M/S.Reganathan And Sons vs. Additional Commissioner Of GST And Central Excise

Facts

The petitioner, M/s. Renganathan & Sons, a partnership firm engaged in the tobacco business, challenged an order passed by the Assistant Commissioner of GST & Central Excise. The respondent authority demanded enhanced compensation cess, asserting that the petitioner's product should be classified under HSN 2403 99 10, rather than the petitioner's declared classification under HSN 2403 99 90. The impugned order dated 13.02.2025 confirmed a demand of Rs. 1,31,98,398/- for short payment of compensation cess for the financial year 2020-21, along with interest and a penalty of Rs. 13,19,840/-. The petitioner contended that their product, processed by sprinkling jaggery water, did not undergo manufacturing that would change its character, and thus, they paid compensation cess at 96%. The respondent disagreed, leading to the present writ petition.

Held

The Court held that the product manufactured by the petitioner, which involves sprinkling jaggery water on dried tobacco leaves, does not constitute a manufacturing activity. Relying on the Division Bench judgment in Pachiappa Chettiar v. State of Madras, the Court found that mere sprinkling of jaggery water, drying in the shade, and bulking does not convert raw tobacco into a different product. The Court emphasized that manufacture implies a change, but not every change is manufacture, and the essential character of the article must be altered. The Court also referred to the Explanatory Notes of HSN for unmanufactured tobacco and the decision in Crane Betel Nut Powder Works v. CCE, Thiruppathi, which held that processes that do not result in a new and distinct product with a different character and use do not amount to manufacturing. The Court found that the petitioner's activity fell far short of what was considered manufacturing in these precedents. Consequently, the Court set aside the impugned order and held that the petitioner's product would fall under CETH 2401 20 90 as unmanufactured tobacco, provided their activity remains confined to what was approved in Pachiappa Chettiar's case. The writ petition was allowed.

Key Issues

1. Whether the product manufactured and cleared by the petitioner, involving the sprinkling of jaggery water on dried tobacco leaves, constitutes a manufacturing activity thereby warranting classification under HSN 2403 99 10 for compensation cess purposes, as contended by the revenue, or if it remains unmanufactured tobacco classifiable under HSN 2403 99 90, as argued by the petitioner? Petitioner's Contention: The petitioner argued that the process of sprinkling jaggery water does not alter the character of the raw tobacco, and therefore, no manufacturing activity is involved. They relied on the principle that manufacture implies a change in the article, and mere treatment, labour, or manipulation does not necessarily amount to manufacture if the essential character remains the same. They cited precedents like Pachiappa Chettiar v. State of Madras and Crane Betel Nut Powder Works v. CCE, Thiruppathi. Revenue's Contention: The revenue contended that the processes adopted by the petitioner resulted in a product that is capable of being chewed, thus classifying it as a manufactured product under HSN 2403 99 10 and demanding enhanced compensation cess.