Supreme Court Classifies Medicated Talcum Powder as Cosmetic Under Kerala and Tamil Nadu Sales Tax Laws (2023)

LEGAL ISSUE: Classification of medicated talcum powder under sales tax laws.

CASE TYPE: Sales Tax Law

Case Name: HEINZ INDIA LIMITED vs. THE STATE OF KERELA & M/s Glaxo Smithkline Pharmaceuticals Ltd vs. State of Tamil Nadu

[Judgment Date]: May 4, 2023

Date of the Judgment: May 4, 2023

Citation: 2023 INSC 415

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 recently addressed this question, focusing on whether medicated talcum powder should be categorized as a medicine or a cosmetic under the Kerala and Tamil Nadu sales tax laws. This judgment clarifies the classification of “Nycil Prickly Heat Powder,” a product with both cosmetic and medicinal attributes. The bench comprised Justices S. Ravindra Bhat and Dipankar Datta, with the majority opinion authored by Justice S. Ravindra Bhat.

Case Background

This case involves appeals from two separate High Court judgments regarding the classification of “Nycil Prickly Heat Powder” for sales tax purposes. The first set of appeals comes from the Kerala High Court, where Heinz India Limited challenged the classification of Nycil powder as “medicated talcum powder” instead of “medicine.” The second set of appeals is from the Madras High Court, where M/s Glaxo Smithkline Pharmaceuticals Ltd (GSK) contested the classification of the same product as a “toilet powder” rather than a “medicinal formulation.”

In Kerala, the tax authorities reclassified Nycil powder from medicine (8% tax) to medicated talcum powder (20% tax), which was upheld by the Kerala High Court. In Tamil Nadu, the tax authorities classified Nycil powder as a toilet powder, despite its medicinal properties, which was also upheld by the Madras High Court. The core issue in both cases is whether Nycil powder should be classified as a medicine or cosmetic for the purpose of sales tax.

Timeline

Course of Proceedings

In Kerala, the assessing officer initially accepted Heinz’s classification of Nycil powder as a medicine. However, the revisional authority, believing this was prejudicial to revenue interests, reclassified it as “medicated talcum powder,” subject to a higher tax rate. The Kerala Sales Tax Appellate Tribunal upheld this reclassification, and the Kerala High Court concurred with the tribunal’s decision.

In Tamil Nadu, the assessing officer classified Nycil powder as a “toilet powder,” which was affirmed by the Appellate Assistant Commissioner. However, the Appellate Tribunal initially accepted Heinz’s argument that the product was a medicine. The Madras High Court overturned the tribunal’s decision, agreeing with the tax authorities that Nycil powder is a toilet powder.

Legal Framework

The core of the dispute revolves around the interpretation of entries in the Kerala General Sales Tax Act, 1963 (KGST Act) and the Tamil Nadu General Sales Tax Act, 1959 (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 key point of contention is whether Nycil powder, which contains medicinal ingredients, should be classified as a medicine or as a cosmetic, specifically as medicated talcum powder or toilet powder. The explanation to Entry 1(iii) of Part F of the TNGST Act is crucial, as it explicitly includes medicated items under the cosmetic category, even if they are licensed under the Drugs and Cosmetics Act, 1940.

Arguments

Arguments on behalf of Heinz and GSK:

• Medicinal Composition: Nycil powder contains Chlorphenesin, Zinc Oxide, and Boric Acid, which are medicinal ingredients. These ingredients constitute about 32% of the powder and are effective against fungal and bacterial infections.

• Therapeutic Use: Nycil powder is primarily used for treating prickly heat, dhobie itch, and other skin infections. It is not merely a cosmetic but a product with therapeutic applications.

• Common Parlance Test: Nycil powder is not an ordinary talcum powder used for general purposes. It is used specifically to treat skin ailments and is discontinued once the ailment is cured.

• Drug Definition: Under Section 3(b) of the Drugs and Cosmetics Act, 1940, a drug includes substances used for the mitigation or prevention of diseases. Nycil powder fits this definition due to its medicinal properties.

• Precedents: Reliance was placed on cases like 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 properties were classified as medicaments.

• Explanation to TNGST Act: The explanation to Entry I(iii) of Part F should be interpreted in context. It does not automatically classify all medicated items as cosmetics but clarifies that if a product is used predominantly as a cosmetic, it falls under this entry. Nycil powder is primarily a medicine, not a cosmetic.

• Consumer Understanding: The product is understood by consumers as a treatment for prickly heat and other skin conditions, not as a cosmetic for beautification.

Arguments on behalf of the State of Kerala and Tamil Nadu:

• Specific Entry: Entry 127 of the KGST Act specifically includes “medicated talcum powder” under the cosmetic category. This specific entry should override the general entry for medicines.

• Legislative Intent: The legislature intended to classify medicated talcum powder as a cosmetic, regardless of its medicinal properties. The term “including” in Entry 127 expands the scope of talcum powder to encompass medicated versions.

• Hybrid Nature: Products like Nycil powder can have dual uses (cosmetic and medicinal). However, the statute clearly classifies it as a cosmetic.

• Explanation to 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 the cosmetic category. This provision is decisive.

• Legislative History: The amendment to the TNGST Act and the addition of the explanation in 1994 clearly indicate the legislative intent to include medicated talcum powder under the cosmetic category.

• Plain Meaning: The plain meaning of the entries and the explanation should be followed. The court should not strain the interpretation to classify Nycil powder as a medicine when the statute clearly includes it under cosmetics.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether “Nycil Prickly Heat Powder” is classifiable as a “medicine” or “drug” or as a “medicated talcum powder” under the Kerala General Sales Tax Act, 1963.
2. Whether “Nycil Prickly Heat Powder” is classifiable as a “medicinal formulation or preparation” or as a “toilet powder” under the Tamil Nadu General Sales Tax Act, 1959.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

The Supreme Court held that Nycil prickly heat powder is classifiable as “medicated talcum powder” under the KGST Act and as a “toilet powder” under the TNGST Act. The Court reasoned that the specific entries and explanations in both statutes clearly indicate the legislative intent to classify medicated talcum powder as a cosmetic, regardless of its medicinal properties.

How each authority was viewed by the Court?

• The court distinguished the cases cited by the appellants, stating that the specific entries in the KGST and TNGST Acts and the explanations provided therein made the present case different from the cases cited.
• The court relied on Hamdard (Wakf) Laboratories v. Deputy Commissioner [2007 (5) SCR 873]* and N.D.P. Namboodripad (Dead) by LRs. v. Union of India [2007 (3) SCR 769]* to interpret the word “includes” as an inclusive term to expand the scope of the entry.
• The court relied on A.V. Fernandez v. State of Kerala [1957 (1) SCR 837]* to reiterate that fiscal statutes must be interpreted strictly, and the plain meaning of the words must be given effect to.
• The court relied on Oblum Electrical Industries Pvt. Ltd., Hyderabad v Collector of Customs, Bombay [1997 Supp (3) SCR 683]* and Union of India (UOI) and Ors. vs. Godfrey Philips India Ltd. [1985 Supp (3) SCR 123]* to interpret the function of an explanation to a statute.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the specific wording of the entries in the KGST and TNGST Acts and the legislative intent behind them. The inclusion of “medicated talcum powder” in the cosmetic category, along with the explanation in the TNGST Act, was decisive. The Court emphasized that the plain meaning of the statute should be followed, and the specific legislative intent should override general principles or common parlance tests.

Logical Reasoning:

The court rejected alternative interpretations that favored classifying Nycil powder as a medicine. The court emphasized that the specific entries and explanations in the statutes were clear and decisive, leaving no room for alternative interpretations. The court also rejected the common parlance test and the arguments based on consumer understanding, stating that the specific legislative intent should prevail.

The Supreme Court’s decision was based on the following reasons:

• The specific inclusion of “medicated talcum powder” under the cosmetic category in Entry 127 of the KGST Act.
• The explanation to Entry 1(iii) of Part F of the TNGST Act, which explicitly includes medicated items under the cosmetic category.
• The legislative intent to classify medicated talcum powder as a cosmetic, regardless of its medicinal properties.
• The strict interpretation of taxing statutes, which requires that the plain meaning of the words be given effect to.

The court quoted from the judgment:

“The use of the term “includes” after talcum powder, followed by “medicated talcum powder” in this court’s opinion can lead to only one inference, which is that the clear legislative intent was that all kinds of talcum powders, which contained medications (irrespective of the proportion, or at any rate, not containing predominant proportions) should necessarily be treated as cosmetics, falling under Entry 127.”

“In the present case, the TNGST was consciously amended to include talcum powder, whether or not medicated in the specific entry or class of entries, enumerating cosmetics. Hence, like in the Kerala case, the plain meaning of that taxation head or entry had to be given, as there was no ambiguity.”

“In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case of not covered within the four corners of the provisions of the taxing statue, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter.”

There were no minority opinions in this case. The bench was unanimous in its decision.

The court analyzed the reasoning, legal interpretation, and application to the facts, emphasizing the specific legislative intent and the plain meaning of the entries in the statutes. The court also analyzed the legislative history of the TNGST Act, which showed that the explanation was added to clarify that medicated talcum powder should be classified as a cosmetic. The court also discussed the various precedents cited by the parties and distinguished them on the basis of the specific wording of the entries in the KGST and TNGST Acts.

The court’s decision has potential implications for future cases involving the classification of products with both cosmetic and medicinal properties. The decision reinforces the principle that specific legislative intent and the plain meaning of the words in a statute should be given precedence over general principles or common parlance tests.

The court did not introduce any new doctrines or legal principles, but it did clarify the interpretation of specific entries in the KGST and TNGST Acts. The court’s decision reinforces the principle that specific legislative intent and the plain meaning of the words in a statute should be given precedence over general principles or common parlance tests. The court also analyzed the arguments for and against the classification of medicated talcum powder as a cosmetic, explaining why it accepted the revenue’s arguments and rejected the assessee’s arguments.

Key Takeaways

• Medicated talcum powder is classified as a cosmetic for sales tax purposes under the Kerala and Tamil Nadu laws.
• Specific entries in tax statutes override general classifications.
• Legislative intent and the plain meaning of words in a statute are paramount in interpretation.
• The “common parlance” test may not apply when the statute provides specific classifications.
• The presence of medicinal ingredients does not automatically classify a product as a medicine for tax purposes.

Final Conclusion: The Supreme Court’s judgment clarifies that products with dual cosmetic and medicinal properties can be classified as cosmetics for sales tax purposes if the statute specifically includes them under that category. This decision emphasizes the importance of specific legislative intent and the plain meaning of the words in a statute when interpreting tax laws. The court’s analysis of the legal provisions and its treatment of the authorities provides valuable insight into how tax laws are interpreted and applied.