In relief to fast moving consumer goods (FMCG) players such as Marico and Bajaj Consumer, the Supreme Court on Wednesday ruled in a 15-year-old dispute that small bottles of coconut oil should be classified as edible oil and taxed at 5%, rejecting the tax department’s demand to classify the oil as hair oil and tax it at 18%. Goods and services tax (GST) on edible oil is set at 5% while hair oil is taxed at 18%.

The court, however, clarified that if coconut oil is packaged in small bottles and labelled as hair oil, it should be classified as hair oil under the Central Excise Tariff Act, 1985.

This decision came as a relief for both manufacturers and consumers, as prices of edible coconut oil could have increased if it was classified as hair oil.

The Supreme Court's three-judge bench of Chief Justice Sanjiv Khanna and Justices Sanjay Kumar and R Mahadevan, had reserved the judgement on October 17 in this case.

The issue for consideration in the appeals filed by the revenue department was whether pure coconut oil, packaged and sold in small quantities ranging from 5 ml to 2 litres, would be classifiable as “Edible oil” under Heading 1513, titled Coconut (Copra) oil, etc., in Section III-Chapter 15, or as “Hair oil” under Heading 3305, titled Preparations for use on the hair, in Section VI-Chapter 33 of the First Schedule to the Central Excise Tariff Act, 1985.

The court ruled that the argument of the revenue department that the fact that edible coconut oil marketed by the respondents could also be used as hair oil is, therefore, not sufficient to classify the same under Heading 3305.

The ruling is in favour of manufacturers such as Marico Ltd, which has the Parachute brand, and Madhan Agro, which markets its edible coconut oil under the Shanthi brand.

The revenue department had stated before the court that the amount involved in its appeals, such as the excise duty, penalties, redemption fine and interest, would aggregate to over ?159 crore. The department had argued that the issue was relevant due to pendency of similar cases at various levels.

The entire row started when the Customs, Excise and Service Tax Appellate Tribunal (Cestat) in 2009 ruled that small-pack coconut oil should be classified as edible oil under Heading 1513 of Central Excise Tariff Act, 1985. This was against the Central Excise Commissioner’s views.

Madhan Agro Industries Pvt Ltd, which made 100% coconut oil in containers of up to 2 litres under the “Shanthi” brand, had challenged the show-cause notices of the Central Excise authorities proposing to levy duty treating the coconut oil sold during April 1, 2005 to August 31, 2007 as “hair oil”.

Similarly, Marico, which sells 100% coconut oil under the “Parachute” brand, challenged the show-cause notices of the Central Excise authorities. Marico’s appeals were allowed. 

Experts say this decision, if confirmed, brings considerable relief to manufacturers by enabling them to benefit from lower tax rates, especially for smaller packages that dominate the market.

 “Reduced tax burdens help manufacturers offer competitive pricing, thereby benefiting consumers in price-sensitive segments. The judgment also underscores the importance of clear product packaging and marketing strategies to navigate dual-use classifications effectively. By doing so, it sets a significant precedent for fairer tax treatment of products with overlapping uses, promoting broader market penetration, consumer affordability, and brand loyalty,” SR Patnaik, Partner (head - taxation), Cyril Amarchand Mangaldas, said.

For the Revenue, he said that looking ahead, applying the lower 5% GST rate, instead of the 18% rate for hair oil, would result in reduced tax revenues. “The ruling may also create a precedent for manufacturers of dual-use products. This ripple effect may prompt the revenue department to revise classification criteria and enforce stricter guidelines to mitigate potential losses for future. The decision emphasizes the need for a balanced tax framework that protects revenue while accommodating market realities and supporting industry growth,” he added.

Saurav Agrawal, Advocate, Delhi High Court agrees. “The ruling reshapes the Revenue Department’s approach to taxing coconut oil and similar dual-use products. This decision could lead to a reduction in the tax base, particularly for smaller packs of coconut oil, and further lead to a tangible drop in revenue generation, especially considering the substantial consumption of smaller packs in the domestic market, particularly in rural and economically weaker sections,” he said.