CESTAT Delhi Sets Aside Excise Demand Where Department Had Consistently Classified Product as Chewing Tobacco
Background and Overview
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi recently delivered a significant ruling in the matter of Rajan Jhiriwal Vs Additional Director General (Adjudication), addressing a fundamental question of product classification under the Central Excise Tariff. The dispute revolved around whether products sold under the "MAMA" brand were correctly classifiable as "chewing tobacco" under Central Excise Tariff Item (CETI) 2403 99 10 or as "zarda scented tobacco" under CETI 2403 99 30. The Tribunal, after examining the factual matrix and applicable legal principles, allowed all four appeals and set aside the impugned order, primarily on the ground that both the assessee and the department had consistently adopted the same classification over several years.
The proceedings arose from an order dated 31.01.2022 passed by the Additional Director General (Adjudication), New Delhi, which confirmed a demand for differential central excise duty, interest under Section 11AA, and penalty under Section 11AC of the Central Excise Act, 1944. Additionally, penalties were imposed on associated entities and individual partners under Rule 26 of the Central Excise Rules, 2002.
Factual Background
Manufacturing Activity and Initial Classification
The assessee operated two manufacturing units — M/s. Rajan Jhiriwal and M/s. R.R. Jhiriwal — both engaged in producing zarda and supari under the "MAMA" brand name.
As early as 02.08.2012, the assessee wrote to the Superintendent of Central Excise intimating its intention to manufacture "MAMA zarda" under the category of "chewing tobacco (powder form)". Along with this communication, the assessee filed a Form-1 declaration under Rule 6 of the Chewing Tobacco and Manufactured Tobacco Packaging Machine (Capacity Determination and Collection of Duty) Rules, 2010 (referred to as the Capacity Determination Rules).
Acting on this declaration, the Assistant Commissioner of Central Excise passed an order dated 02.08.2012 under Rule 6(2) of the Capacity Determination Rules, classifying the products of the assessee under CETI 2403 99 10 as chewing tobacco. This was the starting point of an unbroken chain of consistent departmental classification extending over nearly four years.
Departmental Orders Consistently Upholding the Classification
Between 2012 and 2016, the department issued no fewer than thirteen formal orders, all classifying the assessee's products under CETI 2403 99 10. These orders covered successive periods and were passed by multiple jurisdictional officers including the Assistant Commissioner and the Deputy Commissioner. The assessee also filed ten ER-1 returns from August 2012 through March 2016, all consistently declaring the classification under CETI 2403 99 10.
Attempt to Amend Classification Following Notification No. 05/2015-CE
Following the issuance of Notification No. 05/2015-CE dated 01.03.2015, which altered the duty structure for zarda scented tobacco, the assessee attempted to amend its classification from CETI 2403 99 10 (chewing tobacco) to CETI 2403 99 30 (zarda scented tobacco). A fresh declaration under Rule 6 of the Capacity Determination Rules was filed on 02.03.2015, and an online application for amendment in central excise registration was also submitted on 04.03.2015.
However, the department did not accept this reclassification. The jurisdictional Superintendent Central Excise, after visiting the factory premises and reviewing the manufacturing process, reported on 04.03.2015 that the assessee's final product was correctly classified under CETI 2403 99 10 and did not merit classification under CETI 2403 99 30. Samples were collected from the factory under a Panchnama dated 16.03.2015 and forwarded to the Central Revenues Control Laboratory (CRCL), New Delhi, for chemical analysis.
The Deputy Commissioner also passed an order dated 04.03.2015 under Rule 6(3) of the Capacity Determination Rules, classifying the product under CETI 2403 99 10 as chewing tobacco — thereby rejecting the assessee's own amendment request.
CRCL Report and Withdrawal of Amendment Application
The CRCL issued its test report on 23.04.2015, containing the following opinion:
"The sample is in the form of brown coloured powder. It is a preparation containing tobacco, lime and flavouring compound."
Subsequently, on 07.07.2015, the assessee, under a bona fide belief that it had incorrectly applied for amendment, filed an application for withdrawal of the amendment request. The department formally accepted this withdrawal by e-mail dated 01.09.2016.