Flavoured Milk Classified Under Tariff Heading 0402, Subject to 5% GST: Karnataka High Court

In a significant relief for the dairy industry, the Karnataka High Court has clarified the long-standing tax controversy surrounding "flavoured milk." Justice S.R. Krishna Kumar ruled that the product must be classified under Tariff Heading 0402, which attracts a Goods and Services Tax (GST) rate of 5%, rather than the higher bracket of 12% often demanded by tax authorities under Heading 2202.

The Contentious Classification

The dispute originated when tax authorities issued show-cause notices to M/s. Dodla Dairy Limited, alleging that flavoured milk—due to the addition of flavouring agents—ceased to be mere "milk" and should instead be treated as a "beverage" under Chapter 22 (Heading 2202). Consequently, orders were passed demanding higher tax rates.

The petitioner, having deposited over Rs. 72 lakh under protest, moved the High Court, arguing that flavoured milk is predominantly milk and should be classified alongside dairy products.

Judicial Reasoning and Precedents

Justice S.R. Krishna Kumar relied heavily on the principle of consistency in judicial rulings. The court noted that the Andhra Pradesh High Court had previously settled this exact issue in Sri Vijaya Vishakha Milk Producers Company Ltd. Vs. Assistant Commissioner of Central Tax , where it was determined that the addition of minor flavouring agents does not alter the fundamental characteristics of milk.

Furthermore, the court referred to the Madras High Court judgment in Parle Agro Pvt. Limited Vs. Union of India , which held that even with additives, flavoured milk remains a dairy product. The court observed that interpreting Heading 2202 to include flavoured milk would be an incorrect application of tariff logic, as "beverages" in that context typically refer to non-dairy concoctions.

Key Observations

The judgment clarifies the application of tariff entries, emphasizing that the nature of the product, not just a superficial interpretation of "beverages," is paramount:

• "Though the entry speaks only of milk containing added sugar or other sweetening matter, flavoured milk cannot be taken out of tariff heading 0402 merely because of addition of 0.5% of Badam flavour."
• "Flavoured milk derived from dairy milk... cannot fall within Chapter 22."
• "The GST Council can recommend a rate only but cannot determine the classification of goods or services."

Final Decision and Implications

The High Court allowed the writ petition, quashing the impugned adjudication orders from 2021 and 2022. The Court has directed the respondents to refund the amounts collected from the dairy company, along with applicable interest, within three months.

This decision serves as a binding precedent, providing industry-wide clarity that flavoured milk is to be treated as a dairy product under the 5% tax slab. For businesses, this resolves the uncertainty caused by conflicting classification claims and reinforces the judicial stance against aggressive revenue interpretations that inflate tax burdens on essential dairy products.