The Central Excise and Service Tax Appellate Tribunal (CESTAT) has reaffirmed a foundational principle in tax administration: where both the assessee and the department have consistently classified goods under the same tariff heading for years, the department cannot later reclassify the goods to impose differential duty, interest, or penalty. This judgment underscores the doctrine of promissory estoppel and legitimate expectation in indirect tax matters.
Background & Facts
The Dispute
The dispute centers on the classification of a tobacco product branded "MAMA Zarda" manufactured by M/s. Rajan Jhiriwal and M/s. R.R. Jhiriwal. The department contended that the product should be classified under Central Excise Tariff Item (CETI) 2403 99 30 as "zarda scented tobacco", attracting a higher duty rate. The appellant maintained that it was correctly classified under CETI 2403 99 10 as "chewing tobacco", which carried a lower duty. The differential in duty rates became significant after Notification No. 25/2015-CE dated 30.04.2015, which increased the duty on zarda scented tobacco.
Key Facts
- The appellant began manufacturing "MAMA Zarda" on 01.08.2012
- On 02.08.2012, the appellant intimated the Superintendent of Central Excise of its intention to manufacture the product as "chewing tobacco" and filed Form-1 under the Capacity Determination Rules, 2010
- On 02.08.2012, the Assistant Commissioner issued an order classifying the product under CETI 2403 99 10
- Between 2012 and 2016, the department issued at least 13 orders consistently classifying the product under CETI 2403 99 10
- On 02.03.2015, the appellant applied to amend its classification to CETI 2403 99 30, but the Deputy Commissioner rejected the application on 04.03.2015
- On 07.07.2015, the appellant withdrew its amendment application, which was accepted by the department via email on 01.09.2016
- The appellant filed ER-1 returns from August 2012 to March 2016, consistently declaring the product under CETI 2403 99 10
- On 21.01.2016, a search was conducted at the appellant’s premises; samples were seized and sent to the Central Referral Chemical Laboratory (CRCL)
- On 23.04.2015, CRCL reported the product as "brown coloured powder containing tobacco, lime and flavouring compound"
- On 23.02.2017, a show cause notice was issued demanding differential duty for March 2015 to February 2016, alleging misclassification
- On 31.01.2022, the Additional Director General confirmed the demand of central excise duty, interest under section 11AA, and penalty under section 11AC, and imposed penalties under Rule 26 of the Central Excise Rules, 2002 on the company and its partners
Procedural History
- 01.08.2012: Commencement of manufacturing and initial classification under CETI 2403 99 10
- 02.08.2012: Assistant Commissioner’s order classifying product as chewing tobacco
- 02.03.2015: Appellant’s application to reclassify as zarda scented tobacco
- 04.03.2015: Deputy Commissioner rejects amendment; reaffirms classification under CETI 2403 99 10
- 07.07.2015: Appellant withdraws amendment application
- 01.09.2016: Department accepts withdrawal via email
- 21.01.2016: Search conducted; samples seized under Panchnama
- 23.02.2017: Show cause notice issued
- 31.01.2022: Order-in-Original passed by Additional Director General confirming demand and penalties
- 08.04.2026: Hearing before CESTAT
- 02.06.2026: Final Order passed by CESTAT
The Parties' Positions
Appellant (M/s. Rajan Jhiriwal, M/s. R.R. Jhiriwal, Robin Jhiriwal, Rajan Jhiriwal): Argued that the classification under CETI 2403 99 10 had been consistently accepted by the department for over four years. Relied on Commissioner of Central Excise and S.T., Alwar v. Tara Chand Naresh Chand to assert that the department cannot change its stance after acquiescence. Contended that the CRCL report was not conclusive and that the samples tested were from 2015, not the period under scrutiny.
Respondent (Directorate General of GST Intelligence): Relied on the CRCL report and recovered perfume bottles during the search to argue that the product contained scent and flavor, thus qualifying as "zarda scented tobacco". Argued that the earlier classifications were erroneous and that the search-based samples were more reliable.
Relief Sought
The appellants sought:
- Setting aside of the demand for differential central excise duty of Rs. 43.47 lakh per machine per month
- Cancellation of interest under section 11AA
- Cancellation of penalty under section 11AC
- Setting aside of penalties imposed under Rule 26 of the Central Excise Rules on M/s. R.R. Jhiriwal, Robin Jhiriwal, and Rajan Jhiriwal
The Legal Issue
Can the department impose differential duty, interest, and penalty on an assessee for misclassification when both the assessee and the department have consistently classified the goods under the same tariff heading for over four years, and the department had previously rejected the assessee’s attempt to reclassify?
Arguments Presented
For the Appellant
The appellant’s counsel relied on the Supreme Court’s decision in Commissioner of Central Excise and S.T., Alwar v. Tara Chand Naresh Chand, where the Court held that where both parties have consistently treated a product as falling under one tariff heading, the department cannot later reclassify it to impose higher duty. The appellant emphasized that the department had issued 13 orders between 2012 and 2016 confirming the classification under CETI 2403 99 10. The withdrawal of the 2015 amendment application further demonstrated mutual acceptance of the classification. The CRCL report was challenged as irrelevant since it was based on samples from 2015, while the demand pertained to 2015 - 2016. The counsel argued that the presence of flavoring agents does not automatically make a product "scented tobacco" under the tariff.
For the Respondent
The department’s representative relied on the CRCL report indicating the presence of flavoring compounds and the recovery of perfume bottles during the search to argue that the product was intentionally adulterated to evade higher duty. It contended that the earlier classifications were based on incorrect information and that the search-based evidence was more reliable. It further argued that the appellant’s conduct amounted to deliberate misdeclaration to avail lower duty rates.
The Court's Analysis
The Tribunal conducted a meticulous review of the timeline and the conduct of both parties. It noted that from 2012 to 2016, the department had not only accepted but actively affirmed the classification of the product under CETI 2403 99 10 through multiple formal orders. The department’s own actions constituted a binding acquiescence.
"The department cannot, therefore, contend that the product should be classified as zarda scented tobacco under CETI 2403 99 30."
The Tribunal distinguished the Tata Chemicals case cited by the department, noting that in that case, the assessee had not consistently maintained its classification. Here, the appellant’s position was consistent, and the department had never objected until after a search in 2016, when duty rates had increased.
The Court further held that the CRCL report, while scientifically valid, could not override the long-standing administrative practice. The Tribunal emphasized that tax administration must be guided by certainty and fairness, not retrospective reinterpretation.
Regarding penalties under Rule 26 of the Central Excise Rules, the Tribunal observed that the order failed to make any finding that the goods were liable to confiscation. Rule 26(1) explicitly requires that the person must be dealing with goods "which he knows or has reason to believe are liable to confiscation." The Tribunal cited its own decision in Shri Ramesh Garg v. Commissioner, CGST, holding that without a finding of confiscation liability, penalty under Rule 26 cannot be imposed.
"There has to be a discussion and a finding that the goods are liable to confiscation. In the absence of such a finding penalties under rule 26 of the Central Excise Rules could not have been imposed."
The Court concluded that the department’s conduct amounted to a waiver of its right to reassess, and the imposition of penalties was legally unsustainable.
The Verdict
The appeals were allowed. The order dated 31.01.2022 was set aside in its entirety. The demand for differential central excise duty, interest under section 11AA, and penalty under section 11AC were cancelled. Penalties imposed under Rule 26 of the Central Excise Rules on M/s. R.R. Jhiriwal, Robin Jhiriwal, and Rajan Jhiriwal were also set aside. The Tribunal directed that all proceedings arising from the impugned order be closed.
What This Means For Similar Cases
Classification Consistency Overrides Technical Findings
- Practitioners must argue that long-standing mutual classification (4+ years) creates a legitimate expectation that bars retrospective reassessment
- Even if scientific reports suggest a different classification, administrative acquiescence prevails unless fraud or misrepresentation is proven
- ER-1 returns and departmental orders are critical documentary evidence to establish consistency
Penalty Under Rule 26 Requires Confiscation Finding
- Rule 26 penalties cannot be imposed unless the order explicitly holds that goods are liable to confiscation
- Merely proving duty evasion is insufficient; the statutory condition of "liability to confiscation" must be independently established
- Practitioners should challenge Rule 26 penalties in all cases where confiscation is not discussed or ordered
Departmental Acquiescence Is a Defense
- Taxpayers should document all departmental communications, orders, and approvals
- Any attempt by the department to change classification after years of acceptance must be challenged on grounds of promissory estoppel and abuse of power
- This judgment reinforces that tax administration cannot be used as a tool for revenue recovery through retroactive reinterpretation
