Parachute Oil – an edible product or a cosmetic product

Amazing story of the well known Parachute Hair Oil (Sorry, Coconut Oil) and how the company has been going around the excise department in an intelligent way. Parachute Hair Oil has been a household name for the past few decades, among the Indian families. All we know is that, Parachute is a Hair Oil. However, the company does not claim so. It just writes “coconut oil”, even though majority of consumers use it like a hair oil.

Coconut oil is an edible product, and it was not liable for excise duty.

Hair oil is a cosmetic product, and it is liable for excise duty.

Did you notice that the bottle of Parachute  Hair Oil does not write “hair oil” on it?

Marico claims that  it manufactures and markets pure coconut oil (CNO) under the brands Parachute, Nihar and Oil of Malabar. Its contention is that such CNO is a 100 % natural product and meets all standards of edible oil as given in the Prevention of Food Adulteration Act.

Under Central Excise Tariff rules, Chapter 15 covers various types of vegetable oil including coconut oil and Chapter 33 – heading 3305 covers cosmetics including hair oil.covered by

CBEC\’s Circular No. 890/10/09/-CX dated 3.6.2009 was the department attempt to fight back

It said that small coconut oil packs of up to 200 ml would be classified as hair oil and subject to excise duty rate of 8% as per Chapter 33 of the Central Excise Tariff rules, while bigger packs would come under vegetable oil and subject to chapter 15 with no excise duty on them.

A substantial portion of Marico’s CNO sales (largely Parachute) are contributed by SKUs (stock keeping units) under 200 ml. It had created a provision of Rs 11 cr in its accounts under the head \” Other Expenditure\” for the quarter ended 31.12.09 with impact for 9 months ending 31.12.09 would have been Rs 28.20 crores

Eventually, in the year 2014, the Madras High Court , in its judgment in case of VVD & Sons (Pvt.) Ltd. (supra) upheld its contention that the re-classification based on packaging size is not valid

Bottles containing coconut oil did not indicate their use on hair and the bottles and other packings in which coconut oil was filled were not in form clearly specialised to the product\’s use as \’Hair oil\”.

It is found that packing of coconut oil was not of the specialised type as in the cases cited above or which could be solely and exclusively said to be meant for application on hair only.

Examples to support the HSN Note expression \’form clearly specialised to such use\” include

a) nail varnish put up in small bottled along with brush required for applying the varnish;

b) packing of a talcum powder containing of puff for applying on the face or

c) a bottle of mascara or eyeliner containing a specialised brush for application of the same etc.

(i)It is hostile discrimination of identical goods in violation of the equality clause enshrined in Article 14 of the Constitution of India

To elaborate, the department has not chosen to levy duty on coconut oil packed in the containers above 200 ml upto 20kgs, which are purchased and consumed by financially well to do people and the department has chosen to levy and collect service tax on coconut oil sold in small packs containing 50ml and 100ml and 200ml which are predominately purchased and consumed by economically poor and downtrodden, who cannot afford to buy even in such small packs and the same is against the principle enshrined in Article 14 of the Constitution of India

Small packs will be normally purchased by consumers with lesser financial ability to pay. If the object to be achieved by such classification is to bring uniformity, the classification leads to more disparity among the purchasers and the same is hence unreasonable and arbitrary.

It is also not indicated in the circular as to how the uniformity can be achieved by bringing the same coconut oil based on the packing under two different headings.

Except stating that the market survey is the basis for arriving at the conclusion that upto 200ml pack is being purchased by the consumers for use it as hair oil, the classification made by CBEC is unfounded and without any basis.

The court said that CBEC classified the coconut oil packed in 200 ml and above 200ml under different chapters, when the coconut oil contained in the container upto 200 ml and above 200 ml remains the same, without any difference between the two and the levy of tax to the same product contained in the retail packet upto 200 ml and exemption from payment of duty in respect of the same product packed in the container above 200ml does not amount to classification, but amount to discrimination.

(ii)It does not satisfy the twin tests to ascertain whether the classification is permissible or not

a) Classification must be founded on an intelligible differential which distinguishes persons or things that are grouped together from others left out of the group; and

b) The differential must have a rational relation to the object sought to be achieved by the statute in question

(iii)It results in indirectly legislating under Section 37B of the Act.  

It reiterate the observation of the Delhi High court in Faridabad Iron and Steel Traders Association v. Union of India CBEC through the circular, proceeded to impose tax for the coconut oil packed in the container upto 200ml and thus usurped the function of the legislative body. It sought to impose duty indirectly, which, the legislature would intend to impose directly in accordance with law. Thus way, the same amounts to indirectly legislating, which is not legally permissible.

Section 37B only enables CBEC to act for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods and such power cannot be exercised to issue any orders or instructions to overturn the decision of the Tribunal, which power is exclusively vested with the High court or Supreme court depending upon the nature of the dispute.

So finally on 12th October 2015, CBEC withdrew the circular

Central Excise Circular No: 1007/14/2015-CX (12-Oct-2015) Withdrawal of Order under 37B of Central Excise Act, 1944 on classification of Coconut Oil packed in small containers-reg

The issue has been examined and it has been noted that there are decisions on the issue by Hon’ble Tribunals/Courts wherein it has been held that just because the retail packs of Coconut Oil are in sizes of 200 ml or less, the same cannot be presumed to be meant for use as Hair oil and would not be classifiable under heading no. 3305. Following judgments are relevant in this regard: –

 Following the rulings in the case of Raj Oil Mills Ltd. vs. Commissioner, Central Excise [2014 (314) ELT 541/2013-TI0L-1609-CESTAT] and Capital Technologies Ltd. & Ors vs CCE, Tirupati reported in [2015(321) ELT 479/2011-TIOL-775-CESTAT], it was held that edible Coconut Oil in retail packing of 200ml or less is classifiable under Chapter 15 covering Animal or Vegetable Fats and Oils and not under Chapter 33 covering Cosmetics and Toilet Preparation

 

In view of the judgments of the Hon’ble Courts, the Central Board of Excise & Customs withdraws Circular No. 890/10/2009-CX dated June 03, 2009. The issue of classification may be decided by the field taking into consideration the facts of the case read with the judicial pronouncements.”