AI Drafter 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2024 (5) TMI 1143
X X X X Extracts X X X X
X X X X Extracts X X X X
....o sell Diagnostic Kits. Most of these Diagnostic Kits are imported, manufactured, and sold under Drug Licenses issued by the competent authority and they have been paying Value Added Tax (VAT). The grievance of the petitioners is that the Revenue authorities are seeking to impose VAT at the rate of 12.5% instead of at 4%, meant for "drugs", by not treating the Diagnostic Kits as "drugs". 4. In exercise of the powers conferred under Section 17 of the Jammu and Kashmir Value Added Tax Act, 2005, the Government of Jammu and Kashmir issued a Notification under SRO 167 dated 16th June 2005 containing the Schedules which prescribe the rates on which various commodities/articles are to be taxed. As per Schedule A, commodities falling under it are to be taxed at the rate of 0%, in respect of Schedule B commodities, at the rate of 1%, and for Schedule C commodities, at the rate of 4%, and for Schedule D commodities, at the rate of 12.5%. 5. According to learned counsel for the petitioners, the Diagnostic Kits namely, (i) Hepatitis HBS AG Device Card, (ii) HIV Device Card, (iii) Pregnancy Device Card, and (iv) VDRL Device Card are chargeable at the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from the following attributes: (a) They are used for diagnosis of various human diseases. (b) These kits are manufactured under a drug license issued by the Drug Controller to manufacturers of drugs. (c) These drugs are imported on the License issued by the Drug Controller for import of Drugs under the Drugs and Cosmetics Act. (d) They fall within the definition of "drug" under the Drugs and Cosmetics Act. (e) They fall within the scope of "drugs" in Entry 48 of Schedule C of SRO 167 which has adopted the definition of "drug" as given under the Drugs and Cosmetics Act. (f) They are known and understood as drugs in common parlance by the manufacturers, sellers, doctors, pathologists, and patients. (g) Diagnostic tests are done using Diagnostic Kits by diagnostic laboratories on medical prescription which are meant for diagnosis of diseases. (h) Packing and labeling on it describe it as a Diagnostic Reagent/Diagnostic kit for diagnosis of a particular disease. It has the date of manufacturing and the date of expiry as in the case of any drug or medicine. (i) All medical literature describes it as a drug ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns, the Department had made it clear that Diagnostic Kits are not covered under Entry 48 of Schedule C to SRO 167, but under Entry 164 of Schedule D to SRO 167. All the entries under Schedule C are chargeable @ 4% of VAT, whereas all the items falling under Schedule D are chargeable @ 12.5%. 12. The petitioners have also questioned the competency of the PA (Technical) in issuing any clarification under Section 87 of the VAT Act, as it is only the Commissioner who is competent to issue such a clarification. 13. It is the case of the petitioners that it is not correct on the part of the Commissioner to clarify that the Diagnostic Kits are reagents/ chemicals and other substances and are packed in convenient combinations. Petitioners contend that while it is true that Diagnostic Kits are manufactured out of reagents/chemicals and other substances, yet Diagnostic Kits are manufactured by medical formulation / preparation and are distinct from different reagents/chemicals out of which, these are manufactured. The Diagnostic Kits, the end product of a combination of the reagent/chemicals are a unique product having a distinct purpose, names, uses, and characters and these are sold ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....65 of Schedule D which clearly indicates inconsistency and non-application of mind on the part of the authority. 17. Further, it has also been contended on behalf of the petitioners that while issuing the clarification no reason has been assigned. Thus, the clarification is a non-speaking order without proper reasons as to why the aforesaid items cannot be treated under Entry 48 of Schedule C. 18. It has been also submitted that these Diagnostic Kits have been treated by manufacturers, importers, exporters, and sellers as "drugs" by obtaining the necessary license under the Drugs and Cosmetics Rules, in the support of which the licenses issued to the petitioners by the Drug Controller have been annexed. 19. The petitioners have also stated that the Directorate General of Health Services Drug Control Section, Nirmal Bhawan New Delhi in the reply to a query had categorically stated that In Vitro Diagnostic Kits are drugs under the Drugs and Cosmetics Act. 20. It has been also stated by the petitioners that in other States all these items are treated as drugs and charged accordingly. The petitioners, accordingly, have sought for quashing the aforesaid clarifications and fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that these Kits are used for diagnosis, and hence have to be treated as "drugs" within the meaning of Section 3 (b) (i) of the Drugs and Cosmetics Act, 1940. If that is so, there cannot be any doubt that these items will be covered under Entry 48 of SRO 167 and liable to be taxed @ 4%. Since the argument of the petitioners hinges on the definition of "drug" as provided under the Drugs and Cosmetics Act, 1940, we will analyze and examine the aforementioned definition clause. Section 3 (b) of the Drugs and Cosmetics Act of 1940 defines "Drug" as follows: Section 3: In this Act, unless there is anything repugnant in the subject or context,- (b) "drug" includes - i) all medicines for internal or external use of human beings or animals and all substances intended to be used for or in the diagnosis, treatment, mitigation or prevention of any disease or disorder in human beings or animals, including preparations applied on human body for the purpose of repelling insects like mosquitoes; (ii) such substances (other than food) intended to affect the structure or any function of the human body or intended to be used for the destruction of vermin or ins....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ration for the treatment or cure of illness or prevention of disease. Thus, to consider "medicines" as "drugs" does not pose any difficulty. But this simplistic definition of drug is stretched a bit when any substance/medicine is also considered "drug" even when it is used for diagnostic purpose. It is still comprehensible if such "medicine", as commonly understood, is treated as drug, if it is used for diagnostic purposes. However, the real difficulty emerges when "Diagnostic Kit" which is not commonly understood as "medicine" is claimed to be "medicine" to bring within the meaning of "drug". 31. What is a "Diagnostic Kit"? "Diagnostic Kit" means "a product containing reagents and other items necessary to conduct a test to detect the presence of or to measure a given Biomarker in a given Patient Sample", and it means an In Vitro Diagnostic product. [See: https://www.lawinsider.com/dictionary/diagnostic-kit]. In Vitro means a process taking place outside a living body, in a scientific apparatus as opposed to In Vivo, a process taking place inside the body [Oxford Advanced Learners Dictionary, 10^th Edn., 2020]. 32. The contention of the petitioners is that "Diagnostic Kit" co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of "drug" under sub-section (i) of Section 3 (b) as contended by the petitioners or can it considered to be a "device" to bring within the meaning of "drug" under sub-section (iv) of Section 3 (b) of the Act? 35. Definitely, "medicines" which are drugs as per sub-section (i) of Section 3 (b) of the Act are different from "devices" which are also treated as drugs as per sub-section (iv) of Section 3 (b) of the Act (provided these are specified as such by the Central Government), though both the "medicines" and "devices" may be used for diagnostic purpose. The existence of these two sub-sections under the same section of the statute clearly indicates that "medicines" are different from "devices", though both are "drugs" within the meaning of Section 3 (b). If we try to comprehend "Diagnostic Kits" vis-à-vis "medicines" and "devices", there cannot be any doubt that "Diagnostic Kits" would be more akin to "devices" rather than "medicines". When any particular item is compared with two competing substances for the purpose of classification, the item can be clubbed with the substance with which the item bears more resemblance. 36. In the present context, "Diagnostic Kits" be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the reason that the container is not an integral part of the medicine, but the container is used only for the purpose of safe and uncontaminated storage of the medicine which is to be used independently of the container. The use of a medicine, say, cough syrup has no co-relation with the container or apparatus or bottle, which is used only for storing the cough syrup. On the other hand, Diagnostic Kit is a wholesome and composite product consisting not only of the chemical reagents and other non-chemical substances which are used in the kit, but the apparatus which holds the reagents and chemicals and other non-chemical substances, like polythene materials. The chemical reagents found in the Diagnostic Kit cannot be used independently and without the existence of the apparatus or the device. Thus, there should not be any confusion about the apparatus or the device which is an integral part of the chemical reagent used along it to form the Diagnostic Kit, with the mere container containing a medicine as in the case of a cough syrup or tablets. Devoid of the physical device or apparatus and other non-chemical components of the Kit, the reagents/chemicals contained in the Diagnost....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Certainly, Diagnostic Kits even if understood in the trade circles as medicines or drugs as claimed by the petitioners, Diagnostic Kits are not understood as medicines or drugs amongst the medical practitioners, medical literature and certainly by the patients but understood as devices or tools. 43. It may also be noticed that in the Entry 48 of Schedule C, the rule making authorities have consciously included syringes and dressings also within the meaning of drugs and medicines. Nobody in his normal senses would treat syringes or dressings to be "drugs" or "medicines". Everybody would treat a syringe to be a medical tool to inject medicines in the body and dressing to be materials to protect wounds. By any stretch of imagination, they are treated as drugs or medicines in common parlance, yet the rule making authorities deemed it fit to categorize these as drugs or medicines for the purpose of levy of tax under the VAT under Entry 48 of Schedule 'C'. There could be certain reasons for doing so. We may only speculate that as these articles are so commonly used with treatment of patients and used along with medicines and drugs that these are treated as "drugs" or "medicines" for ....