Decoding the Popcorn Puzzle: Analyzing Classification Inconsistencies Under GST

[DrJoshua Ebenezer]

The 55^th GST Council recommendation on the applicable GST rates for various types of Pop-corn (Ready-to eat Pop-corn with salt and spices and Caramel Pop-corn) has kicked up quite a stir in the public space.

The recommendations are as under:

Type of Popcorn	Classification Code	GST Rate (Other than Pre-Packaged and Labelled)	GST Rate (Pre-Packaged and Labelled)
Ready-to-Eat Popcorn with Salt and Spices	HS 2106 90 99	5%	12%
Caramel Popcorn (Considered a sugar confectionary)	HS 1704 90 90	18%

It has also been clarified that while there is no new tax imposition, the clarification is to resolve disputes arising from different interpretations by field units.

Given the codes suggested it could be seen that in the opinion of Government, Pop-corn can be classified under two different headings depending on the type of Pop-corn, as under:

1. When flavoured with salt and spices, the Pop-corn should be treated as a Namkeen and should be classified under CTH 21069099
2. When treated with Caramel – should be regarded as a sugar confectionary and classified under CTH 17049090

It should be noted that the clarification did not touch upon the classification of plain Pop-corn (unflavoured or un-sweetened), which remains classified under CTH 19041090 as ‘other’- prepared foods obtained by the swelling or roasting of cereals or cereal products (for example , corn flakes).

The focus of this article is the inconsistencies in the classification of various types of Popcorn and not to discuss the rates of GST.

It is established that the classification under the GST Rate Schedules will be in accordance with the principles of classification applicable for classification under the First schedule to the Customs Tariff.  It is also established that in determining the classification of goods under the First Schedule to the Customs Tariff, reliance can be placed on the HSN Explanatory Notes.

In this regard a reference to the HSN ENs under CTH 1904 will be relevant:

(A)    Prepared foods obtained by the swelling or roasting of cereals or cereal products (for example, corn flakes),

The group covers a range of food preparations, made from cereal grains (maize, wheat, rice, barley etc) which have been made crisp by swelling or roasting. They are mainly used, with or without milk, as breakfast foods. Salt, sugar, molasses, malt extract, fruit or cocoa (see Note 3 and the General Explanatory Note to this Chapter), etc., may have been added during or after their manufacture.

This group further includes crisp savoury food products, obtained by submitting moistened cereal grams (whole or in pieces) to a heating process which makes the grains swell, these being subsequently sprayed with a flavouring consisting of a mixture of vegetable oil, cheese, yeast extract, salt and monosodium glutamate. Similar products made from a dough and fried in vegetable oil are excluded (heading 19JJ5).

(B) Prepared foods obtained from unroasted cereal flakes or from mixtures of unroasted cereal flakes and roasted cereal flakes or swelled cereals,

This group includes prepared foods obtained from unroasted cereal flakes or from mixtures of unroasted cereal flakes and roasted cereal flakes or swelled cereals. These products (often called "Mussli") may contain dried fruit. Nuts, sugar or honey. etc. They are generally put up as breakfast foods.

 (D) Other cereals, other than maize (corn), pre-cooked or otherwise prepared.

Similarly, the group covers, for example, products consisting of pre-cooked rice to which other ingredients such as vegetables or seasonings have been added, provided that these other ingredients do not alter the character of the products as rice preparations.

The heading also excludes:

(a) Prepared cereals coated or otherwise containing ‘sugar in a proportion’ which gives them the character of sugar confectionery (heading 17.04).

It is therefore apparent that the various types of Pop-corn that will remain under CTH 1904 are as under:

1. Plain Pop-corn, which are essentially cereal grains made crisp by swelling;
2. Plain Pop-corn containing salt, sugar, honey, added during or after the process of manufacture. The plain Pop-corn even subsequently sprayed with a flavouring consisting of a mixture of vegetable oil, cheese, yeast extract, salt and monosodium glutamate etc will remain in the heading;
3. The only sugar coated Pop-corn that is excluded the product that contains sugar in ‘such proportions’ that the product attains the ‘essential character’ of a sugar confectionary.

The recommendation of the GST Council has to be viewed in the above legal background for classification of the different types of Pop-corn.

The recommendations of the GST Council are that-

1. Ready-to-Eat Popcorn with Salt and Spices will be regarded as Namkeen and classified under CTH 21069099
2. Caramel Pop-corn is considered as sugar confectionary and classified under CTH 1704 9090.

We will first look at appropriateness of deeming salted and spiced Pop-corn as Namkeen recommended for classification under CTH 21069099.

In this regard, it is also relevant to refer to Supplementary Note 6 to Chapter 21 as extracted below;

6. Tariff item 2106 90 99 includes sweet meats commonly known as "Misthans" or "Mithai" or called by any other name. They also include products commonly known as "Namkeens", "mixtures", "Bhujia", "Chabena" or called by any other name. Such products remain classified in these sub-headings irrespective of the nature of their ingredients.

This Note is specific to India and is not part of the HSN, This Note has been issued to bring about a uniformity in classification a specific group of products such as ‘sweet meats’ and ‘Namkeens’, mixtures, Bhujia and Chabena.

As the Supplementary Note is specific to India and deals with Food Products, it will be appropriate to refer to the Direction issued by FSSAI under Section 16 (5) of Food Safety and Standards Act, 2006 regarding Food Category for Registration/Licensing of FBOs manufacturing Indian Sweets and Snacks & Savouries will be necessary.  This Direction defines the Indian Confectionery and Namkeens as under:

18.2 Indian Snacks & Savouries Products

Indian snacks also known as Namkeens are the products originating from Indian heritage and culture and are prepared using a single or mixture of number of ingredients and may be available in various forms.

18.2.1 Cereal or pulses flour/ Starch based Snacks & Savouries Includes all savoury snacks, with or without added flavourings prepared from cereal or pulses (legumes and lentils) and/or their flour or starch, and may contain other ingredients like potatoes, salt, sugar, edible vegetable oil, dry fruits, vegetable, peanuts, spices and condiments, nuts and seeds as per the intended use of the product.

Example includes Bhujia, bundia, Channa Jor Garam, Papads, khari, karo murukku, amakpara, chiwda, pa/akayalu, ribbon or thattupakoda, dalmoth or mixtures, soya nuts, nimki, fali (e.g. cholafali), uppuseedai, appam, bhe/-mix, Sev, Sev fried Dall Gathiya, shankarpa/i, farsan, Kachori, kurmura, murmura, papadi, crisps, chak/i, Chiwda, Poha, Khee/ etc. Also inlcudes namkeen mix/mixtures like khatta- meetha, cornflake mix, navratan mixture etc. and similar products sold by any other name.

It is apparent that Namkeen is an Indian snack, and the examples provided do not seem to have any closeness or nexus with the Pop-corn.

Further it is well settled that in matters of classification Trade Parlance plays an important role. Reliance can be placed on the settled ratio in this regard in DUNLOP INDIA LTD. & MADRAS RUBBER FACTORY LTD. VERSUS UNION OF INDIA AND OTHERS - 1975 (10) TMI 94 - SUPREME COURT,  INDIAN ALUMINIUM CABLES LTD. VERSUS UNION OF INDIA - 1985 (5) TMI 54 - SUPREME COURT and COLLECTOR OF CENTRAL EXCISE, KANPUR VERSUS KRISHNA CARBON PAPER CO. - 1988 (9) TMI 50 - SUPREME COURT By no stretch of imagination can a salted/ spiced Pop-corn will be regarded as Namkeen by a consumer as in the case of products such as Mixture or Bhujia or Chabena.

Coming to the carmel coated or sugar coated Pop-corn, the exclusion Notes under the heading 1904 clearly specify that only such products where the sugar content is in ‘such proportions’ the sugar content determines the character of the product as a sugar confectionary.  The above cited FSSAI Direction defines Indian Confection thus:

18.1.4 Indian confections

These are the products prepared from sugar, jaggery and may contain dry fruits, nuts like peanuts, ghee, and other ingredients. Examples include Chikki, Gajjak, Til kut barfi, Til rewari and other similar products sold by any other name.

Illustrative examples of sugar confectionary covered under CTH 1704 as listed in the HSN ENs under CTH 1704 are :

It includes, inter alia :(1) Gums containing sugar (including sweetened chewing gum and the like). (2) Boiled sweets (including those containing malt extract). (3) Caramels, cachous, candies, nougat, fondants, sugared almonds, Turkish delight. ( 4) Marzipan. (5) Preparations put up as throat pastilles or cough drops, consisting essentially of sugars (whether or not with other foodstuffs such as gelatin, starch or flour) and flavouring agents (including substances having medicinal properties, such as  benzyl alcohol, menthol, eucalyptol and tolu balsam).

It cannot be any body’s case that the sugar coated or caramel pop-corn can be treated on a par with the any of the sugar confectionery listed supra. It cannot also be any body’s case that caramel Pop-corn has the character of sugar confectionery as the content of sugar is minimal as compared to the Pop-corn.

It is also strange that Sl No 15 of Schedule III of Notification 1/2017 ( Central Tax Rate) dated 28.6.2017 retains the item, “parched paddy or rice ‘coated with sugar or gur’, commonly known as Murki’ under CTH 1904.

In any case, both salted / spiced pop-corn and caramel Pop-corn retain the essential character of the Popcorn only and do not lose the character of pop-corn.  The fact that the HSN ENs state that such products will remain under CTH 1904 even after addition or salt, seasoning, sugar or honey during or after manufacture is a case in point.   Some of the judicial decision relevant in this regard are also cited below: M/s. Kellogg India Pvt. Ltd. vs Commissioner of Central Excise. Products that retain their essential cereal character, even when coated with sugar, remain under CTH 1904. The Tribunal ruled that cereal-based products, despite sugar coatings, are not transformed into a new product. Applying this logic, caramel-coated popcorn retains its identity as popcorn. Coca-Cola India Pvt. Ltd. (Advance Ruling) Classification should rely on a product's essential nature, not on secondary ingredients. The Advance Ruling Authority held that added ingredients or processing should not alter the primary classification of a product. Caramel-coated popcorn's primary identity as a cereal-based snack supports its classification under CTH 1904.

Finally! Popcorn is Still Popcorn

In the light of the discussion supra, it is apparent that the GST Councils recommendations for classification of salted/ spiced Pop-corn under CTH 21069099 as ‘Namkeen’ and caramel Pop-corn as ‘sugar confectionery’ under CTH 1704 does not appear to be reasoned recommendations and appear to run counter to the legal principles of classification under the First schedule to the Customs Tariff.

The objective of the Authors is to ensure that an effort in seeking uniformity in classification does not lead to more disputes.  It is imperative for policymakers to reconsider the recommendation to ensure consistency and legal principles in classification. Proper adherence to classification principles will not only align with international standards but also protect the interests of the industry and consumers.

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By Dr Joshua Ebenezer & Adv Immanuel Samraj Barnabas of NuCov Attorneys.