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Following are the keywords used, herein explained for the understanding of the potential readers
“Oil” Coconut oil
“Product”- Coconut oil
“The Brand” Parachute
“The Company” Marico
“Market”- the Coconut oil market
Power of Five ka Waada, Har Boond Mein Zyada
India’s no. 1 Oil
The above-mentioned phrases can only be a synonym to one brand which has been diversely famous for its purity and that uniquely identified bottle- Parachute. Marico’s one of the major brands which cover ~59% of the share market in 2019, stands firm dominance over the market of coconut oil. Not only in India the brand has a dominant market presence in Bangladesh as well. The journey from selling oil in 100% tins, in the 1980’s to advertising the brand in its trademark blue round-shaped-plastic bottles, the brand has had a journey of its own. But, as they say, running a company is not a cakewalk, as things may not go that well as you imagined it to be.
Keeping the Parachute’s Tax Planning on the mind, the company took some steps. In order to avoid excise duty, the in-house marketing minds of the Company planned to never advertise the end-usage and purpose of the product. As the oil was available in comparatively smaller bottles which led to the huge popularity of the oil as a “hair oil”.
Now, the question arises, what’s the problem in this aspect of marketing? If you would have noticed Parachute bottles do not have “hair Oil” written on it. Also, even in the advertising, the brand talks about its purity and its diverse usage. While applying classification under excise duty the Company classified it under chapter 15 as edible oil which is not subject to excise duty. While hair oil is a beauty product classified under chapter -33 hence, it was liable for excise duty @8%.
The CBEC questioned the intent of the brand as they were selling the product in packets containing less than 200ml of oil. The government argued on the subject taking into consideration, the concept of substance over form. It explaining the fact that the prima facie usage of the product as intended by the company was as hair oil not as edible or cooking oil.
In return, the Company’s Parachute’s Tax Planning argument was based on the fact that the end-use of the product by the consumer is not the liability of the Company. Also, the small packets were made available in the market for the potential consumer base in form of students, who occasionally get involved in cooking, stating clearly the fact that Parachute oil is completely edible and pure, as approved by FSSAI
The CBEC discarded this argument and introduced a new rule, effective prospectively,
The earlier rule said the following:
“Circular No.145/56/1995-CX-3, dt. 31.08.1995, clarified that for classification of coconut oil under chapter 33 (as hair oil), it must satisfy the requirements of chapter Note 2 and 6 of Chapter 33 (of erstwhile 6 digit tariff system). Though oil may be capable of being used as hair oil, the product must satisfy the criteria of label/literature on packing of coconut oil showing its use as hair oil as per note 2 to Ch.33. The circular says that in the absence of any proof that the coconut oil was specifically prepared for use on the hair (or) any label/literature/indications on the containers to the effect, the subject goods cannot be classified under 3305.90 simply because they were packed in small containers and applied by some sections of the society on the hair and it would be classified under chapter 15 as coconut oil.”
The above paragraph sums up the entire fact that earlier if any oil has to be classified as hair oil under the head of beauty products. The same should be in the label and in its packaging. The classification under the head of “hair oil” cannot be merely on the basis of its end usage and availability of the product in smaller quantities in the market.
The above rule under the Circular No.145/56/1995-CX, dated. 31.08.1995 was withdrawn and a new rule under Circular No. 890/10/2009-CX dated 03.06.2009 (Order under section 37 B of Central Excise Act, 1944.) came into force
“In view of the foregoing discussion, it is concluded that coconut oil packed in containers up to 200 ml may be considered as generally used as hair oil. This would bring uniformity in assessment in respect of coconut oil sold in small containers irrespective of the fact as to whether its use as hair oil is indicated on containers/labels or not. Therefore, the following instructions/directions are issued:
(i) The Circular No.145/56/1995-CX, dated. 31.08.1995, stands withdrawn.
(ii) The coconut oil packed in small containers of sizes up to 200 ml shall be classified under heading 3305.”
The CBEC stood firm on its ground that the classification of the oil should be under the head of “hair oil” not “edible Oil”. Hence, in order to bring uniformity and cover parachute under the chargeability of excise duty, the CBEC changed criteria of classification, covering the 200ml parachute bottles under the chapter 33, which cover cosmetics, and are charged @8% and thereafter affecting their one of the most popular line items, contributing 70% of Marico’s CNO (coconut oil) Sales.
How can Marico accept defeat, when coconut oil packs up to size 200 ml forms about 22% of their consolidated turnover. They appealed to the higher authorities and the judgment turned into their favour. It gave India one of the landmark decisions in the history of tax planning and HSN classification. As per circular No. 1007/14/2015-CX, the order under 37B of Central excise act, 1944 was withdrawn, and Marico’s parachute continued to be classified under chapter 15 as edible oil. Afterwards, the company launched various new line items such as “parachute Advanced”. It was specifically marketed and sold as the “hair oil”
Conclusion:
The case of Marico’s brilliant Parachute’s Tax Planning was a classic example of well-coordinated business minds which takes into consideration even the smallest details in all the business aspects, whether it is financial planning, marketing arrangements and understanding legal as well as regulatory dynamics.
Sources:
https://pdicai.org/docs/Circular_No_1007_13_2015_CX_1310201511519523.pdf
https://www.dnaindia.com/business/report-marico-gears-up-for-excise-battle-1265211
http://www.ieport.com/2009/excise_cir/Circular-890.htm
https://cleartax.in/s/fats-oils-waxes-their-fractions-gst-rate-hsn-code
https://isha.sadhguru.org/in/en/wisdom/article/think-outside-bottle-story-parachute-oil
https://economictimes.indiatimes.com/news/economy/policy/gst-debate-now-continues-on-categorisation-of-products/articleshow/57819772.cms?from=mdr
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