Nestle (India) Ltd. v. Commissioner Of Central Excise, Mumbai

[Order per : Gowri Shankar, Member (T)]. - The principal question for consideration in this appeal is classification of product marketed under the label ‘KIT-KAT’ manufactured by the appellant. The secondary questions are whether the notices issued for recovery of the duty alleged to be short paid on the product manufactured and cleared from the appellant’s factory at Usgao in Goa for the period July, 1995 to August, 1997, is barred by limitation, and whether the appellant is liable to penalty.

2. The principal ingredients of the product are wafer, sugar, milk powder, wheat flour, cocoa paste, cocoa butter, hydrogenated vegetable oil and process additives. The process of manufacture is in four parts. The wafer is made out of wheat flour, oil and other such goods. A filling made of praline and other substances is sandwiched between layer of such wafers and waffles. The sandwiched wafers are thereafter coated with chocolate manufactured from the cocoa paste, cocoa butter, sugar, so as to completely cover it. The resultant product is thereafter packed.

3. Prior to setting up of the factory for the manufacture of the goods the appellant claimed classification of these goods under Heading 19.05 of the tariff, in the classification list filed in August, 1994 and May, 1995. The classification so claimed was approved by the Assistant Commissioner. The appellant cleared these products after paying the duty applicable to this heading. Four notices dated 3-7-1996, 14-10-1996, 20-4-1997 and 24-9-1997 were issued between July, 1996 and April, 1997 alleging short payment of duty on the ground that the goods were classifiable under Heading 18.04 of the tariff and proposing recovery for each of the periods mentioned in those notices. These notices were issued by the Superintendent. Another notice was issued on 11-9-1997 by the Commissioner (Adjudication), Mumbai in exercise of powers conferred on him, proposing classification of the goods under Heading 18.03 of the tariff and demanding duty so found short paid. In the order impugned in the appeal the Commissioner has confirmed classification of the goods under Heading 18.03, confirmed proposed duty demand in the show-cause notice and dropped the proceedings proposed in the other four notices.

4. The basis on which the notices proposed classification under Heading 18.03 of the product is as follows: The wafer is only one of the articles which used to make the product in question. It is completely covered by chocolate. It is therefore not classifiable under Heading 19.05. Further the product is a composite product consisting of chocolate, wafer and praline. It therefore cannot be classified as a wafer under Heading 19.05. It would also not be correct to say that wafer contains chocolate since it is completely covered by it. The predominant product in terms of value and weight is milk chocolate, comprising 68 to 72% by weight of chocolate and also value. It is considered by the manufacturer to be chocolate and treated as chocolate for purposes of storage and transport. It is perceived by the dealers of the product as well as its ultimate customers as chocolate and no person in common trade parlance refers to it as a wafer. Its classification, being a composite product, is to be decided by reference to Rule 3(b) as it is chocolate that gives this product its essential character. This is the reasoning that the Commissioner has approved in his order.

5. The Advocate for the appellant raises following arguments in support of the classification claimed. The products of Chapter 19 are for preparations of cereals, flour, starch or milk and pastry cook’s products. Except in those cases as in Heading 19.04, where a product containing more than a prescribed quantity of cocoa or chocolate is excluded the presence of cocoa or chocolate, would not prevent classification in this chapter. The presence of the words “whether or not containing cocoa” in Heading 19.05 emphasise this. Baked goods in which chocolate may predominant by weight or value, such as chocolate cakes are also classifiable in this heading. Note 1 to Chapter 18 excludes inter alia preparations falling under Headings 19.01, 19.04, and 19.05. The product is therefore, clearly classifiable under Heading 19.05. This is made clear from the amendment carried out in the 1998 budget by the introduction of sub-heading (sic) to this heading, for wafers and waffles coated with chocolate or containing chocolate. Since there has been no change in the words of the main heading, carving out a separate entry for wafers and waffles coated with or containing chocolates clearly shows that the main heading included in its scope these products. It is not correct to say that the product is treated by the appellant as chocolate or so understood in the market. On the other hand the product could not be marketed as chocolate since specifications of chocolate contained in Heading 25.03 of the Prevention of Food Adulteration Rules, 1955, excluded the presence of any vegetable fat other than cocoa butter and the goods containing hydrogenated palm kernel oil. The Indian Standard Specifications IS: 2397 of 1988 say in paragraph 5.1.3 that wafers may be coated with chocolate. The Explanatory Notes to Harmonized System of Nomenclature, 2nd edition, 1996, on which the tariff is based, say at page 151-153 (for Heading 19.05) that waffles under this heading, may also be chocolate covered. These notes say at page 144 that chocolate covered biscuits are excluded from Heading 18.06 and indicate their classification under Heading 19.05. Heading 19.05 in the Central Excise Tariff Act, is identically worded as the same heading in the explanatory notes. In deciding the classification reference to these notes is justified. The Supreme Court’s judgment in C.C.E. v. Wood Craft Industries - 1995 (77) E.L.T 23 and Collector v. Bakelite Hylam - 1997 (91) E.L.T 13 is cited in favour of the proposition that explanatory rules may be referred to when the tariff is based is Harmonized System of Nomenclature. It is contended that the Supreme Court in its judgment in Akbar Badruddin Jiwani v. Collector of Customs - and Collector v. Fenoplast - , held that, where words in the tariff is used in scientific and technical sense it is improper to apply common parlance understanding of the words. The notice is barred by limitation, as the extended period in the proviso to Section 11A of the Act will not be available, the department having been aware of relevant facts.

6.  The representative of the department, in addition to adopting the reasoning in the Commissioner’s order contends that while the Explanatory Notes may be a good guide indicating the scope of entry in the tariff, where these are identically worded, this proposition has no legal backing and therefore cannot be the sole basis for classification of the goods. He states that there can be no doubt that its manufacturer treats the product as chocolate and it is presented to customers as chocolate, which is predominant in value and weight. He points to the guidelines issued to dealers which is suggestive of treating the goods as chocolates for the purpose of storage and transportation and it is being considered as chocolate in a market survey. He further contended that Heading 19.05 relates to presence or absence of cocoa and not chocolate. The product is thus commercially and generally known as chocolate and Interpretative Rule 3(b) has been rightly applied. The Supreme Court’s judgment in C.C.E. v. Wood Polymers Ltd. - 1998 (97) E.L.T 193 and C.C.E. v. Bakelite Hylam - 1997 (91) E.L.T 13 are cited in support.

7. The conflicting entries during the relevant period are as follow :

8. The note to Chapter 18 excluded at the relevant time, preparations of Headings 04.04, 19.01, 19.04, 19.05, 21.05, 22.02, 30.03. These headings cover other dairy product, edible products of animal origin not else specified or included (Heading 04.04); malt extract, food preparations of flour, malt, etc. not containing cocoa powder in a proportion by weight of less than 50% not elsewhere specified; food preparations of milk or ghee not containing cocoa powder (19.01); or containing cocoa powder in a proportion by weight of less than 10% not elsewhere specified; prepared foods obtained by swelling or roasting of cereals or cereal products (19.04); ice-creams and other edible ice, whether or not containing cocoa (21.05) other than mineral water (21.05), medicaments (including veterinary medicaments) (30.03). Out of the products contained in any of these headings, we will exclude for the moment Heading 19.05 from the scope of our consideration. Product classifiable under any of the remaining headings may or may not contain cocoa. The fact of presence of cocoa, or in the case of heading (such as 19.04) where a minimum proportion of cocoa is specified, the presence of cocoa up to this limit will not render the goods classifiable under Chapter 18 as cocoa preparation. The object of Note 1 to Chapter 18 is to exclude cocoa products of this heading notwithstanding that they may contain cocoa, or as the case may be, cocoa within limits specified. Ice-cream, notwithstanding that it may contain cocoa (in the form of chocolate) as a predominant component in terms of value or even possibly weight, continues to be classified as ice cream under Heading 21.05. A preparation of milk, sugar and cocoa powder is classifiable under Heading 04.04 notwithstanding that its taste, flavour and appearance may have been contributed to by means of cocoa and sugar, a combination of which by itself may be classifiable under Chapter 18. Thus by application of Note 1 to Chapter 18 to these products and the products of the Heading 19.05 will not be classifiable under Chapter 18 because of the mere presence of cocoa. This is made clear by Note 2 to Chapter 19 at the relevant time. This provided that Heading 19.04 does not cover preparations containing more than 8% by weight of cocoa powder or coated with chocolate, or any other preparations containing cocoa of Chapter 18. These products, if otherwise classifiable under Heading 19.04, would, if coated with chocolate or containing more than 8% by weight of cocoa be classifiable under Chapter 18.

9. This scheme of classification in the Central Excise tariff follows closely that in the Harmonized System of Nomenclature. By and large, the Headings in Chapters 18 and 19 of the tariff and in the Explanatory Notes, tally except for minor differences. Heading 19.05 of the tariff tallies, word for word, with the same heading in the Explanatory Notes. Heading 18.03 of the tariff is for chocolate in any form and Heading 18.06 of the Explanatory Notes is for chocolates and other food preparations containing cocoa. Note 2 to Chapter 18 of the tariff is identical in contents with Note 2 Chapter 18 of the Explanatory Notes, except for the differences with the numbering in the Tariff Headings (18.03 and 18.06). Note 2 to Chapter 19 of the tariff tallies (except for the percentage of the cocoa) with Note 4 to Chapter 19 of the Explanatory Notes. In fact, each of the heading of the Chapter 19 at the relevant time tallied word for word with the heading in the HSN except to the extent of difference in the percentage of cocoa powder (referred to in Heading 19.01). The HSN used the word cocoa and not cocoa powder as in the present tariff after its amendment in March, 1998. There is a difference in the arrangement of the chapter, in that any prepared cocoa in the form of pitments and shells is not classifiable under Chapter 18 in the tariff (unlike in the HSN) and processed cocoa base is also excluded from the chapter. Cocoa butter and oil in Heading 18.01 of the tariff corresponds to the 18.04 of the HSN. Heading 18.02 with 18.05. Heading 18 of the HSN, chocolates and other food preparations containing cocoa, had been split up into two; 18.03 for chocolates in any form, whether or not containing nuts, etc. and 18.04 for other food preparations containing cocoa, in the tariff.

10. In the light of this correspondence reference to the explanatory note in deciding the scope of the tariff is justified. The Supreme Court stated in paragraph 18 of its judgment CCE v. Wood Craft Industries Ltd. [1995 (77) E.L.T 23] that the structure of the Central Excise Tariff is based on the internationally accepted nomenclature in the HSN and therefore dispute relating to tariff classification must, as far as possible, be resolved with reference to the nomenclature indicated by the HSN unless a difference in intention in the statute is indicated by the Central Excise Tariff Act, 1985. The comparison between the headings in both the tariffs and the explanatory notes, when we have attempted does not show the presence of a different intention. On the contrary, the headings are closely aligned and in many cases are identical. Reference to the HSN explanatory notes is therefore called for.

11. These notes are clear that biscuits and waffles covered with- chocolate are to be classified under Heading 19.05. The 2nd edition of the Explanatory Notes provide at page 141, for exclusion from Heading 18.05, biscuits and other bakers’ wares covered with chocolates. These are shown as classifiable under Heading 19.05 and the note at page 153 under heading 19.05 includes the following goods under that heading :

“Waffles and wafers, which are light fine bakers’ wares baked between patterned metal plates. This category also includes thin waffle products, which may be rolled, waffles consisting of a tasty filling sandwiched between two or more layers of thin waffle pastry, and products made by extruding waffle dough through a special machine (ice cream cornets, for example). The water content must be 10% or less by weight of the finished product. Waffles may also be chocolate-covered. Wafers are products similar to waffles”.

By applying these notes it is clear that, irrespective of the proportion of the chocolate by weight or value, these goods would be classifiable under Heading 19.05.

12. It is difficult to find the material on the basis of which the department alleges that the product is commercially known and sold as chocolate. It is not contended in any of the notices that the appellant advertises the product to its customers as chocolate. The representative of the department referred to what he called advertising brief prepared by one of the appellant’s officers, to guide the advertising of the product. The brief in fact goes against the department’s case. It describes the product as “a delicious, light, crisp, wafer covered with milk chocolate snack” it emphasised that the product draws from both the chocolate and biscuit markets. It further described the product as “biscuit covered with chocolate snack”. There is certainly some reference in the guidelines, with regard to storage and transport suggesting that the product must, for the purposes of ambient temperature, be considered to be chocolate “must care as for chocolate.” There is incidentally a reference to caution in handling - “handle like eggs - with care”. From that direction by itself, it would not be legitimate to draw a conclusion that the appellant marketed the product as chocolate or that any of the buyers purchased the same as chocolate, or that it is commonly considered as chocolate.

13. It might have been necessary, in view of the presence of chocolate, to refrigerate the product to prevent its melting or spoiling. That alone cannot justify the view that the product’s essential character of the product has been conferred upon it by chocolate. There is nothing to show that the buyers of the goods bought as chocolate, not as a combination of chocolate and biscuits; that it was the presence of the chocolate alone as distinct from the chocolate and biscuits which length of the product is appeal to customers. On the other hand, the market advertising brief produced by the appellant refers to the presence of the biscuit market as well as the chocolate market and it talks of the products as wafer covered with crisp chocolate and say that the product creates niche for itself, drawing from both the biscuit market as well as the chocolate market.

Even on the assumption mat the product is sold and known as chocolate, the classification confirmed cannot be justified. In Akbar Badruddin Jiwani v. Collector of Customs - 1990 (47) E.L.T 161 the Supreme Court was of the view that “marble” occurring in Heading 25.15 of the Customs tariff refer not only to marble but for other calcareous stones. The Supreme Court said that while there is no doubt that general principles of tariff entries occurring in a text statute is of a commercial nomenclature and understanding between persons in the trade but it is also a settled legal position that the said doctrine of commercial nomenclature or trade understanding should be departed from in a case where the statutory content in which the tariff entry appears, requires such a departure. “In other words, in cases where the application of commercial meaning or trade nomenclature runs counter to the statutory context in which the said word was used then the said principle of interpretation should not be applied. Trade meaning or commercial nomenclature would be applicable if a particular product description occurs by itself in a Tariff Entry and there is no conflict between the Tariff Entry and any other Entry requiring to reconcile and harmonise that Tariff Entry with any other Entry”. The relevant headings in the tariff provides for classification on the basis of principles which may be contrary to the common or commercial understanding. The Explanatory Notes provides for classification of waffles and wafers containing chocolate in Heading 19.05 and exclude their classification from Chapter 18. The scheme of classification in the Central Excise tariff also follows closely the scheme in the Explanatory Notes. It is therefore on the basis of the principles incorporated in the Explanatory Notes and in the tariff that we must decide the classification and the test of common parlance and understanding would not apply.

14. It is also to be noted at this juncture that the appellant, in view of the provisions of the Prevention of Food Adulteration could not, except by violation of law has sold the goods as chocolate. We must also refer here to the decision of this Tribunal in Kirloskar Oil Engines Ltd. v. Union of India - 1995 (77) E.L.T 479 and National Sales Corporation - 1995 (78) E.L.T 653 to the effect that the Indian Standard Institute are good and reliable indication of the common parlance and understanding. We have noted that the ISI specifications for biscuits include biscuit covered or coated with chocolate. Even if the common parlance test was to be applied presence of the contents of ISI specifications would be in favour of the appellant.

15. The representative of the department relies upon the Supreme Court’s judgment in CCE v. Wood Polymers Ltd. The bench of the Supreme Court, which delivered that judgment, was concerned with classification of decorative paper based laminating sheets. The Court did not accept the contention of the manufacturer of the goods that by applying the common parlance test must be considered to be fairer, except, “in view of the rules regarding interpretation which are containing in the new tariff the matter of classification has to be considered in the light of the said rules”. It thereafter proposed to apply Rule 3(b) of the Interpretation Rules on the view that it contains the principles to be applied to the classification of the goods which are prima facie classifiable under two or more headings. Since the case of composite goods classification must be determined under Rule 3(b).

16. Rule 3 of Interpretative Rules laid down the principles for classification of the goods, which are prima facie, classifiable under two or more headings. Sub-rule (a) of that rule provides that the headings which provides the most specific description shall be preferred to headings providing a more general description. Sub-rule (b) provides that mixtures of composite goods consisting of different materials or made up of difference components and goods put up for such retail sale which cannot be classified by reference to (a) shall be classified as if they consist of the material or component which gives them their essential character insofar as this criterion is applicable. Application of Rule 3 therefore would be resorted to only if on a plain reading of the tariff the goods cannot be classified in a particular heading. In view of the specific contents of the notes and chapter headings, which we have discussed, there is no reason to refer to Rule 3. Even if there is, sub-rule (a) will have to be excluded before we proceed to sub-rule (b). By reference to the notes to the Chapters 19 and 18 and others that we have seen, the most specific description of the goods in conformity with the terms of the tariff headings and the related chapter notes is that the most specific description is provided in the heading claimed by the appellant. It is not permissible to ignore the provisions of sub-rule (a) of Rule 3 to proceed directly to sub-rule (b) of Rule 3, since in our view sub-rule (a) itself provides the answer. Reference to sub-rule (b) is uncalled for.

17. On the basis of these discussions it has to be held that the goods are classifiable under Heading 19.05. There is another aspect of the matter which requires consideration. This is the amendment carried out to Heading 19.05 by the budget of 1998. By this amendment two new sub-headings have been created in Heading 19.05, for wafers and waffles. Sub-heading 1905.31 for waffles and wafers coated with or containing chocolate called a rate of duty of 18% (corresponding to the same rate of duty as was applicable to Heading 18.03). Sub-heading 39 is “other”. It can hardly be disputed that wafers and waffles coated with or containing chocolate are classifiable, after the amendment, under heading 1905.31. Now, in the amendment made in 1998, there has been no change in the wordings of Heading 19.05 or of Heading 18.04, nor there has been any change in any of the notes to the Chapter 18 and 19 with which we are concerned. The Headings 19.05 and 18.03 and the notes, therefore remain unchanged before and after the amendment. That being the case, the effect of introduction of these two sub-headings would be only to carve a separate niche within the same heading for these products. This would mean that both before and after the amendment, waffles and wafer coated or covered with chocolate were classifiable under Heading 19.05.

18. The representative’s of the department contend that this amendment is not retrospective in nature for which he cites Supreme Court judgment in Shri Vijayalakshmi Rice Mills v. State of A.P. - AIR 1976 SC 1471. The retrospective application of the amendment is not an issue, it is not the appellant’s contention that the amendment is retrospective. The contention, which has to be accepted is that the amendment shows that the product was always classifiable under the particular Heading 19.05 in which it has now been assigned a particular sub-heading which were not present earlier. Therefore waffles and wafers containing chocolate, even prior to the amendment were classifiable under Heading 19.05. The appeal would succeed on this ground also.

19. The representative of the department raises a point that sub-Heading 1905.31 refers to waffles and wafers coated or containing chocolate, whereas Heading 19.05 refers to products whether or not containing cocoa. The Larousse Gastronomique, a recognised cookery encyclopaedia refers, in the 1988 Mandarin Paperback edition, to chocolate as a product consisting essentially of a mixture of cocoa and sugar to which milk, honey, dried fruit, etc., may be added. The New Shorter Oxford Dictionary gives the following meanings for chocolate:

“Article of food made from cacao seeds, infl. by unrelated cacaua-alt drink made from cacao; 1. A drink made of prepared chocolate (sense 2) dissolved in hot milk or water. 2. An enable paste or solid made from cacao seeds by roasting, grinding, etc.; a sweet or confection made of or covered with chocolate.”

We are concerned with the second meaning. The New Oxford Dictionary gives the following meaning for ‘cocoa’ and ‘cacao’:

20. The Prevention of Food Adulteration Act, 1955 defines chocolate as a homogeneous product obtained by an adequate process of manufacture from a mixture of one or more of the ingredients, namely cocoa (cocoa) beans, cocoa (cocoa) nib, cocoa (cocoa) mass, cocoa press sake and cocoa dust (cocoa fines/powder), including fat reduced cocoa powder with or without addition of sugars, cocoa butter, milk solids including milk fat and non prohibited flavouring agents.. That the Explanatory Notes also proceed on this understanding that chocolate must contain cocoa is clear from the following extract in these notes in Heading 18.06 at pages 43 of the 1996 Explanatory Notes.

“chocolate is composed essentially of cocoa paste and sugar or other sweetening matter; usually with the addition of flavouring and cocoa butter; in some cases, cocoa powder and vegetable oil may be substituted for cocoa paste. Milk, coffee, hazelnuts, almonds, orange-peel, etc. are sometimes also added.”

21. Thus while all chocolate must necessarily contain cocoa, it is not every cocoa product or preparation that is chocolate. The fact that Heading 19.05 uses the word “cocoa” whereas sub-heading 1905.31 refers to chocolate, therefore it is not significant in considering classification of this product. The tariff itself reconises that chocolate must contain cocoa. Heading 18.03 is for “chocolates in any form . . . including drinking chocolates”; Heading 18.04 is for other food preparations containing cocoa. The other (emphasis ours) food preparation containing cocoa of Heading 18.04 therefore must be those preparations other than the chocolates of Heading 18.03. It is therefore evident that the chocolates of Heading 18.03 must contain cocoa.

22. In view of this conclusion we do not consider it necessary to go into the aspect of limitation. It would also follow that penalty ordered cannot be impossable. Appeal allowed. Impugned order set aside with consequential relief.