Last Updated on November 3, 2023 by News Desk
In a significant legal decision, the Supreme Court has reaffirmed the imposition of penalties and a demand for differential duty against an Assessee who intentionally misclassified their product ‘Zarda’ as ‘Chewing Tobacco’ to evade higher duty payments. The ruling, delivered by a bench of Justices S. Ravindra Bhat and Aravind Kumar, underlines the Assessee’s deliberate attempt to change the product’s classification, resulting in a lower tax liability.
The case revolves around the classification of ‘chewing tobacco’ and ‘zarda/jarda scented tobacco’ under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. These terms were not explicitly defined in the legal framework.
A pivotal Notification (No.13 of 2002) was issued in 2002, introducing a duty of excise based on the retail sale price for specific goods, including ‘chewing tobacco.’ This notification allowed for an abatement from the retail sale price, effectively lowering the tax burden.
In 2005, a significant change occurred with the reorganization of Central Excise Tariff Sub-Heading (CET SH) 2403 9910 as ‘chewing tobacco’ and CET SH 2403 9930 as ‘zarda/jarda scented tobacco,’ both attracting a duty of 34%.
Subsequently, Notification No.2 of 2006, issued in 2006, replaced the earlier notification from 2002. While it covered goods classified as ‘chewing tobacco’ under CET SH 2403 9910 for MRP-based assessment, it excluded ‘zarda/jarda scented tobacco’ under CET SH 2403 9930.
However, an amendment in 2006, through Notification No.16 of 2006, extended the scope to include ‘zarda/jarda scented tobacco’ under MRP-based assessment, effectively bringing it under the ambit of ‘notified goods’ as per Section 4A of the Central Excise Act.
The Assessee’s Alleged Misclassification:
The Assessee, M/S Urmin Products P. Ltd., was accused of clearing ‘zarda/jarda scented tobacco’ as ‘chewing tobacco’ between March 1, 2006, and July 10, 2006, for the purpose of evading higher duty payments. Despite the absence of any substantial changes in the product’s nature, ingredients, or manufacturing process, the Assessee chose to reclassify it.
This decision prompted the Central Excise Department to issue a Show Cause Notice to the Assessee, demanding the payment of differential duty and imposing a penalty.
The Revenue argued that the Assessee continued to benefit from MRP-based assessment under Section 4A of the Central Excise Act, even when they were ineligible for it. The classification of ‘chewing tobacco’ under this scheme provided for a 50% abatement, resulting in lower tax payments. Thus, reclassification as ‘chewing tobacco’ was a deliberate attempt to minimize the tax liability.
Moreover, as per the Revenue, ‘zarda/jarda scented tobacco’ was not included in the MRP-based assessment under Section 4A of the Central Excise Act for the period in question, further justifying the tax liability on ‘chewing tobacco.’
Supreme Court Verdict:
The Supreme Court concurred with the view that ‘zarda scented tobacco’ could not be assessed under the MRP-based assessment scheme, as it was not specified in the Notification No.2 of 2006. The Court emphasized that the classification of goods should align with specific entries in the fiscal statute and that the most specific description should prevail over general descriptions.
In light of these considerations, the Court upheld the imposition of penalties and the demand for payment of differential duty. The Assessee’s attempt to evade higher duty payments through the misclassification of their product was deemed deliberate.
The Court’s decision underscores the importance of accurate classification and fair tax assessment in ensuring fiscal compliance.
The Supreme Court’s ruling in the ‘Zarda’ misclassification case serves as a vital reminder of the consequences of deliberate misclassification for tax evasion. It highlights the significance of maintaining the correct classification of goods under the Central Excise Act and the Central Excise Tariff Act. The decision reinforces the principle that specific entries in the law should prevail over general ones, ensuring fair tax assessment and compliance with fiscal regulations.
Written — Athi Venkatesh