Mere Broad-Basing Of Entries Under Central Excise Tariff Act, Cannot Justify Re-Classification, Without Change In Nature, Character Or Use Of The Product: Supreme Court
The Supreme Court has ruled that the classification of a product under the Central Excise Tariff Act, 1985, cannot be changed merely on the ground of change of tax structure or tariff entries, without showing a change in the nature and character of a product or a change in the use of the product(Commissioner of Customs, Central Excise and Service Tax, Hyderabad vs Ashwani Homeo...
The Supreme Court has ruled that the classification of a product under the Central Excise Tariff Act, 1985, cannot be changed merely on the ground of change of tax structure or tariff entries, without showing a change in the nature and character of a product or a change in the use of the product(Commissioner of Customs, Central Excise and Service Tax, Hyderabad vs Ashwani Homeo Pharmacy).
The bench of Justices Dinesh Maheshwar and Vikram Nath was dealing with an appeal against the decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) who had set aside the order of the Commissioner of Customs and Central Excise (Adjudicating Authority), where the latter had confirmed the demand raised on the respondent, Ashwani Homeo Pharmacy, for the differential duty payable by it with respect to the product, “Aswini Homeo Arnica Hair Oil” (AHAHO).
The Adjudicating Authority had held that the product could not be classified as ‘medicament’ under Tariff Item 3003 90 14 or under any item stated in Chapter 30 of the First Schedule to the Central Excise Tariff Act. The Adjudicating Authority opined that the product being a “Hair oil”, was required to be classified as ‘cosmetic’ under Tariff Item 3305 90 19 under Chapter 30.
The top court observed that the said product was classified as ‘medicament’ under Chapter 30 on at least four different occasions by the department, including two orders passed by the Commissioner (Appeals), and the said orders had attained finality.
The court concluded that the department was not justified in seeking to re-open the settled position in relation to the product in question, merely on the ground of the amendment made to the Central Excise Tariff in the year 2012, which had made certain changes in Chapter 30 and Chapter 33. The said changes had essentially broadened their ambit and scope and provided modified marginal notes and tariff entries with detailed specifications.
While holding that the said changes had no impact on the product of the respondent, the court by applying the twin test of ‘common/commercial parlance test’ and the ‘ingredients test’, held that the said product merited classification as ‘medicament’ under Chapter 30 and not as ‘cosmetic or toilet preparations’ under Chapter 33 of the First Schedule to the Act.
While dismissing the contention of the department that the product was classifiable under Chapter 33 as a ‘cosmetic or toilet preparations’ merely because its label carried the expression “Hair Oil”, the court remarked that anything which is prepared for being used on the hair and carries the name “Hair Oil”, would not lose its character as medicament if otherwise it has been prepared for therapeutic or prophylactic uses. The bench observed that the Adjudicating Authority had ignored the preceding significant expressions “Homeo” and “Arnica”.
While holding that for a product to be classified under Chapter 33, it has to be first a ‘cosmetic’, the court concluded that AHAHO was predominantly of pharmaceutical value and the item of cosmetic, i.e., hair oil, was nothing but a medium for appropriate use of that pharmaceutical value.
The respondent, Ashwani Homeo Pharmacy, is engaged in the manufacture of the said product, which is used for control/ prevention of hair fall and dandruff, amongst other purposes.
Ashwani Homeo challenged the order of the Adjudicating Authority, where the latter had confirmed the demand raised on it for the differential duty payable in terms of Section 11-A (10) of the Central Excise Act, 1944, ordered payment of interest on the said differential duty, and imposed penalty under Rule 25 of the Central Excise Rules, 2002.
The appeal was allowed by CESTAT, who set aside the order of the Adjudicating Authority. The Tribunal held that AHAHO fell in the category of ‘medicament’ and thus, it was rightly classified under Chapter 30 of the First Schedule to the Act.
The Tribunal ruled that only for the reason of being sold over the counter and not on a medical prescription, would not take the product out of the category of medicine. The Tribunal reckoned that when different branches of medicine and licensing authority recognized baldness or hair fall as a disease, the Adjudicating Authority was not entitled to take a different view. The Tribunal concluded that AHAHO was a homeopathic medicine and its classification, as previously accepted, was not required to be altered.
In the appeal filed against the decision of the Tribunal before the Supreme Court, the Revenue Department pleaded that due to the change in tariff structure, the orders prior to 2012 had lost their precedential value.
The department argued that Chapter 30 has been reworded to remove the distinction between patent/proprietary and generic medicaments, and has been amended to classify them in terms of whether they are put in unit containers for retail sale or not. Also, the mention about the Drugs and Cosmetics Act and the various Pharmacopeia came to be deleted. It further pointed out that under Chapter 33, the phrase “Hair oil” became prominent under which, subsidiary headings of “perfumed hair oil” and “others” came to be specified.
It averred that Tariff Item 3305 90 19, specifically meant for “Hair oils”, directly covered the product in question.
The top court observed that the said product was classified as ‘medicament’ under Chapter 30 on at least four different occasions by the department, including two orders passed by the successive Commissioner (Appeals) during 1994-2004; and the said orders had attained finality.
The bench dealt with the issue of whether the product AHAHO, merited classification as a ‘medicament’ under Chapter 30 or as ‘cosmetic or toilet preparations’ under Chapter 33, by applying the following test. Firstly, the common/commercial parlance test i.e., how the product is understood commonly, including by the persons dealing in the same and by the end users; Secondly, the ingredients test i.e., whether the ingredients used in the product are found mentioned in authoritative textbooks.
Dealing with the common parlance test, the court remarked that as the primary object of a taxing statute is to raise revenue, the entries under which various products are classified are not to be understood in their scientific and technical meaning; rather the terms and expressions used in tariff have to be understood by their popular meaning, i.e., the meaning attached to them by those dealing with or using the product.
Further, the words and expressions, unless defined in the statute, have to be construed in the sense in which persons dealing with them understand i.e., as per trade understanding and usage.
The bench added: “Yet further, there is no fixed test or static parameter for correct classification of a product and it essentially depends on the meaning assigned to it by the persons concerned with it.”
The court observed that one of the essential factors for determining whether a product falls under Chapter 30 as a ‘Pharmaceutical product’ or not, is as to whether the product is understood as a pharmaceutical product in common parlance.
Referring to a catena of judgments, the court added: “Moreover, as held in Sharma Chemicals (supra), the mere fact that a product is sold across the counters and not under a doctor’s prescription, does not by itself lead to a conclusion that it is not a medicament; and in Meghdoot (supra), that a product may be medicinal without having been prescribed by a medical practitioner. It is held by this Court in BPL Pharmaceuticals (supra) and reiterated in Meghdoot (supra) that the items which may be sold under names bearing a cosmetic connotation would nevertheless remain medicines based on the composition.”
On the issue whether a particular product is classifiable under Chapter 30 as ‘medicament’ or under Chapter 33 as ‘cosmetic’, the court said that one of the essential factors to be considered is whether the preparation is essentially for cure/prevention of disease or for care; the former being a medicament and the latter a cosmetic. The court added that preparation having only subsidiary curative or prophylactic value would fall under Chapter 33.
Applying the twin test, the court concluded that the said product had satisfied the said tests and was rightly held as a ‘medicament’ by the Tribunal. It further held that merely for being available across the counter and not on doctor’s prescription, the said product does not cease to be a medicament.
“Taking up the test relating to the ingredients, there appears absolutely no reason to suggest that the product in question, AHAHO, does not pass this test. It remains indisputable that the product has been manufactured as a drug after being duly licensed by the competent authorities and carries the combination of as many as four Homeopathic medicines, Arnica Montana, Cantharis, Pilocarpine, and Cinchona in its preparation. These Homeopathic medicines are duly found mentioned in Homeopathic Pharmacopoeia of India15 as also in the Dictionary of Practical Materia Medica16 placed before us by the learned counsel for the respondent,” said the court.
It added: “As noticed, the product in question is essentially meant for dealing with the conditions arising in and on the scalp with hair being the integral part thereof. The product consists of Homeopathic medicines.”
While dealing with the observations of the Adjudicating Authority that, if the intention was to identify the product as medicament, there was no need to label it as “Hair Oil”, the court said, “While the expression “Hair Oil” does appear on the label, the other integral expressions “Homeo” and “Arnica” preceding the expression “Hair Oil” could not have been ignored and could not have been left aside.”
The court further held that the Tribunal had rightly observed that when hair fall or baldness is recognised as a medical condition, the Adjudicating Authority could not have taken a different view, which was not recognized by any branch of medicine.
“The Adjudicating Authority had gone to the extent of observing that hair growth was at best a cosmetic necessity rather than a disease requiring immediate attention or treatment! The Tribunal has rightly observed that when hair fall or baldness is recognised as a medical condition, the Adjudicating Authority could not have taken a different view, which was not recognized by any branch of medicine. The Tribunal has also rightly pointed out that the product clearly mentioned that it could be used for other ailments like headache and that it induces good sleep,” said the court.
“Moreover, the Adjudicating Authority seems not to have given adequate attention to the contents of Chapter 30 and the fact that for being accepted as medicament, the product is not invariably required to carry only therapeutic use. A product having prophylactic use is also envisaged under the Headings 3003 and 3004. If the product claims to improve blood circulation to the hair roots and thereby controlling hair fall, its prophylactic use cannot be gainsaid,” the court added.
The bench observed that the words “Hair Oil” occurring on the label of the product was only indicating the medium through which Homeopathic medicines comprising the product are to be applied. It accepted the respondent’s contention that in relation to the product in question, hair oil was only a medium through which the medicine was to be applied on the scalp.
“We are unable to accept the submissions and the efforts on the part of the appellant to take the product in question to Chapter 33 merely because of its label carrying the expression “Hair Oil” while ignoring the preceding significant expressions “Homeo” and “Arnica”. As observed by this Court in BPL Pharmaceuticals (supra), for a product to be taken to Chapter 33, it has first to be a ‘cosmetic’,” said the court.
While dealing with the contention advanced by the department that since “Hair oil” is specifically mentioned in Chapter 33, a specific entry under Chapter 33 would take precedence over a general entry under Chapter 30, the court held, “The submissions about specific entry to be preferred to the general entry do not take the case of appellant any further. In the present case, in fact, the referred entry of Chapter 33 relating to the Tariff Item ‘Hair oil’ under the Heading 3305 is itself to be taken as a general entry and in any case, when hair oil is being used only as a medium for use/administration/application of the medicine, the case would fall in the specific entry pertaining to medicament under Headings 3003 or 3004; and it being of the medicines of Homeopathic system, it would fall either in Tariff Item 3003 90 14 or in Tariff Item 3004 90 14. In any case, the product in question cannot fall under Chapter 33.”
The court further held that the drug license issued by the respective authorities under Schedule K to the Drugs and Cosmetics Rules, 1945, was a relevant factor that cannot be ignored.
The bench thus dismissed the appeal of the department.
“For what has been discussed hereinabove, answers to the points arising for determination are that the product in question, AHAHO, merits classification as ‘medicament’ under Chapter 30 and not as ‘cosmetic or toilet preparations’ under Chapter 33 of the First Schedule to the Central Excise Tariff Act, 1985; and the change in tariff structure by way of amendment brought about in the year 2012 did not justify any re-look at the classification of the product in question.”
Case Title: Commissioner of Customs, Central Excise and Service Tax, Hyderabad vs Ashwani Homeo Pharmacy
Citation : 2023 LiveLaw (SC) 397
Counsel for the Appellant: Mr. Vikramjit Banerjee, ASG Mr. Akshay Amritanshu, Adv. Mr. Abhishek, Adv. Mr. Adit Khorana, Adv. Mr. Prashant Rawat, Adv. Mr. Tathagat Sharma, Adv. Mr. shivam Singhania, Adv. Mr. Sunil Kumar Srivastava, Adv. Mr. Brajesh Kumar, Adv. Mr. Sudhakar Kulwant, Adv. Mr. Ashutosh Jain, Adv. Mr. Samyak Jain, Adv. Mr. Mukesh Kumar Maroria, AOR
Counsel for the Respondent: Mr. V.V.S. Rao, Sr. Adv. Mr. D. Bharat Kumar, Adv. Mr. Aman Shukla, Adv. Mr. M. Chandrakanth Reddy, Adv. Mr. Gopal Jha, AOR
Central Excise Tariff Act, 1985: The Supreme Court has ruled that mere broad-basing of entries under the Central Excise Tariff Act, cannot justify re-classification, without a change in the nature, character or use of the product.
The court concluded that the revenue department was not justified in seeking to re-open the settled position in relation to the classification of a product, merely on the ground of the amendment made to the Central Excise Tariff in the year 2012, which had made certain changes in Chapter 30 and Chapter 33.
While holding that the said changes had no impact on the product in question, the court by applying the twin test of ‘common/commercial parlance test’ and the ‘ingredients test’, held that the said product merited classification as ‘medicament’ under Chapter 30 and not as ‘cosmetic or toilet preparations’ under Chapter 33 of the First Schedule to the Act.