Court rules medicinal products taxed at 4% not 12.5% under Assam VAT Act

The court concluded that the goods in question, primarily used as "drugs and medicines," should be taxed at 4% under entry 21 of the Fourth Schedule of the Assam Value Added Tax Act, 2003. The court held that products primarily used for medicinal purposes should be classified as medicaments, even if they have ancillary cosmetic uses. Therefore, the respondent authorities' classification of the products as cosmetics for a 12.5% tax was deemed incorrect. The court quashed the notifications, letters, and orders imposing the higher tax rate and upheld the petitioners' position.

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Issues Involved:
1. Classification of goods as either "cosmetics and toilet preparations" or "drugs and medicines" under the Assam Value Added Tax Act, 2003.
2. Applicable tax rate for the classified goods.

Detailed Analysis:

Issue 1: Classification of Goods
The primary issue revolves around whether the goods in question should be classified as "cosmetics and toilet preparations" or "drugs and medicines" under the Assam Value Added Tax Act, 2003.

- Petitioners' Argument: The petitioners contended that their products, which include ayurvedic medicines, should be classified under entry 21 of the Fourth Schedule to the Act of 2003 as "drugs and medicines" and not under entry 1 of the Fifth Schedule as "cosmetics and toilet preparations." They argued that these products are primarily used for medicinal purposes and are treated as such in common parlance. They relied on several judicial precedents, including *Puma Ayurvedic Herbal (P.) Ltd. v. Commissioner, Central Excise, Nagpur* and *V.C. Ramalingam and Sons v. State of Tamil Nadu*, to support their claim that the main use of the products should determine their classification.

- Respondents' Argument: The respondents, represented by the Tax Department, argued that the goods in question are capable of being used as cosmetics and toilet preparations, thus falling outside the scope of entry 21 of the Fourth Schedule. They relied on the "users test" and "common parlance test" to assert that the products should be taxed at 12.5% under entry 1 of the Fifth Schedule. They cited *C.C.E. v. Richardson Hindustan Ltd.* to support their position.

Issue 2: Applicable Tax Rate
The second issue is the applicable tax rate for the classified goods.

- Petitioners' Argument: The petitioners argued that if their products are classified as "drugs and medicines," they should be taxed at 4% as per entry 21 of the Fourth Schedule. They emphasized that the percentage of medicinal components in the products is immaterial, citing *Commissioner of Central Excise, Calcutta v. Shartna Chemical Works*.

- Respondents' Argument: The respondents maintained that the products should be taxed at 12.5% as per entry 1 of the Fifth Schedule, arguing that the Commissioner of Taxes had correctly applied the provisions.

Court's Findings:
The court analyzed the relevant entries and judicial precedents to determine the correct classification and applicable tax rate.

1. Entry 21 of the Fourth Schedule: This entry covers "drugs and medicines" and specifies a tax rate of 4%. The explanation attached to this entry excludes products capable of being used as cosmetics and toilet preparations.

2. Entry 1 of the Fifth Schedule: This entry covers all other goods not specified in the First, Second, Third, and Fourth Schedules and imposes a tax rate of 12.5%.

The court referred to the Supreme Court's decision in *Puma Ayurvedic Herbal (P.) Ltd.*, which distinguished between cosmetics and medicaments based on their primary use. It emphasized that a product primarily used for medicinal purposes should be classified as a medicament, even if it has ancillary cosmetic uses.

Conclusion:
The court concluded that the products in question are primarily used as "drugs and medicines" and should be taxed at 4% under entry 21 of the Fourth Schedule. The explanation to entry 21 is designed to exclude goods primarily used as cosmetics but not those primarily used as medicines. Therefore, the respondent authorities were incorrect in classifying these products as cosmetics for the purpose of levying a 12.5% tax.

Judgment:
The court quashed and set aside the notifications, letters, and orders classifying the impugned goods as cosmetics and subjecting them to a 12.5% tax rate. The interim order passed earlier was made absolute.

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