SC resolves 15-year tax dispute over coconut oil classification

NEW DELHI: In a landmark judgment, the Supreme Court settled a 15-year-old dispute on the classification of coconut oil, and ruled that coconut oil in small packages can be classified as 'edible oil'.

A bench comprising Chief Justice of India Sanjiv Khanna, Justice PV Sanjay Kumar and Justice R Mahadevan rejected the revenue department's arguments, emphasising that tax classification should align with common parlance and trade practices rather than speculative interpretations.

After 15 years of deliberations, the Supreme Court has finally ruled that small packs of coconut oil are to be classified as cooking oil unless explicitly labeled for hair care.

This landmark decision settles a prolonged tax dispute that had entangled manufacturers, consumers, and government agencies since 2009.

The Bench clarified that coconut oil's classification should align with common usage and trade practices, rather than speculative interpretations.

The judgment brings relief to consumers and manufacturers, as cooking oil attracts a lower GST rate of 5%, compared to the 18% applicable to hair care products.

The case revolved around the dual-use nature of coconut oil and whether packaging size determines its purpose.

While the revenue department argued that small packs are primarily marketed and used as hair oil, manufacturers, including Madhan Agro Industries and Marico Ltd (maker of the popular Parachute brand), maintained that coconut oil is fundamentally edible, irrespective of packaging.

The court rejected the revenue department's claim that packaging and marketing dictate usage. "The mere capability of coconut oil being used as a cosmetic does not suffice to classify it as 'hair oil.'

Small-sized containers are common for both edible and hair oils, and classification cannot hinge solely on container size," the bench held.

The judgment also emphasized that coconut oil has long been recognized as an edible product under the Central Excise Tariff Act and aligns with international standards under the Harmonized System of Nomenclature (HSN).

This decision not only clarifies tax classifications but also has broader implications for various stakeholders. For Consumers, the ruling ensures lower prices for small packs of coconut oil, enhancing affordability.

For Manufacturers, it provides clarity on tax obligations, enabling streamlined operations and marketing strategies. For the Industry, the verdict reinforces that tax classifications should be based on objective criteria rather than subjective interpretations.

Dinkar Sharma, company secretary and partner at Jotwani Associates, hailed the judgment as a milestone in Indian tax jurisprudence.

"This ruling encourages authorities to adopt a scientific and objective approach to classifying multi-use goods, avoiding speculative factors like consumer behaviour or marketing," he said, adding that it brings stability to the edible oil industry.

The dispute began in 2009 when the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ruled that small-pack coconut oil should be categorized as edible oil under Heading 1513 of the Central Excise Tariff Act. The revenue department challenged this, arguing it should fall under Heading 3305 for hair care products.

A split verdict by a two-judge Supreme Court bench in 2018 delayed the matter further, necessitating intervention by a larger bench.

Wednesday's ruling finally resolves the deadlock, preventing what could have been a ?159 crore annual tax windfall for the government had coconut oil been classified as a hair care product, Advocate Dinesh Jotwani founder of Jotwani Associates said adding that this decision underscored the importance of a robust legal framework in resolving commercial disputes, providing much-needed clarity and consistency in India's tax regime.