Broad construction of 'drug' exemption sustained refund and consequential interest after illegal customs levy under mistake of law.

An inclusive definition of "drug" under the Drugs and Cosmetics Act was construed broadly to include the imported goods as drug or drug intermediates, so they qualified for exemption from additional duty. The refund applications could not be rejected merely on a six-month limitation objection under the customs refund provision where the duty had been levied illegally under a mistake of law. Interest was allowed as consequential relief, running after expiry of the refund period rather than from the date of collection, at 12% per annum from the end of eight weeks. The refund-rejection orders were quashed and return of the collected duty was directed.

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Issues: (i) whether the imported goods were drugs or drug intermediates entitled to exemption from additional duty; (ii) whether refund claims were barred by limitation under the customs refund provision; and (iii) whether interest was payable on the refunded sums.

Issue (i): whether the imported goods were drugs or drug intermediates entitled to exemption from additional duty.

Analysis: The exemption notification had to be read in the light of the expression "drug" in Section 3(b) of the Drugs and Cosmetics Act, 1940. That definition is inclusive and therefore not confined to the enumerated items alone; the word must be understood in its statutory as well as ordinary, popular and natural sense. On that approach, the earlier decision treating Phenol USP and Sorbitol as covered by the notification applied, and the presence or absence of pharmacopoeial suffixes did not control the character of the goods for exemption purposes.

Conclusion: The goods were held to be drugs or drug intermediates entitled to exemption, in favour of the assessee.

Issue (ii): whether refund claims were barred by limitation under the customs refund provision.

Analysis: The rejection of refund applications solely on the ground of six months' limitation under Section 27(1) of the Customs Act, 1962 could not stand where the levy itself was held to be illegal and the duty had been collected under a mistake of law. The Court also treated the prior authority on the point as governing the controversy and held that the stated reason for rejection was not good in law.

Conclusion: The refund claims were not barred in the manner held by the authorities, in favour of the assessee.

Issue (iii): whether interest was payable on the refunded sums.

Analysis: Interest was granted as ancillary relief, but not from the date of collection. The Court fixed a fair compensatory rate and made interest run only after the period allowed for making refund had expired.

Conclusion: Interest was directed at 12% per annum from expiry of eight weeks, in favour of the assessee.

Final Conclusion: The petitions succeeded, the refund-rejection orders were quashed, and the respondents were directed to return the collected additional duty with consequential interest if payment was not made within the time granted.

Ratio Decidendi: An inclusive statutory definition of "drug" must be construed broadly, and where duty has been levied contrary to an applicable exemption under a mistake of law, a refund cannot be defeated by an unsustainable limitation objection.

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