NEW DELHI, DEC 03, 2012: REVENUE has won yet another case in the Supreme Court.

The short question of law for consideration in these appeals, filed by the Revenue, under Section 35L of the Central Excise Act is whether soft serve served at the restaurants/outlets commonly and popularly known as McDonalds, is classifiable under heading 21.05 (as claimed by the revenue) or under heading 04.04 or 2108.91 (as claimed by the assessee) of the Central Excise Tariff Act, 1985.

During the relevant period, the respondent-assessee was engaged in the business of selling burgers, nuggets shakes, soft-serve etc. through its fast food chain of restaurants. In so far as the manufacture and service of soft serve is concerned, the assessee used to procure soft serve mix in liquid form from one M/s Amrit Foods, Ghaziabad; at Amrit Foods, raw milk was pasteurised, skimmed milk powder was added (the milk fat content in the said mixture is stated to be 4.9%, not exceeding 6% at any stage); sweetening agent in the form of sugar or glucose syrup and permitted stabilizers were added; the mixture, in liquid form, was then homogenized, packed in polyethylene pouches and stored at 0 to 40C. This material was then transported to the outlets under the same temperature control, where the liquid mix was pumped into a Taylor-make vending machine; further cooled along with the infusion of air, and finally, the end product, soft serve, was drawn through the nozzle into a wafer cone or in a plastic cup and served to the customers at the outlet.

For the periods from April 1997 to March 2000, three show cause notices were issued to the assessee. These alleged that the soft serve ice-cream was classifiable under Chapter 21, relating to - Miscellaneous Edible Preparations of the Tariff Act, attracting 16% duty under heading 21.05, sub-heading 2105.00 - Ice-cream and other edible ice, whether or not containing cocoa.

While adjudicating on the first show cause notice, vide order dated 31st May, 2000, the adjudicating authority held that : soft serve was classifiable under heading 04.04. Describing the goods as - other dairy produce; edible products of animal origin, not elsewhere specified or included, it held that the process undertaken by the assessee amounted to manufacture and the extended period of limitation was not applicable. However, while adjudicating on the second show cause notice, vide order dated 28th September, 2001, the adjudicating authority concluded that: soft serve was classifiable under heading 21.05; the process undertaken by the assessee for conversion of soft serve mix to soft serve amounted to manufacture and that the assessee was not entitled to small scale exemption because of use of the brand name - McDonalds.While adjudicating on the third show cause notice, the adjudicating authority reiterated that : soft serve was classifiable under heading 21.05; the process undertaken by the assessee for conversion of soft serve mix to soft serve amounted to manufacture and small scale exemption was not available to the assessee because of use of the brand name - McDonalds.In an appeal filed by the assessee, the Commissioner of Central Excise (Appeals) reversed the above finding and classified soft serve under the sub-heading 2108.91.

The Tribunal came to the conclusion that the process undertaken by the assessee, namely, conversion of soft serve mix to soft serve amounted to manufacture and that soft serve was classifiable under sub-heading 2108.91, describing the goods as - Edible preparations, not elsewhere specified or included - not bearing a brand name, attracting nil rate of duty.

The Revenue is in appeal before the Supreme Court.

The Supreme Court noted,- According to the rules of interpretation for the First Schedule to the Tariff Act, mentioned in Section 2 of the Tariff Act, classification of an excisable good shall be determined according to the terms of the headings and any corresponding chapter or section notes. Where these are not clearly determinative of classification, the same shall be effected according to Rules 3, 4 and 5 of the general rules of interpretation. However, it is also a well known principle that in the absence of any statutory definitions, excisable goods mentioned in tariff entries are construed according to the common parlance understanding of such goods.

Therefore, in order to find an appropriate entry for the classification of soft serve, it would be necessary to first construe the true scope of the relevant headings. None of the terms in heading 04.04 and heading 21.05 have been defined and no technical or scientific meanings have been given in the chapter notes. Evidently, soft serve is not defined in any of the chapters. Under these circumstances, it becomes imperative to examine if the subject good could come under the purview of any of the classification descriptions employed in the Tariff Act. Having regard to the nature of the pleadings, the issue is whether the term - ice-cream in heading 21.05 includes within its ambit the product soft serve. That leads us to the pivotal question, whether, in the absence of a statutory definition, the term - ice-cream under heading 21.05 is to be construed in light of its scientific and technical meaning, or, whether we are to consider this term in its common parlance understanding to determine whether its amplitude is wide enough to include soft serve within its purview.

Common Parlance Test: Time and again, the principle of common parlance as the standard for interpreting terms in the taxing statutes, albeit subject to certain exceptions, where the statutory context runs to the contrary, has been reiterated. The application of the common parlance test is an extension of the general principle of interpretation of statutes for deciphering the mind of the law maker; - it is an attempt to discover the intention of the legislature from the language used by it, keeping always in mind, that the language is at best an imperfect instrument for the expression of actual human thoughts.

The Supreme Court referred to several decisions and observed. - Therefore, what flows from a reading of the aforementioned decisions is that in the absence of a statutory definition in precise terms; words, entries and items in taxing statutes must be construed in terms of their commercial or trade understanding, or according to their popular meaning. In other words, they have to be constructed in the sense that the people conversant with the subject-matter of the statute, would attribute to it. Resort to rigid interpretation in terms of scientific and technical meanings should be avoided in such circumstances. This, however, is by no means an absolute rule. When the legislature has expressed a contrary intention, such as by providing a statutory definition of the particular entry, word or item in specific, scientific or technical terms, then, interpretation ought to be in accordance with the scientific and technical meaning and not according to common parlance understanding.

Classification of Soft-Serve

The Tribunal has held that in view of the technical literature and stringent provisions of the PFA, soft serve cannot be classified as - ice-cream under Entry 21.05 of the Tariff Act. The Supreme Court is of the opinion, that in the absence of a technical or scientific meaning or definition of the term - ice-cream or soft serve, the Tribunal should have examined the issue at hand on the touchstone of the common parlance test.

Headings 04.04 and 21.05 have been couched in non-technical terms. Heading 04.04 reads - other dairy produce; edible products of animal origin, not elsewhere specified or included whereas heading 21.05 reads - ice-cream and other edible ice.Neither the headings nor the chapter notes/section notes explicitly define the entries in a scientific or technical sense. Further, there is no mention of any specifications in respect of either of the entries. Hence, Supreme Court was unable to accept the argument that since soft serve is distinct from - ice-cream due to a difference in its milk fat content, the same must be construed in the scientific sense for the purpose of classification. The statutory context of these entries is clear and does not demand a scientific interpretation of any of the headings. Therefore, in the absence of any statutory definition or technical description, Supreme Court saw no reason to deviate from the application of the common parlance principle in construing whether the term - ice-cream under heading 21.05 is broad enough to include soft serve within its import.

The assessee has averred that soft serve cannot be regarded as - ice-cream since the former is marketed and sold around the world as soft serve.Supreme Court did not see any merit in this averment. The manner in which a product may be marketed by a manufacturer, does not necessarily play a decisive role in affecting the commercial understanding of such a product. What matters is the way in which the consumer perceives the product at the end of the day notwithstanding marketing strategies. Needless to say the common parlance test operates on the standard of an average reasonable person who is not expected to be aware of technical details relating to the goods. It is highly unlikely that such a person who walks into a - McDonalds outlet with the intention of enjoying an - ice-cream, softy or soft serve, if at all these are to be construed as distinct products, in the first place, will be aware of intricate details such as the percentage of milk fat content, milk non-solid fats, stabilisers, emulsifiers or the manufacturing process, much less its technical distinction from - ice-cream.On the contrary, such a person would enter the outlet with the intention of simply having an - ice-cream or a softy icecream, oblivious of its technical composition. The true character of a product cannot be veiled behind a charade of terminology which is used to market a product. In other words, mere semantics cannot change the nature of a product in terms of how it is perceived by persons in the market, when the issue at hand is one of excise classification.

The counsel for the assessee also contended that based on Rule 3(a) of the General Rules of Interpretation which states that a specific entry shall prevail over a general entry, soft serve will fall under heading 04.04 since it is a specific entry. Supreme Court did not see any merit in this contention. The counsel for the assessee had himself contended that - ice-cream was a dairy product and would have been classified under heading 04.04 if heading 21.05 had not been inserted into the Tariff Act. However, in the presence of heading 21.05, - ice-cream cannot be classified as a dairy product under heading 04.04. Hence, it is obvious that in relation to heading 04.04, heading 21.05 is clearly a specific entry.

Therefore, the Court could not subscribe to the claim that heading 04.04 is to be regarded as a specific entry under Rule 3(a) of the General Rules of Interpretation, since such an interpretation would be contrary to the statutory context of heading 21.05.

In conclusion, Supreme Court rejected the view taken by the Tribunal and held that soft serve is to be classified as - ice-cream under heading 21.05 of the Act.

Resultantly, the appeals are allowed and the impugned orders of the Tribunal are set aside.

(See 2012-TIOL-114-SC-CX)