The Supreme Court recently ruled that pure coconut oil, packaged and sold in quantities ranging from 5 ml to 2 liters, should be classified as 'edible oil' for tax purposes under the Central Excise Tariff Act of 1985 rather than as hair oil.

As a result, it would be subject to the lower duty of 8% rather than the higher tax rate applied to hair oil.

The Supreme Court reasoned that the fact that coconut oil can also be used as a cosmetic or toiletry product is not enough to exclude it from being classified as 'edible oil' and categorize it as 'hair oil'.

"The mere fact that coconut oil is also capable of being put to use as a cosmetic or toilet preparation, by itself, would not be sufficient to exclude such oil from the ambit of ‘coconut oil’ and subject it to classification as ‘hair oil’ as ‘coconut oil’ is name-specific," the judgment dated December 18 said.

A bench comprising Chief Justice of India Sanjiv Khanna, Justices PV Sanjay Kumar, and R Mahadevan stated that for coconut oil to be classified as hair oil, it must meet all the criteria outlined in Chapter Note 3 of Section VI-Chapter 33 of the First Schedule to the Central Excise Tariff Act.

"We are of the opinion that pure coconut oil sold in small quantities as ‘edible oil’ would be classifiable under Heading 1513 in Section III-Chapter 15 of the First Schedule to the Central Excise Tariff Act, 1985, unless the packaging thereof satisfies all the requirements set out in Chapter Note 3 in Section VI-Chapter 33 of the First Schedule to the Central Excise Tariff Act, 1985, read with the General/Explanatory Notes under the corresponding Chapter Note 3 in 12 Chapter 33 of the Harmonized System of Nomenclature, whereupon it would be classifiable as ‘hair oil’ under Heading 3305 in Section VI Chapter 33," the Bench said.

The Court was hearing appeals filed by the Commissioner of Central Excise, challenging the order passed by the Customs Excise and Service Tax Appellate Tribunal (CESTAT), which had held that coconut oil should be classified as 'edible oil' under Heading 1513 in Chapter 15 of Section III of the First Schedule to the Central Excise Tariff Act (CETA) of 1985.

The CESTAT had disagreed with the Excise Commissioner's finding that coconut oil, when packed in small containers, should be classified as hair oil under Heading 3305 of Chapter 33 of the CETA.

When the matter was initially presented to the Supreme Court, a Bench of Justices Ranjan Gogoi and R Bhanumathi (both retired) delivered a split verdict. Justice Ranjan Gogoi believed that coconut oil in small packings should be classified as edible oil under Heading 1513, while Justice R Bhanumathi concluded that coconut oil, packed in small sachets or containers suitable for use as hair oil, should be classified as such under Heading 3305.

Due to the difference in opinion, the case was referred to a three-judge Bench. The three-judge Bench ruled that the Revenue's argument that pure coconut oil should invariably be classified under Heading 3305 was incorrect. The Court relied on the Harmonized System of Nomenclature (HSN) and other precedents to hold against the Revenue's classification.

Consequently, the Court ruled that coconut oil marketed and sold by the respondents during the relevant period must be classified as edible oil.

The Court also clarified that the fact that edible coconut oil marketed by the respondents could be used as hair oil was not sufficient to classify it under Heading 3305.