Aravind Kumar Agrawal, Propreitor, Prabhat Gudakhu Factory (Appellant) has filed an appeal before AAAR, Odisha on 12.03.2019 aggrieved by advance ruling no 06/ ODISHA-AAR/ 2018-19 dated 05.02.2019 pronounced by the Odisha Authority for Advance Ruling, Bhubaneswar (AAR) under Section 100 of the Odisha Goods and Service Tax Act, 2017/CGST Act, 2017.

2.0. Aravind Kumar Agrawal, having GSTN 21AACHA8243B2Z2 is registered in Koraput Circle within the jurisdiction of State of Odisha. The Appellant is stated to be engaged in manufacturing and sale of ‘Gudakhu’, a tobacco product in a paste form which is applied orally on the teeth and gums, especially in the rural belts of Odisha and neighbouring states. The appellant’s submission is that the tobacco content in gudakhu manufactured by them is about 20% while molasses accounts for about 50-60%. Gudakhu is commercially available in a paste form as well as in a granular form. While the Gudakhu in paste form is used orally as toothpaste, the substance in a granular form is used for smoking as hookah. The appellant in the instant case is engaged in the manufacture of gudakhu in paste form only.

2.1. The appellant used to pay Central Excise Duty, the applicable additional duties and state VAT at the prevalent rates in the pre-GST regime. The appellant also used to pay NCCD (National Calamities Contingency Duty) in addition to Central Excise and VAT during the pre-GST era classifying their product under tariff heading ‘2403 99 90’.

2.2. In the GST regime ‘compensation cess’ is payable for the product manufactured by the appellant in addition to the GST. The appellant contended that he is made to pay compensation cess at a higher rate due to wrong classification and therefore approached the Odisha Authority for Advance Rulings to properly classify the said product in the GST era.

3. Accordingly, the Appellant sought Advance Ruling before the Authority for Advance Ruling, Odisha (AAR) putting-forth the following question.

1. Appropriate Classification of Gudakhu under the GST Tariff Heading and

2. Determination of the liability to pay NCCD (National Calamity Contingency Duty).

4.0. The AAR, Odisha after hearing the appellant and considering their submissions vide their rulings held as follows:-

4.1. The appellant had been clearing their product as Branded Gudakhu with CETH No – 2403 99 90 right since the day of taking Central Excise Registration. Though, the product remained the same under the GST regime, the appellant now wants to reclassify the same under the tariff item ‘24031110’.

4.2. In sub heading note to chapter 24 it is explained, that for the purposes of sub-heading 2403’ – 11, the expression “water pipe tobacco” means tobacco intended for smoking in a water pipe which consists of a mixture of tobacco and glycerol, whether or not containing aromatic oils and extracts, molasses or sugar and whether or not flavored with fruit. The tariff item ‘2403 11 10’—Hookah or Gudakhu Tobacco bearing a brand name refers to Hookah or Gudakhu Tobacco (branded) used as a smoking tobacco in a water pipe as explained in the sub heading note of Chapter 24. In no way it refers to any non-smoking tobacco irrespective of the nomenclature and composition. Commercially Hookah or Gudakhu Tobacco is sold in granular form which is not the case in gudakhu manufactured by the appellant. Gudakhu manufactured by the appellant is sold as a paste and is used as a tooth paste. Hence, it is distinctly different from hookah tobacco by its essential character and use. While hookah or gudakhu tobacco as classified under 2403 11 10 is used as a smoking tobacco through a water pipe, gudakhu manufactured by the appellant is sold in the form of a paste for use as a tooth paste and not as a smoking tobacco. In the scheme of classification of tobacco product for the purpose of assigning HSN Code under tariff sub-heading 2403 11, only water pipe tobacco intended for smoking in a water pipe are included and not any other form of tobacco.

4.3. As per the scheme of classification, tariff sub-heading 2403 99 is a residual sub-heading under which all forms of tobacco not specified under other sub-headings of Chapter heading 2403 are classified. The said subheading is not just confined to chewing tobacco only such as khaini, gutkha and zarda etc.; it also includes cut tobacco, tobacco extracts and snuffs which do not belong to the family of chewing tobacco. The sub-heading which reads as ‘2403 99 – other’ bears the essential character of a residual entry so as to classify all other forms of tobacco not specified in the preceding sub-headings under tariff heading 2403. No doubt it classifies certain known chewing tobacco products under the sub-heading but, it also includes cut tobacco, tobacco extracts, snuff and other which are not chewing tobacco. The entry ‘other’ appearing against 2403 99 90 is intended to cover all other tobacco products not specified under the preceding subheadings under chapter 24 and also not specified under the tariff items specified under the sub-heading 2403 99. Thus, the contention of the appellant that a tariff item can be classified under the sub-heading 2403 99 only if the said item belongs to the family of chewing tobacco like ‘gutkha’, zarda or khaini is totally misplaced in as much as the said sub-heading also specifies other tobacco products such as cut tobacco, tobacco extracts and snuff etc. Gudakhu as manufactured by the appellant is certainly not classifiable under any specific tariff item in any of the sub-headings under the Heading 24 03. Accordingly, it can only be classified and rightly so under the residual tariff item ‘2403 99 90 – other’ of the said Chapter Heading because of its composition, character and use.

4.4. Regarding ‘Determination of the liability to pay NCCD (National Calamity Contingency Duty), it is clarified that in the instant case the duty is a levy under the Central Excise Act and not under the CGST/OGST/IGST Act. The scope of issuing a ruling u/ s 98 of the OGST/CGST Act is limited to the extent prescribed in sub-section (2) of Section 97 of the OGST/CGST Act. NCCD being not a levy under the OGST/CGST Act, it is not within the competence and mandates of the Authority of Advance Ruling, constituted u/ s 96 of the OGST Act to give a ruling on the liability of the appellant to pay NCCD.

5.0. The appellant in its ground of appeal, has assailed the ruling of AAR inter-alia on the following grounds.

a. In Para 4.2 of the order, the AAR, Odisha observes that the appellant has been clearing the product as branded gudakhu with CETH No. 2403 99 90 right since the day of taking the Central Excise Registration with effect from 01.10.2002. Though, the product remained the same under the GST regime, the appellant now wants to reclassify it under the code ‘2403 11 10’. In this regard the appellant submitted as follows:-

i. That, the Central Excise Duty under Code 2403 99 90 has not been paid by the appellant by himself. In Para 3 of the written submission made by the appellant before the Ld. Authority for Advance Ruling, the appellant submitted that ‘Upon specific instructions from the Central Excise Officials then, the appellant had to classify their product under tariff heading ‘2403 99 90’ which is the residual category for manufactured tobacco that is ‘used for chewing’. Though the appellant was of the belief that gudakhu would be covered by the tariff heading no. 2403 11 10, in view of the instruction from the central excise officials, the tariff heading was declared as 2403 99 90 and applicable taxes and duties were paid as applicable to the latter tariff heading. This submission has not been considered at all by the Ld. AAR, Odisha.

ii. That, Duty on 2403 99 90 has been paid on specific instructions of the Departmental Officers and the appellant to maintain a harmonious relationship with the Department and to avoid litigations paid the duty on 2403 99 90.

iii. That, upon introduction of GST, the appellant further came to understand that he is required to pay a higher Compensation Cess by classifying his product under CETH 2403 99 90 while the product ‘gudakhu’ squarely fell under the code 2403 11 10. His stand is substantiated by opinions from legal experts and even an opinion from a leading GST Journal which clarified that the impugned product falls under the code 2403 11 10 and not under 2403 99 90.

b. Vide Para no.4.4 of the order of the Hon’ble AAR, the authority has opined that the product covered under CETH 2403 1 1 10 is tobacco intended for smoking in a water pipe only. In this regard the appellant submitted as follows:-

i. That, the Ld. AAR had failed to appreciate the point raised by the appellant that the Gudakhu in granular form which is meant for smoking is no different than the Gudakhu manufactured by the appellant in a paste form which is used to apply on the teeth, but not chewing. The appellant had even furnished a case law of the Hon’ble High Court of Odisha in the case of ‘State of Orissa vs. Samsuddin Akbar Khan & Co’ reported in 35 STC 179 (1979)  Orissa, wherein the Hon’ble Court held that the gudakhu in paste form is no different than the gudakhu in granular form (meant for smoking) and that both these products had the same ingredients in them. Even the CESTAT, Delhi had adopted and concurred with the views of the High Court in other cases. Therefore, it is settled law that gudakhu whether in granular form or in paste form is the same tobacco product though their usage may be different. It is submitted that the Ld. AAR ought to have considered the judgments of High Court and order of CESTAT in the present case but chose to ignore the same.

ii. That, the order of the High Court is binding on the lower authorities. Thus, the order of High Court is to be followed by the Ld. AAR. This amounts to a violation of the principle of Natural Justice.

iii. That, the entry 2403 11 10 – Hookah or Gudakhu Tobacco does not give further classification as granular and paste as held by the Ld. AAR. It is therefore fit to classify the paste oriented gudakhu under the entry 2403 11 10.

iv. That, when there is a ‘specific entry’ referring to the goods by its very name, it is incorrect to classify and group the product under the residual category. It is now a well settled law that when the nomenclature of a product is mention by its very name, it is not correct to group them under the residual category. In the instant case, the name ‘Gudakhu’ is mentioned against CETH 2403 11 10 and therefore, should be rightly classified under that CETH only. The order of the Hon’ble High Court in the above referred case law also goes on to say that the products are same with exactly similar composition.

v. It may also be worthwhile to mention that compensation cess is fixed on tobacco products basing on the extent of harm that different tobacco products are perceived to cause to the human body. Therefore, cigarettes and gutkha are taxed at substantially higher rates than other tobacco products. Basing on this logic, it would be irrational to classify the gudakhu used as tooth paste at a higher rate (by classifying it under 2403 99 90) while it is taxable at a lower rate in granular form) when it is used for smoking by classifying the same under 2403 11 10. It is common sense that gudakhu when smoked as hookah is likely to result in a graver health condition than when it is merely used as a toothpaste.

6.0. During the course of hearing on 03.06.2019, Shri Bhagban Panda, Advocate on behalf of the Appellant reiterated the points as stated in its Grounds of Appeal. They have also stated that case law of Hon’ble High Court of Orissa in the Samsuddin Akbar Khan & Co. as relied upon by them has neither been taken into consideration nor distinguished by the Authority for the Advance Ruling.

7.0. We have given careful consideration to the submissions of the appellants. We find that the issue involves classification of ‘Gudakhu’ manufactured by the appellant. Before proceeding further, we deem it fit to discuss the relevant provisions of classification under GST.

7.1. Rate of tax for goods under GST has been notified in 6 separate schedules contained in Notification No. 1/2017-C.T. (Rate) and another Schedule for Nil Rated Goods in Notification No. 2/2017-C.T. (Rate). Similarly, rates of Compensation Cess for specified goods has been notified vide Notification No. 1/2017 -Compensation Cess (Rate), dated 28-06-2017. All the above notifications issued by the Government contain an explanation to the following effect.

“(i) In this schedule, “tariff item”, “heading”, “sub-heading’ and “Chapter” shall mean respectively a tariff item, heading, sub-heading and Chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

(ii) The rules for the interpretation of the First Schedule to the said Customs Tariff Act, 1975, including the section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this Notification.”

7.2. The above factual position makes it clear that for classification of goods, tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 is applicable. The rules for the interpretation f the First Schedule to the Customs Tariff Act, 1975, including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule are also applicable. Harmonized System Nomenclature (HSN) code is an internationally accepted method of classifying and identifying products; each identified by a 2-8 digit code. Under GST, the taxpayer has to indicate HSN code in their tax invoice depending on their turnover. In terms of Notification No. 12/2017-C.T., HSN (Harmonised System of Nomenclature) code shall be used in the invoices for classifying the goods under the GST regime.

7.3. For easy reference and discussion, we hereby re-produce the relevant portion of Tariff item 2403 from the First Schedule to the Customs Tariff Act, 1975.

7.3.1. We also deem it proper to re-produce the relevant sub-heading note of Chapter 24, which is as follows.

“Sub-heading Note:

For the purposes of sub-heading 2403 11, the expression “water pipe tobacco” means tobacco intended for smoking in a water pipe and which consists of a mixture of tobacco and glycerol, whether or not containing aromatic oils and extracts, molasses or sugar, and whether or not flavoured with fruit. However, tobacco free products intended for smoking in a water pipe are excluded from this sub-heading.”

7.3.2. In the Customs Tariff, goods of the same class have been grouped together. Also, the residuary items have been provided separately for each class of goods under each chapter. The Notes to the Tariff, giving explanation to the scope and ambit of the respective chapter have statutory backing. In the appeal petition, the appellant has stated that “Gudakhu” manufactured by them is intended to be used as a tooth paste. No-where, the appellant contends that the “Gudakhu” being dealt by them are intended for smoking, which is an essential requirement to qualify for classification under sub-heading 240311. Hookah or Gudaku tobacco intended for smoking is only classifiable under 24031110. By applying the interpretative rules, which are statutory guidelines for interpreting the tariff and taking into consideration the relevant sub-heading note, we are in agreement with the rulings of the Advance Ruling Authority that “Gudakhu” being manufactured by the Appellant for use as a tooth paste is appropriately classifiable under residuary tariff item 2403 9990.

7.4. The appellants in their grounds of appeal have mentioned about the case law of the Hon’ble High Court of Odisha in the case of ‘State of Odisha Vrs Samsuddin Akbar Khan & Co’ as reported in 35 STC 179 (1979) Orissa, which we have gone through. Honble High Court of Orissa in the said case decided the question referred to by the Tribunal under Section 24(1) of the Orissa Sales Tax Act, 1947. The question of law decided in the said order is:

Whether gudakhu is covered by the expression ‘tobacco’ as denned in Section 2(c) of the Additional Duties of Excise (Goods of Special Importance) Act, 1957, which was substituted with effect from 1st July, 1967, by Notification No. 21278_F. dated 6th June 1967, and is exempted from tax under the Orissa Sales Tax Act, 1947?

Obviously, in the aforesaid judgement delivered on 16th July, 1974, Hon’ble High Court neither interprets classification of Gudakhu in terms of Customs Tariff Act, 1985 nor under Central Excise Tariff Act, 1985 which are subsequent legislations based on Harmonized System of Nomenclature (HSN). Hence, we fin o merits in appellant’s contention about applicability of the case law of State of Odisha Vrs Samsuddin Akbar Khan & Co, cited supra in the facts and circumstances of the case.

7.4.1. Neither in the appeal petition nor during the hearing of the case, the appellant could produce any case law/judgments of High Court/order of CESTAT, where-in products manufactured by the appellant was ordered for classification under Tariff item 240311.

7.5. The appellant in its ground of appeal has also contended that their stand is substantiated by opinions from legal experts and opinion from a leading GST Journal. In this regard, we are of the view that the views of the consultants or publications which are not supported by statutory provisions are not legally tenable. Thus, the appellant’s contentions in this regard are invalid.

7.6. The appellant has also contended about higher rate of Compensation Cess for sub-heading 2403 9990 vis-a-vis 2403 11 10. In this regard, we are of the considered view that, fixation of rate of duty is beyond the scope of this forum.

8. The Ruling pronounced by the Advance Ruling Authority, is thus correct and justified. Thus, the appeal filed by the Appellant fails and the ruling of the Odisha Authority for Advance Ruling pronounced vide Order No 06/ODISHA-AAR/2018-19 dated 05.02.2019, is upheld. The instant appeal stands disposed of accordingly.