Supreme Court Clarifies Tax on Medical Oxygen and Nitrous Oxide: Linde India Ltd. vs. State of Andhra Pradesh (2020)

Introduction

Date of the Judgment: April 13, 2020
Citation: 2020 INSC 319
Judges: Dr. Dhananjaya Y Chandrachud, J and Ajay Rastogi, J.

Are medical gases like oxygen and nitrous oxide medicines, or just another industrial product? The Supreme Court of India recently addressed this question in a tax dispute, clarifying whether these gases should be taxed at a lower rate applicable to medicines or a higher rate for unclassified goods. This decision impacts how these essential medical supplies are treated under tax laws. The judgment was delivered by a two-judge bench comprising Dr. Dhananjaya Y Chandrachud, J and Ajay Rastogi, J, with the opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

The case involves M/s Linde India Ltd., a company that manufactures and trades industrial gases, including Medical Oxygen IP and Nitrous Oxide IP. The Commercial Tax Officer of Gajuwaka and Dwarakanagar Circle in Andhra Pradesh assessed a tax liability of Rs 5,11,062 on Linde India Ltd. for the period between August 1, 2005, and August 31, 2005. The dispute arose over whether Medical Oxygen IP and Nitrous Oxide IP should be taxed under Entry 88 of Schedule IV of the Andhra Pradesh Value Added Tax Act, 2005 (2005 Act), which applies to “drugs and medicines” at a rate of 4%/5%, or as “unclassified goods” under Schedule V, which attracts a higher tax rate of 12.5%/14%.

Timeline:

Course of Proceedings

Initially, the Commercial Tax Officer determined that Linde India Ltd. owed Rs 5,11,062 in taxes. Linde India Ltd. appealed this assessment to the Appellate Deputy Commissioner, who upheld the original decision. Subsequently, the Sales Tax Appellate Tribunal, relying on a judgment from the Andhra Pradesh High Court in Inox Air Products Ltd v The Assistant Commissioner (CT), Hyderabad, overturned the previous decisions and ruled in favor of Linde India Ltd. The State of Andhra Pradesh then appealed to the High Court for the State of Telangana and the State of Andhra Pradesh, which was dismissed. Finally, the State of Andhra Pradesh appealed to the Supreme Court.

Legal Framework

The core of the dispute revolves around the interpretation of Entry 88 of Schedule IV of the Andhra Pradesh Value Added Tax Act 2005, which taxes “drugs and medicines” at a lower rate. This entry refers to the definition of drugs in clauses (i), (ii), and (iii) of Section 3(b) of the Drugs and Cosmetics Act 1940 (1940 Act). The relevant part of Section 3(b)(i) of the 1940 Act defines a “drug” as:

“(i) All medicines for internal or external use of human beings or animals and all substances intended to be used for or in the diagnosis, treatment, mitigation or prevention of any disease or disorder in human beings, or animals, including preparations applied on human body for the purpose of repelling insects like mosquitoes;”

Schedule V of the 2005 Act stipulates that all goods not specified in Schedules I, III, IV, and VI are taxed at a higher rate of 14.5%. The case hinges on whether Medical Oxygen IP and Nitrous Oxide IP fall within the definition of “drugs” under the 1940 Act, thereby qualifying for the lower tax rate under Entry 88 of Schedule IV of the 2005 Act.

Arguments

Arguments by the Appellant (State of Andhra Pradesh):

• The State argued that the Andhra Pradesh High Court’s decision in Inox Air, which included Medical Oxygen IP and Nitrous Oxide IP under “similar articles” in Entry 88, was incorrect. They contended that gases are not “similar articles” to the other products specified in the entry, applying the principle of ejusdem generis.
• The State submitted that the phrase “used for or in” in Section 3(b)(i) of the 1940 Act only applies to “substances” and not “medicines.” They argued that this phrase cannot be used to broaden the scope of Entry 88.
• The State highlighted that while Section 3(b)(i) of the 1940 Act includes substances used as aids for surgical or other treatments, Entry 88 contains an exclusion clause. Entry 100(36) of Schedule IV specifically excludes “medical grade oxygen.” The State argued that without specific inclusion in Entry 88, Medical Oxygen IP and Nitrous Oxide IP should be classified as unclassified goods under Schedule V.
• The State argued that not every substance used for medicinal purposes can be classified under Entry 88. They contended that a substance must strictly adhere to the definition in Section 3(1)(b) of the 1940 Act to qualify.

Arguments by the Respondent (Linde India Ltd.):

• Linde India Ltd. argued that Section 3(b)(i) of the 1940 Act broadly defines a “drug” as a medicine or substance used for diagnosis, treatment, mitigation, or prevention of any disease or disorder. They asserted that Medical Oxygen IP and Nitrous Oxide IP are widely recognized for their curative properties and are used as medicines for these purposes.
• The company contended that Medical Oxygen and Nitrous Oxide are included in the Indian Pharmacopoeia, which sets standards for drugs and has legal status under Section 16 of the 1940 Act. Therefore, they argued that these substances are drugs under Section 3(1)(b) of the 1940 Act and are expressly included in Entry 88 of the 2005 Act.
• Linde India Ltd. argued that goods should be classified based on their popular or commercial understanding. They stated that oxygen is widely used as an emergency medicine, and nitrous oxide is used for anesthetic purposes in surgery and dentistry. They argued that under the common parlance test, these products are used for mitigating diseases and disorders and should be included in Entry 88.
• The company cited several High Court judgments that have consistently held that Medical Oxygen IP and Nitrous Oxide IP are medicines under the respective state enactments, including Southern Gas v State of Kerala, State of Tamil Nadu v Ram Oxygen, Panki Oxygen v State of Uttar Pradesh, Chimanlal v State of Maharashtra, Indian Oxygen v State of Karnataka, State of Kerala v Indian Oxygen, and ACTO, Special Circle Jodhpur v M/s Jodhpur Gases.
• Linde India Ltd. pointed out that the National List of Essential Medicines 2011, which is Schedule I of the Drug Price (Control) Order 2013, includes “Oxygen” and “Nitrous Oxide” as “anesthesia” under Section 1.
• The company contended that the High Court’s decision, based on the judgment in Inox Air, was correct and should be upheld.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether Medical Oxygen IP and Nitrous Oxide IP are taxable under Entry 88 of Schedule IV of the Andhra Pradesh Value Added Tax Act 2005 or as “unclassified goods” under Schedule V.

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

The Supreme Court held that Medical Oxygen IP and Nitrous Oxide IP are indeed “drugs” under Section 3(b)(i) of the 1940 Act. The Court emphasized that the definition of “drug” is comprehensive and includes not only medicines but also substances used for or in the diagnosis, treatment, mitigation, or prevention of any disease or disorder. The Court noted that the term “medicine” should be understood in its natural, ordinary, or popular sense, which includes substances with curative properties used for or in diagnosis, treatment, mitigation, or prevention of diseases.

The Court observed that Medical Oxygen IP and Nitrous Oxide IP are included in the Indian Pharmacopoeia, which sets standards for drugs, and are also listed as essential medicines by the Central Government. The Court also considered the use of these gases in hospitals and surgical procedures, underscoring their medicinal purpose.

The Supreme Court upheld the High Court’s decision that Medical Oxygen IP and Nitrous Oxide IP fall under Entry 88 of the 2005 Act, thereby attracting the lower tax rate applicable to drugs and medicines. The appeals filed by the State of Andhra Pradesh were dismissed.

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

How each authority was viewed by the Court?

The Court relied on the following authorities to reach its conclusion:

• Chimanlal Jagjivandas Sheth v State of Maharashtra, AIR 1963 SC 665: The Supreme Court used this case to establish that the definition of “drugs” includes substances used for treatment, not just medicines.
• Ishwar Singh Bindra v The State of UP, (1969) 1 SCR 219: The Supreme Court used this case to interpret the word “and” disjunctively, meaning that both medicines and substances used for treatment fall under the definition of “drug.”
• State of HP v Pawan Kumar, (2005) 4 SCC 550: The Supreme Court used this case to affirm that statutes should be interpreted according to their plain, literal, and grammatical meaning.
• State of Goa v Leukoplast (India) Ltd, (1997) 4 SCC 82: The Supreme Court used this case to determine that a product’s medicinal content and curative function must be ascertained to determine if it is a medicine.
• Southern Gas Ltd. v State of Kerala, 2005 (139) STC 504 (Ker): The High Court of Kerala’s decision was used to support the argument that Medical Oxygen and Nitrous Oxide are medicines based on user and functional tests.
• Indian Oxygen Ltd v State of Karnataka, 1990(79) STC 351: The High Court of Karnataka’s decision was used to distinguish between industrial and medical oxygen, noting that medical oxygen is not an industrial gas.
• State of Tamil Nadu v Ram Oxygen (Pvt.) Ltd, [2011] 5 GST 87 (Mad HC): The High Court of Madras’s decision was used to support the argument that medical oxygen is a “drug” under the 1940 Act.
• Panki Oxygen v State of Uttar Pradesh, 2014 SCC Online All 2144: The High Court of Allahabad’s decision was used to support the argument that Oxygen IP is covered under “medicines and pharmaceutical preparation.”
• Inox Air Products Ltd v The Assistant Commissioner (CT), Hyderabad, 2014 VIL 339 AP: The High Court of Andhra Pradesh’s decision was used to support the argument that Medical Oxygen IP and Nitrous Oxide IP fall under the definition of “drug” under Section 3(b)(1) of the Drugs Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The comprehensive definition of “drug” in Section 3(b)(i) of the 1940 Act, which includes both medicines and substances used for treatment.
• The inclusion of Medical Oxygen IP and Nitrous Oxide IP in the Indian Pharmacopoeia, indicating they meet the standards for drugs.
• The listing of Oxygen and Nitrous Oxide as essential medicines in the National List of Essential Medicines 2011, which is Schedule I of the Drug Price (Control) Order 2013.
• The common understanding and medical usage of Medical Oxygen IP and Nitrous Oxide IP in hospitals and surgical procedures, which demonstrates their curative properties.
• The consistent views of various High Courts which have held that Medical Oxygen IP and Nitrous Oxide IP are medicines.

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• Medical Oxygen IP and Nitrous Oxide IP are classified as “drugs” under the Drugs and Cosmetics Act, 1940.
• These gases are therefore taxed at a lower rate under Entry 88 of Schedule IV of the Andhra Pradesh Value Added Tax Act 2005.
• The judgment clarifies the scope of “drugs” to include substances used for treatment, not just conventional medicines.
• The decision has implications for tax assessments of similar medical gases across India.

Directions

No specific directions were issued by the Supreme Court, except for the dismissal of the appeals.

Development of Law

The Supreme Court’s decision reinforces the broad definition of “drugs” to include substances used for treatment, aligning with the intent of the Drugs and Cosmetics Act, 1940. This clarifies that medical gases like oxygen and nitrous oxide, when used for therapeutic purposes, are considered medicines for tax purposes. The ratio decidendi of the case is that substances used for or in the diagnosis, treatment, mitigation or prevention of any disease or disorder in human beings, or animals are also drugs under Section 3(b)(i) of the Drugs and Cosmetics Act, 1940.

Conclusion

The Supreme Court’s judgment in The State of Andhra Pradesh vs. M/s Linde India Ltd. settles the dispute regarding the tax classification of Medical Oxygen IP and Nitrous Oxide IP. By affirming that these gases are “drugs” under the Drugs and Cosmetics Act, 1940, the Court ensures they are taxed at the lower rate applicable to medicines under the Andhra Pradesh Value Added Tax Act, 2005. This decision has significant implications for the taxation of essential medical supplies and provides clarity on the interpretation of “drugs” under Indian law.

Category

Parent Category: Tax Law

Child Categories:

• Value Added Tax
• Goods and Services Tax
• Drugs and Cosmetics Act, 1940
• Section 3(b), Drugs and Cosmetics Act, 1940

Parent Category: Andhra Pradesh Value Added Tax Act, 2005

Child Categories:

• Entry 88, Andhra Pradesh Value Added Tax Act, 2005
• Schedule IV, Andhra Pradesh Value Added Tax Act, 2005

FAQ

Q: What was the main issue in the case of The State of Andhra Pradesh vs. M/s Linde India Ltd.?

A: The main issue was whether Medical Oxygen IP and Nitrous Oxide IP should be taxed as “drugs and medicines” or as “unclassified goods” under the Andhra Pradesh Value Added Tax Act, 2005.

Q: What did the Supreme Court decide about Medical Oxygen IP and Nitrous Oxide IP?

A: The Supreme Court decided that Medical Oxygen IP and Nitrous Oxide IP are “drugs” under the Drugs and Cosmetics Act, 1940, and therefore should be taxed at the lower rate applicable to medicines.

Q: Why did the Supreme Court classify these gases as “drugs”?

A: The court classified them as “drugs” because they are used for or in the diagnosis, treatment, mitigation, or prevention of diseases, and are included in the Indian Pharmacopoeia and the National List of Essential Medicines.

Q: What is the significance of this decision?

A: This decision clarifies that medical gases used for therapeutic purposes are considered medicines for tax purposes. It ensures that these essential medical supplies are taxed at a lower rate, reducing costs for healthcare providers and patients.

Q: What is the Drug and Cosmetics Act, 1940?

A: The Drugs and Cosmetics Act, 1940 is a law in India that regulates the import, manufacture, distribution, and sale of drugs and cosmetics. It defines what constitutes a “drug” and sets standards for their quality and safety.