Supreme Court Classifies Ayurvedic Products: Commissioner of Central Excise vs. Ishaan Research Lab (2008)

Introduction

Date of the Judgment: September 8, 2008

Judges: Hon’ble Mr. Justice Ashok Bhan and Hon’ble Mr. Justice V.S. Sirpurkar

Are products containing Ayurvedic ingredients but sold as cosmetics truly medicines under the eyes of the law? The Supreme Court of India addressed this complex question in a dispute over excise duties levied on Ishaan Research Lab’s (IRL) products. The core issue revolved around whether IRL’s 22 products should be classified as “Ayurvedic medicines” subject to a 10% duty or as “cosmetics and toilet preparations” attracting a higher 40% duty. This judgment clarifies the criteria for distinguishing between Ayurvedic medicines and cosmetics, impacting manufacturers and tax authorities alike. The judgment was delivered by a two-judge bench comprising Hon’ble Mr. Justice Ashok Bhan and Hon’ble Mr. Justice V.S. Sirpurkar, with the opinion authored by Hon’ble Mr. Justice V.S. Sirpurkar.

Case Background

M/s. Ishaan Research Lab Private Limited (IRLP) manufactured 92 products, 22 of which were at the center of a classification dispute. The Revenue Department argued that these 22 products, including items like Bio-Apple, Bio-Aloevera, and Bio-Bhringraj, were cosmetics and toilet preparations, thus falling under Chapter 33 of the Central Excise Tariff and subject to a 40% ad valorem duty. IRLP, on the other hand, contended that these products were Ayurvedic medicines, classifiable under Central Excise Tariff Sub-heading 3003.30, attracting only a 10% duty.

The dispute also involved the relationship between IRLP and two other entities, M/s. Ishaan Marketing Private Limited (IMPL) and IRL Marketing Pvt. Ltd. (IRL(M)). The Revenue Department claimed that these entities were related persons under Section 4(4)(c) of the Central Excise Act, which would affect the determination of assessable value.

Timeline

Legal Framework

The core legal provisions at play in this case include:

• Section 4(4)(c) of the Central Excise Act: This section defines “related persons” and is crucial for determining the assessable value of the excisable goods. The Tribunal ruled that IRLP, IMPL, and IRL(M) were not related persons under this section.
• Section 11A of the Central Excise Act: This section pertains to the recovery of duties not levied or not paid, or short-levied or short-paid, or erroneously refunded. It also deals with the extended period of limitation under specific circumstances.
• Rule 9(2) of the Central Excise Act, 1944: This rule empowers the authorities to demand duty.
• Rule 173Q of Central Excise Rules: This rule specifies penalties.
• Rule 209A of Central Excise Rules: This rule specifies penalties that can be imposed under the Central Excise Rules.
• Chapter 30 and Chapter 33 of the Central Excise Tariff Act: These chapters classify goods for excise duty purposes. Chapter 30 covers “Pharmaceutical products,” while Chapter 33 covers “Essential oils and resinoids; perfumery, cosmetic or toilet preparations.”
• Section 3(a) and 3(h) of the Drugs and Cosmetics Act: These sections define “drug” and “patent or proprietary medicine,” respectively.

The classification of the products under either Chapter 30 or Chapter 33 has significant implications due to the difference in the applicable duty rates.

Arguments

Issues Framed by the Supreme Court

1. Whether the 22 products manufactured by M/s. Ishaan Research Lab Private Limited are classifiable under the Central Excise Tariff Sub-heading 3003.30 as “Ayurvedic medicines” or under Chapter 33 as “cosmetics and toilet preparations.”
2. Whether IRLP and M/s. Ishaan Marketing Private Limited (IMPL) were related persons in terms of Section 4(4)(c) of the Central Excise Act.
3. Whether the extended period of limitation was applicable in all the cases.

Treatment of the Issue by the Court

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

Authorities

The court considered several cases and legal provisions to arrive at its decision.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision in the case of Commissioner of Central Excise v. Ishaan Research Lab was influenced by several key factors. The court carefully considered the nature of the products, the claims made on their labels, the licensing under which they were manufactured, and expert opinions regarding their medicinal properties. The fact that the products were manufactured under a drug license and contained Ayurvedic medicinal elements weighed heavily in favor of classifying them as Ayurvedic medicines rather than cosmetics.

The court’s reasoning was also influenced by a series of prior judgments, particularly the principles established in BPL Pharmaceuticals Ltd. V. Collector of Central Excise, Vadodara. The court distinguished the case from Shri Baidyanath Ayurved Bhavan Ltd. V. Collector of Central Excise, Nagpur, clarifying that the “common parlance” test is not the sole determinant.

Ultimately, the court concluded that the products in question were medicinal products covered by Chapter 30, based on the factual evidence presented and the legal principles established in previous cases.

Key Takeaways

• Classification of Ayurvedic Products: Products containing Ayurvedic medicinal herbs, manufactured under a drug license, and not explicitly marketed as cosmetics are likely to be classified as Ayurvedic medicines under Chapter 30.
• Importance of Labeling: The claims made on product labels regarding medicinal properties are crucial in determining the classification of the product.
• Drug License: Manufacturing under a drug license provides strong support for classifying a product as a medicine.

Development of Law

The ratio decidendi of this case reinforces the principles established in BPL Pharmaceuticals Ltd. V. Collector of Central Excise, Vadodara, clarifying the criteria for distinguishing between Ayurvedic medicines and cosmetics for excise duty purposes. It also clarifies that the “common parlance” test is not the sole determinant.

Conclusion

In summary, the Supreme Court dismissed the appeals, affirming the Tribunal’s decision to classify the products as Ayurvedic medicines under Chapter 30. The court emphasized the importance of the product’s medicinal properties, manufacturing license, and labeling in determining its classification.