2017 (9) TMI 2050 - HC - VAT / Sales Tax

White/yellow petroleum jelly held drug under Schedule K of Drugs & Cosmetics Act; taxable at 5% under Entry 67(i) II(a)

HC held that white and yellow petroleum jelly (IP) is a drug for external use under the Drugs & Cosmetics Act and listed in Schedule K of the Rules, ... Classification of goods - white and yellow petroleum jelly [IP], which has admittedly not been specifically mentioned in the Schedules appended to the Tripura Value Added Tax Act, 2004 - drug within the meaning of Drug & Cosmetic Act, 1940 - should fall under Entry 67 (i) of the Schedule (ii)(a) of the TVAT Act, 2004 and the same should be taxable at 5%? - HELD THAT:- White or yellow petroleum jelly apparently is a drug for external use for mitigation and prevention of skin related disease or disorder. In Schedule K appended to the Drugs and Cosmetics Rule, 1945, white or yellow petroleum jelly [IP] [non perfumed] has clearly been shown as the drug and can only be manufactured under a valid drug manufacturing license. Having regard to the said identity and its medicinal applications, prima facie this court is satisfied that white and yellow petroleum jelly [IP] cannot be treated as a cosmetic but be treated as a drug as the same is manufactured by a person holding license under Drug and Cosmetics Act, 1940. Further, when the petitioners claimed that the said product can only be treated as the drug not as the sub-product of petroleum to bring the same under Entry No. 45 of Schedule 2 (b) of the TVAT Act, 2004, it was the bounded duty of the respondents to discharge the burden to prove it by scientific test that the white or yellow petroleum jelly is a sub-product of petroleum. Mere assertion in this regard is of no avail. ‘White or Yellow’ petroleum jelly is exigible to tax at 5% under Entry 67(i) of the Schedule II(a) of the TVAT Act - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether white and yellow petroleum jelly (IP) manufactured under a licence under the Drugs and Cosmetics Act, 1940, falls within the definition of 'drug' and is therefore taxable under the lower rate entry for 'Medicine and drugs' in Schedule II(a) of the TVAT Act, rather than as a 'cosmetic' or 'petroleum sub-product' under Schedule II(b). 2. Whether the taxing authority discharged the burden of proof required to reclassify the product as a 'cosmetics and toilet article' or as a 'petroleum product' exigible to a higher VAT rate. 3. Whether the product is excluded from the 'cosmetics and toilet preparations' exclusion in Schedule II(a) by reason of being capable of use as cosmetics or toilet preparations. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: drug vs cosmetic vs petroleum sub-product (legal framework) Legal framework: Definitions and entries considered include (i) definition of 'Cosmetic' and 'Drug' under the Medicinal and Toilet Preparation (Excise Duty) Act, 1955 and related statutory definitions; (ii) Schedule K and Rule 123 of the Drugs and Cosmetics Rules, 1945 which list white/yellow petroleum jelly (IP) and exempt certain items from Chapter IV; (iii) Entry 67(i) of Schedule II(a) (reduced VAT for medicines/drugs) and Entry 45 of Schedule II(b) (higher VAT for cosmetics and toilet articles) of the TVAT Act as amended. Precedent treatment: The Court relied on the apex-court decision holding that petroleum jelly manufactured under a Drugs and Cosmetics Act licence is a 'drug' not a 'cosmetic' (Ponds India Ltd.); and on authorities establishing that the meaning of 'drug' is wide and that classification under a taxing statute requires consideration of contents, use, legislative history and regulatory treatment (including Chamanlal Jagjivandas Sheth and other precedents referenced). Interpretation and reasoning: The Court examined statutory definitions, the listing of white/yellow petroleum jelly in Schedule K (Drugs and Cosmetics Rules), and its medicinal uses (occlusive agent, prevention/mitigation of skin disorders, post-operative wound care, dermatological prescriptions). The Court accepted that the product, when manufactured under a drug licence and having recognised medical uses and pharmacopoeial standards, prima facie falls within the statutory definition of 'drug'. The Court also adopted the tests articulated in precedent (dictionary/technical/use/popular meaning/history of entry) and noted that regulatory recognition and licensing under the Drugs and Cosmetics Act weigh heavily in favour of classification as a drug. Ratio vs. Obiter: Ratio - Where a product is specifically enumerated in Schedule K, manufactured under a drug licence and possesses recognised medicinal uses (prevention/mitigation/treatment), it is a drug for the purposes of classification and taxation and should be covered by the 'Medicine and drugs' entry in the taxing schedule. Obiter - Observations on popular references (e.g., Wikipedia) and general discussion of cosmetic usage as background. Conclusion: White and yellow petroleum jelly (IP) manufactured under a drug licence and listed in Schedule K is a 'drug' for VAT classification and falls within Entry 67(i) of Schedule II(a) of the TVAT Act, attracting the 5% rate rather than Entry 45 of Schedule II(b). Issue 2 - Burden of proof on the taxing authority to reclassify and evidence required Legal framework: Principles of classification under taxing statutes require the revenue to show that goods fall within the class it seeks to impose; general canon that onus is on revenue to prove goods are not of the class claimed by the assessee when relevant statutory/regulatory recognition points to the assessee's claim (Sharma Chemical Works; Dunlop; Garware Nylons precedents invoked). Precedent treatment: The Court relied on authoritative rulings that (i) burden of proving that a product falls within a taxing entry is on the Revenue; (ii) mere assertion by revenue is insufficient; (iii) scientific/technical material may be required to substantiate classification as a different product or sub-product. Interpretation and reasoning: The respondents asserted the product was a 'petroleum sub-product' and therefore fell under Entry 45, but produced no scientific tests, comparative chemical evidence or other material to rebut the regulatory classification and licensing as a drug. The Court emphasized that where the revenue seeks to deny 'parentage' under an enumerated tariff item, it must lead imperative material to establish that the product is of a different class; absent such material and where licensing/regulation points to drug classification, the assessee's claim prevails. Ratio vs. Obiter: Ratio - Taxing authority must discharge an evidentiary burden (including scientific/technical proof where appropriate) to reclassify a product otherwise prima facie classifiable under an enumerated lower-rate entry; mere assertion is inadequate. Obiter - General remarks on the heavier burden of taxing authorities in classification disputes. Conclusion: The respondents failed to discharge the burden to show that the petroleum jelly was a petroleum sub-product or a cosmetic rather than a regulated drug; therefore the classification as drug stands. Issue 3 - Applicability of the Schedule II(a) exclusion 'but does not include the products capable of being used as cosmetics and toilet preparations' Legal framework: Entry 67(i) of Schedule II(a) expressly excludes 'products capable of being used as cosmetics and toilet preparations'; the Court considered whether a product capable of cosmetic use is thereby excluded despite regulatory classification as a drug. Precedent treatment: The Court applied tests from Ponds India and other authorities concerning the twin tests for cosmetics/toilet preparations (used for beautification or care of skin in normal circumstances) and the necessity to examine actual function/use and legislative intent. Interpretation and reasoning: The Court acknowledged that petroleum jelly may be used in cosmetic skin care but held that such capacity does not override regulatory classification and recognized medical uses. The statutory exclusion targets products 'capable of being used as cosmetics' in the ordinary/normal sense (beautification/care); where a product is primarily a drug, listed in Schedule K, and used for prevention/mitigation/treatment, the mere capacity for cosmetic usage does not exclude it from the drugs entry. The Court applied the Ponds India tests and found the product did not satisfy the twin tests to be treated as a cosmetic in preference to its drug identity. Ratio vs. Obiter: Ratio - The mere capability of cosmetic application does not automatically exclude a product from the 'medicine/drug' entry where regulatory listing, licence and primary medicinal uses establish its character as a drug. Obiter - Observations on factual inquiry required in borderline cases. Conclusion: The exclusion clause does not operate to remove white/yellow petroleum jelly (IP) from Entry 67(i) where it is manufactured under a drug licence and has recognised medicinal uses; it remains taxable at the drug rate. Overall Disposition and Tax Consequence The Court quashed and set aside the taxing authority's clarifications treating white and yellow petroleum jelly as taxable under the higher-rate cosmetic/petroleum entry. The product is exigible to tax at 5% under Entry 67(i) of Schedule II(a) of the TVAT Act; the taxing authority must assess tax accordingly. The Court applied binding precedent, statutory definitions and regulatory listings, and imposed on the revenue the evidentiary burden which the revenue failed to discharge.