2018 (7) TMI 1971 - HC - VAT and Sales Tax

Court upholds 14% tax on HPMC Capsule Shells under VAT Act despite classification dispute.

M/s. Erawat Pharma Ltd. Versus State of M.P. & Another

The Court upheld the Commissioner's decision to tax Hydroxy Propyl Methyl Cellulose (HPMC) Capsule Shells at 14% under the Madhya Pradesh VAT Act, 2002. ... Classification of goods - Empty Har Gelatin Capsules - contention of the petitioner is that empty HPMC Capsule Shell are made of Hydroxy Propyl Methyl Cellulose and are used by Pharmaceutical Industries for filling medicines - Whether HPMC (Hydroxy Propyl Methyl Cellulose) Capsule Shells are taxable as per entry No.5 of Part-IV of Schedule-II of Madhya Pradesh VAT Act, 2002 and therefore, taxable @ 14%? HELD THAT:- M erely because the capsules manufactured by the petitioner is being manufactured on account of inclusion of the same in the drug licence, it can never be said that its a drug. The learned Commissioner has observed that certain cosmetics are also manufactured under the drug licence and therefore, if the analogy given by the petitioner is accepted then all cosmetics will have to be included under the heading of drug. This Court after hearing learned counsel for the parties, as it is not established that the capsule in question is exclusively used for the purpose of drugs only, is of the opinion that the learned Commissioner was justified by rejecting the prayer of the petitioner and the entries under the VAT Act as reflected in the schedule are very clear, once the capsule manufacture by the petitioner is not included under the category of drugs, it has to be charged under the residuary entry. Petition dismissed. Issues:1. Interpretation of the taxability of Hydroxy Propyl Methyl Cellulose (HPMC) Capsule Shells under the Madhya Pradesh VAT Act, 2002.Analysis:1. The petitioner, a company manufacturing Empty HPMC Capsule Shells, challenged the taxability decision of the Commissioner, Commercial Tax, which classified HPMC Capsule Shells as taxable at 14% under the Madhya Pradesh VAT Act, 2002.2. The petitioner argued that HPMC Capsule Shells, made of Hydroxy Propyl Methyl Cellulose, are used by Pharmaceutical Industries for filling medicines and should be taxed at 5% under the Drugs and Medicines category. The petitioner emphasized that since HPMC Capsules serve the same purpose as Gelatin Capsules, they should be treated alike for taxation purposes.3. The petitioner submitted detailed information about the manufacturing process of both HPMC Capsule Shells and Gelatin Capsule Shells, along with Composition Certificates, to support their contention that HPMC Capsule Shells should fall under the Drugs and Medicines category for taxation.4. The Commissioner, however, held that HPMC Capsule Shells do not qualify as drugs or medicines, and therefore, should be taxed at 14%. The Commissioner rejected the petitioner's argument based on the purpose of manufacturing under a drug license, stating that including HPMC Capsule Shells as drugs would lead to including all cosmetics manufactured under drug licenses as well.5. The Court analyzed Section 3(b) of the Drugs and Cosmetics Act, 1946, defining drugs, and considered precedents like The State of Andhra Pradesh Vs. Raja Medical Stores and other relevant judgments to interpret the classification of products under the Madhya Pradesh VAT Act, 2002.6. The Court reviewed the schedules of the Madhya Pradesh VAT Act, 2002, specifically Entry No.19 and 19-A of Part-II of Schedule-II, which list tax rates for Bulk Drugs and Drugs and Medicines. The Court also examined Part-IV of Schedule-II, which covers goods not specified in other parts, taxed at 13%.7. After careful consideration, the Court concluded that since the purpose of HPMC Capsule Shells was not exclusively for drugs, they should be taxed under the residuary entry at 14%. The Court upheld the Commissioner's decision, stating that the statutory provisions were clear, and there was no basis to interfere with the tax classification of HPMC Capsule Shells.8. Consequently, the Court dismissed the petition, affirming the taxability of HPMC Capsule Shells at 14% under the Madhya Pradesh VAT Act, 2002.