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Journalism of Courage
Is coconut oil an edible oil or a hair care product for the purposes of taxation?
After the judiciary at several levels pondered this question for more than 15 years, the top court has made its decision: coconut oil is an edible oil, and should be taxed at a lower rate. And it does not matter that coconut oil, like personal care products, is sometimes sold in small packets.
Edible oils currently attract a lower rate of Goods and Services Tax (5%) than hair care products (18%).
Before 2017, when the GST regime was implemented, provisions of the Central Excise Tariff Act, 1985 (CET Act) were applied to coconut oil.
After 2005, when the CET Act was amended, coconut oil was included under Section III – “Animal or Vegetable Fats and Oils and their Cleavage Products; Prepared Edible Fats; Animal of Vegetable Waxes” – and carried an excise duty of 8%.
“Preparations for use on the hair” appeared under Section VI (“Products of the Chemical or Allied Industries”) of the Act, and carried an excise duty of 16%.
This was in line with the Harmonised System of Nomenclature (HSN), international taxation norms published in 1988 by the World Customs Organization, an intergovernmental body representing 186 customs administrations around the world.
In June 2009, the Central Board of Excise and Customs under the Department of Revenue of the Union Ministry of Finance, issued a circular classifying coconut oil sold in containers of less than 200 ml as hair oil, so it could be taxed at the higher rate of 16%.
The circular was withdrawn in October 2015 after rulings by Tribunals and courts to the effect that “just because the retail packs of coconut oil were in sizes of 200 ml or less, the same could not be presumed to be meant for use as hair oil”.
In the GST regime, coconut oil is taxed at 5%, while products under the “Preparations for use on the hair” category carry an 18% tax.
Case before the SC
In 2007, central excise authorities issued show-cause notices to Madhan Agro Industries (India) Pvt Ltd, a company that sold coconut oil in packets of 5 ml to 2 litres, proposing to impose a higher tax, classifying the oil as a hair care product.
On Madhan Agro’s challenge, the Customs Excise and Service Tax Appellate Tribunal (CESTAT) in Chennai held that following the 2005 amendment to the CET Act, coconut oil was an edible oil and not a hair care product. The Tribunal passed similar orders in challenges involving several Puducherry-based companies that sold coconut oil in small containers.
The Commissioner of Central Excise, Salem, challenged these orders before the SC.
View of the top court
In 2018, a Bench of Justices Ranjan Gogoi and R Banumathi delivered a split verdict – Justice Gogoi held that coconut oil should be classified as edible oil regardless of the package size; Justice Banumathi applied the “Common Parlance Test” and held that coconut oil sold in small packages is “understood in the market by dealers/ consumers as ‘Hair Oil’”, and must be taxed as such.
On Wednesday, a Bench comprising Chief Justice of India Sanjiv Khanna and Justices Sanjay Kumar and R Mahadevan held that the headings specifically provided under the law in line with international HSN norms “cannot be ignored while classifying goods”.
It also rejected the application of the common parlance test in this case, saying the test could only be applied “when a product is not clearly defined or specifically dealt with” under the law.
“The mere fact that coconut oil [can]…also [be] use[d] as a cosmetic or toilet preparation, by itself, would not be sufficient to exclude [it] from the ambit of ‘coconut oil’ and subject it to classification as ‘hair oil’,” the court said.
Also, it said, “Small-sized containers are a feature common to both ‘edible oils’ [and] ‘hair oils’. …There must be something more to distinguish between them for classification…other than the size of the packing.”
The court also noted that under the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, edible oil can be packed in sizes of 50 ml, 100 ml, 200 ml, etc.
The test is employed when a good or product can be reasonably classified under two different taxing entries – the court will see what uses the market and the public generally tend to associate it with.
* In May 2023, the SC held that homeopathic hair oil should be classified as a “medicament” and taxed at a lower rate under the CET Act, and should not be included under “Cosmetic or Toilet Preparations”.
* In 2022, the SC considered whether anardana (dried pomegranate seeds) should be included under “Edible Fruit and Nuts” or “Oil seeds and Oleaginous Fruits; Miscellaneous Grains, Seeds and Fruit”. It held that ‘seeds’ fall under the latter heading because they are known to be used for sowing in common parlance, while pomegranate is consumed as a fresh fruit.
