2017 (1) TMI 202 - HC - VAT and Sales Tax

Classification of goods - candy, namely Swad - classified as Ayurvedic medicine and taxable at 6% or as confectionery item taxable at 10%? - Held that - any drug for even prevention of disease or disorder in human beings or animals, and is manufactured exclusively in accordance with the formulae prescribed in the authoritative books, can be said to fall within the definition of a drug and once a common parlance test is applied, after noticing the ingredients, as noticed earlier, Swad cannot be said to be a toffee, and one takes the same in case of a stomach disorder or for digestion purposes. It can easily be observed that majority of the ailments begin with stomach and majority of the illness emanates from stomach disorder and by & large, any human being to keep his stomach in a proper manner or condition, even for digestion purposes, takes such tablet like Swad , which cannot be said to be a toffee or a candy. In my view, merely because it is available in a tea stall or a betel shop or other various places where confectionery items are sold, does not change the character of an item. There is no evidence on record or authoritative material put on record by the AO so that it can be said to be a confectionery item and not a drug. The burden was on the Assessing Officer if according to the AO it was a confectionery item, and it did not lead any evidence or produced any material or evidence to discharge the onus. The Tax Board is just and proper and has rightly held that it is a Ayurvedic medicine with the rate applicable of 6% - petition dismissed - decided against the Revenue and in favor of the assessee.

Issues Involved:
1. Classification of "Swad" as Ayurvedic medicine or confectionery.
2. Applicability of tax rate (6% for Ayurvedic medicine vs. 10% for confectionery).
3. Liability for interest on differential tax rate.

Detailed Analysis:

Issue 1: Classification of "Swad" as Ayurvedic Medicine or Confectionery

The primary issue revolves around whether "Swad" should be classified as an Ayurvedic medicine or a confectionery item. The respondent assessee argued that "Swad" is an Ayurvedic medicine, containing ingredients such as rock salt, black salt, citric acid, pepper, cumin, carom seeds, ginger powder, and long pepper root, which aid digestion and are used for stomach ailments. The Assessing Officer (AO) contended that "Swad" is a confectionery item, primarily because it contains 97% sugar and is sold in non-medical shops, including betel shops and tea stalls.

The Tax Board concluded that "Swad" is an Ayurvedic medicine, citing the formula and ingredients used in its preparation. The Board referenced the definition of Ayurvedic, Siddha, or Unani drug under Section 3(a) & (b) of the Drugs and Cosmetics Act, 1940, which includes medicines intended for the diagnosis, treatment, mitigation, or prevention of disease or disorder in human beings or animals, manufactured in accordance with authoritative books of Ayurvedic medicine.

The High Court of Madhya Pradesh in Panama Chemical Works v. UOI had previously considered "Swad" as an Ayurvedic product, emphasizing the medicinal properties of its ingredients and the use of sugar as a preservative and binding agent. The court held that the presence of sugar does not alter the medicinal nature of the product.

Issue 2: Applicability of Tax Rate

The AO applied a 10% tax rate, arguing that "Swad" is a confectionery item. The assessee paid a 6% tax rate, claiming it as an Ayurvedic medicine. The Tax Board supported the assessee's position, stating that "Swad" should be taxed at 6% as an Ayurvedic medicine. The Board emphasized that the availability of "Swad" in non-medical shops does not change its classification as a medicine.

The court upheld the Tax Board's decision, stating that "Swad" meets the definition of a drug under the Drugs and Cosmetics Act, 1940. The court noted that the AO failed to provide evidence or authoritative material to classify "Swad" as a confectionery item.

Issue 3: Liability for Interest on Differential Tax Rate

The revenue challenged the relief granted on interest by the Tax Board. The Board had ruled that once the product is classified correctly, the interest on the differential tax would automatically be reduced. The court agreed with the Tax Board, stating that the AO did not discharge the burden of proving "Swad" as a confectionery item. Consequently, the interest on the differential tax rate was not applicable.

Conclusion:

The court concluded that "Swad" is an Ayurvedic medicine and should be taxed at 6%. The court answered all the questions posed by the revenue against the revenue and in favor of the assessee. The Tax Board's decision was upheld as just and proper, and the petitions were dismissed.

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