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Smart Summary

Factual and Procedural Background

These appeals arise from multiple Central Excise orders imposing duty, education cess, penalties and fines arising from the classification of a product described as "Poha" (also referred to as Avalakki or rice flakes). The appeals challenge the following departmental orders (as recorded in the opinion):

  • E/71/2007 — OIO No. 8/2006 dated 1-12-2006 (Duty: Rs. 1,75,34,808; Education Cess: Rs. 95,406; Penalty: Rs. 1,76,30,214; Fine: Rs. 3,000)
  • E/888/2007 — OIA No. 39 & 40 dated 31-8-2007 (Duty: Rs. 19,98,332; Education Cess: Rs. 39,967; Penalty: Rs. 10,000; Fine: Nil)
  • E/891/2007 — OIA No. 39 & 40 dated 31-8-2007 (Duty: Rs. 15,39,053; Education Cess: Rs. 30,781; Penalty: Rs. 15,000; Fine: Nil)

Shri K.S. Ravi Shankar and R. Dakshina Murthy appeared for the appellants. Shri K. Sambi Reddi appeared as the departmental representative for the Revenue and referred extensively to HSN notes and the manufacturing process in support of the departmental view.

Procedurally, the Commissioner and lower authorities had confirmed demands treating the product as classifiable under Chapter 19 (preparations of cereals ...), and the appellants have appealed against those confirmations. The Tribunal heard both sides and consolidated the appeals for a common order.

Legal Issues Presented

  1. Whether the product `Poha` (rice flakes/avalakki) is classifiable under Chapter 19 (Heading 19.04: prepared foods obtained by swelling or roasting of cereals or cereal products) and therefore liable to duty, or whether it is classifiable under Chapter 10/Chapter 11 (as a form of rice / cereals) and not liable to duty under Chapter 19.
  2. Whether the invocation of extended periods and imposition of penalties (on the basis of alleged suppression or misrepresentation) is justified where the dispute is essentially one of tariff classification and statutory interpretation.

Arguments of the Parties

Revenue's Arguments

  • The Revenue contended that Poha is a manufactured, prepared food falling under Heading 19.04 ("Prepared foods obtained by the swelling or roasting of cereals or cereal products"), which would attract duty.
  • The departmental representative relied on the HSN note for 19.04 and the product's manufacturing process (including heating in rotating drums, pressing between rollers, sieving and packing) to characterise Poha as a "prepared food".
  • It was argued that Poha is ready-to-eat (can be mixed with milk or jaggery and consumed) and is packed in unit containers, supporting classification under Chapter 19.
  • The Revenue relied on a Tribunal decision in M/s. Favourite Food Products v. CCE, Rajkot, which had held that Poha merits classification under Heading 19.04; the Commissioner had relied on that decision to confirm the demand and deny SSI benefits (including clubbing of clearances of units).

Appellants' Arguments

  • The appellants contended that Poha is merely a particular form of rice and therefore classifiable under Chapter 10 or Chapter 11 (specifically heading 11.04), not Chapter 19.
  • They relied on judicial decisions, including the Larger Bench decision in Mahavir Food Products & Ors. v. CCE (Tri.-LB), which held that flakes processed to the extent covered under Heading 11.04 fall under Chapter 11, and only where processing goes beyond that (making a "prepared food") would Chapter 19 apply. The appellants pointed out that Mahavir overruled the Favourite Food Products decision.
  • It was emphasized that no cooking (such as cooking in a pressure cooker) occurs in the manufacture of the appellants' Poha; mere heating (to bring softness) does not amount to "cooking" transforming it into a prepared food under Chapter 19.
  • The appellants relied on the Supreme Court decision in Commissioner of Commercial Tax, Indore v. TTK Healthcare Ltd. (2007) to argue that undercooked/fryums-type products which require further cooking are not "cooked food" for tariff purposes; similarly, Poha requires further cooking/processing before consumption and therefore is not a prepared food under Chapter 19.
  • The appellants also argued that packaging facts (bulk gunny bags, exports treated by Customs as a form of rice) and the nature of processing demonstrate classification under Chapter 11, and that classification disputes do not justify invoking extended limitation periods or allegations of suppression.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
M/s. Favourite Food Products v. CCE, Rajkot (Tribunal) Held that Poha (rice/maize/wheat flakes) merits classification under Heading 19.04 (prepared foods obtained by swelling or roasting of cereals or cereal products). The Commissioner relied on this decision to classify the product under Chapter 19 and confirm duty demand. The Tribunal noted this reliance but observed that this decision had subsequently been overruled by a Larger Bench and that its facts (involving cooking in pressure cookers) differed from the present case.
Mahavir Food Products & Ors. v. CCE (Tri.-LB) — Larger Bench Held that a harmonious construction of Headings 19.04 and 11.04 shows: flakes processed to the extent covered under Heading 11.04 fall under Chapter 11; flakes processed beyond that into prepared foods fall under Chapter 19. The Tribunal treated the Larger Bench decision as overruling Favourite Food Products. The court applied Mahavir to conclude that when processing does not go beyond the processes described in Chapter 11, the product must be classified under Chapter 11 and not Chapter 19.
Commissioner of Commercial Tax, Indore & Others v. TTK Healthcare Ltd. (2007) (Supreme Court) Clarified that products such as 'fryums' (which undergo frying and addition of preservatives but remain undercooked) are not "cooked food" and cannot be consumed directly; process of manufacture matters for classification as cooked/prepared food. The appellants relied on this Supreme Court ruling to support the proposition that Poha is not "cooked" or a prepared food within Chapter 19 because it requires further cooking/processing; the Tribunal accepted this reasoning as applicable to the facts.

Court's Reasoning and Analysis

The Tribunal proceeded by examining the character of the product vis-à-vis the tariff headings and the actual manufacturing process described by the parties. Key steps in the Tribunal's reasoning were:

  1. Identification of the central dispute: whether Poha is classifiable under Chapter 19 (prepared foods) or under Chapter 10/11 as a form of rice/cereal product.
  2. Consideration of the manufacturing process (as described in the record): procurement of raw paddy, cleaning, soaking (3–5 hours), draining and brief resting, heating in electrically heated rotating drums using sand medium preheated to about 130°C to bring softness, pressing between rollers to produce flakes, sieving, natural cooling and packing. The Tribunal emphasised that the processes described do not include cooking in pressure cookers or other cooking operations described in cases where Chapter 19 classification was found.
  3. Assessment of precedent and HSN notes: although the Revenue and the Commissioner relied on the Favourite Food Products decision and HSN 19.04, the Tribunal noted that Favourite Food Products had been overruled by the Larger Bench decision in Mahavir Food Products, which undertook an elaborate examination of Chapter notes for Chapters 11 and 19 and set out the limiting principle for classification of flakes.
  4. Application of the Mahavir principle: the Tribunal applied the Larger Bench reasoning that flakes processed only to the extent described under Chapter 11 remain within Chapter 11; only when processing goes beyond that and the product becomes a prepared food would Chapter 19 apply. On the facts before the Tribunal, the manufacturing steps described remained within the processes referred to in Chapter 11.
  5. Evaluation of the "cooking" contention: the Tribunal rejected the Revenue's contention that mere heating in the rollers constituted "cooking" converting Poha into a prepared food under Chapter 19. The Tribunal accepted the appellants' contention (supported by authority such as TTK Healthcare) that Poha requires further cooking/processing for consumption and is therefore not a "cooked" prepared food within the meaning of Chapter 19.
  6. Consequence for extended period and penalty: the Tribunal observed that the case was essentially one of tariff classification and statutory interpretation. In such a dispute, there was no basis to allege suppression or misrepresentation with intent to evade duty; hence invocation of extended periods and heavy penal consequences was not justified on the facts.
  7. Overall conclusion: given that the Favourite Food Products authority had been overruled and that the manufacturing process fell within Chapter 11 processes, the Tribunal found no merit in the impugned orders and decided to set them aside.

Holding and Implications

Holding: The Tribunal set aside the impugned orders and allowed the appeals with consequential relief.

Implications and direct effects:

  • The departmental demands and related penalties/fines confirmed by the lower authorities and Commissioner in respect of the subject Poha clearances were set aside in these appeals.
  • The Tribunal concluded that the product, as manufactured and described, did not fall within Chapter 19 but was to be treated within the scope of Chapter 11 (i.e., as a form of rice/cereal flakes produced within the processes described in Chapter 11), and therefore the duty demands premised on Chapter 19 classification could not stand.
  • The opinion does not purport to lay down a novel precedent beyond applying the existing Larger Bench authority (Mahavir). The decision's effect is confined to these appeals: it reverses the specific departmental orders and denies the invocation of extended periods/penalties on the facts before the Tribunal.

Pronounced in open Court on 5-8-2008.

    Bhagyalakshmi Poha Industries v. Commr. Of C. Ex.-Iii, Bangalore

    [Order per : T.K. Jayaraman, Member (T)]. - These appeals have been filed against the following orders which are given in the tabular column.

    Appeal No. OIO/OIA Duty Education Cess Penalty Fine
    E/71/ 2007 OIO No. 8/2006 dt. 1-12-2006 Rs. 1,75,34,808/- Rs. 95,406/- Rs. 1,76,30,214/- Rs. 3,000/-
    E/888/2007 OIA No. 39 & 40 dt. 31-8-2007 Rs. 19,98,332/- Rs. 39,967/- Rs. 10,000/- Nil
    E/891/2007 Rs. 15,39,053/- Rs. 30,781/- Rs. 15,000/- Nil

    2. Shri K.S. Ravi Shankar and R. Dakshina Murthy, learned advocates appeared on behalf of the appellants. Shri K. Sambi Reddi, learned departmental representative appeared on behalf of the Revenue. He argued forcefully referring extensively to HSN Notes.

    3. We heard both sides. The issue involved in all these appeals is the correct classification of a product called ‘Poha’. The appellants classify them either in Chapter 10 failing which under Chapter 11 of the Central Excise Tariff, whereas, the department is of the view that it would be classifiable under Chapter 19. In that case, it would attract levy of duty. This is the main dispute. The department is of the view that the item would be covered under Chapter 19 : “preparations of cereals, flour, starch or milk; pastrycooks’ products, etc.”, if the item is classified under Chapter 19, then it would be liable to duty. This is the main contention of the Revenue. The learned SDR referred our attention to HSN 19.04 which reads as follows :

    19.04 - Prepared foods obtained by the swelling or roasting of cereals or cereal products (For Example, corn flakes); cereals other than maize (corn) in grain form or in the form of flakes or other worked grains (except flour, groats and meal), pre-cooked or otherwise prepared, not elsewhere specified or included.
    Whereas, the appellant states that if these items are to be treated as rice, it would be covered under Chapter 10 or they would be covered under Chapter 11.06.

    3.1 The learned SDR invited our attention to the manufacturing process of the impugned item. The impugned item is known as “Poha”. Its manufacturing process is as follows :

    The process adopted for the manufacture of Poha/Avalakki by the appellants are as follows :

    •       First raw paddy is procured which contains high moisture and impurities.
    •       It is cleaned and then soaked in water for about 3 to 5 hours.
    •       Then the water is drained and the paddy is kept in heaps for 2 to 3 hours for brining about equal moisture.
    •       Later on it is heated in the electrical rotating drums using sand medium preheated to about 130 degree Celsius.
    •       This process brings softness to the paddy.
    •       Then the paddy is fed into the edge runner having two rollers for pressing which results in rice flakes or beaten rice or poha etc.
    •       It is then sieved for separating the flakes from the broken rice and husk.
    •       Subsequently, the hot rice flakes/poha are kept for natural cooling.
    •       The cooled poha/rice flakes are packed in 500 Gm and 1 kg unit containers (Polythylene bags) and jute gunny bags of 5 kg, 10 kg, 30 kg and 60 kg.

    3.2 Further, the learned SDR stated that the Poha is a manufactured product and it answers the description of Chapter 1904, the description of which is already given above. He said that the Commissioner has elaborately discussed and stated that these items are nothing but precooked preparations and they would certainly answer the description of 19.04. The learned departmental representative took great pains to show that avalakki or poha would answer the description in 19.04. It was also emphasized that this should be considered as a ready to eat food because it can be just mixed with milk or jaggery and consumed. He also relied on certain websites to show that it can be just taken along with jaggery or milk and consumed. In that sense, it was strongly urged that the impugned items should be considered as prepared food. It was also argued that they are packed in unit containers, therefore, they would be perfectly classifiable under Chapter 19.

    3.3 Further, the learned SDR referred to the decision of the Tribunal in the case of M/s. Favourite Food Products v. CCE, Rajkot - wherein it has been categorically held that Poha whether of Rice, Maize or Wheat merit classification under Heading 19.04 of the Central Excise Tariff. In view of the above finding, the learned Adjudicating Authority had confirmed the demand. There was also an issue of clubbing of the clearances of other two units, on account of that the SSI benefit was also denied. Thus, the duty was confirmed in the Orders passed by the Commissioner. Similarly, the lower authorities confirmed the demand for different periods and they have been upheld by the Commissioner (A), which are also impugned. Since all impugned orders deal with the samo issue, we are taking them up together for common order.

    4. The learned advocate stated that the Adjudicating Authority has not properly applied the provisions of law to the impugned product. According to the learned advocate, the impugned product is only one form of rice. For this, they relied on certain decisions of the Supreme Court and some other judicial decisions. It was also pointed out that the case-law relied on by the Commissioner has been overruled by the Larger Bench decision in the Mahavir Food Products & Ors. v. CCE, Vadodara and vice versa - (Tri.-LB) wherein it is held that harmonious construction of the two Headings 19.04 and 11.04 shows that if flakes processed to an extent covered under Heading 11.04 namely stage of steam heated or rolled between heated rollers would fall under the said heading and if processed beyond so as to make them prepared foods would fall under Heading 19.04. It was held that the product in question ‘makkai poha’ was classifiable only under Heading 11.01 and not under Chapter 19. In this case, the decision of the Favourite Food Products (supra) case has also been overruled. It was also brought to our notice that the department had not gone in appeal against the Larger Bench decision in the case of Mahavir Food Products (supra) and the same has been accepted.

    4.1 The learned advocate pointed out that after referring to the relevant Chapter Note 19.04 and stated that 19.04 would not be applicable because in the preparation of poha no cooking is involved. It was strongly emphasized that mere heating of the paddy cannot be equated with a cooking. But in the Favourite Food Products case (supra), the Adjudicating Authority himself has accepted that there was cooking in pressure cooker but that is not the case in these present appeals. Therefore, the facts of the Favourite Food Products case (supra) can be distinguished.

    4.2 Further, the learned advocate relied on the decisions in the case of Commissioner of Commercial Tax, Indore & Other v. TTK Healthcare Ltd. - 2007 (7) VST 1 (SC) wherein it has been held that process of frying and addition of preservatives to be applied before ‘fryums’ become consumable. Fryums cannot be considered as cooked food. Even the High Court held that fryums to be cooked food but the Hon’ble Apex Court reversed the decision on the ground that fryums were not cooked food and they were undercooked items which could not be consumed directly. It was strongly emphasized that avalakki or poha has to be further cooked before it can be taken. It may be edible but it cannot be considered as cooked food. It was also emphasized that the classification of the item is one of the interpretation of the statute and there is no justification in invoking the extended period because there is actually no suppression of facts involved. A large number of case laws were also cited. It was further emphasized that even though the avalakki is packed in 10 kg, 15 kg, 20 kg, they are put together into gunny bag of 100 kg, therefore, it cannot be said that they are cleared in unit containers. In view of all these submissions and also relying on the decision of the Mahavir Food Products case, it was contended that the item would not be classifiable under Chapter 19 and it would be classifiable only under Chapter 11.04.

    5. On a very careful consideration of the issue, we find that the Commissioner has mainly relied on the decision of the Favourite Food Products case but however, we note that the Favourite Food Products case which dealt with poha has been overruled by Larger Bench. Moreover, in the Favourite Food Products case, there was question of cooking in pressure cookers but in the present case there is, actually no cooking in pressure cookers. The process of manufacture had already been described. It is seen that beyond the processes mentioned in Chapter 11, no further process has been carried out. Moreover, the Favourite Food Products case has been overruled by the Larger Bench decision in the Mahavir Food Products case where the Chapter Notes of both 11 and 19 have been elaborately examined and it was held that when there is no process beyond that which is mentioned in Chapter 11, the item cannot be classified under Chapter 19. In our view, we cannot say that mere heating of the paddy in the rollers before making avalakki is a process of cooking and which is something more than what is mentioned in Chapter 11. Moreover, many decisions have been cited to show that avalakki is also a particular form of rice. Even in the export of the item, it has been stated that the Customs are accepting this as a particular form of rice only. In view of all these factors, we do not find any merit in the impugned orders. Moreover, the longer period has been invoked. In our view, the whole thing is the question of classification and matter of interpretation of the entries in the Customs Tariff. In such a case, there cannot be any allegation of suppression of facts or misrepresentation with an intend to evade duty. All the case laws cited by the learned advocates are applicable to the facts of the present case. The Favourite Food Products case has been distinguished. Moreover, the case on which the Adjudicating Authority and lower authorities have relied on has been overruled in the Larger Bench decision. In view of all the above observations, we do not find any merit in the impugned orders. Therefore, we set aside the impugned orders and allow the appeals with consequential relief.

    (Pronounced in open Court on 5-8-2008)

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    Bhagyalakshmi Poha Industries v. Commr. Of C. Ex.-Iii, Bangalore
    (Aug 5, 2008)