Hand Sanitizers are classifiable under Heading 3808; therefore liable to tax at the rate of 18%: No Relief to Wipro Karnataka AAAR upheld the decision of AAR:

Introduction: An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAAR is as follows:

Whether the classification of goods determined by the AAR is appropriate or requires re-classification as contended by the appellant company, M/S Wipro Enterprises Pvt. Ltd.

Facts of the appeal made to AAAR, by M/S Wipro Enterprises Pvt. Ltd. (appellant)’, dated 16-Apr-2021:

The appellant, M/S.Wipro Enterprises Pvt. Ltd., was aggrieved by the order passed by the Karnataka Authority for Advanced Ruling (AAR) vide order no. KAR ADRG 08/2021 dated 26.Feb.2021. The appellant is a manufacturer of LED bulbs and fittings, soaps and other toiletries. Due to the heavy demand caused by the pandemic, the appellant also started manufacturing and marketing hand sanitizers and paying GST at the rate of 18% under goods classification HSN 3808.94. But the appellant contended that they should pay only 12% GST as the classification of goods should be under HSN 3004. The appellant had approached the AAR with the dispute and the AAR confirmed that GST should be charged at 18% and confirmed that the classification of the said goods have to be under HSN 3808.94. Aggrieved by the order of the AAR, the appellant approached the AAAR.

The appellant’s contention w.r.t to classification to be made under HSN 3004 having GST rate of 12% is as under.

• The hand sanitizers manufactured and sold by them have 95% ethyl alcohol which is the standard prescribed by the Indian Pharmacopoeia. It is used to kill 99% germs and keep hands clean and hence have ‘therapeutic’ and ‘prophylactic’ medicament properties. Since they have the aforementioned properties, they have to be classified under HSN 3004.
• Several Supreme Court rulings, Commissioner of Central Excise Vs. Wockhardt Life Sciences Ltd., Sujanil Chemo Industries Vs. Commissioner of Central excise and customs, Pune, etc were quoted, where it was uniformly held that if a product is used for preventing disease, then it has prophylactic properties and should be classified under medicament products.
• The appellant also quoted World Health Organizations quote which reiterated the fact that hand sanitizers do have the properties of preventing spread of disease and kills germs and hence the appellant has classified them as medicament products under HSN 3004.

Further, the appellant is of the view that products classified under HSN 3808 are used on inanimate objects or used for cleaning non-living objects and hence will not qualify as disinfectants which causes skin damage, as their sanitizers are used by living beings and cannot be classified under HSN 3808. The appellant submitted that the ‘common parlance test’ should be considered while classifying products and their scientific or technical terminology should not be considered. Since hand sanitizers are perceived by general public as medications which kills germs and prevents disease and the Supreme Court has also ruled in Commissioner of Customs and Excise, Nagpur Vs. Shree Baidyanath Ayurved Bhawan Ltd., Dabur (India) Ltd Vs. Commissioner of Central Excise, Jamshedpur etc that the ‘common parlance test’ has to be considered in classifying products, the  should be classified under HSN 3004.

The appellant also submitted that products which are classified under heading HSN 3809.94 are insecticides, fungicides, rodenticides, disinfectant, herbicides and similar products and hence disinfectant (hand-sanitizer) cannot be classified under this heading as it refers to disinfectants used on inanimate objects only.  They also stated that the DGFT vide notification no. 08/2015-2020 dated 01.Jun.2020 prohibited the export of products under heading 3808.94 and therefore it is the intention of the DGFT also to classify hand-sanitizers under Heading 3004 as they are medicament products. And since the appellant, before starting manufacture of the product in question had to obtain license under Drugs and Cosmetics Act, 1940 but the sale did not require licensing as it was required in bulk to combat the pandemic, the product has medicament properties and therefore are to be classified under heading 3004. As per judgement given in the case of Commissioner of Sales Tax Vs. S S Balsara Hygiene Products Ltd., any product that saves the human skin from infection requires the license as per Drugs and Cosmetics Act, 1940. The appellant contended that comparing their product to that of soap by the AAR does not hold any merit as soap requires usage of water and produces a lather whereas their product requires neither.

The appellant also took another example of the product Odomas, a mosquito repellent being classified as a medicament as it prevents spread of disease through mosquito’s and required license to manufacture under Drugs and Cosmetics Act, 1940. The ruling was issued in the case of Commissioner of Sales Tax Vs. S S Balsara Hygiene Products Ltd. The appellant further reiterated that the manufacture of Odomos was based on Indian Pharmacopoeia, 2018, similar to the hand-sanitizer and hence has the classification of the hand-sanitizer should be under Heading 3004 and GST rate applicable would be 12% as per Serial No. 63 of Schedule II of Notification no. 01/20 CT (rate) dated 28.Jun.2017. The appellate also appealed to the AAAR to excuse the delay of 12 days to file the appeal due to the 2^nd wave of pandemic and consequent delay in communicating the order by the concerned AAR.

Observations and final ruling by AAAR vide Order No. KAR AAAR-07/2021 dated 30.Jun.2021:

In the personal hearing held on 25.Jun.2021, the appellant’s representative presented their case as above and reiterated the reasoning for classifying the hand-sanitizer under Heading HSN 3004 instead of HSN 3808.94 as contended by the AAR vide its order no. KAR/ADRG 08/2021 dated 26.Feb.2021. He also pleaded to excuse the 12 delay in filing the appeal. The appellate authority excused the delay of 12 days considering the circumstances caused by the pandemic. Further, the appellate authority took note of all the representations made by the appellant, through their duly authorized representative.

The appellate authority took note of the appellants representations in terms of license granted under Drugs and Cosmetics Act, 1940, several judgments in terms of common parlance test, DGFT notification, the product being an alcohol based product, WHO’s contention on hand-sanitizer being a preventive item to combat spread of disease, appellant contention that the product fulfills ‘therapeutic’ and ‘prophylactic’ characteristics and hence is a medicament product, notification dated 20.Jul.2020 that the product is a drug and hence a medicine etc. The appellate authority opined that the hand-sanitizer is not a medicine as per the common parlance test pointed out by appellant, but is used as a hygiene product to prevent spread of germs. Further it opined that all medicines are drugs and all drugs are not medicines and even though the manufacture of the hand-sanitizer is basis Indian Pharmacopoeia standards and requires a license under Drugs and Cosmetics Act, 1940, the product is not a medicine. Hence the appellant authority is of the view that the product cannot be classified under Heading HSN 3004.

Further the appellant authority pronounced that the hand-sanitizer would indeed be classified under HSN 3808.94 as it is a disinfectant and the explanatory note to heading 3808.94 quoting “generally used on inanimate objects” does not disqualify the item to be used for human purposes, for external usage. It quoted Kerala High Court judgment in the case of Reckitt Benckiser (India) Ltd, to further explain its contention. It further stated that the appropriate reference to be made for classification of goods is as per the 1^st schedule to the Customs Tariff Act read with relevant sections and chapter notes and not DGFT notifications.

The appellate authority concluded that for reasons stated as above, it upholds the order passed by AAR and the hand-sanitizers are to be classified under heading 3808.94 which attracts GST rate of 18% as per Sl.No. 87 of Schedule III of Notification No. 11/2017 CT (R )  dated 28.Jun.2017, which was reduced to 5% between 14^th Jun 2021 to 30^th Sep 2021 as per Notification No. 05/2021 CT (R ) dated 14.Jun.2021. The AAAR further dismissed the appeal filed by the appellant.

To Read the Ruling Download PDF Given Below :