Facts of the Case

The petitioner, M/s. Esveeaar Distilleries Private Limited, was engaged in the manufacture of Indian Made Foreign Liquor at its distillery situated at Karakambadi Village, Chittoor District. It was a franchisee of M/s. United Spirits Limited, Bangalore, for the manufacture of “McDowell” brand alcoholic beverages such as rum, whisky and brandy.

For carrying on the manufacturing activity, the petitioner purchased extra neutral alcohol from various distilleries, along with food flavours, special spirits and caramel, from registered dealers situated within the State of Andhra Pradesh as well as from dealers located outside the State.

An assessment was made by Respondent No. 1 for the tax periods 2017–18, 2018–19 and 2019–20, levying CGST amounting to Rs. 24,94,104 along with penalty and interest under the CGST and IGST framework.

The petitioner challenged the levy principally on the ground that job work charges relating to the manufacture of alcoholic liquor were liable to GST at 5% and that levy at 18%, with reference to Notification No. 6/2021-Central Tax (Rate) dated 30 September 2021, was illegal and contrary to law.

The central controversy before the High Court was whether “alcoholic liquor for human consumption” falls within the meaning of “food or food products” for the purpose of the concessional GST rate applicable to specified job work services.

Issues Involved

  1. Whether alcoholic liquor for human consumption can be regarded as “food” or a “food product” for the purpose of the concessional GST rate applicable to job work in relation to food and food products falling under Chapters 1 to 22 of the First Schedule to the Customs Tariff Act, 1975.
  2. Whether job work services in relation to the manufacture of alcoholic liquor for human consumption are taxable at 5% GST or 18% GST.
  3. Whether Notification No. 6/2021-Central Tax (Rate) dated 30 September 2021 operates prospectively from 1 October 2021 or, being clarificatory in nature, applies retrospectively.
  4. Whether the petitioner could claim the concessional rate merely because alcoholic beverages fall under Chapter 22 of the First Schedule to the Customs Tariff Act, 1975.

Petitioner’s Arguments

The petitioner contended that Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017, Notification No. 31/2017-Central Tax (Rate) dated 13 October 2017 and Notification No. 6/2021-Central Tax (Rate) dated 30 September 2021, when read together, established that the job work undertaken by the petitioner was liable to tax at 5% and not 18%.

It was argued that the product manufactured by the petitioner, namely alcohol, beverages or liquor, falls under Chapter 22 of the First Schedule to the Customs Tariff Act, 1975. Chapter 22 deals with “Beverages, spirits and vinegar.” Therefore, according to the petitioner, liquor was covered within the expression “food and food products” falling under Chapters 1 to 22 for the purpose of the relevant concessional-rate entry.

The petitioner accordingly submitted that the applicable GST rate was 5%, comprising 2.5% CGST and 2.5% SGST, rather than 18%.

The petitioner further contended that Notification No. 6/2021 dated 30 September 2021 came into effect from 1 October 2021. Therefore, even if the notification was accepted as prescribing 18% GST on services by way of job work in relation to the manufacture of alcoholic liquor for human consumption, it could operate only prospectively and not retrospectively.

The petitioner’s case was that, until the relevant notification was published in the Gazette on 30 September 2021, the earlier concessional treatment could not retrospectively be displaced.

Respondents’ Arguments

The State respondents contended that where the dispute involved questions requiring examination under the statutory framework, the petitioner had an alternative remedy by way of appeal.

On merits, the respondents disputed the petitioner’s interpretation of the notifications. They argued that merely because a product is classified within Chapters 1 to 22 of the First Schedule to the Customs Tariff Act, 1975, it does not automatically become “food” or a “food product.”

According to the respondents, the concessional entry covered only those goods within Chapters 1 to 22 that were actually “food and food products.” Alcoholic liquor could not be treated as food merely because it appeared within Chapter 22.

The respondents further contended that Notification No. 6/2021 did not substitute the earlier notification. Rather, it clarified the existing legal position by specifically providing for services by way of job work in relation to the manufacture of alcoholic liquor for human consumption.

It was also argued that alcoholic liquor for human consumption was not covered by the concessional 5% rate and that the appropriate GST rate was 18%.

The State further maintained that the clarification was retrospective in operation because it clarified what was already implicit in the earlier legal framework.

Court’s Findings and Order

1. Mere Human Consumption Does Not Make a Product “Food”

The High Court observed that the CGST Act did not define the expressions “food” and “food products.” However, the Court held that everything consumed by human beings cannot, merely on that basis, be construed as “food” or a “food product” for the purpose of a concessional GST treatment or exemption.

The Court rejected the proposition that alcoholic liquor becomes a food product merely because it is intended for human consumption.

2. Chapter 22 Classification Does Not Automatically Confer the 5% Rate

The Court examined the petitioner’s argument that alcoholic liquor falls under Chapter 22, dealing with “Beverages, spirits and vinegar.”

It held that the concessional entry was applicable to “food and food products” falling within Chapters 1 to 22. It did not mean that every product classified anywhere within Chapters 1 to 22 automatically qualified as food or a food product.

Therefore, the mere tariff classification of alcoholic liquor under Chapter 22 was insufficient to bring job work relating to its manufacture within the concessional 5% GST rate.

3. Alcoholic Liquor for Human Consumption Is Not “Food or Food Product”

The High Court held that alcoholic liquor for human consumption cannot be treated as an article of food or as a food product for the purpose of the relevant GST rate entry.

The Court also referred to the nature of alcoholic liquor and observed, among other considerations, that warnings associated with such products state that their consumption is injurious to health. The petitioner’s argument that alcoholic liquor should be treated as food merely because of its placement in Chapter 22 was therefore rejected.

4. GST Council’s 45th Meeting Clarification Considered

The Court noted that the issue whether alcoholic liquor constituted food was considered in the 45th Meeting of the GST Council held on 17 September 2021.

The clarification recorded that “food and food products” for the relevant concessional entry excluded alcoholic beverages for human consumption. It further stated that, in common parlance, alcoholic liquor is not considered food.

Accordingly, services by way of job work in relation to the manufacture of alcoholic liquor for human consumption were held not eligible for the 5% GST rate applicable to job work relating to food and food products.

The GST Council recommended that such job work services attract GST at 18%.

5. Notification No. 6/2021 Prescribed 18% GST

The Court noted that Notification No. 6/2021-Central Tax (Rate) dated 30 September 2021 inserted, against Serial No. 26, the following specific category:

“Services by way of job work in relation to manufacture of alcoholic liquor for human consumption.”

The prescribed central tax rate was 9%, resulting in an aggregate GST burden of 18%, i.e., 9% CGST plus 9% SGST.

Since the petitioner’s manufacturing activity related to alcoholic liquor for human consumption by way of job work, the Court held that the petitioner was liable to pay GST at 18%.

6. Notification No. 6/2021 Held Clarificatory, Not Substitutive

A significant finding of the High Court was that Notification No. 6/2021 did not substitute the earlier notification.

According to the Court, it clarified the earlier notification by incorporating a specific clause in light of the applicable legal position.

The Court held that no specific exemption had, at any point of time, been granted to “alcoholic liquor for human consumption.” Neither the notification nor the relevant items under Chapters 1 to 22 clearly treated alcoholic liquor for human consumption as food or a food product.

The Court observed that the petitioner had been claiming the exemption on its own interpretation, which led to the issuance of Notification No. 6/2021.

7. Notification No. 6/2021 Held Retrospective in Operation

The Court rejected the petitioner’s contention that the 18% rate could apply only prospectively from the issuance or effective date of Notification No. 6/2021.

The High Court relied upon the principle that a clarificatory amendment or notification, intended to clear doubts or explain what was already implicit in the law, may operate retrospectively.

Since Notification No. 6/2021 was held to be clarificatory in nature, the Court concluded that it had retrospective operation.

8. Writ Petition Dismissed

The High Court found no merit in the writ petition and dismissed it.

There was no order as to costs. All pending miscellaneous petitions, if any, were also ordered to stand closed.

Important Clarification

The judgment draws an important distinction between:

  • a product merely falling within Chapters 1 to 22 of the First Schedule to the Customs Tariff Act, 1975; and
  • a product actually qualifying as “food” or a “food product” for the purpose of the concessional GST entry.

The High Court clarified that classification under Chapter 22 does not by itself mean that alcoholic liquor is “food” or a “food product.”

Accordingly:

  • Alcoholic liquor for human consumption is not “food or food product” for the relevant concessional GST job work entry.
  • Job work services relating to the manufacture of alcoholic liquor for human consumption attract GST at 18%.
  • The 18% rate consists of 9% CGST and 9% SGST in an intra-State transaction.
  • Notification No. 6/2021-Central Tax (Rate) dated 30 September 2021 was treated as clarificatory in nature.
  • Because the notification was clarificatory, the High Court held it to be retrospective in operation.
  • The Court found that no specific exemption had earlier been granted to alcoholic liquor for human consumption.
  • Merely falling under Chapter 22 of the Customs Tariff Act, 1975 does not confer eligibility for the concessional 5% GST rate.

Sections and Statutory Provisions Involved

Central Goods and Services Tax Act, 2017

Section 9(1) – Levy and collection of Central Goods and Services Tax.

Section 11(1) – Power to grant exemption from tax in the public interest on the recommendations of the GST Council.

Section 15(5) – Provision concerning determination of value of specified supplies as may be notified on the recommendations of the Council.

Section 16(1) – Eligibility and conditions for taking input tax credit, as referred to in the enabling basis discussed in relation to Notification No. 11/2017.

Customs Tariff Act, 1975

First Schedule, Chapters 1 to 22 – Relevant to the expression “food and food products” appearing in the applicable GST rate notification.

Chapter 22 – “Beverages, spirits and vinegar.”

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783492743_1396compressed.pdf

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