GST Council cannot Determine Classification: Madras High Court

While granting Parle Agro relief on the taxability of flavoured milk, the Madras High Court ruled that the GST Council cannot determine the categorization.

In a recent ruling, a single judge bench ruled that flavoured milk will be subject to 5 % GST. At its meeting on December 22, 2018, the GST Council classified ‘flavoured milk’ as HSN (Harmonised System of Nomenclature) Code 2202. As a result, it was subject to GST at the rate of 12%. The question now was whether it was a ‘beverage containing milk’ (HS Code 2202, GST rate 12%) or a ‘Milk and Cream’ (Chapter 0402, GST rate 5%).

“The GST Council made the incorrect recommendation. It cannot also decide classification. Determination of classification is also not within the purview of the respondent GST Council,” a bench led by Justice C. Saravanan ruled.

Furthermore, the bench stated that Classification should have been determined independently by the Assessing Officer. It is the responsibility of the government to determine an appropriate tariff for goods classifiable under the Customs Tariff Act of 1975.

The bench cited the ruling of the Supreme Court in Mohit Minerals. The Supreme Court ruled that the GST Council’s recommendations are not binding on the Union or the states. The deletion of Article 279B and the addition of Article 279(1) by the Constitution Amendment Act 2016 indicate that Parliament intended the GST Council recommendations to have only a persuasive value, particularly “when interpreted in conjunction with the GST regime’s objective to foster cooperative federalism and harmony between the constituent units,” the Supreme Court stated in its ruling.

Meanwhile, on the issue of flavoured milk, a single judge bench of the Madras High Court observed that this expression must necessarily contain alcohol of a specified strength, and thus ‘flavoured milk’ made from dairy milk from milch cattle/dairy animals cannot fall under the purview of Chapter 22. It used the ‘Nosciter – a social’ principle (which states that words must take on the colour of the words with which they are associated) to determine that the expression ‘Beverage Containing Milk’ can only include beverages containing plant/ seed-based milk that also contains alcohol of a specified strength, such as coconut milk, almond milk, peanut milk, lupin milk, hazelnut milk, pistachio milk, walnut milk, or seed-based milk.

The bench ruled that notifications issued under the former Central Excise Act of 1944, classifying ‘Flavoured Milk’ as ‘Beverage Containing Milk,’ were ‘erroneous,’ and that the fact that they were never challenged by assessees as being beneficial did not make the classification valid. It further stated that classifications used under the previous indirect tax regime, namely excise, are no longer relevant for determining the correct classification under the new GST regime.

The ‘Flavoured Milk’ that the petitioner proposed to manufacture at the time of the Writ Petition must still be classified under Tariff Heading 0402 of the Customs Tariff Act, 1974, and is thus subject to Central Tax at 2.5 % (5 % after adding SGST at 2.5 %) in accordance with Entry 8 of the First Schedule to Notification No.1/2017-CT(Rate) dated June 28, 2017.

However, the Central Government can change the rate based on the GST Council’s proposal or on its own.