Did you know Popcorns are ‘other foods prepared from cereal flakes’ to be taxed @ 18% in GST
Under the GST regime, the classification of various items which are the subject matter of tax, be it goods or services, is an essential and integral part of the whole levy and collection mechanism. It is important both from the taxpayer’s perspective and tax collector’s perspective to have a definite class or group under which subject matters of tax can be divided. The primary intention of classifying them is to determine whether or not the same would be restricted by the levy of these taxes and if so, under which category the tax liability would arise.
Under the Indian environment, the GST is also complex and varied. Hence, the issues relating to classification which are not prevalent across the world are applicable in India. There are various reasons which add up to the complexity under the classification in India. One major reason for same is the multiple GST Rate structure. Today, Indian GST has 8 different types of GST Rates namely 0%, 0.25%, 1%, 3%, 5%, 12%, 18% and 28%. Since the industry structures are different and exemptions add to this complex web of multi point rate structure, a situation of arbitrage due to classification arises.
A similar classification issue arose in the case of Jay Jalaram Enterprises who seeked advance ruling for classification of their products ‘Popcorn’. Conflicting issues were whether their product is classifiable under:-
- Sr. No.50/Tariff item 1005 of Schedule I and would be liable to be taxed @2.5% CGST and @2.5% SGST or 5% IGST
2. Entry at Sr. No. 15 of Schedule III and attract 9% CGST and 9% SGST or 18% IGST.
Facts of the Case:-
- The applicant is a proprietorship concern who manufactures Pop Corn, which is sold in a sealed plastic bag bearing a registered brand name as “J.J.’s POPCORN.”
- Their product is manufactured by using corn/maize grains.
- The Raw corn – grains are heated in an electric oven and due to the heat so given to the grains, they turn into puffed corns/popcorns which are known in Gujarati language as “dhani” which is similar to that of puffed rice known as murmura.
- Then after they are sieved so as to remove some grains which are left unpuffed. During the process Salt, Edible Oil and Turmeric Powder are mixed in required quantity.
How would supply made by the applicant of popcorn be classified? Classification will be under which Schedule/Sr. No./Chapter heading/Sub heading/tariff Item (HSN)? What rate of CGST/SGST would be applicable on the supply made by the applicant on [J.J.’s] Popcorn?
Submission by the Applicant
- The applicant contended that its product which is popularly known as POPCORN is nothing but corm/maize, which is a CEREAL, falling under Chapter 10.
- Applicant placed reliance on a judgment delivered by Apex Court in the case of M/s Alladi Venkateshwaralu and Others v. Govt. of A.P. wherein it was held that the term” “Atukulu” (parched rice) and “muramaralu” (puffed rice) are “Rice”. Thus applying the same ratio of this judgment, the applicant further submitted that the term used in the above entry as Maize (corn) also included Puffed Maize/POP CORN, as being cereal within its meaning and therefore [J.J.’s] Popcorn is covered in Sr. No./ Entry 50 in the above tariff item 1005 of Schedule I and is taxable accordingly.
- The applicant also submitted that though this judgment is under the provision of The Central Sales Tax Act 1956, but it is still as relevant as was at earlier time laying down the principle for determining the classification of commodity and the principle laid down therein is that a cereal grain, even after applying a process of heating, it does not lose its basic characteristics and thus it remains the same cereal grain and this principle is applicable squarely also to Maize as popcorn.
- The applicant also clarified that the above commodity is classified under Chapter 10, which is for CEREALS and as per the above judgment, though a simple process of heating is done on Maize and to make it palatable other ingredients like salt and turmeric powder are added to it, still it remains a Cereal grain and further clarified that the use of negligible quantity of oil is only for the purpose of sticking the salt and turmeric on the maize/corn, and not for cooking/frying
- The applicant further placed reliance on a judgment delivered by High Court Gujarat in the case of M/s Vadilal Wafers Company which is, in their view, a direct judgment on POPCORN and is applicable squarely to the present case also. The applicant contended that this case directly dealt on the issue of interpretation of the term CEREARL as it stood in the entry, at Entry No. 2 of Sch. I of The Gujarat Sales Tax Act 1969, as ‘Cereal and pulses in all forms and flour thereof except maize flour’.
- The applicant further submitted that in view of the above cited two judgments it is very clear and it can beyond doubt be interpreted as and it would mean that:
i. by addition of the above ingredients /masala after the process the form of grain can’t be said to be changed, it still remains grain and
ii. The change in shape due to process of heating also has no relevance, and, therefore, when ‘maize’ as a grain, even after undergoing the process of heating and addition of masala remains a grain,
could very clearly be covered in Sr. No.50/Tariff item 1005 of Schedule I and would be liable to be taxed @2.5% CGST and @2.5% SGST.
7. The applicant also submitted that in case the above contention, for any reason, is not accepted, then there is another similar entry, at sr. No. 57, in the same Schedule I, under which the product can be covered. As the description in Sr. No. 57 also refers to Cereal, at the same time it also refers to a cereal grain which is ‘otherwise worked’ and in their case, maize/corn as grain is worked with heating and then it is known as Popcorn.
Proceedings of AAR
Provisions of Notification No. 1/2017- Central Tax (Rate)
- According to Explanation (iii), “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).
- According to Explanation (iv), The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 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.
Observations of AAR
- Product in question i.e. ‘POP CORN’ is manufactured from raw corn/maize grains, by heating in an electric machine/oven and due to the heat so given to the grains, they turn into puffed corns/popcorns.
- Then to make it palatable other ingredients like salt and turmeric powder are added to it and a negligible quantity of oil is also used for the purpose of sticking the salt and turmeric on the maize/corn.
- Thus it is a ready to eat prepared food and fits the description as ‘Prepared foods obtained by the roasting of cereal’.
Classification under the Customs Tariff Act, 1975
- The description provided attracts classification under Chapter Sub-Heading 1904 10 of the First Schedule to the Customs Tariff Act, 1975 which pertains to “Prepared foods obtained by the swelling or roasting of cereals or cereal products”
Since it is not:-
i. Corn flakes (tariff item 1904 10 10)
ii. Paws, Mudi and the like (tariff item 1904 10 20)
iii. Bulgur wheat (tariff item 1904 10 30)
It will fall under the residual tariff item 1904 10 90 of the First Schedule to the Customs Tariff Act, 1975.
Supreme Court Decision
The Apex Court in the case of M/s Frito Lay India , while distinguishing between ordinary popcorn and eclair popcorn, held that an ordinary popcorn as against eclair popcorn would bring out the distinction between the foods obtained by swelling or roasting of cereals and food obtained by process involving use of other ingredients like eclair.
Classification under GST Law
1.There is no specific entry for the product ‘POP CORN’ in Notification No. 1/2017-Central Tax (Rate).
2. But there is an entry most akin to the product and process (chapter heading 1904) at Sr. No. 15 which attracts 9% CGST and 9% SGST or 18% IGST.
3. The Entry, at sr. No. 15, in the Schedule III pertains to “All goods i.e. Corn flakes, bulgar wheat, prepared foods obtained from cereal flakes [other than Puffed rice, commonly known as Muri, flattened or beaten rice, commonly known as Chira, parched rice, commonly known as khoi, parched paddy or rice coated with sugar or gur, commonly known as Murki]”
4. The applicant’s contention that their product falls under Sr. No. 50 of Schedule I of Notification No.1/2017 Central Tax (Rate), is not acceptable on the following grounds:
a. This entry pertains to Chapter Heading 1005, which is meant for Maize (corn). Note 1(A) to the Chapter 10 clearly mentions that ‘the products specified in the headings of this Chapter are to be classified in those headings only if grains are present, whether or not in the ear or on the stalk’. Since the applicant’s product loses the presence of grain in it, it cannot be classified in that heading.
b. The applicant contended that its product is similar to parched rice and puffed rice. We see that vide entry at Sr. No. 95 of Schedule under Notification No.2/2017 Central Tax (Rate), ‘Puffed rice, commonly known as Muri, flattened or beaten rice, commonly known as Chira, parched rice, commonly known as khoi, parched paddy or rice coated with sugar or gur, commonly known as Murki’ have been classified under Chapter Heading 1904.
c. The ratio of the Apex Court decision in the case of M/s Alladi Venkateshwaralu [(1978) 41 STC 394 (S.C)] and the High Court Gujarat decision in the case of M/s Vadilal Wafers Company (S. T. Reference No.31 of 1980 Dt. 24-02-1982) cannot be applied here due to the fact that these decisions are not only in respect of a separate set of laws i.e. ‘the Central Sales Tax Act 1956 and ‘the Gujarat Sales Tax Act 1969’ respectively and classification under those laws but also the system of classification of products under ‘the Goods & Service Tax’ is quite different and is based upon international Harmonised System of Nomenclature (HSN).
d. The very clarification by the applicant that though a simple process of heating is done on Maize and to make it palatable other ingredients like salt and turmeric powder are added to it and a negligible quantity of oil is used for the purpose of sticking the salt and turmeric on the maize/corn, makes it clear that the product does not remain GRAIN and amounts to have gone under processing/preparation of food.
5. The applicant’s further contention that their product may be held to fall under Sr. No. 57 of Schedule I of Notification No.1/2017 CENTRAL TAX (Rate) Dated 28-6-2017, is not acceptable on the grounds that this entry pertains to Chapter Heading 1104, which is meant for ‘Cereal grains otherwise worked’.
6. Note 1 to the Chapter 11 clearly mentions that ‘this Chapter does not cover:
a. roasted malt put up as coffee substitutes (heading 0901 or 2101)
b. prepared flours, groats, meals or starches of heading 1901
c. corn flakes or other products of heading 1904;
7. Since the applicant’s product matches the description at heading 1904, it does not deserve to be classified in the chapter 11.
Ruling by AAR
The product namely ‘[J.J.’s] POP CORN’, manufactured from raw corn/maize grains, which, by heating turn into puffed corns/popcorns and then to make it palatable other ingredients like salt and turmeric powder along with oil are added to it fits the description as ‘Prepared foods obtained by the roasting of cereal’.
This description attracts classification under Chapter Sub-Heading 1904 10 of the First Schedule to the Customs Tariff Act, 1975. By virtue of this, the said product falls under entry at Sr. No. 15 of Schedule III of Notification No.1/2017 Central Tax (Rate) Dated 28-6-2017 and attracts 9% CGST and 9% SGST or 18% IGST.