J. K. Papad Industries v Union Of India: Gujarat HC on Fryums Classification

J. K. Papad Industries & Anr. challenged, before the Gujarat High Court, a show cause notice issued under Section 74 of the Central/Gujarat Goods and Services Tax Act, 2017. The notice sought to levy GST at 18% on unfried fryums (un-cooked snack pellets made by extrusion), which the petitioners had supplied under HSN 19059040 instead of HSN 19059030. The case shows how a Section 74 notice can turn on a classification dispute that involves an advance ruling, a CBIC circular and a GST Council recommendation. The petitioners succeeded.

This page is a research summary of one specific Indian tax judgment, NOT legal advice. Always verify against the full judgment and consult a professional for case-specific guidance.

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The case at a glance

• Parties: J. K. Papad Industries vs Union Of India
• Bench: Gujarat High Court
• Date: 11 September 2024
• Court level: High Court
• Sections engaged: 74
• Outcome: Taxpayer succeeded

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Facts of the case

The petitions were filed in the High Court's supervisory jurisdiction under the Constitution. They challenged a show cause notice dated 7 February 2024 under Section 74 of the GST Act as wholly without jurisdiction. The notice proposed GST at 18% because the petitioners manufacture un-fried or un-cooked snack pellets through extrusion and supplied them without payment of GST, classifying them under HSN 19059040 rather than HSN 19059030. Several special civil applications raised the same classification issue. They were heard together with the consent of counsel, and Special Civil Application No. 3711 of 2024 was treated as the lead matter.

In the lead matter, the petitioner is a private limited company in edible food products, registered under the GST Acts. One of its products is unfried fryums. They are made from cereals and pulses such as wheat, adad and rice, with edible starch, salt, preservatives and water. The mix is cooked in a steam cooker or extruder into dough, shaped through a sheeting machine or die, dried, cooled, packed and sold. The petitioner's case was that before 1 July 2017 fryums were covered by the entry for "Papad" under the Gujarat Value Added Tax Act, 2003. It relied for this on the Gujarat VAT Tribunal's decision in Avadh Food Products v. State of Gujarat, followed in Swethin Food Products v. State of Gujarat. Under GST there was confusion over classification, and in a case involving M/s Sonal Products an advance ruling held that unfried fryums were not "papad" and were taxable at 18%.

The petitioner applied for an advance ruling in 2019. The Advance Ruling Authority, by order dated 17 September 2020, followed the Sonal Products line and held 18% applicable. On appeal, the Advance Ruling Appellate Authority by order dated 28 June 2021 allowed the appeal. It held that "papad" of different shapes and sizes is classifiable under heading 1905, covered by Entry no. 96 of the exemption notification, and therefore chargeable to nil rate. CBIC then issued a circular dated 13 January 2023 clarifying in para 5 that snack pellets such as fryums fall under Customs Tariff Heading 19059030 and are taxable at 18%.

Central GST audit of the petitioner's returns and books ran from February to April 2023. The audit raised the classification issue and relied on the circular. The petitioner objected, relying on the appellate advance ruling order. The audit report dated 24 April 2023 rejected the objection on the strength of the circular and initiated the demand process. At its 50th meeting on 11 July 2023, the GST Council recommended a 5% rate for uncooked/unfried snack pellets made by extrusion, with the past-period issue to be regularised on an "as is where is" basis. CBIC followed with a circular dated 1 August 2023. The department nonetheless issued an intimation in Form GST DRC-01A proposing to demand tax, and the Section 74 notice followed.

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Issues raised

• Was the Section 74 show cause notice dated 7 February 2024 without jurisdiction?
• Are unfried fryums or snack pellets made by extrusion classifiable under HSN 19059040 (nil rate, per the appellate advance ruling) or HSN 19059030 (18%, per the CBIC circular dated 13 January 2023)?
• What is the effect, for the past period, of the GST Council's 50th-meeting recommendation and the CBIC circular dated 1 August 2023?
• Did the petitioners suppress facts, namely the extrusion stage of their process, when obtaining the advance ruling, as the Revenue alleged?

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What the court held

The case is recorded as a taxpayer success. The source reasoning field states "appeal was allowed". The Revenue's contentions in the judgment show what the petitioners had to meet.

The Revenue submitted that the circular dated 13 January 2023 was issued on the GST Council's recommendation and was only clarificatory. It also contended that the petitioners had not mentioned the extrusion stage in the manufacturing process chart furnished to the Gujarat Appellate Authority for Advance Ruling. In its view, the petitioners had therefore suppressed material facts about fryums made and supplied through extrusion. On that footing it said they obtained an advance ruling placing the product under HSN 19059040, when the correct heading was 19059030, taxable at 18% under Serial No. 16 of Schedule III to Notification No. 1/2017-Integrated Tax (Rate) dated 28.06.2017. The Revenue further argued that the decisions relied on by the petitioners did not apply on these facts.

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Strategy observations

1. The petitioner in the lead matter relied on the Advance Ruling Appellate Authority's order dated 28 June 2021, which had placed "papad" of different shapes and sizes under heading 1905 at nil rate. It cited that order in its objection during the audit.
2. The petitioner relied on the earlier VAT-era decisions in Avadh Food Products and Swethin Food Products, which treated fryums as covered by the "Papad" entry.
3. The petitioner relied on the GST Council's 50th-meeting recommendation of 11 July 2023 and the CBIC circular dated 1 August 2023, which provided for regularising the past period on an "as is where is" basis.
4. The Revenue relied on the circular dated 13 January 2023 and the suppression allegation about the extrusion stage. The suppression allegation was directed at the advance ruling obtained by the petitioners.
5. Several similar petitions were heard together, with Special Civil Application No. 3711 of 2024 as the lead matter. The challenge went to the jurisdiction of the Section 74 notice itself.

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Why this case matters

The case sits at the intersection of an advance ruling, a later CBIC clarificatory circular, and a GST Council recommendation on how the past period is to be treated. It also involves an allegation of suppression made against a taxpayer who held a favourable appellate advance ruling. A Section 74 notice rests on allegations of this kind, and here the notice was challenged on jurisdiction at the show cause stage.

The matter is one of several connected classification petitions on unfried fryums and snack pellets before the Gujarat High Court. For researchers tracking GST classification disputes over fryums, papad and extruded snack pellets, it records the competing positions of the taxpayer and the Revenue and a result in the taxpayer's favour.

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Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals. Original document: https://indiankanoon.org/doc/53545595/