Is Rooh Afza fruit drink? Supreme Court ends decade-long tax war for Hamdard’s iconic ‘sharbat’

The Supreme Court on February 25 further noted that ‘Roof Afza’ reasonably answers the description of a ‘fruit drink’, and it cannot be denied merely on account of its label or regulatory categorisation.

‘Sharbat Rooh Afza,’ fruit drink or not

• The product’s distinctive character is as a flavoured sharbat intended for dilution and consumption as a refreshing drink.
• In common trade understanding, fruit squashes, concentrates, and sharbat preparations intended for dilution are all capable of being understood as fruit drink preparations.
• The nomenclature “sharbat” does not strip the product of its essential character as a fruit-based beverage.
• Entry 103 covers processed or preserved vegetables and fruits; it does not prescribe any minimum threshold of fruit content.
• The expression “fruit drink” occurring in Entry 103 cannot be confined solely to ready-to-consume bottled beverages. 
• If common parlance and essential character tests reasonably answer the description of the product as a “fruit drink”, the same cannot be denied merely on account of its label or regulatory categorisation. 
• “Sharbat Rooh Afza” is classifiable under Entry 103 of the UPVAT Act as a fruit drink / processed fruit product and is exigible to VAT at 4 per cent during the relevant assessment years.
•  The judgments affirming classification under the residuary entry and levy at 12.5 per cent are set aside.
• Hamdar’s appeal is allowed, and consequential relief, including refund or adjustment of excess tax paid in accordance with the law granted.

Commercial identity of products 

• Food laws operate in controlling quality, setting safety standards and licensing; they do not classify taxes unless they are clearly adopted by the taxation laws.
• The documents produced by the Hamdard, including dealer testimonials and other material documents evidencing market understanding, were not adequately considered. 
• The tax authority seeking to classify the product under residuary from that claimed by the assessee, the burden lies squarely upon the department.
• The tax authority has failed to discharge the burden cast upon it to prove that “Rooh Afza” is liable to be taxed under the residuary.
• Though invert sugar syrup constitutes approximately 80% by volume, it does not determine the commercial or beverage identity of the product. 
• The dispute pertains to the period from January 1, 2008, to March 31, 2012.
• Since the issue involved in all these appeals is identical and the parties are the same, they were heard in parallel and are being disposed of by this common judgment.
• The company was granted a license in 1972, which allowed it to manufacture fruit syrups and squashes, and non-fruit syrups/sharbat under the FPO and the Prevention of Food Adulteration Act, 1954.  
• The product “Sharbat Rooh Afza” admittedly contains 10 per cent fruit juice (8 per cent pineapple juice and 2 per cent orange juice) along with 80 per cent invert sugar syrup.
• The company’s contention that solely based on the classification of the product under food laws cannot interpret tax imposition under the UPVAT Act is accepted.
• The high court relied on food laws and a license instead of noting the commercial perception of the product, which stands contrary to the common parlance test.

10 per cent fruit content

• The counsel for the tax authority submitted that even if Hamdard claimed their product as “Sharbat” containing 10 per cent fruit content, Entry 103 does not include either “Sharbat” or “fruit juice” within its ambit.
• After consideration, the assessing officer rejected Hamdard’s claims and categorised the product under residuary and levied tax at 12.5 per cent.
• It was submitted that, in accordance with the Fruit Product Order, 1955, the company’s license allowed them to manufacture “non-fruit syrup/sharbat,” containing less than 25 per cent fruit juice, labelled as “non-fruit”, and could not be treated as “fruit drink” for tax purposes.
• The mere presence of 10 per cent fruit content, admittedly reduced now, did not qualify the product as a fruit drink, particularly when a minimum 25 per cent fruit juice content is required to qualify as a “fruit drink” as prescribed by FPO.
• Subsequently, it was submitted that the word “shall” in the FPO renders a mandate, leaving no discretion with the manufacturer to object to the Order and mislead the consumers. 
• The counsel contended that applying the common parlance test, “Sharbat Rooh Afza”, containing only 10% fruit juice and being marketed and labelled as a non-fruit syrup, cannot be regarded by consumers or traders as a “Fruit Drink”.

Within the ambit of Entry 103

• It was submitted that merely because the product contains some quantity of fruit extract, it does not automatically qualify as a fruit drink within the meaning of Entry 103.
• The counsel submitted that all the authorities below had consistently applied the common test and had concurrently held that the product does not fall within Entry 103 but is an unclassified item taxable under the residuary entry.
• It was further submitted that the high court, while dismissing the revision petitions, recorded concurrent findings of fact and relied upon the precedents concerning Hamdard, holding the product to be a sugar-based or non-fruit syrup.
• It was also submitted that under the earlier UP Trade Tax Act, 1948, the product was taxable at 16%, and upon enactment of the UPVAT Act, it was taxed at 12.5%; hence, there was no sudden or excessive increase in the tax burden as alleged by the company. 

Evolution of statutes governing sales tax/VAT

1. Pre-VAT Regime: UP Tarde Tax, 1948

• The said Act provided for the levy of tax either at the first stage of sale/purchase or at the last stage of sale on specified goods. 
• In 1981, “Sharbat Rooh Afza” was classified under soft beverages taxed at 12 per cent.
• In a 2005 decision in Hamdard v. Commissioner of Sales Tax, the product was treated as a “syrup” as it was essentially a sugar-based concentrate.
• Subsequently, in 2005, “Rooh Afza” was taxed at 16 per cent for sugar juices and soft drinks.
  

2. VAT Regime: UP Value Added Tax Act, 2008  

• With effect from January 1, 2008, the UPVAT Act, 2008 came into force, repealing the Uttar Pradesh Trade Tax Act, 1948.
• Under UPVAT, Entry 103 taxes fruit juices and fruit drinks at 4 per cent.
• The company claims “Sharbat Rooh Afza” within the “fruit juice” category as above; however, the tax authority has classified it under residuary applicable to be taxed at 12.5 per cent.

3. Post-VAT Regime: GST 

• After the 101st Constitutional Amendment, GST replaced VAT, and under GST, fruit-based drinks fall under Tariff Heading 2202 and attract 2.5% CGST.

‘Rooh Afza’, non-alcoholic summer drink

• The senior counsel for Hamdard submitted that the ‘Sharbat Rooh Afza’ is a non-alcoholic summer drink and has been consumed by the general public in India for several decades.
• The product is manufactured primarily from pineapple and orange juice blended in a specific formulation along with fruit extracts and herbs; the product contains not less than 10% fruit juice.
• It was submitted that, in line with the court’s ruling in Hamdard Dawakhana (Wakf), Delhi and another v  Union of India, the product has been treated as a fruit product or sharbat since 1965, under the Fruit Products Order 1955.
• It was argued that since the UPVAT came into force, the product has been classified under Entry 103, which includes fruit juices and other preservatives.
• The counsel contends that the high court accepted the tax authority’s terms and shifted the product ro resudiary entry merely based on the common parlance test andnabsence of the word “Sharbat” in Entry 103.
• The counsel stated that the high court failed to consider the statutory recognition of the product as a “fruit drink”.
• It was argued that under the Central Excise Tariff Act, 1985, and the FPO, 1955, “Sharbat” is defined as a fruit-based beverage, so it cannot be classified under the residuary entry.

Essential character

• The counsel submitted that the high court did not duly consider the company’s evidence placed on record and made an error by applying the common test, as the tax authority did not prove that the product falls under the residuary.
• It was argued that the high court should have applied the “essential character test,” as classification should depend on the ingredient that gives the product its essential character, not on which ingredient is present in the highest percentage. Here, sugar is only a preservative, while fruit gives the product its identity.
• The counsel relied on the order dated April 11, 2022, passed by the VAT Appellate Tribunal, which held that “Rooh Afza” is classified as a “fruit drink”.
• It was submitted that the “Rooh Afza,” classified as a fruit drink, is taxable at the lower rate in all other states across the country, except Uttar Pradesh and Haryana.
• It was contended that the judgments are legally unsustainable and liable to be set aside by holding that “Sharbat Rooh Afza” is classifiable under Entry 103 as a fruit drink and not under the residuary entry.
• The counsel submitted that since the company had already paid the tax at 12.5 per cent on demand, and the burden of tax had been passed to the buyer, making any refund would not be practical.

Appeal rejected thrice 

• Hamdard Laboratories, manufacturer of “Sharbat Rooh Afza”, a non-alcoholic sweetened beverage, is prepared from invert sugar and blended with fruit juices, vegetable extracts and added flavours.
• The company claimed that the fruit juice content in “Rooh Afza” was 10 per cent.
• The manufacturer sold Rooh Afza and paid VAT at the rate of 4% on the sales through its monthly returns, treating the product as “Fruit Drink” or “Processed Fruit” covered under the UPVAT Act. 
• The joint commissioner, commercial tax, Ghaziabad, made provisional assessments holding that “Sharbat Rooh Afza” was an unclassified item taxable at 12.5% under the residuary entry in Schedule V. 
• The company, aggrieved, filed its first appeal, but it was dismissed by the additional commercial, commercial taxes range, Ghaziabad.
• The company then filed a second appeal, which was again dismissed by the Commercial Tax Tribunal. 
• Later, the aggrieved party filed revisions against the tribunal’s orders with the high court, but the court upheld the tribunal’s findings and dismissed the revision on August 3, 2022.