2015 (11) TMI 1319 - HC - VAT and Sales Tax

Classification of goods under Assam VAT - ayurvedic medicines or cosmetics and toilet preparations - Goods fall under Entry 1 of the Fifth Schedule or Entry 21 of the Fourth Schedule - Held that - Drugs and medicines clearly falls within the purview of entry 21 of the Fourth Schedule to the Act of 2003 and as such, taxable at four per cent on MRP basis. The Explanation which was added to the aforesaid entry No. 21 by notification dated July 29, 2005 states that expression drugs and medicines should not include products capable of being used as cosmetic and toilet preparation including toothpaste, tooth powder, cosmetic and toilet articles and soaps. - Explanation, however, lays emphasis on the term shall not include and the same is designed to exclude the goods which are primarily cosmetic in use but have a subsidiary use as drugs and medicines. However, when some goods which are drugs and medicines in their primary use but have cosmetic use as well cannot be treated as product covered by entry 1 of the Fifth Schedule. - products which are involved in the proceedings before us are basically treated as drugs and medicines although they have ancillary use as cosmetics and toilet products, and as such, the respondent-authorities herein were not right in treating those articles as cosmetics and toilet products for the purpose of levy of tax at 12.5 per cent in terms of entry No. 1 of the Fifth Schedule to the Act of 2003. Rather, tax on those products was to be levied at per cent in terms of entry No. 21 of the Fourth Schedule to the aforesaid Act. - notification/letters/orders classification in so far they relate to the impugned goods, so specified in the writ petitions aforesaid are hereby quashed and set aside - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of goods as either "cosmetics and toilet preparations" or "drugs and medicines" under the Assam Value Added Tax Act, 2003.
2. Applicable tax rate for the classified goods.

Detailed Analysis:

Issue 1: Classification of Goods
The primary issue revolves around whether the goods in question should be classified as "cosmetics and toilet preparations" or "drugs and medicines" under the Assam Value Added Tax Act, 2003.

- Petitioners' Argument: The petitioners contended that their products, which include ayurvedic medicines, should be classified under entry 21 of the Fourth Schedule to the Act of 2003 as "drugs and medicines" and not under entry 1 of the Fifth Schedule as "cosmetics and toilet preparations." They argued that these products are primarily used for medicinal purposes and are treated as such in common parlance. They relied on several judicial precedents, including *Puma Ayurvedic Herbal (P.) Ltd. v. Commissioner, Central Excise, Nagpur* and *V.C. Ramalingam and Sons v. State of Tamil Nadu*, to support their claim that the main use of the products should determine their classification.

- Respondents' Argument: The respondents, represented by the Tax Department, argued that the goods in question are capable of being used as cosmetics and toilet preparations, thus falling outside the scope of entry 21 of the Fourth Schedule. They relied on the "users test" and "common parlance test" to assert that the products should be taxed at 12.5% under entry 1 of the Fifth Schedule. They cited *C.C.E. v. Richardson Hindustan Ltd.* to support their position.

Issue 2: Applicable Tax Rate
The second issue is the applicable tax rate for the classified goods.

- Petitioners' Argument: The petitioners argued that if their products are classified as "drugs and medicines," they should be taxed at 4% as per entry 21 of the Fourth Schedule. They emphasized that the percentage of medicinal components in the products is immaterial, citing *Commissioner of Central Excise, Calcutta v. Shartna Chemical Works*.

- Respondents' Argument: The respondents maintained that the products should be taxed at 12.5% as per entry 1 of the Fifth Schedule, arguing that the Commissioner of Taxes had correctly applied the provisions.

Court's Findings:
The court analyzed the relevant entries and judicial precedents to determine the correct classification and applicable tax rate.

1. Entry 21 of the Fourth Schedule: This entry covers "drugs and medicines" and specifies a tax rate of 4%. The explanation attached to this entry excludes products capable of being used as cosmetics and toilet preparations.

2. Entry 1 of the Fifth Schedule: This entry covers all other goods not specified in the First, Second, Third, and Fourth Schedules and imposes a tax rate of 12.5%.

The court referred to the Supreme Court's decision in *Puma Ayurvedic Herbal (P.) Ltd.*, which distinguished between cosmetics and medicaments based on their primary use. It emphasized that a product primarily used for medicinal purposes should be classified as a medicament, even if it has ancillary cosmetic uses.

Conclusion:
The court concluded that the products in question are primarily used as "drugs and medicines" and should be taxed at 4% under entry 21 of the Fourth Schedule. The explanation to entry 21 is designed to exclude goods primarily used as cosmetics but not those primarily used as medicines. Therefore, the respondent authorities were incorrect in classifying these products as cosmetics for the purpose of levying a 12.5% tax.

Judgment:
The court quashed and set aside the notifications, letters, and orders classifying the impugned goods as cosmetics and subjecting them to a 12.5% tax rate. The interim order passed earlier was made absolute.