2014 (9) TMI 299 - HC - VAT / Sales Tax

Harpic and Lizol classified as pesticides attract 4% VAT, Dettol deemed medicine not cosmetic

The Gauhati HC ruled in favor of the assessee regarding VAT classification of household products. Harpic and Lizol were classified as pesticides under ... Duty exemption - Rate of duty - 12.5% or 4% - Classification of Harpic and lizol under the residual items under entry No. 1 of the Fifth Schedule of the Assam Value Added Tax Act, 2003 or under specific entries provided under Schedule to the said Act - Meaning of 'hygiene' - common parlance test and users test - Held that:- The compositions of the products show that these are meant to be disinfectants, to kill germs and bacteria, which has not been seriously contested. The expert opinions by way of certificates from various individuals, organisation, relied upon by the petitioner have not been refuted or contradicted by the respondents. Whether, 'Harpic' and 'Lizol' if treated as disinfectants, can be considered as 'pesticides' for the purpose of entry 19 of the Second Schedule to the Assam VAT Act - Held that:- If the word 'pests' is to be given a restrictive meaning by limiting to the dictionary meaning as had been done by the Revenue in the impugned order, disinfectants which primarily kills germs and bacteria cannot be considered 'pesticides'. However, by giving a broader meaning to the word 'pest', by including bacteria and germs within the meaning of 'pests', Harpic and Lizol which are disinfectants would be clearly covered by the item 'pesticide', in which event, the petitioner would be liable to be assessed only at the rate of four per cent. 'Harpic' and 'Lizol' which are disinfectants being 'pesticides', in terms of the decision of the honourable Supreme Court in Bombay Chemical Private Limited [1995 (4) TMI 59 - SUPREME COURT] would be covered by entry No. 19 of Part A of the Second Schedule to the Assam VAT Act and chargeable at four per cent. Whether Dettol is an item of medicament to be treated as a drug and medicine as contended by the petitioner or is to be treated as 'cosmetic' or 'toilet preparation' because of its general attributes and would stand excluded from entry No. 21 of the Fourth Schedule in terms of the Explanation to it - Held that:- Revenue does not seem to controvert or deny the use of Dettol for first aid, nappy wash, shaving, uses in personal hygiene, surgical, medical, midwifery and the like. It cannot be denied that use of Dettol for the purposes mentioned above primarily to prevent infections, which is also admitted by the respondents, is only because of its prophylactic properties. The main purpose for the use of Dettol is to prevent infections which may occur due to minor cuts, injuries, abrasions, grazes, insect bites, etc. Thus, by applying the 'users test', it would squarely fall under the definition of 'drug' as defined under section 3(b) of the Drugs and Cosmetics Act, 1940 as well as under the definition of section of the Medicinal and Toilet Preparations (Excise Duty) Act, 1955. Dettol is definitely not used for beautifying, promoting attractiveness, or altering the appearance. It is not used for cleansing as a substitute for soap or detergent. Though it is used for cleansing, the purpose is to prevent infection and for sanitisation because of its therapeutic and prophylactic properties. Therefore, Dettol cannot be considered to be a cosmetic substance. Further, from the users point of view, it cannot also be considered a toilet preparation in terms of the definition given in the Medicinal and Toilet Preparations (Excise Duty) Act, 1955. Though it may be kept in the toilet, it is not used on human body to improve or alter the complexion, skin, hair or teeth. It is also not used as deodorant or perfume. Of course, it is also used for cleansing purpose, but only because of its prophylactic qualities, i.e., to cleanse any wound, or minor injuries or cuts, etc. It has been also noted that Dettol is manufactured and sold by the petitioner under a licence issued under the Drugs and Cosmetics Act, 1940 and the Drug Price Control Order applies to Dettol also. These are facts which had been pleaded by the petitioner before respondent No. 3, but there is neither any reference to the same in the impugned order nor was it contested by the authorities. These facts are also clearly indicative of the fact that 'Dettol' is a drug and not a cosmetic item. Maintenance of hygiene is possible only when such substance is used to prevent illness or disease. Therefore, if Dettol is used for maintaining hygiene, it cannot be said that it does not have prophylactic qualities and its medicinal value cannot be ignored. Therefore, it is difficult to hold the view that Dettol is not a medicament. Products Harpic and Lizol having been declared to be pesticides as discussed above, would be liable to tax under entry No. 19 of Part A of the Second Schedule to the Assam VAT Act and Dettol would be liable to be assessed as an item under entry 21 of the Fourth Schedule to the Assam VAT Act and will not fall within the excluded category under the Explanation. - Decided in favour of assessee. Issues Involved:1. Classification of Harpic and Lizol under the Assam VAT Act.2. Classification of Dettol under the Assam VAT Act.3. Assessment of VAT rates applicable to Harpic, Lizol, and Dettol.4. Procedural irregularities in the assessment process.Issue-Wise Detailed Analysis:1. Classification of Harpic and Lizol under the Assam VAT Act:The petitioner-company contended that Harpic and Lizol should be classified under entry No. 19 of Part A of the Second Schedule to the Assam VAT Act, which covers 'Chemical fertilizers, pesticides, weedicides and insecticides excluding mosquito repellents.' The petitioner argued that these products are disinfectants and thus fall under the category of pesticides. The Revenue, however, classified these products under the residual entry No. 1 of the Fifth Schedule, subjecting them to a higher VAT rate of 12.5%. The court referred to various definitions and expert opinions to conclude that Harpic and Lizol possess disinfectant properties, which qualify them as pesticides. The court also relied on the Supreme Court's broader interpretation of 'pesticide' in the Bombay Chemical Private Limited case, which includes disinfectants that kill bacteria and germs.2. Classification of Dettol under the Assam VAT Act:The petitioner argued that Dettol should be classified under entry No. 21 of the Fourth Schedule, which covers 'Drugs and medicines including vaccines, disposable hypodermic syringes, hypodermic needles, catguts, sutures, surgical dressing.' The petitioner emphasized that Dettol has therapeutic and prophylactic properties, making it a drug or medicine. The Revenue classified Dettol under the residual entry, arguing that it is a toilet preparation. The court examined the definitions of 'drug' and 'toilet preparation' under relevant Acts and determined that Dettol, used primarily for its prophylactic properties, qualifies as a drug. The court also noted that Dettol is sold under a license issued under the Drugs and Cosmetics Act, 1940, further supporting its classification as a drug.3. Assessment of VAT rates applicable to Harpic, Lizol, and Dettol:The petitioner had been paying a VAT rate of 4% on Harpic, Lizol, and Dettol, based on their classification under specific entries in the Assam VAT Act. However, the Revenue issued notices demanding a higher VAT rate of 12.5%, classifying these products under the residual entry. The court concluded that Harpic and Lizol, being disinfectants, should be classified as pesticides and taxed at 4% under entry No. 19 of Part A of the Second Schedule. Similarly, Dettol, being a drug, should be taxed at 4% under entry No. 21 of the Fourth Schedule.4. Procedural irregularities in the assessment process:The petitioner alleged procedural irregularities in the assessment process, including the issuance of notices demanding higher VAT rates without proper provisional assessment orders. The court noted that the petitioner had been consistently assessed at the lower VAT rate in previous years, and there was no material change to justify the reassessment. The court emphasized that when two views are possible, the one favoring the assessee should be adopted, and consistent interpretation of tax entries should not be altered without material change.Conclusion:The court allowed the writ petitions, setting aside the impugned assessment orders and directing the respondents to take necessary consequential actions in accordance with law. Harpic and Lizol were classified as pesticides under entry No. 19 of Part A of the Second Schedule, and Dettol was classified as a drug under entry No. 21 of the Fourth Schedule, both subject to a VAT rate of 4%. The court's decision was based on a thorough analysis of definitions, expert opinions, and relevant case law, ensuring a fair and consistent application of the Assam VAT Act.