The Customs Appellate Tribunal has delivered a pivotal ruling clarifying that imported raw materials, even if destined for oral consumption as nutraceuticals or probiotics, must be classified based on their physical and chemical condition at the time of import - not their intended end-use. This decision reinforces the foundational principle of customs law that the taxable event is determined by the state of goods upon entry into India, not by post-import processing or marketing claims.
Background & Facts
The Dispute
The appellant, Sundyota Numandis Probioceuticals Private Limited, imported three key ingredients - Tendofit, Mobilee, and GG Orosoluble - for use in manufacturing nutraceutical and probiotic products in India. The Department of Customs classified these ingredients under Chapter 2106 as "miscellaneous edible preparations," triggering higher customs duties and penalties. The appellant contested this, asserting that each ingredient should be classified under more specific headings based on their intrinsic chemical composition: Tendofit and Mobilee under Chapter 3913 as natural polymers, and GG Orosoluble under Chapter 3002 as live microorganisms (probiotics).
Procedural History
- 2020: Department issued Show Cause Notice alleging misclassification and demanding Rs. 7.07 crore in differential duty, interest, and penalties.
- 28.06.2021: Commissioner of Customs confirmed the demand, classifying all three ingredients under CTH 2106 9099.
- 2022: Appellant filed appeal before the Customs Appellate Tribunal.
- 29.01.2026: Tribunal delivered final order allowing the appeal.
Relief Sought
The appellant sought: (1) Setting aside of the demand and penalties; (2) Reclassification of Tendofit and Mobilee under CTH 3913 as natural polymers; (3) Reclassification of GG Orosoluble under CTH 3002 as probiotics; and (4) Cancellation of interest and penalties on the grounds that the underlying demand was unsustainable.
The Legal Issue
The central question was whether imported raw ingredients, which are not edible in their imported form and require significant formulation before human consumption, can be classified as "food preparations" under Chapter 2106 of the Customs Tariff Act, 1975, based solely on their eventual use or FSSAI clearance, or whether classification must be determined by their condition, composition, and essential character at the time of import.
Arguments Presented
For the Appellant
The appellant relied on the General Rules of Interpretation (GIR), particularly GIR 3(b), which mandates classification by the component giving the product its essential character. For Tendofit, it argued that Mucopolysaccharides (85%) and Chondroitin Sulphate constituted the essential character, qualifying it as a natural polymer under CTH 3913. For Mobilee, Sodium Hyaluronate (60-75%) was the dominant component, similarly placing it under CTH 3913. For GG Orosoluble, it contended that Lactobacillus Rhamnosus GG - a live microorganism - constituted the essential character, making it classifiable under CTH 3002 as a probiotic. The appellant submitted expert certificates from IIT Delhi and IIT Bhubaneswar, referenced US and EU customs rulings, and cited Union of India v. Garware Nylons Ltd. to establish that the burden of proof lies with the Department to justify a different classification.
For the Respondent
The Department argued that because the ingredients were ultimately used in edible products and required FSSAI clearance, they were inherently "food preparations" under Chapter 2106. It contended that the presence of collagen or excipients like xylitol and sorbitol negated the "natural polymer" or "probiotic" classification, transforming the goods into consumable formulations. It relied on FSSAI certification as conclusive evidence of edibility and cited Bright Performance Nutrition to support classification of nutraceuticals under Chapter 2106. It dismissed expert opinions and foreign rulings as irrelevant, asserting that the final product’s intended use dictated classification.
The Court's Analysis
The Tribunal conducted a rigorous analysis grounded in the Customs Tariff Act, 1975, and binding precedents. It emphasized that classification must be determined by the condition of goods at the time of import, as established in Welkins Foods and Dunlop India. The Department’s reliance on FSSAI clearance was rejected as irrelevant, since FSSAI regulates end-products, not raw material imports. The Tribunal noted that none of the ingredients were in edible form upon import: Tendofit and Mobilee were imported in 25kg and 5kg drums respectively, requiring formulation into precise dosages; GG Orosoluble contained excipients solely for stability, not flavor or consumption.
"The core of the principles outlined above is to prevent subjectivity from influencing classification disputes. Reckless and unfounded consideration of subjective elements can lead to a cascade of issues in classification."
The Tribunal applied GIR 3(b) to each product, finding that the dominant component - Chondroitin Sulphate in Tendofit, Sodium Hyaluronate in Mobilee, and Lactobacillus Rhamnosus in GG Orosoluble - gave each its essential character. It accepted the expert opinions from IITs as credible, noting the Department failed to produce any chemical analysis or expert rebuttal. The Tribunal distinguished Bright Performance Nutrition, which dealt with finished supplements, from the present case involving raw materials. It also affirmed the persuasive value of US and EU customs rulings under the Harmonized System, citing S.R. Files and Tissues Ltd. and Hindalco Industries.
The Tribunal further held that the Department had not discharged its burden of proof under Garware Nylons and HPL Chemicals, and that interest and penalties could not be sustained where the underlying demand was legally untenable.
The Verdict
The appellant won. The Tribunal held that classification under the Customs Tariff Act must reflect the condition and essential character of goods at the time of import, not their intended use or post-import processing. Tendofit and Mobilee were reclassified under CTH 3913 as natural polymers, and GG Orosoluble under CTH 3002 as probiotics. The demand, interest, and penalties were set aside.
What This Means For Similar Cases
Classification Is Determined at Import, Not by End-Use
- Practitioners must challenge classifications based on FSSAI clearance, marketing claims, or intended consumption if the imported goods are raw materials.
- The burden shifts to the Department to prove the goods are not in the form claimed by the importer.
- Importers should document and retain technical data (e.g., assay reports, formulation protocols) to substantiate classification claims.
Essential Character Prevails Over Composite Composition
- When a product contains multiple components, classification follows the component that imparts the essential character, even if other substances are present.
- Excipients used for stability, preservation, or transport do not alter the essential character if they are not functional in the final edible product.
- Expert reports from reputable institutions (e.g., IITs, CSIR labs) carry significant weight if scientifically sound and unchallenged.
Foreign Customs Rulings Are Persuasive in HSN Matters
- US and EU classifications under the Harmonized System are admissible as persuasive authority in Indian customs disputes.
- Tribunals and courts increasingly recognize global alignment in HSN interpretation, especially where domestic jurisprudence is silent.
- Importers should proactively reference international rulings in their submissions to strengthen classification arguments.
