2024 (5) TMI 1143 - HC - VAT and Sales Tax

Classification of Diagnostic Kits - to be considered as drugs which are covered by Entry 48 of Schedule C to SRO 167 or under Entry 87 of Schedule D or Entry 165 of Schedule D - whether 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? - HELD THAT - In the definition of drug under Section 3 (b) of the Act, as quoted above, it is clearly mentioned under Section 3 (b) (iv) that drug includes such devices intended for internal or external use in the diagnosis, treatment, mitigation or prevention of disease or disorder in human being or animals. While sub-section (i) of Section 3 (b) brings within the ambit of drug , medicines used for diagnosis, sub-section (iv) of Section 3 (b) brings devices used for diagnosis within the ambit of drug . However, every such device cannot be deemed to be a drug within the meaning of Section 3 (b) (iv) unless such device is specified as drug by the Central Government by notification in the Official Gazette. Thus, if such device used for diagnostic purpose is not specified by the Central Government in the Official Gazette, such device cannot be treated to be a drug within the meaning of Section 3 (b) (iv) of the Act. Can a Diagnostic Kit be treated as medicine to fall within the definition 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? - HELD THAT - In the present context, Diagnostic Kits bears more resemblance with devices rather than medicines . Thus, seen from this perspective, Diagnostic Kits cannot be considered to be medicine and can be considered to be device . In such an event, the Diagnostic Kit will not come under the definition clause of sub-section (i) of Section 3 (b) but would come under sub-section (iv) of Section 3 (b) of the Drugs and Cosmetics Act, 1940 - Diagnostic kit which is a composite device, is a medicinal device, but it cannot be considered or understood to be a medicine . Consequently, if Diagnostic kit which is undoubtedly a medicinal device is to qualify to be a drug within the meaning of sub-section (iv) of Section (3)(b) of the Act, the same will be required to be notified as such by the Central Government in the Official Gazette. The Diagnostic Kits in issue in the present case cannot be considered to be drugs within the meaning of Section 3 (b) (iv) of the Drugs and Cosmetics Act till these are so specified by the Central Government by notification. What is notable is that the petitioners have not brought to the notice of this Court any material to show that Diagnostic Kits are considered to be medicines or drug by the medical practitioners, pathologists, patients and in medical literature - That these Diagnostic Kits are manufactured under the Drug License issued by the Drug Controller, does not necessarily make the Diagnostic Kits to be drugs within the ambit of VAT Act, unless these are notified by the Central Government to that effect under Section 3 (b) (iv) of the Act. If these Diagnostic Kits are notified as drugs within the meaning of Section 3 (b) (iv) of the Drugs and Cosmetics Act, 1940 by the Central Government by issuing notifications in the Official Gazette in consultation with the Drugs Technical Advisory Board, these Diagnostic Kits would be liable to be charged only @ 4% as these would then be covered within Entry 48 of Schedule C of SRO 167 of 16th June, 2005. If the devices namely, (i) Hepatitis HBS Ag Device Card, (ii) HIV Device Card, (iii) Pregnancy Device Card and (iv) VDLR Device Card have been notified by the Central Government in the Official Gazette after consultation with the Drugs Technical Advisory Board as drugs within the meaning of Section 3 (b) (iv) of the Drugs and Cosmetics Act, 1940. If it is found to be so, the above mentioned four Diagnostic Kits have to be treated as drugs falling within Entry 48 of Schedule C of SRO 167 dated 16th June, 2005 and charged VAT accordingly @ 4% with prospective effect from the date such notification is issued. Otherwise, being not drugs , the aforesaid Diagnostic Kits would fall under the residuary Entry 165 of Schedule D of SRO 167 of 16th June 2005 and attract VAT at the rate of 12.5%. Petition disposed off.

Summary

Issues Involved:
1. Classification of Diagnostic Kits as "drugs" or "devices" under the Drugs and Cosmetics Act, 1940.
2. Applicability of VAT rate on Diagnostic Kits under the Jammu and Kashmir Value Added Tax Act, 2005.

Summary:

Issue 1: Classification of Diagnostic Kits
The primary issue is whether Diagnostic Kits such as Hepatitis HBS AG Device Card, HIV Device Card, Pregnancy Device Card, and VDRL Device Card are classified as "drugs" u/s 3(b)(i) of the Drugs and Cosmetics Act, 1940. The petitioners argued that these kits are "drugs" as they are used for diagnosis, falling within the broad definition of "drug" u/s 3(b)(i). The court examined the inclusive definition of "drug" under Section 3(b) and noted that while medicines used for diagnosis are considered "drugs," devices used for diagnostic purposes are not automatically classified as "drugs" unless specified by the Central Government u/s 3(b)(iv).

The court held that Diagnostic Kits, being composite products consisting of reagents and apparatus, are more akin to "devices" rather than "medicines." Thus, these kits can only be considered "drugs" if notified by the Central Government in the Official Gazette u/s 3(b)(iv). The court clarified that Diagnostic Kits are not "medicines" and cannot be treated as "drugs" under Section 3(b)(i).

Issue 2: Applicability of VAT Rate
The second issue concerns the appropriate VAT rate applicable to Diagnostic Kits under the Jammu and Kashmir Value Added Tax Act, 2005. The petitioners contended that these kits should be taxed at 4% under Entry 48 of Schedule C to SRO 167, which includes "drugs and medicines." The respondents, however, argued that these kits fall under Entry 165 of Schedule D, attracting a 12.5% VAT rate.

The court noted that Diagnostic Kits cannot be classified under Entry 48 of Schedule C unless notified as "drugs" by the Central Government. Since these kits are not merely reagents/chemicals but composite devices, they do not fall under Entry 87 of Schedule D either. Consequently, the court concluded that in the absence of such notification, Diagnostic Kits fall under the residuary Entry 165 of Schedule D and attract a 12.5% VAT rate.

Conclusion:
The court directed the respondent authorities to verify if the Diagnostic Kits have been notified as "drugs" by the Central Government u/s 3(b)(iv). If so, these kits should be taxed at 4% under Entry 48 of Schedule C. Otherwise, they fall under Entry 165 of Schedule D, attracting a 12.5% VAT rate. The petitions were disposed of with these clarifications and directions.