Medicated Talcum Powder Classified as Cosmetic: Supreme Court Decision on KGST and TNGST Acts (2023)

Date of the Judgment: May 4, 2023
Citation: 2023 INSC 488
Judges: S. Ravindra Bhat, J., Dipankar Datta, J.
Can a product with medicinal properties be classified as a cosmetic for tax purposes? The Supreme Court of India addressed this complex question in a recent judgment, concerning the classification of medicated talcum powder under the Kerala General Sales Tax Act, 1963 (KGST Act) and the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act). The court had to determine whether products like “Nycil Prickly Heat Powder” should be taxed as medicines or as cosmetics. This judgment, authored by Justice S. Ravindra Bhat, clarifies the interpretation of specific entries in tax statutes, particularly when dealing with hybrid products that have both cosmetic and medicinal attributes.

Case Background

The appeals before the Supreme Court arose from two separate cases concerning the classification of “Nycil Prickly Heat Powder” for sales tax purposes. In the first case, Heinz India Limited (hereafter “Heinz”) contested the Kerala High Court’s decision, which classified their product as “medicated talcum powder” rather than a medicine. The second case involved Glaxo Smithkline Pharmaceuticals Ltd (“GSK”), which appealed against the Madras High Court’s judgment, which classified the same product as a toilet powder instead of a medicinal formulation.

The core issue was whether “Nycil Prickly Heat Powder,” which contains medicinal ingredients like chlorphenesin, zinc oxide, and boric acid, should be classified as a medicine or a cosmetic under the respective state sales tax laws. Heinz argued that the product’s medicinal properties and its use in treating prickly heat should classify it as a medicine. In contrast, the tax authorities contended that the product fell under the category of “medicated talcum powder” or “toilet powder,” which are taxed at a higher rate.

Timeline

Course of Proceedings

In the Kerala case, the assessing officer initially accepted Heinz’s classification of “Nycil Prickly Heat Powder” as a medicine, taxable at 8%. However, the revisional authority, believing this to be prejudicial to revenue interests, reclassified it as “medicated talcum powder,” taxable at 20%. The Kerala Sales Tax Appellate Tribunal upheld this reclassification. The Kerala High Court concurred with the revenue’s classification, noting that while the product had medicinal value, the specific entry for “medicated talcum powder” should prevail over the general entry for medicines.

In the Tamil Nadu case, the assessing officer initially taxed “Nycil” as a toilet powder. The Appellate Assistant Commissioner affirmed this view. However, the Appellate Tribunal sided with Heinz, classifying the product as a medicine. The Madras High Court reversed this decision, holding that the explanation to the relevant entry in the TNGST Act specifically included medicated items, even if licensed under the Drugs Act, under the category of toilet powders.

Legal Framework

The core legal issue revolved around the interpretation of specific entries in the KGST Act and the TNGST Act.

Kerala General Sales Tax Act, 1963 (KGST Act):

• Entry 79: “Medicines and Drugs including allopathic, ayurvedic, homeopathic, siddha and unani preparations and glucose IP.”
• Entry 127: “Shampoo, Talcum Powder including medicated talcum powder, Sandalwood Oil, Ramacham Oil, Cinnamon Oil, other perfumeries and cosmetics not falling under any other entry in this Schedule”.

Tamil Nadu General Sales Tax Act, 1959 (TNGST Act):

• Entry 20(A) of Part C: “Any medicinal formulation or preparation ready for use internally or externally for treatment or mitigation or prevention of diseases or disorders in human being or animals (excluding products capable of being used as creams, hair oils, tooth pastes, tooth powders, cosmetics, toilet articles, soaps and shampoos), but including (i) Allopathic medicine. (ii) Other medicines and drugs including ayurvedic, homeopathic, siddha and unani preparations. (iii) Medicinal mixtures or compounds, the components of which have not already suffered tax. (iv) Surgical dressing which expression shall include adhesive plasters, adhesive plaster dressing, gypsona plaster of paris and bandages, velroc pop bandages, elastro crape bandages, gauze, wadding gauze, lint and cotton wool poultices and similar articles impregnated or coated with pharmaceutical substances put up in forms or packing for surgical purposes which have been sterilized and conform to the accepted standards of the medical profession. (v) Pharmaceutical and surgical products of plastic and rubber including gloves, aprons and caps.”
• Entry 1(iii) of Part F: “Lipsticks, lip-salve, nail polishes, nail varnishes, nail brushes, beauty boxes, face powders, toilet powders, baby powders, talcum powders, powder compacts, powder pads and puffs, toilet sets made of all materials (with or without contents) toilet sponges, scent spray, depilatories, blemish removers, eye liners all sorts, eye shadow, eyebrow pencils, eyelash brushes, eau de cologne, solid colognes, lavender water, snows, face creams, all purpose creams, cold creams, cleaning creams, make-up creams, beauty creams, beauty milk, cleaning milk, hair foods, skin tonics, complexion rouge, nail cutters, sanitary towels and napkins, astringent lotions, pre-shave and aftershave lotions and creams, moisturisers of all sorts and personal (body) deodorant.”
• Explanation to Entry 1(iii) of Part F: “Any of the items listed above even if medicated or as defined in section 3 of the Drugs and Cosmetics Act, 1940 (Central Act XXIII of 1940) or manufactured on the licence issued under the said Act will fall under this item.”

The court also considered the definitions of “drug” and “cosmetic” under the Drugs and Cosmetics Act, 1940.

Arguments

Arguments by Heinz and GSK:

• Medicinal Properties: Nycil powder contains chlorphenesin, zinc oxide, and boric acid, which have antifungal, antibacterial, and antiseptic properties. These ingredients are effective in treating skin conditions like prickly heat, dhobie itch, and athlete’s foot.
• Treatment, Not Care: Nycil powder is not a daily-use cosmetic but is used specifically to treat skin ailments. Its use is discontinued once the ailment is cured, indicating its primary function is treatment rather than care.
• Common Parlance Test: Relying on the common parlance test, Nycil should be considered a medicine because it is understood by consumers as a product for treating specific skin conditions.
• Reliance on Precedents: They cited cases such as Puma Ayurvedic Herbal Pvt Ltd v Collector of Central Excise, B.P.L Pharmaceuticals v. Collector of Central Excise, and Muller & Phipps (India) Ltd v. Collector of Central Excise, where products with medicinal ingredients were classified as medicaments.
• Interpretation of Explanation: The explanation in the TNGST Act should not override the essential character of the product as a medicine.

Arguments by the State of Kerala and Tamil Nadu:

• Specific Entry: The KGST Act has a specific entry (Entry 127) for “medicated talcum powder,” which includes Nycil, regardless of its medicinal properties.
• Inclusive Definition: The term “including” in Entry 127 of the KGST Act broadens the scope to include medicated talcum powder within the category of cosmetics.
• Explanation in TNGST Act: The explanation to Entry 1(iii) of Part F of the TNGST Act explicitly states that items listed, even if medicated or licensed under the Drugs Act, fall under this entry, which includes toilet powders.
• Legislative Intent: The legislature intended to classify medicated talcum powder as a cosmetic, irrespective of its medicinal ingredients.
• Hybrid Nature: While Nycil has medicinal properties, it also functions as a cosmetic. The specific inclusion of “medicated talcum powder” in the cosmetic category is intentional.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but addressed the core question:

1. Whether “Nycil Prickly Heat Powder” should be classified as a medicine or a cosmetic under the KGST Act and the TNGST Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The court considered various authorities, particularly those related to the classification of products as medicines or cosmetics. However, the court distinguished the present case due to the specific entries in the KGST and TNGST Acts, particularly the inclusion of “medicated talcum powder” in the cosmetic category.

• The Court noted that cases like Puma Ayurvedic Herbal, B.P.L Pharmaceuticals, and Muller & Phipps, which classified products with medicinal ingredients as medicaments, were decided in the context of the Central Excise Tariff Act (CETA) which has elaborate notes and rules for interpretation. The KGST and TNGST Acts lack such detailed guidance.
• The Court relied heavily on Hamdard (Wakf) Laboratories and N.D.P. Namboodripad, which emphasized that the word “includes” in a definition clause is meant to be extensive.
• The Court also cited A.V. Fernandez v. State of Kerala, highlighting the principle of strict interpretation in construing a taxing statute.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the specific wording of the entries in the KGST and TNGST Acts. The inclusion of “medicated talcum powder” in the cosmetic category, especially with the use of the word “including,” indicated a clear legislative intent to classify such products as cosmetics, regardless of their medicinal properties. The Court emphasized the principle of strict interpretation of tax laws, stating that the plain meaning of the words must be followed.

The Court also noted that while Nycil powder has medicinal ingredients, the specific legislative intent to include medicated talcum powder under cosmetics could not be ignored. The explanation in the TNGST Act further solidified this position, explicitly stating that medicated items, even those licensed under the Drugs Act, would fall under the cosmetic category.

The court observed that the legislature had consciously used specific language to classify medicated talcum powder as a cosmetic, and the court could not substitute its interpretation for the clear intent of the legislature.

Fact:Law Ratio

The court’s reasoning was predominantly based on the legal interpretation of the statutes (70%), with a lesser emphasis on the factual aspects of the product itself (30%).

Logical Reasoning

Key Takeaways

• Specific Entries Prevail: When a tax statute has a specific entry for a product, it takes precedence over a general entry, even if the product has characteristics that might place it under the general entry.
• “Includes” Expands Scope: The word “includes” in a definition clause is meant to broaden the scope of the definition, bringing within its ambit items that might not ordinarily be included.
• Plain Meaning Rule: Tax laws must be interpreted strictly, and the plain meaning of the words used by the legislature must be followed.
• Legislative Intent: The court’s primary focus is to give effect to the legislative intent, as expressed in the plain language of the statute.
• Hybrid Products: Products with both medicinal and cosmetic properties can be classified based on specific entries in the statute, even if they have therapeutic uses.

Directions

No specific directions were given by the Supreme Court. The appeals were dismissed.

Development of Law

The Supreme Court’s decision clarifies that when a tax statute has a specific entry, particularly one that includes a sub-category (like “medicated talcum powder”), that entry will prevail over a general category (like “medicines”). This reinforces the principle of strict interpretation of tax laws and emphasizes the importance of legislative intent as expressed in the plain language of the statute.

The ratio decidendi of this case is that the specific inclusion of “medicated talcum powder” within the cosmetic category in both the KGST and TNGST Acts, through explicit wording and explanations, was decisive in classifying Nycil as a cosmetic rather than a medicine. This decision highlights that even if a product has medicinal properties, itsclassification for tax purposes is determined by the specific entries in the tax statutes.