Supreme Court: Mere Broad-Basing of Entries under Central Excise Tariff Act 1985, by itself Cannot Justify Re-Classification of Product

Supreme Court: Mere Broad-Basing of Entries under Central Excise Tariff Act 1985, by itself Cannot Justify Re-Classification of Product

The Supreme Court while considering the classification of ‘Aswini Homeo Arnica Hair Oil’ (AHAHO) under Central Excise Rules, 2002, has ruled that the classification cannot be changed merely on the ground of change of tax structure or tariff entries without showing a change in the nature and character of a product or a change in the use of the product.

The two-judges bench Justice Dinesh Maheshwari and Justice Vikram Nath were adjudicating an appeal against the decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) which had set aside the order of the Commissioner of Customs and Central Excise (Adjudicating Authority), where the latter had confirmed the demand raised on the respondent, Ashwani Homeo Pharmacy, for the differential duty payable by it with respect to the product, Aswini Homeo Arnica Hair Oil.

The Adjudicating Authority had held that the product could not be classified as ‘medicament’ under Tariff Item 3003 90 14 or under any item stated in Chapter 30 of the First Schedule to the Central Excise Tariff Act.

The Adjudicating Authority opined that the product being a “Hair oil,” was required to be classified as ‘cosmetic’ under Tariff Item 3305 90 19 under Chapter 30.

The bench dealt with the issue of whether the product AHAHO, merited classification as a ‘medicament’ under Chapter 30 or as ‘cosmetic or toilet preparations’ under Chapter 33, by applying the following test.

Firstly, the common/commercial parlance test i.e., how the product is understood commonly, including by the persons dealing in the same and by the end users.

In this regard, the Court remarked that as the primary object of a taxing statute is to raise revenue, the entries under which various products are classified are not to be understood in their scientific and technical meaning; rather the terms and expressions used in tariff have to be understood by their popular meaning, i.e., the meaning attached to them by those dealing with or using the product.

Secondly, the ingredients test i.e., whether the ingredients used in the product are found mentioned in authoritative textbooks.

The Court held, “The ingredient test, as extensively dealt with in the leading opinion of majority of the Tribunal in the case of Bakson Homeo Pharmacy (supra), with reference to the fundamental principles of Homeopathy and the medicinal properties and therapeutic/prophylactic use of several of the ingredients, inspires confidence and when AHAHO is found carrying all such Homeopathic medicines which were the ingredients of the product under consideration of the Tribunal, we find it just and proper to endorse the views of the majority of the Tribunal in Bakson Homeo Pharmacy (supra) and there appears no requirement to re-analyse the medicinal properties of the ingredients. Suffice it would be to observe that the product in question, AHAHO, passes the ingredients test beyond any doubt.”

The Apex Court observed that the said product was classified as ‘medicament’ under Chapter 30 on least four different occasions by the department, including two orders passed by the Commissioner (Appeals), and the said orders had attained finality.

The Court opined that the department was not justified in seeking to re-open the settled position in relation to the product in question, merely on the ground of the amendment made to the Central Excise Tariff in the year 2012, which had made certain changes in Chapter 30 and Chapter 33. The said changes had essentially broadened their ambit and scope and provided modified marginal notes and tariff entries with detailed specifications.

The bench further asserted that for a product to be classified under Chapter 33, it has to be first a ‘cosmetic’, hence the Court concluded that AHAHO was predominantly of pharmaceutical value and the item of cosmetic, i.e., hair oil, was nothing but a medium for appropriate use of that pharmaceutical value.

The Court added that one of the essential factors to be considered is whether the preparation is essentially for cure/prevention of disease or for care; the former being a medicament and the latter a cosmetic. The court added that preparation having only subsidiary curative or prophylactic value would fall under Chapter 33.

The Court concurred with the Tribunal’s view that when hair fall or baldness is recognized as a medical condition, the Adjudicating Authority could not have taken a different view, which was not recognized by any branch of medicine.

The Court further highlighted that the drug license issued by the respective authorities under Schedule K to the Drugs and Cosmetics Rules, 1945, was a relevant factor that cannot be ignored.

Accordingly, the Apex Court dismissed the appeal.