2017 (3) TMI 1636 - AT - Central Excise

Classification of goods - NESCLAC Nutritious Milk Drink - Revenue sought to reclassify the above product under Tariff Item 1901 90 90 - appellant classified the above product under Tariff Heading 0404 - Revenue was of the view that the item manufactured would go out of the purview of Tariff Item 0404 since only sugar or other sweetening matter is allowed to be added to natural milk constituent under Heading 0404 - whether the addition of artificial flavour would make it a food preparation and therefore, it would no more remain dairy produce and would be covered under Heading 19.01? Held that - The disputed product, NESLAC NUTRITIOUS Milk Drink is made up of milk predominantly but is added with a few additional ingredients - The reference to HSN Notes to Chapters 4 and 19 clearly indicates that there is no reference to flavouring substance being one of the prohibited ingredients for the product in Chapter 4. HSN Notes also make it clear that product would fall under Chapter 1901 only when natural milk constituents are added with other items such as cereal, groats, yeast, etc., or the milk constituent is replaced by an other substance such as oleic fats. From what is stated before us, we are convinced that this is not a case. Addition of small quantity of artificial flavouring substance does not change the essential nature of the product from what is covered under 0404. It does not make it a food preparation of milk instead of a product consisting of natural milk constituent - there is no justification to shift the classification of the main product from 0404 to 1901, on account of addition of a minuscule quantity of flavouring substance. Even when the stabilizers were not specifically mentioned in the Chapter Note 4 of the Central Excise Tariff Act, still the milk shake mixes containing the same were held classifiable under the Tariff Heading 0404 by the Hon ble Supreme Court in the case of Commissioner of Central Excise Versus M/s Amrit Food (A. Division of Amrit Corporation Ltd) 2015 (9) TMI 1269 - SUPREME COURT , on the ground that stabilizers do not interfere with basic characteristics of the milk products and are added merely to impart stability to the product - same analogy can be drawn in the present case where flavouring agent of 0.03% of the total composition is added, which does not change the basic characteristic of the product and the product remains a nutritious milk drink only. The appropriate classification for the impugned product will be under Chapter Tariff Item 0404 90 00 of the Central Excise Tariff Act, 1985, as contended by the appellant - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Classification of 'NESCLAC Nutritious Milk Drink' under the correct Tariff Heading.
2. Legitimacy of the addition of artificial flavouring substances under Tariff Heading 0404.
3. Applicability of previous case laws to the current classification dispute.

Detailed Analysis:

1. Classification of 'NESCLAC Nutritious Milk Drink' under the correct Tariff Heading:
The primary issue revolves around the classification of the product 'NESCLAC Nutritious Milk Drink'. The appellant classified it under Tariff Heading 0404, which attracts a 'nil' rate of duty, while the Revenue sought to reclassify it under Tariff Item 1901 90 90, attracting a 16% rate of duty. The Revenue's argument was based on the addition of Methyl Vanillin Flavour, an artificial flavouring substance, which they claimed disqualified the product from classification under Heading 0404.

2. Legitimacy of the addition of artificial flavouring substances under Tariff Heading 0404:
The appellant argued that the addition of a negligible quantity (0.3%) of artificial flavouring substance should not disqualify the product from being classified under Heading 0404. They contended that Chapter 4 covers dairy products, including those with added vitamins, minerals, and small quantities of stabilizing agents. The adjudicating authority, however, held that the addition of artificial flavouring substances like Methyl Vanillin Flavour would shift the classification to Chapter 19, as it transforms the product into a food preparation.

3. Applicability of previous case laws to the current classification dispute:
The appellant relied on previous case laws, specifically Amrit Foods v. CCE, Meerut and Nestle India Limited v. CCE, New Delhi, to support their classification under Heading 0404. In these cases, the Tribunal ruled that the addition of stabilizers did not alter the essential nature of milk products, and thus, they remained classifiable under Heading 0404. The Commissioner, however, dismissed these precedents, arguing that the artificial flavouring substance in question was not a permitted additive under Heading 0404.

Conclusion:
The Tribunal examined the competing tariff headings and relevant Harmonized System of Nomenclature (HSN) notes. It was concluded that the addition of a small quantity of artificial flavouring substance does not change the essential nature of the product from what is covered under Heading 0404. The Tribunal noted that the HSN notes do not explicitly prohibit flavouring substances in products classified under Chapter 4. Therefore, the product remains a "product consisting of natural milk constituents" and does not become a food preparation that would necessitate classification under Chapter 19.

The Tribunal also referenced the Amrit Foods and Nestle India Limited cases, emphasizing that the addition of stabilizers or minor ingredients does not interfere with the basic characteristics of milk products. Thus, the product 'NESCLAC Nutritious Milk Drink' should be classified under Tariff Item 0404 90 00.

Judgment:
The Tribunal set aside the impugned order and allowed the appeal, confirming that the correct classification for 'NESCLAC Nutritious Milk Drink' is under Tariff Item 0404 90 00. The differential Central Excise duty demand and the penalty imposed were annulled.