Jaggery Water Sprinkling on Tobacco Leaves Does Not Amount to Manufacture: Madras High Court Sets Aside Reclassification Under HSN 2403

Overview of the Dispute

A registered partnership firm operating in the tobacco trade found itself at the centre of a significant GST classification controversy when the revenue department sought to reclassify its product from one tariff entry to another — with serious financial consequences. The Madras High Court, in Renganathan & Sons Vs Assistant Commissioner of GST & Central Excise, stepped in to resolve the dispute, ultimately ruling in favour of the assessee and setting aside the impugned order demanding differential compensation cess, interest, and penalty.

The core question before the Court was deceptively simple yet legally consequential: does the act of sprinkling jaggery water on raw tobacco leaves, drying them, cutting them into pieces, and packing them constitute a "manufacturing process" under GST law?

Background: What the Assessee Did and What the Department Alleged

The assessee, a partnership firm engaged in the tobacco business, had been classifying its product under HSN 2403 99 90 and paying compensation cess at 96%. The basis for this classification was the firm's consistent position that the tobacco had not undergone any process that fundamentally altered the character of the raw material.

The jurisdictional Assistant Commissioner of GST & Central Excise took a contrary view. The department issued proceedings calling upon the assessee to reclassify its product under HSN 2403 99 10, which attracted a higher rate of compensation cess. Following the adjudication process, a final order was passed on 13.02.2025, the operative portion of which read as follows:

"I order that the final product manufactured and cleared by M/s. R.Renganathan & Sons, No.68, Nagai Road, Tiruvarur 610001, during the period from April 2020 to March 2021 is rightly classifiable under chapter heading HSN 2403 99 10 of CGST Act, 2017 for the purpose of payment of Compensation Cess under Central Goods and Services (Compensation to States) Act, 2017..."

The demand confirmed against the assessee stood at Rs. 1,31,98,398/- representing the alleged short payment of compensation cess for the period April 2020 to March 2021, along with:

• Interest at appropriate rates under Section 50 of the CGST Act, 2017
• Penalty of Rs. 13,19,840/- under Section 73(9) of the CGST Act, 2017 read with Section 122(2)(a) of the CGST Act, 2017 and Section 11 of the Central Goods and Services (Compensation to States) Act, 2017

Aggrieved by this order, the assessee filed the present writ petition before the Madras High Court.

The Division Bench Ruling That Settled the Issue

The High Court noted at the outset that the precise legal question raised in this petition had already been addressed and conclusively settled by a Division Bench of the same Court in W.A.(MD) No. 746 of 2025. The findings recorded therein are reproduced below in relevant part, as they form the foundation of the present judgment.

The Pachiappa Chettiar Precedent

The Division Bench's reasoning was anchored in the landmark decision of Pachiappa Chettiar v. State of Madras ((1963) 2 MLJ 71), a case that originally arose in the context of interpreting Section 5(viii) and (vii) of the Madras General Sales Tax Act. The central question in that case was:

"Whether the goods sold by the assessee, which is described as tundu tobacco, is 'chewing tobacco' produced as a result of any manufacturing operations and assessable as a manufactured product."

The process employed by the assessee in that case was described as follows: