Namaste DOST!

Most businesses believe one simple thing: “We only repack goods. We don’t manufacture anything.”

This Gujarat High Court judgment gently but firmly tells us—GST may not see it that way.

Summary (What, Why, Outcome)

This case dealt with the GST classification of non-fermented, non-liquored crushed tobacco leaves that were packed from bulk gunny bags into small retail pouches. For decades, including under the excise regime, such activity was treated as dealing in unmanufactured tobacco. After GST came into force, the department reclassified the same goods as chewing tobacco, attracting significantly higher Compensation Cess.

The Gujarat High Court held that under GST, the definition of “manufacture” is different from excise law. If processing and retail packing result in a product with a distinct name, character, and use, it can amount to manufacture. On this basis, classification as chewing tobacco was upheld. However, the Court also ruled that the department could not invoke the extended limitation period under Section 74 and restricted the demand to normal limitation under Section 73.

Facts of the Case (Background)

The petitions before the Gujarat High Court involved businesses engaged in supplying non-fermented, non-liquored crushed or cut tobacco leaves. These tobacco leaves were procured in bulk, typically in gunny bags, and then subjected to processes such as drying, cleaning, sieving, sizing, cutting, and packing into small retail pouches.

For many years, including under the Central Excise regime, the petitioners had classified their products as unmanufactured tobacco under Tariff Heading 2401. Even after the introduction of GST from 1 July 2017, they continued the same classification and discharged GST and Compensation Cess accordingly.

Later, the Directorate General of GST Intelligence conducted searches and investigations at the business premises of the petitioners. Based on the investigation, show cause notices were issued proposing to classify the goods as chewing tobacco under Tariff Heading 2403. This change in classification had serious tax consequences because chewing tobacco attracts a much higher rate of Compensation Cess.

In some cases, the department also invoked the extended period of limitation under Section 74 of the CGST Act, alleging suppression or misstatement. The adjudicating authorities confirmed the demands. Aggrieved by these orders, the petitioners approached the Gujarat High Court.

Legal Issue

The core legal issue before the Court was simple to state, but difficult in impact:

A connected issue was equally important:

Arguments

Court’s Decision

The Gujarat High Court examined the matter in detail and delivered a balanced ruling.

Legal Reasoning & Analysis

The most important takeaway from the judgment lies in the shift from excise thinking to GST thinking.

Under excise law, manufacture was closely linked to the process and to deeming provisions in chapter notes. Under GST, Section 2(72) introduces a broader test. The focus is on whether processing results in a product with a distinct name, character, and use.

In this case, even though the raw material remained tobacco leaves, the Court found that the final product was different in use. It was ready for chewing and sold as such. That change in use was enough to cross the line into “manufacture” under GST.

At the same time, the Court recognised that classification disputes are not the same as fraud. A genuine interpretational dispute, especially one rooted in long-standing practice, does not automatically justify invoking Section 74.

Important Message for Every Business Owner: Takeaways

• Do not assume that excise-era classifications are safe under GST. The definition of manufacture has changed.

• Repacking from bulk to retail can matter, especially if the final product acquires a new use.

• Ingredients are not the only test. Under GST, use and marketability can be decisive.

• Section 74 is not automatic. Bona fide classification disputes should fall under Section 73.

• Review high-risk classifications early. Where tax rate differences are large, proactive review can save sleepless nights.

Why This Matters

This judgment has implications beyond tobacco. Any business involved in bulk-to-retail repacking should pause and re-examine its GST classification. At the same time, the ruling reassures taxpayers that honest classification disputes should not be painted as fraud.

Conclusion

This case teaches a simple but uncomfortable lesson. Under GST, it is not enough to say, “We did not add anything.” The law asks a deeper question: What did the product become?

Still, the Court also sent a message of fairness. If a business has acted bona fide, the tax system should not respond with allegations of fraud.

GST compliance today is not about fear. It is about understanding the law as it stands—and acting before disputes arise.

📞 Need help with a similar classification issue? Contact GST DOST for personalized support.

FAQ

Q: What was the dispute in this case?

A: The dispute was whether crushed tobacco leaves packed from bulk into retail pouches should be classified as unmanufactured tobacco or chewing tobacco under GST.

Q: How did the Gujarat High Court rule?

A: The Court upheld classification as chewing tobacco under GST but restricted the demand to normal limitation under Section 73.

Q: Does repacking alone amount to manufacture under GST?

A: As per this judgment, repacking combined with processing that results in a distinct use can amount to manufacture under GST.

Q: Can repacking alone be treated as manufacture under GST?

A: Yes. If repacking, along with processing, results in a product having a different use or identity, it can be treated as manufacture under GST.

Q: What should businesses do after this ruling?

A: Businesses should review bulk-to-retail activities, document processes clearly, and reassess GST classification where tax impact is significant.

References

• Case: Patel Products & Anr. vs Union of India & Ors., Gujarat High Court, R/Special Civil Application No. 2407 of 2025 & connected matters, decided on 19.12.2025.

• Statutory Provisions:

  • Section 2(72), Central Goods and Services Tax Act, 2017

  • Section 73 and Section 74, Central Goods and Services Tax Act, 2017

Written by CA Vikash Dhanania | Reviewed by GST DOST Legal Research Team | Updated on 31/12/2025.

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