Nestle Fined Rs 24 Crore Over Kitkat Classification

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The Central Excise department has slapped a duty of Rs 24 crore on Nestle India, including a 100 per cent mandatory penalty for alleged misclassification of one of its products, "KitKat", which resulted in the company paying a lower rate of duty.

In an order dated July 27, 1998, the Commissioner of Central Excise (Adjudication), Mumbai, has confirmed a duty of Rs 12 crore (approximately) on Nestle India along with an additional mandatory penalty of Rs 12.04 crore as per the demand raised by the excise department.

He has also directed Nestle India to pay interest as per the provisions of section 11 AB of the Central Excise Act.

However, the adjudicator has not ordered the confiscation of plant, land, building or machinery of the company for violation of Central Excise Act and rules. Nestle India had been issued show cause notices by the Central Excise department on September 11, 1997, demanding central excise duty amounting to Rs 12 crore (approximately) from the company.

Replying to a faxed questionnaire from Business Standard to Nestle India, a spokesman from the company said that Nestle is looking into the matter but has no comments to offer at the moment. The Directorate General of Anti-Evasion had earlier initiated an investigation against Nestle India for misclassification of its product "Kitkat" as wafers and waffles attracting excise duty at the rate of 10 per cent.

According to senior officials in the revenue department, investigations conducted at the company's New Delhi corporate office and at its plant at Ponda, Goa, allegedly revealed that the product was in fact classifiable as chocolate attracting a much higher rate of duty at 20 per cent compared to wafers and waffles.

In fact, careful scrutiny of evidence collected revealed that the product "Kitkat" was predominantly made of milk chocolate covering wafers. The marketing of the product was also being done as a chocolate, the officials pointed out.

Based on the evaluation of evidence gathered in the course of investigation, the department had issued a show cause notice to Nestle India on September 11, 1997, demanding central excise duty amounting to Rs 12 crore.

The matter was subsequently adjudicated by the Commissioner who issued the order on July 23 last month, directing the company to pay up Rs 12 crore duty and an additional Rs 12.04 crore mandatory penalty. Nestle India had posted a net profit of Rs 74.3 crore for the fiscal ended December 31, 1997, clocking a 41 per cent increase over its previous year's net profit figure of Rs 52.8 crore. The company recorded a gross revenue of Rs 1434.8 crore, a rise of nearly 18 per cent over the previous year's figure of Rs 1214.4 crore.

The company had created a contingency provision of Rs 35 crore (including Rs 17 crore for earlier years) for various contingencies resulting from matters related to launch of new products in the market and other issues of litigation.