2017 (3) TMI 1409 - AT - Central Excise

Classification of goods - NIDO Nutritious milk for growing kids - classified under CTH 0404 90 90 attracting nil rate of duty or under CTH 1901 90 90, attracting 16% rate of duty? - the adjudicating authority held that the item which is added (Maltodextrine) is in the nature of sweetening matter whose addition is permissible under 0404. However, he held that addition of artificial flavouring substance is an item which is not permitted to be added to natural milk constituent in 0404 - Held that - The disputed product, NIDO Nutritious milk for growing kids is made up of milk predominantly but is added with a few additional ingredients - addition of stabilizer while making the aforesaid preparation would not take it out from Heading 04.01. Thus, it needs to be determined as to whether the addition of artificial flavour would make it a food preparation and therefore, it would no more remain diary produce and would be covered under heading 19.01. 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 the product 'NIDO Nutritious milk for growing kids'.
2. Applicability of Central Excise duty and penalties.

Detailed Analysis:

Issue 1: Classification of the product 'NIDO Nutritious milk for growing kids'
The appellant classified the product under Tariff Item 0404 90 00, which attracts a nil rate of duty. The Revenue sought to reclassify it under Tariff Item 1901 90 90, attracting a 16% rate of duty. The primary contention from the Revenue was that the addition of Maltodextrine and artificial flavoring substances to the milk powder moved the product out of the purview of Tariff Item 0404. The adjudicating authority concluded that while Maltodextrine could be considered a sweetening matter permissible under 0404, the addition of artificial flavoring substances was not permissible, thereby justifying the reclassification to Chapter 19 under item 1901 90 90.

The appellant argued that the addition of a negligible quantity (0.3%) of artificial flavoring substances should not disqualify the product from being classified under Chapter 0404. They contended that Chapter 4 includes products consisting of natural milk constituents with added vitamins, minerals, and stabilizing agents, and that the product should only move to Chapter 19 if it contained ingredients not permitted under Chapter 4.

Issue 2: Applicability of Central Excise duty and penalties
The Revenue issued show cause notices proposing the reclassification and demanded a differential Central Excise duty of ?2,32,05,945/- along with a penalty of ?50,000/- under Rule 25 of the Central Excise Rules, 2002. The appellant contested this, arguing that the product should remain under the nil duty Tariff Item 0404 90 00.

Judgment Analysis:
The Tribunal examined the competing tariff headings and the relevant Harmonized System of Nomenclature (HSN) Notes for Chapters 4 and 19. The Tribunal noted that the HSN Notes for Chapter 4 allow the addition of small quantities of stabilizing agents and other minor additives without altering the classification. The Tribunal found that the addition of artificial flavoring substances did not significantly change the nature of the product from being a natural milk constituent.

The Tribunal referenced previous case laws, including the decisions in Amrit Foods vs. CCE, Meerut and Nestle India Limited vs. CCE, New Delhi, where similar products were classified under Tariff Item 0404 despite containing stabilizers and other minor additives. These decisions were upheld by the Hon'ble Supreme Court, reinforcing that minor additives do not alter the essential characteristics of milk products.

The Tribunal concluded that the addition of a minuscule quantity of artificial flavoring substance does not justify reclassifying the product under Chapter 19. Therefore, the appropriate classification for 'NIDO Nutritious milk for growing kids' is under Tariff Item 0404 90 00, as contended by the appellant.

Final Order:
The impugned order was set aside, and the appeal was allowed. The product 'NIDO Nutritious milk for growing kids' was classified under Tariff Item 0404 90 00, attracting a nil rate of duty, and the penalties imposed were dismissed.

Order Pronounced in Open Court on 24.03.2017