Supreme Court clarifies classification of ‘KADIPROL’ as Poultry Feed vs. Drug: State of Gujarat vs. Cadila Healthcare Ltd. (2022)

Date of the Judgment: July 11, 2022

Citation: 2022 INSC 621

Judges: M.R. Shah, J. and Sanjiv Khanna, J.

Can a product containing medicinal ingredients, but used as a supplement to poultry feed, be classified as a “Drug and Medicine” or “Poultry Feed” for sales tax purposes? The Supreme Court of India addressed this question in a case concerning the classification of a product called “KADIPROL.” The core issue was whether “KADIPROL,” a product used as a poultry feed supplement, should be taxed as a “Drug and Medicine” or as “Poultry Feed” under the Gujarat Sales Tax Act. The bench comprised Justices M.R. Shah and Sanjiv Khanna.

Case Background

The case originated from a dispute over the classification of “KADIPROL,” a product manufactured and sold by Cadila Healthcare Ltd. The Deputy Commissioner of Sales Tax determined that “KADIPROL” should be classified as a “Drug and Medicine” under Entry 26(1) of Schedule II Part A of the Gujarat Sales Tax Act (GST Act). Cadila Healthcare Ltd. had applied to the Deputy Commissioner of Sales Tax under Section 62 of the GST Act to determine the tax rate applicable to “KADIPROL” sold under their invoice dated 20.03.1989. They also sought clarification from the Assistant Commissioner, Food and Drugs Control Administration, regarding the necessity of obtaining a license under the Drugs and Cosmetics Act, 1940, for manufacturing “KADIPROL.” The Authority under the Act, 1940, informed them that no such license was required. However, the Deputy Commissioner of Sales Tax, on 16.04.1990, categorized “KADIPROL” as a “Drug and Medicine” due to its preventive medicinal content. The Sales Tax Tribunal upheld this decision. Cadila Healthcare Ltd. then filed a Reference Application under Section 69 of the GST Act, leading to a reference to the High Court.

Timeline:

Course of Proceedings

The Deputy Commissioner of Sales Tax initially classified “KADIPROL” as a “Drug and Medicine” under Entry 26(1) of Schedule II Part A of the GST Act. The Sales Tax Tribunal upheld this decision. Subsequently, the High Court of Gujarat, in Sales Tax Reference No.4 of 2005, overturned the Tribunal’s decision, ruling that “KADIPROL” should be classified as “Poultry Feed” under Entry 25 of Schedule I of the GST Act. The State of Gujarat then appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of two entries under the Gujarat Sales Tax Act:

• Entry 25 of Schedule I: This entry pertains to “Poultry Feed.”
• Entry 26(1) of Schedule II Part A: This entry covers “Drug and Medicine.”

The Gujarat Sales Tax Act does not define “Poultry Feed” or “Drug and Medicine.” The classification of “KADIPROL” depends on whether it is considered a feed supplement or a medicine for poultry.

Arguments

Arguments by the State of Gujarat:

• The State argued that the High Court erred in overturning the findings of the Tribunal and the Deputy Sales Tax Commissioner, who had correctly categorized “KADIPROL” as a “Drug and Medicine.”
• The composition of “KADIPROL” includes Emporium (Amprolium) Hydrochloride and Vitamin K3, which provide protection against coccidiosis and prevent blood loss.
• The primary purpose of “KADIPROL” is to eliminate subclinical coccidian infection, with the improvement in poultry health being a consequential effect.
• A drug can be administered for prevention or treatment of disease, and “KADIPROL” acts as a preventive measure against infectious diseases.
• The Tribunal had correctly considered expert literature and held that the product was a “non-nutritional additive” which falls under the category of “Drug”.
• The State relied on the High Court’s decision in State of Gujarat vs. M/s. Pfizer (India) Ltd., which held that if the main purpose is medicinal and not nutritional, the product cannot be called “poultry feed.”
• The State also cited Eskayef Limited vs. Collector of Central Excise, where products used for prevention and treatment of ailments in poultry were categorized as “drugs,” not “poultry feed.”

Arguments by Cadila Healthcare Ltd.:

• Cadila Healthcare Ltd. contended that the High Court correctly categorized “KADIPROL” as “poultry feed” under Entry 25 of Schedule I of the GST Act.
• The concept of “poultry feed” has evolved to include concentrates and additives like vitamins and minerals necessary for better development of poultry.
• “KADIPROL” is added to poultry feed to address Vitamin K deficiency and prevent blood loss in birds, making it an essential poultry feed supplement.
• The product is not meant to be given as food directly to the poultry but is mixed with the feed.
• The common parlance test should be applied, and in the poultry rearing industry, “KADIPROL” is considered a “poultry feed” supplement, not a “drug.”
• They argued that even under the Gujarat Value Added Tax Act, 2003, food and dietary supplements are excluded from the ambit of “Drug and Medicine,” which reflects the intention of the legislature.
• The respondent is marketing its product “KADIPROL” as “not for medicinal use”.
• They relied on decisions like Glaxo Laboratories (India) Limited vs. State of Gujarat and State of Gujarat vs. Pfizer Ltd. to support their claim.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in the judgment. However, the core issue was:

1. Whether the product “KADIPROL” should be classified as “Poultry Feed” under Entry 25 of Schedule I or as “Drug and Medicine” under Entry 26(1) of Schedule II Part A of the Gujarat Sales Tax Act.

Treatment of the Issue by the Court

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

Authorities

The following authorities were considered by the Court:

Judgment

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

How each authority was viewed by the Court?

The Court noted that the High Court relied on the decisions in Glaxo Laboratories (India) Ltd. vs. State of Gujarat [(1979) 43 STC 386 (Guj)] and M/s. Pfizer (India) Ltd. without a detailed examination of the facts. The Court did not express a view on the correctness of these decisions. The Court noted the State’s reliance on Eskayef Limited vs. Collector of Central Excise [(1990) 4 SCC 680]. The Court noted the respondent’s reliance on Collector of Central Excise, Kanpur vs. Krishna Carbon Paper Co. [(1989) 1 SCC 150] and Plasmac Machine Manufacturing Company Private Limited vs. Collector of Central Excise, Bombay [(1992) 84 STC 107 (SC)] for the common parlance test. The Court noted the respondent’s submission regarding Commissioner of Customs (Import) Mumbai vs. Dilip Kumar and Company and Ors. [(2018) 9 SCC 1] which overruled Sun Export Corporation vs. Collector of Customs, Bombay [(1997) 6 SCC 564], but clarified that it was not applicable to the present case.

What weighed in the mind of the Court?

The Supreme Court did not delve into the merits of the case due to its academic nature and zero tax effect. The Court noted that the High Court had not addressed the reasoning of the Tribunal, and that the product “KADIPROL” was not meant to be given directly as food to the poultry. The Court kept the larger question on the Common Parlance Test open for consideration in an appropriate case.

Fact:Law Ratio:

The court’s decision was primarily influenced by the legal aspects of the case, such as the interpretation of the relevant entries under the GST Act and the application of the common parlance test. The factual aspects of the case, such as the composition and usage of “KADIPROL,” played a secondary role.

Logical Reasoning:

The Supreme Court did not make a definitive ruling on the classification of “KADIPROL.”

The Court noted that the High Court’s judgment did not deal with the reasoning given by the Tribunal. The Court also noted that the product was not meant to be given as direct food to the poultry. However, the Court did not delve into the merits of the case, as the issue was academic and had no revenue implications.

The Court stated, “Therefore, there is some merit in the contention of the Revenue that the impugned judgment and order does not deal with the reasoning given by the Tribunal. It merely quotes and relies upon the two decisions in the case of Glaxo Laboratories (India) Ltd. (supra) and M/s. Pfizer (India) Ltd. (Supra) without a detailed and an in-depth examination of the facts as found.”

The Court further observed, “However, we are not inclined to pass an order of this nature as it is accepted that the issue in question is of academic interest and even if we decide the appeal in favour of the Revenue, it would not have any revenue implication as there are no tax dues.”

The Court concluded, “In view of the above facts and as the issue in question is in the academic interest and as there is no revenue implication as there are no tax dues and therefore there is zero tax effect, we close the present proceedings keeping the larger question on the Common Parlance Test open, to be considered in an appropriate case in a like matter.”

Key Takeaways

• The Supreme Court did not make a definitive ruling on whether “KADIPROL” is a “Poultry Feed” or “Drug and Medicine.”
• The Court highlighted the importance of considering the reasoning of lower authorities.
• The Court kept the “Common Parlance Test” open for future consideration.
• The decision underscores that cases with no revenue implications may be treated differently by the Court.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of the case is that the Supreme Court did not decide the issue on merits, as it was of academic interest with no revenue implications. The Court kept the larger question of the Common Parlance Test open for consideration in an appropriate case. There is no change in the previous position of law, as the court did not make any specific ruling.

Conclusion

The Supreme Court disposed of the appeal filed by the State of Gujarat without making a definitive ruling on the classification of “KADIPROL.” The Court noted the High Court’s lack of reasoning and the fact that the product was not meant to be directly fed to the poultry. However, due to the academic nature of the issue and the absence of any revenue implications, the Court chose not to delve into the merits of the case, keeping the larger question on the Common Parlance Test open for future consideration.