The Supreme Court of India has held that the taxable event in sales tax law is the act of supply, and the classification of a product must be determined strictly by the physical form in which it is sold rather than its eventual end use by the consumer. A Bench comprising Justice Manmohan and Justice Arun Palli dismissed the appeals filed by the Madhya Pradesh commercial tax authorities, affirming that “GRD Powder” and “GRD Mix” manufactured and marketed by Cadila Health Care Ltd. cannot be classified as “non-alcoholic drinks and beverages” and must instead be taxed under the residuary entry at the lower rate of 8%.
Background of the Case
The appeals arose from a judgment and order dated August 3, 2011, passed by the High Court of Madhya Pradesh in writ petitions W.P. Nos. 3020 of 2003 and 4633 of 2003. The High Court had upheld the classification of Cadila Health Care Ltd.’s products, “GRD Powder” and “GRD Mix,” under the residuary entry (Part VII, Entry 1) of Schedule II to the Madhya Pradesh Commercial Tax Act, 1994, attracting an 8% tax rate for Assessment Year 1997–1998.
The Revenue challenged this before the Supreme Court, contending that the products should be categorized under Entry 20(ii), Part IV, Schedule II of the 1994 Act—covering “All kinds of non-alcoholic drinks and beverages including syrups, cordials, distilled juices, ark and essences when sold in sealed or capsuled or cork bottles or jars”—which attracted a higher tax rate of 10%.
The Court also examined the position under the Entry Tax Act, 1976, for the same assessment year, noting three distinct phases:
- Between April 1 and April 30, 1997, the goods fell under the residuary entry at a 1% tax rate;
- Between May and September 1997, the goods were not amenable to entry tax as no relevant entry existed;
- Between October 1, 1997, and March 31, 1998, the competing entries were Entry 14 of Schedule II (“All kinds of non-alcoholic drinks and beverages, ice-cream, kulfi and ice candy” at 2%) and Serial No. 1 of Schedule III (residuary goods at 1%).
Arguments on Behalf of the Appellants
Advocate Arkaj Kumar, appearing for the tax authorities, argued that taxing entries must be interpreted in their natural sense rather than in a hyper-technical manner. He submitted that the product packaging instructs consumers to “enjoy the preparation either hot or cold” by mixing it with milk or water, projecting the imagery of a health drink rather than a food preparation. He noted that commodities such as tea and coffee, though sold in powder form, are consistently taxed as beverages.
The Appellants submitted that three recognized tests governed classification:
- The “common use and functional character test”, relying on Atul Glass Industries (Pvt.) Ltd v. Collector of Central Excise (1986) 3 SCC 480;
- The “basic nature of the good test”, relying on Indian Aluminum Cables Ltd. v. Union of India & Ors. (1985) 3 SCC 284;
- The “popular meaning or common parlance test”.
The Appellants further cited Pioma Industries v. State of Kerala (2008) 12 SCC 695 (concerning “Rasna” powder under an entry mentioning Horlicks, Boost, and Bournvita), Hamdard (Wakf) Laboratories v. Commissioner, Commercial Tax, U.P., 2026 SCC OnLine SC 306 (holding that the word “including” broadens an entry without quantitative or form thresholds), and S. Samuel M.D., Harrisons Malayalam v. Union of India (2004) 1 SCC 256 (affirming that tea is a beverage and not a foodstuff).
Arguments on Behalf of the Respondents
Senior Advocate Vivek Sarin, representing Cadila Health Care Ltd., argued that under the scheme of the 1994 Act—particularly Sections 2(d) and 9—the charging section restricts levy strictly to goods specified in Schedule II. He maintained that bringing unlisted commodities into a specific entry would impermissibly broaden the statute beyond its express terms.
The Respondents argued that Entry 20(ii) contains no reference to use or adaptation. Citing Dunlop India Ltd. v. Union of India (1976) 2 SCC 241, counsel stressed that the end use of an article is irrelevant for classification. Reliance was also placed on Hamdard Wakf Laboratories v. Collector of Central Excise (1999) 6 SCC 617, which held that beverages are liquids for drinking (other than water), meaning goods must exist in liquid form at the taxable event to qualify.
The Court’s Analysis
The Supreme Court rejected the Revenue’s contentions and held that fiscal statutes demand strict interpretation, reiterating the principle laid down in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 that legislative intention must be gathered strictly from unambiguous statutory wording without adding or implying terms.
Turning to the taxable event and classification criteria, the Bench referred to Commissioner of Central Excise, Delhi v. Carrier Aircon Ltd. (2006) 5 SCC 596, observing:
“the taxable event is the act of supply and the incidence of taxation is determined by the nature of the good in the form in which it is sold.”
The Court emphasized that taxing authorities must judge a product by what is actually supplied rather than how a consumer might later use it:
“However, the tax authorities are bound to levy tax based on the form of the good at the time of sale. The tax authorities are bound to look at what is supplied and not at what is the ‘end use’ of the good.”
“Consequently, the classification which determines the applicable rate of tax must be based on the form of the good at the time of sale and not on the manner in which the consumer may later choose to use it.”
The Court illustrated this distinction by noting that while protein powder can be mixed with milk or water to make a drink, it can also be used to prepare solid foodstuffs such as an Indian milk-based fudge (barfi).
Examining the specific language of Entry 20(ii), the Bench observed that the term “beverages” is accompanied by “syrups, cordials, distilled juices, ark and essences”:
“The common thread running through these enumerated items is that they are liquid substances capable of being bottled, stored and consumed or otherwise utilised in liquid form.”
The Bench pointed out that Entry 20(ii) does not classify items by user adaptation:
“Consequently, what has been specified by the legislature is classification of goods not by reference to its end use, but by reference to their physical characteristic and form. Accordingly, this Court is of the view that the identity of the goods at the time of taxable event, namely, sale, must be the determinative factor for the purpose of classification under the taxing statute.”
Rejecting the Revenue’s attempt to use common parlance or functional character tests to import end-use concepts, the Court ruled:
“This Court is of the opinion that common parlance test, functional test or basic nature test cannot be applied to import end use concept to override or bypass explicit or implicit statutory guidance, particularly, where the language of the entry is clear and unambiguous-like in the present appeals.”
Applying the statutory interpretation rule of ejusdem generis, Justice Manmohan explained:
“The rule of ejusdem generis requires a general word to be construed in the context of specific words accompanying it. The expression ‘beverages’ must derive its meaning from the class constituted by these associated words and cannot be interpreted in isolation so as to encompass goods of an altogether different character or physical form.”
Consequently, the Court held:
“goods which do not answer the description of a specific entry must necessarily fall within the residuary entry. They cannot be forced into an inapposite specific entry merely to attract a higher rate of tax.”
The Court also distinguished the precedents cited by the Revenue:
- Pioma Industries was inapplicable because Entry 87 in that case contained an explicit legislative explanation specifically including powders, tablets, and concentrates used to prepare drinks—a deeming fiction absent in Entry 20(ii).
- S. Samuel M.D. decided only whether tea is a foodstuff; it never determined whether tea leaves in granular or powder form constitute a beverage.
- Hamdard (Wakf) Laboratories (2026) dealt with a sharbat that already existed in liquid form, and the word “including” cannot be treated as all-encompassing across different physical forms.
Decision of the Court
Concluding that the goods are sold across the counter in solid and powder form, the Bench observed:
“While it is possible that the goods may ultimately be used to make a beverage or a solid preparation, at the point of taxable event, they remain in powder form. Consequently, they do not fall within the expression ‘beverage’.”
The Supreme Court accordingly dismissed the appeals and affirmed the classification of the goods under the residuary entry.
Case Details:
Case Title: Addl. Commr. Commercial Tax & Ors. Versus Cadila Health Care Ltd & Anr.
Case No.: Civil Appeal Nos. 9788-9789 of 2013
Bench: Justice Manmohan, Justice Arun Palli
Date: October 5, 2026
