2011 (1) TMI 13 - SC - Central Excise

Excise duty on free samples method of valuation Held that - this Court should follow an earlier decision that has withstood the changes in time irrespective of the rationale of the view taken. - The primary reason of distributing free physician samples by the manufacturer of pharmaceutical drugs to us appears to be only for the purpose of advertising of the product and thereby enhancing the sale of the product in the open market Distribution of free samples are liable to excise duty on the issue of valuation held that samples have to be valued on pro-rata basis for the relevant period

Summary

Issues Involved
1. Whether Physician samples are excisable goods.
2. Appropriate method of valuing Physician samples for excise duty.

Detailed Analysis

Issue 1: Whether Physician samples are excisable goods
The appellant contended that Physician samples are not excisable as they are statutorily prohibited from being sold under the Drugs and Cosmetics Act, 1940. The argument emphasized that the samples do not meet the twin tests of manufacturing and marketability required for excisability.

The court noted that excise duty is levied on goods manufactured or produced in India, regardless of whether they are sold. The court referenced several precedents to establish that marketability does not necessarily require actual sale but the capability of being sold. The court concluded that the statutory prohibition on the sale of Physician samples does not affect their excisability. The court emphasized that the primary object of distributing free samples is advertising, which enhances marketability. Therefore, Physician samples are excisable goods.

Issue 2: Appropriate method of valuing Physician samples for excise duty
The appellant argued that the value of Physician samples should not be determined on a pro-rata basis. Instead, they should be assessed based on the cost of manufacture plus normal profits, as per Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, and Rule 8 of the Central Excise Valuation Rules, 2000.

The court referred to the decision in the case of Commissioner of Central Excise v. M/s. Bal Pharma, where it was held that Physician samples should be valued on a pro-rata basis. The Tribunal had previously upheld this method, and the department had accepted it. Consequently, the court directed that Physician samples be valued on a pro-rata basis for the relevant period.

Conclusion
The court allowed Civil Appeal No. 3626 of 2005, remitting the matter to the Adjudicating Authority to value the goods on a pro-rata basis. Civil Appeal Nos. 1354-1355 of 2010 were dismissed, affirming that Physician samples are excisable and should be valued on a pro-rata basis.