SC Ruling on Coconut Oil Classification: Focus on Labeling

Report

The Supreme Court (SC) has settled a 15-year dispute over the classification of pure coconut oil under the Central Excise Tariff Act of 1985. The three-member bench ruled that companies must classify coconut oil sold in small quantities, ranging from 5 ml to 2 litres, as ‘edible oil,’ unless they label it as a cosmetic product. This decision resolves a long-standing conflict between revenue authorities and companies like Madhan Agro and Marico, which market coconut oil under the ‘Shanti’ and ‘Parachute’ brands.

Aligning with HSN Amendments

The SC’s decision aligns with the 2005 amendment to the Harmonized System of Nomenclature (HSN), which prioritizes packaging and labelling for product classification. The Court emphasized that accurate labelling is crucial for distinguishing edible oils from cosmetic products. It clarified that companies must classify pure coconut oil as edible oil unless its packaging or labeling identifies it as a cosmetic. If the packaging labels it as a cosmetic, the product will be classified differently.

Packaging Size Not the Key Factor

The Court clarified that packaging size alone cannot determine whether coconut oil is a cosmetic. Harpreet Singh, Partner in Indirect Tax at Deloitte, explained that companies must treat even small packs of coconut oil as edible oil unless the labelling indicates otherwise. This ruling also impacts tax rates, as GST taxes edible oils at 5%, while it taxes hair oils at 18%.

Conditions for Cosmetic Classification

The SC outlined specific conditions for coconut oil to qualify as a cosmetic. The product must be marketed, labeled, and packaged solely for use as hair oil, with clear indicators such as labels or supporting literature. Without these specifics, the product cannot be taxed as a cosmetic under Chapter 33. The Court also rejected arguments that smaller packaging sizes or advertisements featuring actresses with flowing hair could classify the product as a cosmetic.

Marico’s Trademark Argument

Marico successfully argued that its Parachute trademark for hair oil did not automatically classify all its products as cosmetics. The company clarified that it markets other coconut-based oils with added perfumes and additives under separate licenses. The Court highlighted that the Agmark certification for “Shanti Coconut Oil” confirmed its suitability for human consumption, reinforcing its classification as edible oil.

Importance of Accurate Labeling

This ruling emphasizes the importance of accurate labelling to ensure proper product classification. Businesses must follow labelling regulations to avoid misclassification, legal issues, and higher tax liabilities. The decision reminds companies that clear and precise labelling is essential for consumer safety and informed decision-making in the food industry.

Source: Times of India