Flavoured milk or beverage? AAAR says Vadilal's Power Sip is the latter

GST rate is 5% on milk and 12% for beverage; company says product is flavoured milk

The issue of classification of food products under the goods and services tax (GST) regime refuses to die down. Under the GST regime, rates are decided based on these classifications, giving rise to various disputes over the matter.

In the latest case, the Gujarat-based Appellate Authority of Advance Ruling (AAAR) upheld the ruling by AAR that a product by Vadilal Industries – Power Sip – is a beverage and not flavoured milk. This went against the contention of Vadilal. Experts too said classification of products should also factor in how are they  referred to in common parlance.

Milk is classified under the harmonised system of nomenclature (HSN) heading 0402 and attracts a five per cent rate. On the other hand, beverages made of milk are classified under the heading 2202 and attract a 12 per cent rate.

The company argued that the product is made by standardisation of fresh milk according to the fat contents and heating at a certain temperature followed by filtration, pasteurisation, homogenisation, and then mixing of sugar as well as various flavours and finally bottling.

It argued that adding flavours to milk does not change the essential character of milk and the product is flavoured milk.

The company further argued that Prevention of Food Adulteration Rules, 1955 (PFA Rules), say skimmed milk is a product containing fat of more than 1.5 per cent and less than 26 per cent. Power Sip, it said, has a fat content of minimum 2.5 per cent and not greater than 26 per cent. As such, it merits classification under HSN 0402.

However, the Gujarat AAR said HSN 0402 does not cover beverages of milk flavoured with cocoa or other substances and as such the product merits classification under heading 2202.

Aggrieved, Vadilal approached the state-based AAAR.

It argued that the AAR overlooked the difference between flavoured milk (which is almost 100 per cent milk) and other products that contain a small percentage of milk and, hence, were beverages containing milk.

The AAAR observed that the heading 0402 contains full cream milk and partially or fully skimmed milk.

However, Power Sip uses double toned milk, which is not full cream milk or skimmed milk. Even if that ground is taken, the product cannot be classified under heading 0402.

Besides, the product is flavoured with cocoa and other substances. As such, it is covered under the heading 2202.

Harpreet Singh, indirect tax partner at KPMG in India, said this is another case law where prominence has been given to constituents of the products rather than applying the common parlance test.

The appellant’s contention that adding flavour to the milk does not change the essential character of milk has not been given heed to, he said.

“Classification under GST involves looking at multiple aspects and principles such as end use, constituents, target buyers, common parlance etc., ” added Singh.