On Thursday, the Irish Supreme Court ruled that bread sold by fast-food giant “Subway” wasn’t actually bread at all and we have to talk about it.

You see, Irish laws mandate that a product will be classified as bread so long as the sugar content does not exceed 2% of the total weight of flour. But all of Subway’s bread options contained ~10% sugar, thereby violating the legal definition.

So in effect, the court ruled that the classification was inappropriate and stated that their bread was no longer exempt from Value Added Tax. Which means the company’s bread will not be treated as a staple food anymore and it will be subject to appropriate tax rates as deemed fit by the authorities.

Now ideally, we’d do a full-fledged story on this bit alone. But we thought it’d be even cooler to look at similar cases from India. So in today’s special edition, we have three examples for you — all illustrating classification problems and court judgments that have altered the nature of doing business in India. At least for the most part.


Case 1 — When Parachute wasn’t hair oil

Parachute is an iconic brand. And it’s safe to say most people have heard about Parachute coconut oil. But the interesting bit is that the product isn’t sold or marketed as hair oil. Instead, Marico classifies them as edible oil. The reason is quite simple. Edible oil carries a low tax rate. Cosmetic hair oil is taxed at a higher rate. So if you were a prudent business person, you’d choose to classify the product based on this little detail. But the authorities did not agree with this classification.

They contested that their market survey told them something entirely different. They believed customers who purchased “coconut oil” in small containers primarily used the product as hair oil. And as such, they were asking the tribunal (ruling on the matter) to not classify the objects based on technical and scientific specifications. Instead, rely on popular consensus. After all, in common parlance people often referred to Parachute oil as hair oil.

However, the tribunal disagreed. They believed that although you could use Parachute as hair oil, it was incumbent on the authorities to prove beyond all reasonable doubt that the product was specifically prepared for use on hair — by way of product labels/literature/indications on the container. Just because some people choose to use the product as hair oil, you can’t classify it as such. There must be a clear nexus between the two. And although Parachute ads subliminally try and indicate that you can use the product as hair oil. They don’t explicitly make this claim. The packaging too is devoid of any such communication. Instead, most of it is centred on the goodness of coconut oil and its apparent benefits to the human body.

Packaging Information

So the tribunal was forced to side with Marico and Parachute oil continued to be classified as “edible oil.”

Case 2 — When Sachin wasn’t a cricketer

If you’ve ever filed taxes, you know that you can save a whole lot of money by claiming deductions. For instance, there’s a clause in the IT Act that exempts income from foreign sources if certain special conditions are met. Let me explain.

Consider Section 80RR. If you were a select professional i.e. if you were an author, playwright, artist, musician, actor, or a sportsman and you received income from a foreign source, then authorities won’t tax the entire income if you earned this money whilst exercising your profession. The object of this circular was to promote a greater understanding of Indian culture abroad and also shore up foreign exchange reserves. So when the legendary cricketer, Sachin Tendulkar claimed deductions on income earned from advertisements and sponsorship deals (from the likes of PepsiCo and Visa), you’d think there would be no reason to suspect his claim.

After all, as a cricketer, Sachin has done more for this country than most people. But…

There is one tiny contention. PepsiCo and Visa didn’t pay him money because he played cricket for them. They paid him money for the ads. So technically, Sachin wasn’t making money whilst exercising his profession as a cricketer. And so there was scope for some confusion. But Sachin quickly clarified this bit for the tax authorities by stating that he was primarily an “actor” and not a “cricketer.”

That’s right. Sachin Tendulkar, arguably, the greatest batsman that has ever lived, was claiming that he was merely a non-professional cricketer. And in a bid to support his argument he showed that all income derived from playing cricket was classified as “Income from Other Sources” in his tax returns. And that’s when matters took a rather interesting turn.

The tax authorities claimed that this was preposterous. “If Sachin is not a cricketer then who is a cricketer?”, argued the Assessing Officer. Their contention was this

The appellant [Sachin] has in fact not been “acting” or performing as an “artist” in any of the commercials or sponsorship events in the spirit of the terms. What he has actually been doing is only “appearing” at these events and commercials. Such activities as earlier discussed are at best “ancillary” or “subsidiary” activities through which the appellant has earned income… His nature of performance as an actor or an artist does not attract the interested parties for paying him substantial amounts of money.,. Even if his performance is most average, the payment is made only on account of his “appearing” and not by virtue of him being an “Actor” or “Artist”.

And so, they argued that there’s no basis for him to claim deductions as he wasn’t earning money by being an Actor. But the tribunal adjudicating the matter disagreed with this assessment. They claimed —

While appearing in advertisements and commercials, [Sachin] has to face the lights and camera. As a model, the assessee brings to his work a degree of imagination, creativity and skill to arrange elements in a manner that would affect human senses and emotions and to have an aesthetic value. No doubt, being a successful cricketer, it has added to his brand value as a model. But the fact remains that the assessee has to use his own skills, imagination and creativity. Every person or for that matter every sportsman do not possess that degree of talent or skill or creativity and face the lights and camera etc.”

And so Sachin was allowed to retain his status as an actor and claim deductions based on Section 80RR.

A sweet victory indeed. Speaking of sweets it would be a travesty if we did not talk about the infamous KitKat ruling before wrapping up this story. So here goes…

Case 3 — When KitKat wasn’t chocolate

Back in 1999, Nestle was grappling with a classification problem. They had argued for long that KitKat was a ‘wafer with a chocolate coating’’.  And as such, the product ought to have attracted a tax rate of 10%. Plain and simple.

The tax authorities disagreed. They believed the product was a “chocolate with a wafer inside”, liable to be taxed at 20%. They wanted to tax Nestle and they wanted it bad.

And finally, the matter was brought before the Mumbai Customs, Excise and Gold Tribunal where the adjudicating authorities had to decide — Is KitKat a ‘wafer with a chocolate coating’ (10% tax) or a ‘chocolate with a wafer inside’ (20% tax)?

The tax authorities started with a bang. They noted 

“The product is a composite product consisting of chocolate, wafer and praline. It, therefore, cannot be classified as a wafer... It would also not be correct to say that wafer contains chocolate since it is completely covered by it. The predominant product in terms of value and weight is milk chocolate, comprising 68 to 72% by weight of chocolate and also value.

It is also considered by the manufacturer to be chocolate and treated as chocolate for purposes of storage and transport. It is perceived by the dealers of the product as well as its ultimate customers as chocolate and no person in common trade parlance refers to it as a wafer.”

Ipso facto, KitKat must be chocolate.

But the tribunal disagreed. Milk chocolate does in fact contain cocoa butter and cocoa powder. However, the mere presence of cocoa does not mean the preparation ought to be classified as chocolate. As they noted — ‘While all chocolate must necessarily contain cocoa, it is not every cocoa product or preparation that is chocolate’​. They also observed that there was nothing to indicate that the product was being sold as chocolate. Their contention was that people were buying KitKat under the tacit assumption that it was a combination of chocolate and biscuit. They did not have any reason to believe otherwise. And as such, they agreed with Nestle’s classification.

KitKat was finally declared a “wafer” and that was that.

Anyway, that’s it from us today. If you thought this was an interesting story, don’t forget to share this article with your friends, family and colleagues. Do it for Sachin eh?

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Until next time…