justify the demand of duty that had been underpaid by the assessee by invoking the proviso under Section 11A (1), along with interest at the appropriate rate under Section 11AB of the CE Act.

The division bench, comprising of Justice S. Ravindra Bhat and Justice Aravind Kumar, examined the contention raised by the assessee regarding the change in the classification of their product. The assessee had argued that they had filed a letter in 2006 to indicate the change in classification and claimed that there was no suppression of information. However, the bench highlighted the timing of the letter, which was sent just two days before a new notification was to take effect. They concluded that the intention behind sending the letter was to evade the payment of higher duty under Section 4 of the CE Act. The assessee had changed the product's description from 'zarda/jarda scented tobacco' to 'chewing tobacco' to take advantage of the lower valuation under the MRP-based assessment, even though their product was not covered by the relevant notification for Section 4A valuation.

The bench further noted that the product manufactured by the appellant was labelled as ‘Baghban Zafrani Zarda’ with the indication ‘flavoured chewing tobacco’ below it. It was observed that there was no evidence of a change in the label or manufacturing process from the six (6) digit era to the eight (8) digit tariff era.

“The tribunal itself seems to have been in dilemma and has been swayed by the fact that no expert opinion had been obtained by the Department for classification,” observed the bench and emphasized that this situation should not have occurred for several reasons. First, the assessee had consistently classified their product as 'chewing tobacco' from the beginning, even after the 8-digit regime came into effect in 2005. In their ER-I returns filed from March 2005 to April 2006, following the sub-classification, the product was described as 'zarda scented tobacco,' but from April 2006, it was reclassified as 'chewing tobacco.'

Additionally, the bench pointed out that Notification No. 2 of 2006, dated 01.03.2006, replaced Notification 13 of 2002, dated 01.03.2002, which specified the goods covered under Section 4A of the CE Act for MRP-based assessment. However, the new notification did not specify goods falling under CET SH 2403 9930, i.e., 'zarda/jarda scented tobacco,' but it did cover goods falling under CET SH 2403 9910, i.e., 'chewing tobacco.' Consequently, as 'zarda/jarda scented tobacco' was not specified under MRP-based assessment under Section 4A of the CE Act, the goods had to be assessed under Section 4 of the CE Act.

The bench stressed that the assessee, despite knowing that there was no change in the product's nature, ingredients, and manufacturing process, had deliberately changed the product's classification from 'zarda/jarda scented tobacco' to 'chewing tobacco.' Continuing with the 'zarda/jarda scented tobacco' classification would have led to considerably higher duty payments based on transaction value under Section 4 of the CE Act, compared to the assessment under Section 4A of the CE Act after a 50% abatement. Thus, the bench concluded that the deliberate change in classification aimed to evade higher duty payments.

Furthermore, the bench noted that the reliance on circulars and notifications issued during the 6-digit tariff classification era, such as the Board's letter dated 23.06.1987, trade notice dated 15.07.1997, and Notification dated 16.03.1995, had no relevance in the present case. The current tariff entry realigned to 8 digits, with specific sub-headings for 'chewing tobacco' and 'zarda/jarda scented tobacco,' making the cited circulars and notifications ineffective in supporting the assessee's position.

The bench emphasized the legal principle that specific entries in a fiscal statute take precedence over general entries. In cases with multiple sub-headings, the one providing the most specific description prevails over the more general description.

Ultimately, based on these considerations, the court ruled that the classification adjudicated by the Revenue should be accepted, and the CESTAT's findings should be set aside.

As a result, the appeal was allowed.