2020 (2) TMI 894 - AAAR - GST

Classification of goods - rate of GST - production and making of nutritional powder for special dietary use called Prohance-D Chocolate variant - diabetic food or not - appellant has stated that Prohance-D is a nutritional powder -special dietary use for people with Diabetics - though the AAR held that the product is a food , it held that it is not a diabetic food - Challenge to AAR decision. HELD 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, whether a normal person not suffering from Diabetes would opt for the Prohance-D variant as a meal replacement? The answer is no. 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 . It is true 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 . The AAR has 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 is hereby set aside - The product would instead classify as a diabetic food covered under chapter heading 21069091.

Issues Involved:
1. Classification of Prohance-D Chocolate variant under GST.
2. Determination of applicable GST rate for Prohance-D Chocolate variant.
3. Comparison of Prohance-D Chocolate variant with Prohance Vanilla variant.
4. Analysis of ingredients and their impact on classification.
5. Consideration of product marketing and labeling.
6. Examination of relevant legal provisions and guidelines.

Detailed Analysis:

1. Classification of Prohance-D Chocolate Variant under GST:
The primary issue was whether Prohance-D (Chocolate) should be classified as a 'diabetic food' under Tariff Item No. 2106 90 91 or as a 'compound preparation for making non-alcoholic beverages' under Tariff Item No. 2106 90 50. The AAR initially classified it under the latter, reasoning that it was marketed for various health benefits and lacked high dietary fiber.

2. Determination of Applicable GST Rate for Prohance-D Chocolate Variant:
Notification No. 1/2017-Central Tax (Rate) dated 30.06.2017 specifies a 12% GST rate for 'diabetic foods' under Tariff Item No. 2106 90 91 and an 18% GST rate for 'compound preparations for making non-alcoholic beverages' under Tariff Item No. 2106 90 50. The appellant argued that Prohance-D should be taxed at 12% as a 'diabetic food.'

3. Comparison of Prohance-D Chocolate Variant with Prohance Vanilla Variant:
The appellant highlighted that the Prohance-D Chocolate variant contains additional ingredients like Isomaltulose, Gum Arabic, Inulins, Myo-Inositol, Sucralose, and Fructose, which are sugar substitutes and dietary fibers, differentiating it from the Prohance Vanilla variant.

4. Analysis of Ingredients and Their Impact on Classification:
The ingredients of Prohance-D Chocolate, including sugar substitutes and dietary fibers, were examined. These ingredients are specifically formulated for diabetic patients, indicating that the product is intended for diabetic use. The explanatory notes to HSN under Chapter 2106 support the classification of foods containing synthetic sweetening agents for diabetics under 'diabetic foods.'

5. Consideration of Product Marketing and Labeling:
The product is marketed as a 'food for special dietary use' and 'food for people with diabetes,' which aligns with its classification as a 'diabetic food.' The labeling and FSSAI license support this classification.

6. Examination of Relevant Legal Provisions and Guidelines:
The General Rules of Interpretation and various legal precedents were considered. Rule 3(a) of the General Rules of Interpretation states that a specific heading should be preferred over a general heading. Since Tariff Item No. 2106 90 91 specifically covers 'diabetic foods,' it should be preferred over the general heading for 'compound preparations for making non-alcoholic beverages.'

Conclusion:
The appellate authority set aside the AAR's classification of Prohance-D (Chocolate) under heading 2106 90 50 and instead classified it as a 'diabetic food' under chapter heading 2106 90 91, attracting a GST rate of 12%. The classification was based on the product's ingredients, intended use, marketing, and labeling, as well as relevant legal provisions and guidelines.

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