Supreme Court Declares Coconut Oil as Edible Oil: Taxation Simplified

What’s in today’s article?

• Why in News?
• Coconut Oil Taxation in India
• Summary of Coconut Oil Tax Disputes
• Supreme Court's Decision on Coconut Oil Taxation

Why in News?

For over 15 years, the classification of coconut oil as an edible oil or a haircare product under India’s tax regime remained unresolved. 

The Supreme Court, on December 18, 2024, ruled that coconut oil should be classified as an edible oil and taxed at a lower GST rate of 5% instead of 18% for haircare products. The court based its decision on the predominant use of coconut oil as a cooking medium, particularly when packaged in small quantities. 

This ruling resolves a long-standing ambiguity and aligns taxation with the product's primary usage.

Coconut Oil Taxation in India

• Taxation Under the CET Act, 1985
  • Prior to GST, coconut oil was taxed under the Central Excise Tariff Act, 1985 (CET Act).
  • In 2005, the CET Act classified coconut oil under Section III as “Animal or Vegetable Fats and Oils” with an 8% excise duty, distinguishing it from haircare products under Section VI, which carried a 16% excise duty.
  • These classifications followed international norms set by the Harmonised System of Nomenclature (HSN) by the World Customs Organisation (1988).
• 2009 Circular and Subsequent Developments
  • In June 2009, the Central Board of Excise and Customs issued a circular to classify coconut oil sold in containers under 200 ml as hair oil and taxed it at 16%.
  • However, this circular was withdrawn in October 2015, following tribunal and court rulings that retail packaging size alone does not define coconut oil as hair oil.
• Taxation Under the GST Regime (2017 Onwards)
  • With the introduction of GST in 2017, coconut oil was categorized under edible oils, attracting a 5% tax.
  • Haircare products under the category “Preparations for use on the hair” continued to attract a higher tax rate of 18%.
• Conclusion
  • The rulings and decisions have consistently leaned towards classifying coconut oil based on its predominant use rather than packaging size or presumed purpose.

Summary of Coconut Oil Tax Disputes

• 2007 Show-Cause Notices to Madhan Agro Industries
  • Central Excise authorities issued show-cause notices to Madhan Agro Industries (India) Pvt. Ltd., proposing a higher tax rate by classifying coconut oil as a haircare product.
  • Madhan Agro, selling coconut oil in packets ranging from 5 ml to 2 litres, challenged the notices before the Customs Excise and Service Tax Appellate Tribunal (CESTAT) in Chennai.
• CESTAT Ruling on Coconut Oil
  • The CESTAT ruled that coconut oil should be classified as an edible oil, not a haircare product, in line with the 2005 amendment to the CET Act.
  • The decision was based on the product's predominant use as an edible oil, irrespective of packaging size.
• Similar Cases and Appeals
  • Similar rulings were passed by the CESTAT in challenges to show-cause notices issued to other enterprises, all based in Puducherry and producing coconut oil in small containers.
  • The Commissioner of Central Excise, Salem, challenged these orders before the Supreme Court, escalating the matter to the highest judicial level.

Supreme Court's Decision on Coconut Oil Taxation

• 2018 Split Verdict
  • Justice Ranjan Gogoi held that coconut oil should be classified as edible oil, regardless of packaging size.
  • Justice R Banumathi applied the “Common Parlance Test”, ruling that coconut oil sold in small packages is perceived as hair oil in the market and should be taxed accordingly.
• 2024 Final Verdict
  • A bench comprising Chief Justice of India Sanjiv Khanna, Justice Sanjay Kumar, and Justice R Mahadevan provided clarity on the matter:
• Rejection of Common Parlance Test
  • The court ruled that the Common Parlance Test can only be applied if the product is not clearly defined or addressed under the law.
  • Since coconut oil is explicitly defined under legal and international HSN norms, the test is unnecessary.
• Classification Based on Specific Legal Headings
  • The court emphasized that legal headings and international HSN norms cannot be ignored when classifying goods.
  • Coconut oil's ability to serve as a cosmetic or hair product does not exclude it from the category of edible oil.
• Container Size Not a Decisive Factor
  • Small container sizes are common for both edible oils and hair oils, and container size alone is insufficient for classification.
  • The court referred to the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, which specify permissible sizes for edible oils (e.g., 50 ml, 100 ml, 200 ml, 1 litre, etc.).
• Conclusion
  • The court classified coconut oil as edible oil for taxation purposes, ensuring consistency with HSN norms and rejecting subjective market perceptions or packaging size as criteria.

Q.1. Why was coconut oil's classification under India's tax regime disputed for over 15 years?

The dispute revolved around whether coconut oil should be taxed as an edible oil (5% GST) or as a haircare product (18% GST). Conflicting interpretations and packaging size led to prolonged legal battles.

Q.2. What was the Supreme Court’s reasoning in classifying coconut oil as an edible oil?

The Supreme Court ruled that coconut oil's primary use as a cooking medium and its explicit inclusion under legal headings make it an edible oil, irrespective of packaging size or alternate uses.

News: Is coconut oil an edible oil or a haircare product? Here is what Supreme Court ruled | Times of India