Excisability of Physician samples

PJ/Case Laws/2010-11/1073

Case: Medley Pharmaceuticals Ltd v/s Commissioner of Central Excise & Customs, Daman

Citation: 2011-TIOL-09-SC-CX

Issue:- Whether Physician samples manufactured and distributed as free samples have to be assessed on the basis of cost of manufacture plus normal profits, if any, earned on the sale under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 upto 1^st July, 2000 and thereafter, on application of Rule 8 of Central Excise Valuation Rules, 2000 i.e. on cost of manufacture plus 15% profit basis and not on pro-rata basis as has been done by the Revenue?”

Brief Facts:- The Commissioner, while passing the order in Original No. 01/MP/ Valsad/2002, has held that the value should be determined under Rule 4 of Rules 1975. In the appeal filed by the appellant, the Tribunal, following the judgment in the case of Mayo India ltd. and Cheryl Laboratories (P) Ltd., held that the value of Physician samples should be determined in accordance with the principle laid down in Rule 6(b)(i) read with Rule 7 of the Rules 2000. After coming to the aforesaid conclusion, the Tribunal has accepted the method of assessable value adopted by the Commissioner, though it was under Rule 4 of the Rules 1975.

In Civil Appeal Nos. 1354-1355 of 2010, the appellant is aggrieved by the final order passed by the Tribunal, bearing No. A/490/WZB/AHD/2009, and the order No. H/853/WZB/AHD/2009, passed on the rectification application in Appeal No. E/384/2005. By the impugned order, the Tribunal dismissed the appellant’s appeal and upheld the order passed by the Commissioner of Central Excise (Appeals) holding that for the purpose of payment of Excise Duty, Physician samples have to be valued for the period post on pro-rata basis on the value of trade packs under Rule 4 read with Rule 11 of the Central Excise Valuation Rules 2000.

Appellant’s Contentions:- Appellant submitted that Physician Samples of Patent and proprietory medicines come into existence as a manufactured product only when the same are labeled and packed for the purpose of sale and distribution. It is also contended that the Physician samples of Patent and proprietary Medicines become manufactured goods only when the same are packed and labeled. It is further contended that the physician Samples of Patent and proprietary Medicines, at the time they are manufactured, are statutorily prohibited from being sold by virtue of section 18 of the Drugs Act read with Rule 65(18) of the Drug Rules and the breach of the Drug Rules invites prosecution under Section 27(d) of the Drugs Act, and also invites penalty under Section 27(c) of the Drugs Act. It is further submitted that the two conditions that require to be satisfied for levy of excise duty are existence of manufacturing process and as a result of such process, goods are produced which are capable, in the ordinary course, of being taken to the market for being bought and sold. It is further submitted that the word ‘excisable goods’ has been construed to mean not only goods specified in the Schedule to the Central Excise Tariff Act, 1985, but also goods which are capable of being sold i.e. marketable. In the Present case, the ‘Physician Samples’ are statutorily prohibited from being sold and therefore, do not satisfy the twin test required to make physician samples excisable goods.

Respondent’s Contentions:- Respondent contended that the physician samples of patent and patent and proprietary medicines are statutorily prohibited from being sold by virtue of Rule 65(18) and Rule 95 and Rule 96 (1) (ix) of the Drugs Rules. It is contented that every drug intended for distribution as physicians sample while complying with the labeling provisions under Drugs and Cosmetic Rules further bear on the label of the Container the words “Physician Samples – Not to be Sold” requires to be over printed and further, the sale of such physician samples is expressly prohibited under Rule 65 (18) of the Drug Rules. They also contends that patent and proprietary drugs are excisable only after the labeling is complete. Since these physician samples cannot be sold in the market after the completion of the labeling in view of the statutory prohibition, the physician samples are not marketable and hence no excise duty is leviable on their manufacture.

The Central Excise Act, apart from others, provides for charging of duty, valuation etc. Section 3 of the Act is the charging provision. It states, there shall be levied and collected in such a manner as may be prescribed duties on excisable goods which are produced or manufactured in India. Basic excise duty and special duty are levied under the charging provision at the rates specified in First and Second Schedule to Central Excise Tariff Act, 1985. The duty is on excisable goods which are manufactured or produced in India. This court in Shinde Brothers vs. Deputy Commissioner, AIR 1967 SC 1512 has held that excise duty is imposed on goods, and the taxable event for the levy is manufacture or production of the goods. A duty of excise is a tax upon the goods and not upon sales or proceeds of sale of goods. In terms of Entry 84, List I of Seventh Schedule to the Constitution, taxable event in respect of excise is manufacture or production. The levy is on the manufacture or production of goods. The collection is shifted to stage of removal. Since excise is a duty on manufacture, duty is payable whether or not goods are sold. Therefore, sale is not necessary condition for charging excise duty.

Emphasis on the following cases:

Ram Krishna Ramanath Agarwal Vs. Secretary, Municipal Commissioner, Kamptee 1950 SCR 15
Union of India Vs. Delhi Cloth and General Mills
Union Carbide India Ltd Vs. Union of India
Bhor Industries Ltd. Vs. Collector of Central Excise, Bombay
HindustanPolymers Vs. CCE
State Electricity Board Vs. CCE, Hyderabad
Indian Cable Company Ltd., Calcutta Vs. Collector of Central Excise and Others
Triveni Engineering & Industries Ltd Vs. CCE
Union of India Vs. Sonic Electrochem(P) Ltd
ITC Ltd. Vs. Collector of Central Excise, Patna
Cadila Laboratories (P) Ltd Vs. CCE, Vadodara
Hindustan Zinc Ltd. Vs. CCE
Dharampal Satyapal Vs. CCE
Gujarat Narmada Valley Fertilizer Co. Ltd. Vs. Collector of Excise and Customs
MorirokuUT India (P) Ltd. Vs. State of Uttar Pradesh and Ors.
CCE Vs. Shree Baidyanath Ayurved Bhavan Ltd

Reasoning of Judgment:- Supreme Court agreed with the appellant’s contention that the manufacture of patent and proprietary drugs is completed only after the labeling is completed, for the purpose of levy of excise duty. However, on a perusal of the labeling provisions of in the Drug Rules, they find that deal with the name of drug, contents of the drug, name and address of manufacturer, a distinctive batch number, preparation of drug, date of manufacture and date of expiry of drug, its storage conditions, etc., which are in aid of the object of the Act, viz promoting the use of good quality drugs, and ensuring that drugs that do not live upto quality do not find their way into the market. Rule 96 (1) (ix) of the Drug Rules on which Appellant heavily relies in support of his submission, states that while complying with the labeling provisions under clauses (i) to (vii) of Rule 96 (1), the manufacturer must further overprint on the label ‘Physician’s Sample – Not to be Sold’, in case they are to be distributed free of cost as physicians samples. Further, the bare perusal of Rule 96 shows that its heading bears ‘Manner of Labelling’ and clause 1 of this Rule Contemplates or govern the manner of labeling in a way that the particulars on the label of the container of a drug shall be either printed or written in indelible ink and shall appear in conspicuous manner. This gives ample clarification that the process of labeling is distinct or different from the overprinting on the label of a physician’s sample, and hence Supreme court are unable to agree with him that the manufacture for the purpose of the Central Excise Act is not completed until ‘Physicians Sample – Not to be Sold’ is printed on the label.

The primary reason of distributing free physician samples by the manufacturer of pharmaceuticals drugs to us appears to be only for the purpose of advertising of the product and thereby enhancing the sale of the product in the open market. It has been shown by research that the market of a pharmaceutical company is enhanced substantially by the distribution of free physician samples. In other words, the distribution of such physician samples serves as a marketing tool in the hands of the pharmaceutical companies.

Relied upon the following cases –

Ranbaxy Laboratories Ltd. Vs. Commissioner of Central Excise, Pune.
Bharat Heavy Electricals Ltd. Vs. Commissioner of Customs & Central Excise
Salgaocar & Bros (P) Ltd. vs. C.I.T
Kunhayammed Vs. State of Kerela
Waman Rao. Vs. Union of India
DelhiCloth and General Mills Vs. Joint Secretary
Amar Lal Vs. CCE
Pfizer Vs. Commissioner of Central Excise
Hindustan Petroleum Corporation Ltd. Vs CCE
Himalaya Drug Company Vs. CCE

In Supreme Courts View, the reliance placed by the Appellant on some of the decisions of the Tribunal would not assist him in support of his submissions for the reason that the goods therein were not marketable and hence, excise duty was not leviable, not because of any statutory prohibition for the sale of the goods, but because they had not reached the stage of satisfying the test of marketability of the goods.

Now coming to the valuation of the Physician samples for the purpose of levy of excise duty, in view of Supreme Court this issue need not detain long. This Court has upheld the conclusion of the Tribunal that the Physician’s samples have to be valued on pro-rata basis. The Tribunal, while arriving at the aforesaid conclusion, had relied upon its earlier decision in the case of Commissioner of Central Excise, Calicut vs Trinity Pharmaceuticals Pvt. Ltd. Therefore, Court held that physician samples have to be valued on pro-rata basis for the relevant period.

Decision:- The case was decided on above terms.

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PJ/Case Laws/2010-11/1073

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