2023 (5) TMI 189 - AT - Central Excise

Court allows appeal, finding impugned order unsustainable. Sterile water integral to vaccine, attracts nil duty.

Chiron Behring Vaccines Pvt Ltd Versus C.C.E. & S.T. -Surat-II

The appeal was allowed as the court found the impugned order unsustainable. The judgment emphasized the correct classification of goods, stating that ... Captive Consumption - sterile water for injection was captively consumed - benefit of N/N. 67/95-CE dated 16.03.1995 as amended by notification no. 16/2003-CE dated 01.03.2003 - HELD THAT:- In the show cause notice, the charge made by the revenue was the Sterile Water cleared in the combi pack along with “Rabipur vaccines” is classifiable under chapter heading no. CETH 28510010 as bulk drugs and the same was liable to duty - the vaccine cannot be administered without sterile water therefore the sterile water is also considered to be the vaccine which attracts only the nil rate of duty under CETH 3002. From the Note 3, it is clear that when the goods are cleared in sets consisting of two or more separate constituents in that case if the product is included to be mixed whether to obtain a product of Section VI or Section VII are to be classified in the heading prior to that product. In the present case, after mixing of the vaccine powder with sterile water, it is clearly intended to be administered as vaccine therefore, entire combi pack shall be correctly classified under the Central Excise Tariff Heading No. 3002 which is meant for vaccine. The condition from (a) to (c) given in Note 3, is clearly satisfied in as much as all the constituents of combi pack are used altogether at the time of administering the vaccine to the human body. Being combi pack it is presented together and since the Rabipur vaccine powder cannot be used without mixing of sterile water, it is undoubtedly complementary to each other - Note 3 of Section VI there is absolutely no doubt that the sterile water cleared in a combi pack with vaccine and syringe will also fall under CETH 3002 which is a vaccine. When this be so, then the entire combi pack attracts nil rate of duty under CETH 3002. On this basis, the demand is not sustainable. Even if it is assumed that the sterile water is used captively for manufacture of vaccine in such case also the sterile water is not liable to duty on the ground that from June 1998 till 24 February 2005, the distilled or conductivity water and water of similar purity used within the factory of production was attracting nil rate of duty and from 24th February 2005 to 30 December 2006, the said product was exempted under notification 3/2005-CE dated 24.02.2005 when used within the factory of production therefore even if the contention of the review order of the revenue is considered even then the product was not liable to duty. Appeal allowed. Issues Presented and Considered 1. Whether the impugned order correctly reversed the Order-in-Original by holding that sterile water for injection (SWFI) was captively consumed and hence ineligible for exemption under the captive-consumption notification (Notification No. 67/95-CE as amended), thereby sustaining duty demand on SWFI cleared in a combi-pack with rabies vaccine. 2. Whether the SWFI included in the combi-pack is properly classifiable as part of the vaccine set and therefore the entire combi-pack (including SWFI and syringe) falls under tariff heading 3002 (vaccines) attracting nil rate of duty, having regard to Note 3 to Section VI of the Central Excise Tariff. 3. Whether the departmental review and Commissioner (Appeals) order went beyond the scope of the original show cause notices (SCNs) which alleged classification of SWFI as a bulk drug/distilled water liable to duty, thereby rendering the appeal/decision unsustainable. 4. Even if SWFI were treated as captively consumed/intermediate, whether SWFI was nonetheless exempt from duty by virtue of applicable notifications and historical tariff treatment (including Notification No. 3/2005-CE and the pre-2005 nil rate position). Issue-wise Detailed Analysis Issue 1 - Validity of Revenue's reliance on 'captive consumption' to deny exemption (scope and correctness of impugned reversal) Legal framework: The charge in the SCNs sought duty on SWFI cleared as part of finished goods for human consumption, alleging classification under tariff subheading for distilled water/bulk drug. Captive-consumption exemption (Notification No. 67/95-CE as amended) denies exemption where goods are used as inputs/intermediates within manufacture. Precedent treatment: Appellant relied on authorities treating combi-packs containing vaccine constituents as a single product classified under vaccines; those precedents were invoked to argue that SWFI in the combi-pack forms part of the vaccine for tariff purposes. Interpretation and reasoning: The Tribunal examined the SCNs and found their grievance to be classification of SWFI as a bulk drug/finished distilled water. The Commissioner (Appeals) and the departmental review, however, introduced a new ground - that SWFI was an intermediate used captively - a theory not advanced in the SCNs. The Tribunal noted that this change of basis represented a departure from the charge actually made. Ratio vs. Obiter: The determination that the departmental appeal and Commissioner (Appeals) decision traveled beyond the scope of the SCNs is ratio: the Tribunal treated it as a jurisdictional/legality defect in the impugned order. Conclusions: The impugned order is unsustainable on the ground that it relied on captive-consumption reasoning not raised in the SCNs, and therefore the appeal as decided by the Commissioner (Appeals) was not maintainable in that respect. Issue 2 - Classification of SWFI and combi-pack under Note 3 to Section VI and Tariff Heading 3002 Legal framework: Note 3 to Section VI provides that goods put up in sets of two or more constituents intended to be mixed together to obtain a product of Section VI/ VII are to be classified in the heading appropriate to that product, provided conditions (a) put up to be used together, (b) presented together, and (c) complementary, are satisfied. Tariff heading 3002 covers vaccines and attracts nil rate of duty. Precedent treatment: The appellant relied on tribunal and higher court decisions holding that constituents of vaccine combi-packs (e.g., reconstitution fluid and syringe) are to be treated as part of the vaccine for classification and duty purposes; one such decision was upheld by the Supreme Court. Interpretation and reasoning: The Tribunal reviewed the composition and mode of use of the combi-pack: lyophilized vaccine powder, 1 ml SWFI ampoule, and syringe/needle presented together and used together for administration. The vaccine cannot be administered without reconstitution with SWFI; thus the SWFI is a constituent complementary to the vaccine powder. All three Note 3 conditions (a)-(c) are satisfied. Therefore the combi-pack is properly classifiable under heading 3002 as a vaccine. Ratio vs. Obiter: The classification conclusion is ratio: the Tribunal's primary legal holding is that SWFI cleared in the combi-pack forms part of the vaccine and the entire set attracts nil duty under CETH 3002. Conclusions: SWFI included in the combi-pack is classifiable with the vaccine under Note 3 to Section VI and tariff heading 3002; consequently the demand for duty on SWFI (when cleared as part of that combi-pack) is unsustainable. Issue 3 - Effect of classification finding on the revenue demand and interplay with the original allegation (bulk drug/distilled water) Legal framework: If goods forming part of a set are classifiable with the principal product, any separate classification advanced in the SCN inconsistent with Note 3 is defeated. The SCNs alleged that SWFI was classifiable as distilled water/bulk drug and liable to duty accordingly. Precedent treatment: Past rulings recognizing combi-packs as single taxable products under the heading of the principal constituent were cited by the appellant and considered persuasive. Interpretation and reasoning: Because the combi-pack falls under heading 3002, the contention that SWFI (as cleared in the combi-pack) is a separate bulk drug/distilled water liable to duty cannot be sustained. The Tribunal held that the SCN's core charge (classification as distilled water/bulk drug) is answered by the correct application of Note 3. Ratio vs. Obiter: The holding that the demand is unsustainable because of classification under 3002 is ratio. Conclusions: The revenue's demand framed on the basis of separate classification of SWFI is rejected; SWFI cleared in the combi-pack with the vaccine attracts nil duty. Issue 4 - If SWFI were captive/intermediate, applicability of historical notifications and exemption (Notification No. 3/2005-CE and pre-2005 treatment) Legal framework: Notifications and tariff schedules determine exemption/zero-rate treatment for distilled/conductivity water when used within factory or as inputs. Notification No. 3/2005-CE (and prior nil-rate position) exempted distilled or conductivity water and similar purity water used within the factory of production for certain periods. Precedent treatment: Not specifically overruled or distinguished; Tribunal considered the temporal applicability of relevant notifications. Interpretation and reasoning: The Tribunal observed that even assuming, arguendo, SWFI were an intermediate used captively, from June 1998 until 24 February 2005 such water attracted nil rate and from 24 February 2005 to 30 December 2006 the product was exempt under Notification No. 3/2005-CE when used within the factory. Thus, for the relevant periods covered by the SCNs, the product would not have been liable to duty even on the captive-use theory. Ratio vs. Obiter: The finding that, in any event, SWFI was not liable to duty for the periods in question due to historical nil/exemption notifications is ratio to the extent it informs the unsustainability of the demand; it is also a contingent/legal alternative to the primary classification holding. Conclusions: Even on the captive-consumption/intermediate hypothesis advanced by the revenue, the historical tariff and notification position precluded liability to duty for the periods involved; therefore the revenue's demand fails on this independent ground. Combined Conclusion and Disposition The Tribunal concluded that (a) the combi-pack is properly classifiable under tariff heading 3002 as a vaccine by application of Note 3 to Section VI, rendering the SWFI part of the vaccine and attracting nil duty; (b) the Commissioner (Appeals) and departmental review proceeded on a ground (captive consumption) not raised in the SCNs, thereby travelling beyond the scope of the charge; and (c) even if captive consumption were taken as valid, historical notifications rendered SWFI non-taxable for the relevant periods. On these bases the impugned order was held unsustainable and set aside; the demand was rejected and the appeal allowed.