2004 (12) TMI 89 - SC - Central Excise

Supreme Court: Actual use of bulk drugs in pharmaceuticals required for exemption. Appellant loses benefit due to diversion.

SARABHAI M. CHEMICALS Versus COMMISSIONER OF CENTRAL EXCISE, VADODARA

The Supreme Court upheld that the exemption notification requires the actual use of bulk drugs in pharmaceuticals, not just the capability of being used. ... Taking of exemption benefit under the notification No. 234/86 in respect of the quantum of bulk drugs cleared to consumers other than the pharmaceutical concerns. Held that:- The words 'normal use' indicate the possible use whereas the expression 'used as such' indicates the actual use. The certificates issued by the Drugs Controller, quoted above, shows that they did not deal with uses other than 'normal uses' of such bulk drugs. In the circumstances, the Tribunal was right in holding that the benefit of the exemption was available only to those drugs which went into the stream of diagnosis, treatment etc. and not to the use of any other profit making activity. In the circumstances, on the question of applicability of the notification, we do not find any infirmity in the impugned decision of the Tribunal. As the demands raised by the department in the impugned three show cause notices were time-barred. The first show cause notice was dated 30-12-1987. It was in respect of period 1-4-1986 to 30-11-1986. The second show cause notice was dated 6-4-1988. Under the said notice, the department has demanded duty for the period 1-3-1984 to 28-2-1986. The last show cause notice was dated 20-6-1988, for the period 1-4-1986 to 30-4-1987. Therefore, section 11A(1) was not applicable. We may mention that in the present case, we have come to the conclusion that there was no wilful suppression of facts on the part of the appellant as the appellant had filed the gate passes, invoices and monthly returns, which were all duly approved by the department from time to time. The invoices, gate passes and the monthly returns indicated the names of the consignees from which it was possible for the department to infer sale of sorbitol solution to non-pharmaceutical companies and yet no steps were taken by the department to raise the demand in time and, therefore, we hold that there was no wilful suppression of material facts for invoking the proviso to Section 11A(1). Although on merits the department succeeds, these appeals need to be allowed as the impugned show cause notices-cum-demands were time barred and as no case is made out by the department for invocation of the proviso to Section 11A(1) of the said Act. Issues Involved:1. Applicability of Exemption Notification No. 234/86.2. Limitation period for raising demands under Section 11A(1) of the Central Excise Act, 1944.Issue-wise Detailed Analysis:1. Applicability of Exemption Notification No. 234/86:The appellant, a manufacturer of bulk drugs, claimed exemption under Notification No. 234/86, which exempts bulk drugs from excise duty provided they are certified by the Drugs Controller as normally used for diagnosis, treatment, mitigation, or prevention of diseases in human beings or animals, and used as such or as an ingredient in any formulation. The appellant argued that the word 'normally' should be interpreted to mean 'under normal circumstances' or 'ordinarily,' thus not restricting the exemption based on individual end use. They contended that the certificate from the Drugs Controller should suffice for exemption without the need to ascertain the end use at the time of clearance.The department, however, contended that the exemption applies only to bulk drugs actually used for the specified purposes and not for other uses. The Tribunal's Third Member agreed with the department, holding that the appellant had wrongly availed of the exemption for quantities of sorbitol solution sold to non-pharmaceutical concerns. The Supreme Court upheld this view, stating that the exemption notification requires the actual use of the bulk drug in pharmaceuticals, and the mere capability of being used as a drug does not suffice. The Court emphasized that the conditions for exemption must be strictly interpreted and that the appellant lost the benefit of exemption by diverting the sorbitol solution to non-pharmaceutical uses.2. Limitation Period for Raising Demands:The appellant received three show cause notices for different periods, alleging wrongful availing of the nil rate of duty. The Judicial Member of the Tribunal found these notices time-barred, as the demands were based on information available in the gate passes and RT-12 returns, which were regularly assessed and approved by the department. The Technical Member disagreed, stating that the appellant had suppressed facts by not disclosing the end use of the sorbitol solution, thus justifying the extended limitation period under the proviso to Section 11A(1).The Supreme Court, however, found no evidence of willful suppression of facts. The appellant had filed classification lists, RT-12 forms, and gate passes, all duly approved by the department, which indicated the names of the consignees, including non-pharmaceutical companies. The Court held that the department could have demanded duty within one year under Section 11A(1) but failed to do so. Consequently, the extended period of limitation was not applicable, and the demands were time-barred.Conclusion:The Supreme Court allowed the appeals on the ground of limitation, setting aside the majority decision of the Tribunal and the three show cause notices-cum-demands as time-barred. The Court emphasized the strict interpretation of exemption notifications and the necessity of proving willful suppression of facts for invoking the extended limitation period. The decision underscores the importance of timely action by the department and proper disclosure by the assessee.