APPELLATE ADVANCE RULING ON CLASSIFICATION OF GOODS (DIABETIC FOOD)

[Dr. Sanjiv Agarwal]

Many a times, assessee and revenue department confront on classification of goods which are subject to different interpretation as to classification of goods resulting in varying tax rates having revenue implications. One such issue came up before Maharashtra Authority for Advance Ruling (AAR) and then Maharashtra Appellate Authority for Advance Ruling (AAAR) for classification of nutritional powder / food for special dietary purposes.

In Sun Pharmaceutical Industries case, assessee was engaged in the business of manufacturing and trading of pharmaceutical products, nutraceutical and allied products falling under Chapter 28 & 30 of the Customs Tariff Act,1975. The Appellant was, inter alia, engaged in the manufacture and supply of medicaments and other related products. The Appellant is also engaged in business of marketing and supplying of a nutritional powder/food for special dietary use known as ‘Prohance’ and ‘Prohance-D’.

Applicant sought an advance ruling on the issue as to what would be the appropriate classification of the Prohance-D - Chocolate variant/flavor.

The AAR, vide ruling dated 23.01.2019 ruled that :

1. Prohance-D is categorized as ‘food’ on the ground that Prohance-D is an eligible substance consisting of nourishing and nutritive components such as carbohydrates, fats, proteins, essential minerals and vitamins and can be ingested and digested and provides nutrition to the human body.
2. Even though the Prohance-D is categorized as ‘food’, the same cannot be treated/considered as ‘diabetic food’ classifiable under Tariff Item No.2106 90 91 of CTA on the ground that Prohance-D is advertised/marketed as providing other health benefits like providing energy, immune health, heart health, vitamins and minerals and maintains cholesterol levels.
3. Relying on the information available on internet, it will not be proper/correct to treat / consider the Prohance-D - Chocolate variant as ‘diabetic food’ as it does not contain high amount of dietary fiber even though it contains gum Arabic and also Prohance-D - Chocolate variant does not contain slow digestion agents.
4. Prohance-D - Chocolate variant is not classifiable as ‘cocoa preparation’ falling under Chapter 18 of the CTA on the ground that the chocolate flavor is used only to attract the end consumer.
5. Prohance-D - Chocolate variant is also not classifiable under Chapter 19 of the CTA.

Prohance - D - Chocolate variant is “Food preparation” classifiable under Chapter Heading No.21.06 as it is meant to be consumed by people by dissolving the same in water or milk.

6. Since Prohance - D - Chocolate variant is a combination of various items and could clearly be treated as a ‘compound preparation’ being in powder form and could be consumed by directly mixing with water or milk. Hence, resulting in a non-alcoholic beverage which is obtained after mixing the powder with water or milk is clearly covered under the description ‘Compound preparation for making non-alcoholic beverages’ falling under Tariff Item No.2106 90 50 attracting GST @ 18% as per Serial no 23 to the Schedule III of the Notification No. 1/2017-CT(R).

[IN RE: M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. 2019 (7) TMI 95 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA; ].

Being aggrieved, assessee preferred on appeal u/s 100 of the CGST Act, 2017 before the AAAR, Maharashtra on the following grounds:

1. Prohance-D - chocolate variant is a “diabetic food” only and hence classifiable under tariff heading no. 2106.90.91 of CTA.
2. Merely mentioning / declaring other health benefits on the label of Prohance-D will not exclude/take away the product in question from being a “diabetic food”.
3. AAR has erred in holding that the Prohance-D (chocolate flavour) does not contain high dietary supplements as required in diabetic foods.
4. AAR erred in classifying the product in question as a “compound preparation for making non-alcoholic beverage”.
5. Prohance-D - chocolate variant/flavour after mixing with water does not result into a “beverage”.
6. The product in question having been held to be food cannot be subsequently be classified as ‘compound preparation for making a non-alcoholic beverage’
7. Relevant guidelines issued by FDA supports the appellant’s submission.
8. In commercial/market parlance too the product in question is identifiable as “diabetic food” and not as a premix for a beverage.
1. Specific entry regarding specific item to be preferred to a general entry - “Prohance -D” is classifiable under tariff item no. 2106 90 91 of the Customs Tariff Act, 1975
10. Specific heading should be preferred and if there are two specific headings, to which a product can be referred, the one occurring subsequently will prevail - “Prohance - D (chocolate)” is classifiable under tariff item no. 2106 9091 of the CTA.
11. When there are two competing entries, the heading beneficial to the assessee is to be adopted - “Prohance - D (chocolate)” is classifiable under tariff item no. 2106 9091 of CTA
50. The heading appropriate to the goods to which they are most akin is to be adopted - “Prohance - D (chocolate)” is classifiable under tariff item no. 2106 9091 of CTA
1000. The sub-heading can be compared at the same level for classification of goods - “Prohance - D (chocolate)” is classifiable under tariff item no. 2106 9091 of CTA
14. The ruling shall only be applicable to the product Prohance-D (chocolate flavour).
15. AAR has failed to peruse the declaration on the label of Prohance-D (chocolate flavor) that it is “food for people with diabetes’’.

The AAAR observed that the issue in the present case is regarding the determination of correct classification and applicable rate of GST of Prohance D- chocolate variant only in terms of Notification No. 1/2017-CT(R) dated 30.06.2017 & the corresponding Notification of relevant State GST Act. However, it is to be noted that there is no dispute in the Ruling dated 23.1.2019 passed by Ld. AAR (between the Appellant and the department) regarding the correctness of the classification of Prohance-D - Vanilla variant under Tariff item No.2106 90 91 and the applicable rate of GST in respect of the same in terms of S.No. 46A of Schedule II to Notification No. 1/2017-CT(Rate) dated 30.06.2017 and the corresponding Notification of relevant State GST Act.

The AAAR observed that Prohance-D Chocolate contains some extra special ingredients which differentiate from the normal Prohance. All the ingredients in it especially Isomaltulose, Gum Arabic, Inulins, Myo-Innositol, Sucralose, Fructose are sugar replacements or sugar substitute. Gum Arabic is used as a ‘soluble dietary fiber’. The fact that these products are used in the Prohance-D shows that it is specially meant for people suffering from diabetes and is also marketed as meal replacement for diabetics.

As per the definition of ‘Diabetic food’ in the ‘Dictionary of Food and Nutrition’ by David Bander, it covers foods that has specially formulated for people suffering from diabetics. In the present case, the impugned product though generally contributes to the well being of patient is specially formulated for diabetic patients as is evident from the fact that it contains certain sugar replacements which are not found in the normal Prohance. It is therefore, specially directed for diabetics. In such a scenario, a normal person not suffering from Diabetes would not opt for the Prohance-D variant as a meal replacement.

Such a person would opt for Prohance and not for Prohance-D as it can be normally expected that only a diabetic patient would go for the Prohance-D variant. This makes it very clear that that the product is formulated for diabetic patients, is targeted at that particular segment and therefore, can be termed as a ‘diabetic food’.

Further, it found that the heading 2106 also covers ‘Compound preparation for making nonalcoholic beverages’ under which heading is the product classified by the AAR. Heading 2106 covers both the descriptions and the Explanatory Notes to the HSN do not make it clear as to which product category the explanatory note given above applies. It is only under Customs Tariff Act that the category for ‘diabetic foods’ is carved out under the Heading 2106. But the very fact that the explanatory note explains what a diabetic food gives an indication as to what is intended to be covered by it. The intention is that foods which contains sugar replacement or sugar substitutes are meant to be covered by heading 2106 and such food may be products like sweets and gums also. In the instant case, the impugned product also contains sugar substitutes and therefore it will be covered by the term ‘diabetic food’.

AAAR also observed that the product is not a diabetic food because it does not contain high amount of dietary fiber and although the fact that it contains Gum Arabic, Gum Arabic is not a great source of dietary fiber. However, the AAR has not given any references in support of the statement that ‘Diabetic Foods’ have to contain dietary fibre. Also, it is felt that such a qualification would not be required to classify a product as diabetic food. As the HSN also considers food containing sugar replacements as diabetic food, the above product would also classify in it.

The Order of the AAR classifying the product Prohance-D (Chocolate) under heading 21069050 was therefore, set aside. It was held that the product would instead classify as a diabetic food covered under chapter heading 21069091. [IN RE: M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. - 2020 (2) TMI 894 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA].