SC has held that excise duty is payable even on drug samples supplied free of cost to doctors for promotional purposes. It dismissed the appeals of a pharmaceutical company, Medley Pharma, that physician samples are not excisable goods since they are not for sale under Drugs and Cosmetics Act.
The case is interesting as when physician samples of patent and proprietory medicines, at the time they are manufactured, are statutorily prohibited from being sold by virtue of Section 18 of the Drugs Act read with Rule 65(18) of the Drug Rules and the breach of the Drug Rules invites prosecution under Section 27(d) of the Drugs Act, and also invites penalty under Section 27(c) of the Drugs Act.`excisable goods' has been construed to mean not only goods specified in the Schedule to the Central Excise Tariff Act, 1985, but also goods which are capable of being sold i.e. marketable.
In the present case, the `Physician Samples' are statutorily prohibited from being sold and therefore, do not satisfy the twin test required to make physician samples excisable goods.every drug intended for distribution as physicians sample while complying with the labeling provisions under Drugs and Cosmetic Rules further bear on the label of the container the words "Physician's Sample- Not to be Sold" requires to be over printed and further, the sale of such Physician samples is expressly prohibited under Rule 65(18) of the Drug Rules.
In the present case, the `Physician Samples' are statutorily prohibited from being sold and therefore, do not satisfy the twin test required to make physician samples excisable goods.every drug intended for distribution as physicians sample while complying with the labeling provisions under Drugs and Cosmetic Rules further bear on the label of the container the words "Physician's Sample- Not to be Sold" requires to be over printed and further, the sale of such Physician samples is expressly prohibited under Rule 65(18) of the Drug Rules.
Trident (Legal Firm) stake on the case is as under:
Procedural History
Medley Pharmaceuticals Ltd filed an appeal under Section 35L(b) of the Central Excise Act, 1944 question the correctness or otherwise of the order passed by Customs Excise and Service Tax Appellate Tribunal (CESTAT) (in short, "The Tribunal") in Appeal No. E/549 to E 551/2003-Mum, dated 3.12.2004. By the impugned order, the Tribunal had confirmed the order passed by the Commissioner of Customs and Central Excise, Valsad dated 30.12.2002, holding that "Physician Samples" are excisable goods held that the value of Physician samples should be determined in accordance with the principle laid down in Rule 6(b)(i) read with Rule 7 of the Rules 2000. After coming to the aforesaid conclusion, the Tribunal has accepted the method of assessable value adopted by the Commissioner, though it was under Rule 4 of the Rules 1975.
Key Issues in the Special Leave Petition
(A) Whether "Physician Samples" are excisable goods in view of the fact that they are statutorily prohibited from being sold under the Drugs and Cosmetics Act, 1940 (in short, "Drugs Act") and the Rules made thereunder?
(B) If physician's samples are held to be excisable, then what is the appropriate method of valuing physician samples for the purpose of excise duty?
(C)Whether Physician samples manufactured and distributed as free samples have to be assessed on the basis of cost of manufacture plus normal profits earned on the sale under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 upto 1st July, 2000 and thereafter, on application of Rule 8 of Central Excise Valuation Rules, 2000 on cost of manufacture plus 15% profit basis and not on pro-rata basis ? (This was the valuation methodology adopted by the revenue)
Held
(A) The prohibition on the sale of Physician Samples intended for distribution to medical practitioners as free samples by Rule 65(18) of the Drugs Rules shall have no bearing or effect upon the levy of excise duty under the Act, since excise is a duty on manufacture, duty is payable whether or not goods are sold. Excise duty is payable even in case of free supply, since sale is not a necessary condition for charging duty under the Act
(B) the Revenue is only concerned with the manufacture of the goods and the possibility of marketability of the goods. When the product is manufactured by a Pharmaceutical Company, it is for the purpose of sale i.e., every such product including Physician Sample is capable of being sold in the open market, but the pharmaceutical company makes the choice to distribute the same as a free sample. In other words, it is not mandatory for the pharmaceutical company to distribute free physician samples of every drug they manufacture. This choice made by the pharmaceutical companies in terms of Rule 96(1) (ix) of the Drugs Rules by overprinting words `Physician's sample-Not to be sold' on the label of the drugs will not come in the way of the Revenue from levying excise duty on the drugs so manufactured.
(c) a perusal of the labelling provisions in the Drug Rules, we find that they deal with the name of drug, contents of the drug, name and address of manufacturer, a distinctive batch number (details of manufacture of drug is recorded and available for inspection as a particular batch), preparation of drug, date of manufacture and date of expiry of drug, its storage conditions, etc., which are in aid of the object of the Act, viz. promoting the use of good quality drugs, and ensuring that drugs that do not live upto quality do not find their way into the market. Rule 96(1) (ix) of the Drug Rules on which Shri Ganesh heavily relies in support of his submission, states that while complying with the labelling provisions under Clauses (i) to (viii) of Rule 96(1), the manufacturer must further overprint on the label `Physician's Sample - Not to be Sold', in case they are to be distributed free of cost as physicians samples. Further, the bare perusal of Rule 96 shows that its heading bears `Manner of Labelling' and Clause 1 of this Rule contemplates or govern the manner of labelling in a way that the particulars on the label of the container of a drug shall be either printed or written in indelible ink and shall appear in conspicuous manner. This gives ample clarification that the process of labelling is distinct or different from the overprinting on the label of a physician's sample, and hence we are unable to agree with him that the manufacture for the purpose of the Central Excise Tariff Act is not completed until `Physicians Sample - Not to be Sold' is printed on the label.
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Held
(A) The prohibition on the sale of Physician Samples intended for distribution to medical practitioners as free samples by Rule 65(18) of the Drugs Rules shall have no bearing or effect upon the levy of excise duty under the Act, since excise is a duty on manufacture, duty is payable whether or not goods are sold. Excise duty is payable even in case of free supply, since sale is not a necessary condition for charging duty under the Act
(B) the Revenue is only concerned with the manufacture of the goods and the possibility of marketability of the goods. When the product is manufactured by a Pharmaceutical Company, it is for the purpose of sale i.e., every such product including Physician Sample is capable of being sold in the open market, but the pharmaceutical company makes the choice to distribute the same as a free sample. In other words, it is not mandatory for the pharmaceutical company to distribute free physician samples of every drug they manufacture. This choice made by the pharmaceutical companies in terms of Rule 96(1) (ix) of the Drugs Rules by overprinting words `Physician's sample-Not to be sold' on the label of the drugs will not come in the way of the Revenue from levying excise duty on the drugs so manufactured.
(c) a perusal of the labelling provisions in the Drug Rules, we find that they deal with the name of drug, contents of the drug, name and address of manufacturer, a distinctive batch number (details of manufacture of drug is recorded and available for inspection as a particular batch), preparation of drug, date of manufacture and date of expiry of drug, its storage conditions, etc., which are in aid of the object of the Act, viz. promoting the use of good quality drugs, and ensuring that drugs that do not live upto quality do not find their way into the market. Rule 96(1) (ix) of the Drug Rules on which Shri Ganesh heavily relies in support of his submission, states that while complying with the labelling provisions under Clauses (i) to (viii) of Rule 96(1), the manufacturer must further overprint on the label `Physician's Sample - Not to be Sold', in case they are to be distributed free of cost as physicians samples. Further, the bare perusal of Rule 96 shows that its heading bears `Manner of Labelling' and Clause 1 of this Rule contemplates or govern the manner of labelling in a way that the particulars on the label of the container of a drug shall be either printed or written in indelible ink and shall appear in conspicuous manner. This gives ample clarification that the process of labelling is distinct or different from the overprinting on the label of a physician's sample, and hence we are unable to agree with him that the manufacture for the purpose of the Central Excise Tariff Act is not completed until `Physicians Sample - Not to be Sold' is printed on the label.
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