A powder you stir into milk is not a beverage: the Supreme Court fixes classification at the point of sale, not the kitchen
Justices Manmohan and Arun Palli hold that a tax entry listing syrups, cordials and essences is a list of liquids, and that what the buyer later does with a product cannot change its rate.
The label on a tin of health drink powder tells you to mix it with milk or water. Madhya Pradesh's commercial tax authorities said that made the product a non-alcoholic drink or beverage, taxable at ten per cent. The manufacturer said that a powder sold across the counter is a powder, taxable at eight per cent under the residuary entry. The High Court agreed with the manufacturer in 2011. Fifteen years later, the Supreme Court has dismissed the revenue's appeals, holding that the identity of goods at the moment of sale decides their classification — and not what the consumer does with them afterwards.
Two entries, two rates
The dispute concerns two products, a health drink powder and a mix, and the assessment year 1997-1998 under the Madhya Pradesh Commercial Tax Act, 1994.
The revenue's case was that the indications on the goods — both the graphical representation and the accompanying instructions — require the consumer to dilute them with milk or water, so they are classifiable under Entry 20(ii) of Part IV of Schedule II, which covers “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”, taxed at ten per cent. The manufacturer's case was that goods sold across the counter in the form of powder and biscuit fall under Part VII Entry 1, the residuary entry for all other goods not included elsewhere, taxed at eight per cent.
The High Court of Madhya Pradesh upheld the residuary classification in August 2011. These appeals, filed in 2013, challenged that.
A parallel dispute ran under the Entry Tax Act, 1976, and the Court set out how fragmented that year was. Within the single assessment year 1997-1998 there were three distinct phases on different slabs. Between 1 April and 30 April 1997 the only entry the goods could fall under was the residuary one, at one per cent. From May to September 1997 they were not amenable to entry tax at all, because the Schedule contained no entry dealing with such goods. From 1 October 1997 to 31 March 1998 two competing entries became relevant — an entry for all kinds of non-alcoholic drinks and beverages at two per cent, and the residuary entry. The same classification question therefore arose under a second statute, on the same products, with the rates and the gap varying month by month.
The taxable event is the supply
The Court's starting proposition is the one that decides the case: 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.
Rates vary according to whether a good is a powder, a concentrate or a beverage, but the authorities are bound to levy tax on the form of the good at the time of sale. They must look at what is supplied, not at the end use. If a powder mix such as protein powder is sold, the tax applicable to powders alone may be levied; if a ready-to-drink beverage such as bottled cold coffee or a packaged protein shake is sold, the rate for beverages applies.
The subsequent act of a consumer mixing powder with milk or water does not alter the taxable event, because liability is fixed at the point of supply. The Bench made the point with an example that disposes of the revenue's argument neatly: protein powder may be consumed in liquid form after mixing, or it may equally be used to make barfi and eaten as a solid. A rule that classified goods by what buyers do with them would give the same tin two rates depending on the household.
For the proposition that end use does not determine classification, the judgment relies on Commissioner of Central Excise, Delhi v. Carrier Aircon Ltd., which holds that the end use to which a product is put cannot by itself be determinative, the relevant factors being the statutory fiscal entry and the basic character, function and use of the goods.
Reading the entry by the company it keeps
The second strand is about the words of Entry 20(ii) itself, and it is an application of a familiar canon.
In that entry the expression “beverages” is followed by “syrups, cordials, distilled juice, ark and essences” — all of which denote liquids or liquid preparations. The common thread running through the enumerated items, the Court held, is that they are liquid substances capable of being bottled, stored and consumed or otherwise used in liquid form. The rule of ejusdem generis requires a general word to be construed in the context of the specific words accompanying it, so “beverages” must take its meaning from that class and cannot be read in isolation to capture goods of an altogether different character and physical form.
The Bench also noted what the entry does not say. It makes no reference to the end use of the goods at all. What the legislature has specified, therefore, is classification by reference to physical characteristic and form, not by reference to purpose — so the identity of the goods at the taxable event must be the determinative factor.
That answered the revenue's reliance on interpretive tests. The common parlance test, the functional character test and the basic nature test cannot be used to import an end-use concept so as to override or bypass statutory guidance, particularly where the language of the entry is clear and unambiguous, as the Court held it is here.
The consequence follows directly, and the Court accepted the respondents' formulation of it: goods which do not answer the description of a specific entry must necessarily fall within the residuary entry, and cannot be forced into an inapposite specific entry merely to attract a higher rate of tax.
Why the revenue's authorities did not fit
Two decisions pressed by the appellants were distinguished, and the reasons are instructive for anyone arguing classification.
In Pioma Industries, the question was whether Rasna is taxable as a beverage or non-alcoholic drink, but there was no adjudication of that point because the matter was remanded to the Tribunal. More importantly, the entry under consideration there carried an explanation that specifically included powders, tablets and concentrates used for the preparation of non-alcoholic drinks. The Court drew the obvious inference: the legislature, knowing that powders can be brought into the beverage category by express deeming fiction, chose not to do so in the entry at issue here. An omission of that kind, set against a statute that made the inclusion elsewhere, is a deliberate choice rather than an oversight.
In S. Samuel M.D., there were no competing entries at all; the question was whether tea is a foodstuff, and the Court held that tea is a beverage produced by steeping leaves in boiled water and is not food. It did not decide whether tea leaves, in the form of granules or powder, could themselves be classified as a beverage — which is the question these appeals turn on.
Order
The appeals were dismissed and pending applications disposed of. Before parting, the Court placed on record its appreciation for the assistance rendered by all the counsel who appeared, naming three of them.
The holding is about a repealed State statute and an assessment year that ended nearly thirty years ago, which makes it tempting to treat as a curiosity. It is not. The reasoning is about how any classification entry is to be read, and both strands travel: that liability attaches to the thing supplied rather than the thing it may become, and that a general word in a list takes its colour from the specific words beside it. Both arise constantly under the current goods and services tax, where concentrates, powders, mixes and ready-to-drink preparations sit at different rates and manufacturers routinely argue about which side of the line a product falls.
The fifteen years the appeals waited are worth a line of their own. The High Court decided in August 2011, the appeals were filed in 2013, and judgment came in October 2026 on an assessment year that closed in March 1998. Classification disputes are among the most common in indirect tax and among the least suited to that kind of delay, because the rate a manufacturer is told to charge determines its pricing while the litigation runs. Here the manufacturer's reading has been vindicated, but it had to price and account on an unresolved question for most of three decades.
The sharpest practical point is the one about the residuary entry. Revenue authorities tend to treat it as a last resort to be avoided, on the instinct that a specific entry is always better. The Court has said the opposite: where goods do not answer a specific description, the residuary entry is where they belong, and the higher rate is not a reason to put them somewhere they do not fit.