High Court Decides Diagnostic Kits as Drugs under Tax Act, Broadening "Externally" Interpretation

The High Court classified diagnostic kits as "drugs" under Schedule entry C-II-37 of the Bombay Sales Tax Act, 1959. The Court determined that the kits, used for diagnosis, should be considered medicinal formulations falling under C-II-37, rejecting the Tribunal's classification under C-II-106 as scientific instruments. The interpretation of "externally" in C-II-37 was broadened to include diagnostic kits used outside the body. The Court ruled in favor of the assessee, concluding that the kits should be classified as drugs under C-II-37, resolving all issues against the Revenue.

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Issues Involved:

1. Classification of diagnostic kits as "drugs" under Schedule entry C-II-37 of the Bombay Sales Tax Act, 1959.
2. Interpretation of the term "externally" in Schedule entry C-II-37.
3. Classification of diagnostic kits under Schedule entry C-II-106 as scientific and laboratory instruments/equipment.

Detailed Analysis:

Issue 1: Classification of Diagnostic Kits as "Drugs" Under Schedule Entry C-II-37

The primary issue was whether the diagnostic kits sold by the assessee could be classified as "drugs" under Schedule entry C-II-37 of the Bombay Sales Tax Act, 1959. The Tribunal held that the diagnostic kits are not classifiable as "drugs" but as scientific and laboratory instruments/equipment under Schedule entry C-II-106. The assessee argued that the diagnostic kits, which are used for detecting AIDS, consist of medicinal formulations and are covered under Schedule entry C-II-37. The products contain components like human plasma, enzyme conjugate, and enzyme substrate, which are essential for diagnostic tests. The Commissioner of Sales Tax initially ruled that the kits do not qualify as "drugs" because they are not applied internally or externally on the human body. However, the Tribunal's larger bench concluded that the diagnostic kits are medicinal formulations but not classifiable under entry C-II-37. The High Court disagreed with the Tribunal, holding that the diagnostic kits, being medicinal formulations used for diagnosis, should be classified under entry C-II-37.

Issue 2: Interpretation of the Term "Externally" in Schedule Entry C-II-37

The second issue was the interpretation of the term "externally" in Schedule entry C-II-37. The Tribunal interpreted "externally" to mean "used upon the body" and not "used upon as well as outside the body." The assessee contended that the term should be interpreted to include diagnostic kits used outside the body for diagnosing diseases. The High Court noted that the term "externally" has been part of the entry since 1965 and has been judicially interpreted to include diagnostic reagents used outside the body. The Court emphasized that the long-standing judicial interpretation should not be disturbed unless there are compelling reasons. The Court held that the term "externally" should not be restricted to mean only those formulations applied on the body, but should include those used outside the body for diagnosis.

Issue 3: Classification of Diagnostic Kits Under Schedule Entry C-II-106

The third issue was whether the diagnostic kits should be classified under Schedule entry C-II-106 as scientific and laboratory instruments/equipment. The Tribunal held that the diagnostic kits, being used exclusively in pathological laboratories, fall under entry C-II-106. The assessee argued that the kits are medicinal formulations and not instruments. The High Court agreed with the assessee, stating that medicinal formulations cannot be equated with instruments. The Court held that once the diagnostic kits are deemed medicinal formulations, they should be classified under entry C-II-37 and not under entry C-II-106.

Conclusion:

The High Court concluded that the diagnostic kits, being medicinal formulations used for diagnosis, should be classified under Schedule entry C-II-37 of the Bombay Sales Tax Act, 1959. The Court answered all three questions in the negative, in favor of the assessee and against the Revenue. The sales tax reference was disposed of with no order as to costs.

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