Incorrect Classification of Savoury Snack Foods: Recovery Stayed

Issue:

Whether extruded or expanded savoury snack food products are correctly classifiable under Tariff Item 2106 90 99 attracting 12% GST, or under Tariff Item 1905 90 30 attracting 18% GST, and whether the demand for differential tax, interest, and penalty under Section 74 of the CGST Act is sustainable given a prior inspection and a recent CBIC Circular.

Facts:

The petitioner manufactures extruded or expanded savoury snack food products. The respondents alleged that the petitioner had wilfully suppressed the correct classification of these products, classifying them under Tariff Item 2106 90 99 (attracting 12% GST) instead of Tariff Item 1905 90 30 (attracting 18% GST). This allegation was based on CBIC Circular No. 189/01/2023-GST, dated January 13, 2023, which clarified that such products are appropriately classifiable under Tariff Item 1905 90 30 as per Serial No. 16 of Schedule III of Notification No. 1/2017 – Central Tax (Rate). A show cause notice (SCN) was issued under Section 74, proposing demand and penalty, which was subsequently confirmed despite the assessee’s reply. The assessee contended that in 2018, an inspection under Section 67 was conducted at their premises, during which the manufacturing process of all products was checked, and no demand or case was made regarding the applicability of 18% GST, even though the assessee was paying 12% GST at that time.

Decision:

The court considered the submissions of both parties and the fact that CBIC Circular No. 189/01/2023-GST formed the basis for the SCN. It was also noted that the GST Council had directed the Fitment Committee to examine the matter. Consequently, the court ordered the respondents to file a counter-affidavit, and crucially, stayed the recovery proceedings against the assessee in the interim.

Key Takeaways:

Classification Disputes: The case highlights ongoing classification disputes under GST, particularly for food products, where subtle differences in wording between tariff items can lead to significant tax implications.
Impact of CBIC Circulars: While CBIC circulars aim to clarify classification, they can also trigger disputes and retrospective demands. However, courts may consider the context, including prior inspections and ongoing deliberations by GST authorities (like the Fitment Committee), when assessing the validity of such demands.
Retrospective Application/Wilful Suppression: The assessee’s argument regarding a prior inspection where no issue was raised on classification despite paying 12% GST suggests a challenge to the “wilful suppression” element required for invoking Section 74.
Interim Relief: The court’s decision to grant a stay on recovery indicates that the issue requires further detailed examination and is not straightforward. This provides temporary relief to businesses facing demands based on reclassification triggered by new circulars.

HIGH COURT OF ALLAHABAD

Shree Girraj Food Products

Union of India

Arun Bhansali, CJ.
and Kshitij Shailendra, J.

WRIT TAX No. 1911 of 2025

APRIL 29, 2025

Atul Gupta and Aayushi Srivastavafor the Petitioner. Nimai Dass, A.C.S.C., Ankur Agarwal, S.C., Gopal Verma and Krishna Agarawalfor the Respondent.

ORDER

1. It is submitted by learned counsel for the petitioner that in the year 2018, inspection under Section 67 of the SGST/CGST Act, 2017 (‘the Act’) was conducted by the State Tax Officers, wherein the process of manufacture of all the products was checked and no demand/case was made regarding applicability of GST @ 18% as petitioner was paying GST @ 12%.

2. Based on clarification given by GST Council, a CBIC Circular dated 13.01.2023 was issued indicating that the products of the petitioner are appropriately classifiable under tariff item 1905 90 30 and thereby attract GST @ 18% vide Serial No. 16 of Schedule III of Notification No. 1/2017 – Central Tax (Rate) dated 28.06.2017.

3. The Circulars dated 27.07.2023 and 01.08.2023 were issued inserting Serial No. 99B in the Notification dated 28.06.2017 and regularising the issue for the past period in relation to un-fried or un-cooked snack pellets. Based on the said circulars, again an inspection under Section 67 of the Act was conducted and a show cause notice under Section 74 of the Act was issued proposing a demand of Rs. 16,85,71,332/- along with interest and penalty on the ground that the petitioner had wilfully suppressed its final product snack food, namely, extruded or expanded products savoury or salted under tariff item 2106 90 99 of Schedule II rather than tariff item 1905 90 30 and was paying reduced GST @ 12% rather than 18%.

4. The petitioner filed detailed reply, however, the demand was confirmed by the order impugned dated 03.02.2025.

5. It is contended that the order is wholly without jurisdiction and has been passed in an arbitrary manner by invoking extended period of limitation. Reference has been made to the minutes of the 54th Meeting of GST Council held on 09.09.2024, wherein the Fitment Committee recommended to reduce the rate of GST of extruded or expanded products savoury or salted from 18% to 12% at par with namkeens, noticing that there was no definition of namkeens and there was diverse practices in the field and therefore, to avoid disputes, action was taken. Further, the decision though provided that the same would be applicable prospectively, the Council recommended that the Fitment Committee may examine the issue of regularising the matters for the past period, which clearly suggests that there doesn’t exist a case of any kind of suppression on part of the petitioner to as to invoke Section 74 of the Act.

6. Further submissions were made that several pleas, raised by the petitioner in reply to the show cause notice, have not at all been considered and the order impugned has been passed by replicating the show cause notice and therefore, the same being contrary to the provisions of Section 75(6) of the Act, cannot be sustained.

7. Learned counsel for the respondent supported the order impugned. Submissions have been made that there has been suppression on part of the petitioner in classifying the goods under wrong category and paying low GST. Further submissions have been made that petitioner has alternative remedy under Section 107 of the Act and filing of the present petition bypassing the remedy cannot be permitted.

8. Counsel for the petitioner submitted that impugned show cause notice as well as the order impugned are influenced by interpretation made by the CBIC and therefore, the first appellate authority would be obliged to follow the said circulars and therefore, filing of the appeal would be an empty formality besides the fact that for a totally unsustainable demand, petitioner would be required to pay huge pre-deposit. Reference was made to orders passed by Karnataka High Court in ITC Ltd. v. Union of India : Writ Petition No. 19526 of 2024/ITC Ltd. v. Union of India [Writ Petition No. 19526 of 2024], wherein noticing the similar issue raised, further proceedings pursuant to the show cause notice itself have been stayed.

9. Having considered the submissions made by counsel for the parties and the fact that the CBIC had issued specific circular indicating the applicable rate, which alone has formed the basis for issuing the notice under Section 74 of the Act and the GST Council has required the Fitment Committee to look into the matter pertaining to the past period, as noticed hereinbefore and the fact that in similar circumstances, Karnataka High Court has granted interim order, the respondents may file their counter affidavit within a period of four weeks.

10. In the meanwhile and till further orders, recovery pursuant to the order dated 03.02.2025 (Annexure No. 1) shall remain stayed.