2006 (8) TMI 220 - AT - Central Excise

Valuation (Central Excise) - Whether the value of physician's samples which are supplied free should be assessed on comparable basis with identical medicaments manufactured and sold for commercial purposes or that their valuation be assessed by adopting the costing method as done by the assessee on the basis of Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 - HELD THAT - dmittedly, the physician's samples were not sold, but they were supplied free, unlike in Sun Pharmaceutical Industries (supra) in which the physician's samples were sold to the distributors and therefore, there was a price indicated for such samples. In that appeal the Tribunal in paras 2(b)(iii) and 3(ii) of the order emphasized that it was a case where physician's samples were actually sold to the distributors before they were given free by the distributors. It was, therefore, held that when the sale price of physician's samples to the wholesale dealers was not impugned, the same was required to be accepted under Section 4(1)(a) of the Act. Therefore, this decision though projected to be laying down proposition of law contrary to the ratio of Cheryl Laboratories (P) Ltd. supra, in no way advances any proposition inconsistent with the one adopted in Cheryl Laboratories (P) Ltd., Charak Pharmaceuticals and Crosslands Research Laboratories Ltd., and therefore cannot be of any assistance to the assessee. Where the medicines put in the retail packs and free physician's samples are identical in the material characteristics as well in quantity, then there would be no scope for any doubt in working out the value of the excisable goods not sold, namely, free physician's samples on the basis of value of such medicines which are sold by the assessee, as provided by Rule 4. The only adjustment contemplated in that rule would be on account of the difference in the dates of delivery which can be made in cases where there is such difference in the delivery dates. However, when the physician's sample differs in quantity though identical in essential characteristics of' the medicine, keeping in view Chapter Note 5 of Chapter 30, which includes labelling, repacking etc. in the manufacturing process, these nonetheless would be comparable goods within the meaning of Rule 6(b)(i) of the said rules and there would be no scope for adopting the costing method contemplated by sub-clause (ii) of sub-clause (b) of Rule 6 in respect of such physician's samples. The material characteristics of the medicine whether in physician's sample or in retail pack do not at all change by virtue of the provisions of Note 5 of Chapter 30. Moreover, the medicine, having been already manufactured even before the packaging, could be consumed as such medicine even before its removal. Once taken out of the packages it was difficult to relate medicine from one package to the medicine from the other type of package, as was amusingly demonstrated in the court. The only adjustments in such cases would therefore be in the context of the proviso to sub-clause (i) of Rule 6(b), as discussed above. Thus, the decisions in Cherly Laboratories (P) Ltd. 1997 (3) TMI 206 - CEGAT, NEW DELHI and Charak Pharmaceuticals 2000 (6) TMI 80 - CEGAT, MUMBAI , holding that the provisions of Rule 6(b)(i) would apply in such cases where physician's samples are supplied free lay down the correct legal position. The reference stands disposed off accordingly. The matter will now be placed before the concerned division bench for decision on the merits of the appeal in accordance with law and in the light of this judgment.

Issues Involved:
1. Valuation method for physician's samples supplied free of cost.
2. Applicability of Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975.
3. Comparison of physician's samples with commercial packs for valuation.
4. Interpretation of Section 4(1)(a) and 4(1)(b) of the Central Excise Act.
5. Precedents and divergent views on the valuation of physician's samples.

Issue-wise Detailed Analysis:

1. Valuation method for physician's samples supplied free of cost:
The primary issue was whether the value of physician's samples supplied free should be assessed on a comparable basis with identical medicaments sold for commercial purposes or through the costing method as per Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975. The Tribunal found that the physician's samples and the regular goods were put in similar laminated foils, and there was no major difference in quality. Therefore, the normal price under Section 4(1)(a) should be applied to the physician's samples.

2. Applicability of Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975:
The Tribunal discussed the applicability of Rule 6(b)(ii), which allows for the valuation based on the cost of production plus profits if the value cannot be determined under Rule 6(b)(i). However, it was concluded that Rule 6(b)(i), which refers to the value of comparable goods, was more appropriate since the physician's samples were not significantly different from the commercial packs.

3. Comparison of physician's samples with commercial packs for valuation:
The Tribunal examined whether physician's samples could be considered comparable to commercial packs. It was noted that both contained identical medicines, though the physician's samples had fewer tablets and different labeling. Despite these differences, the Tribunal held that the material characteristics were virtually identical, making the commercial packs comparable goods under Rule 6(b)(i).

4. Interpretation of Section 4(1)(a) and 4(1)(b) of the Central Excise Act:
Section 4(1)(a) provides that the normal price of goods should be the basis for valuation, while Section 4(1)(b) allows for the nearest ascertainable equivalent if the goods are not sold. The Tribunal determined that the normal price under Section 4(1)(a) was applicable to the physician's samples, as they were comparable to the commercial packs.

5. Precedents and divergent views on the valuation of physician's samples:
The Tribunal reviewed various precedents, including Cheryl Laboratories (P) Ltd. v. Collector of Central Excise and Commissioner of Central Excise, Mumbai-I v. Charak Pharmaceuticals, which supported the valuation based on comparable goods. Contrarily, decisions like Commissioner of Central Excise, Calicut v. Trinity Pharmaceuticals Pvt. Ltd. argued against such comparisons. The Tribunal concluded that the decisions supporting the use of comparable goods for valuation laid down the correct legal position.

Conclusion:
The Tribunal resolved the reference by holding that the provisions of Rule 6(b)(i) would apply to physician's samples supplied free, and the normal price under Section 4(1)(a) should be used for valuation. The decision in Trinity Pharmaceuticals Pvt. Ltd. was overruled to the extent it contradicted this position. The matter was remitted to the concerned division bench for a decision on the merits of the appeal in light of this judgment.

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