The Hindu Business Line : Where the assessee won because the taxman slept on

THIS is not about Sarabhai vs Sarabhai, a TV sitcom, but about Sarabhai M. Chemicals vs Commissioner of Central Excise, Vadodara, a case that occupied the Supreme Court recently. The company manufactures bulk drugs such as "ascorbic acid and salts of IP (vitamin C) and sorbitol solution USP". It obtained certificates from the Drugs Controller that these products were bulk drugs, and sought benefit under a notification that exempted bulk drugs as defined therein from payment of excise duty.

The Department "scrutinised, verified and approved" the classification lists; thereafter, Sarabhai cleared the goods submitting gate passes that disclosed the names of the consignees, and filed its monthly returns too.

After about a year, the Department sent show-cause notices to the company denying the exemption given earlier. The notices alleged that the company had "wrongly availed nil rate of duty in respect of its clearances by not bringing to the notice of the Department the fact that certain quantities of sorbitol solution and vitamin C had been sold to non-pharma concerns knowing fully well that the commodities would not be normally used as drugs or medicines by its customers." True, there were instances where Sarabhai had cleared sorbitol solution to cigarette manufacturers.

Sarabhai cited the word `normally' used in the notification, and reasoned that it did not restrict the exemption based on individual end-use. And that if the intention was to restrict use of sorbitol solution by drug manufacturing units only for diagnosis, treatment, medication or in prevention of diseases or as an ingredient in any formulation then the Legislature would have used the word `exclusively' instead of the word `normally'. Thus, in the company's view, the Department's interpretation of `normally' was abnormal.

Another argument of Sarabhai was that that the notification did not require it to ascertain the end use at the time of clearance of a bulk drug from the factory. "Normal trade pattern of putting sorbitol solution in the market was through distributors and consequently it was impossible to get an end use certificate at the time of clearance of the consignments at the factory gate," it contended. What was needed to claim excise exemption was the certificate from the Drugs Controller, said Sarabhai. It recounted how the Department had approved its classification lists, and so there was a bona fide belief that the goods were exempted.

When the Collector of Excise rejected the company's views, the matter went to the Tribunal. There, the Judicial Member opined against the Department saying that the company was under a bona fide belief and that the action was time-barred; but the Technical Member said that mere obtaining a certificate from the Drugs Controller was not enough to absolve the company; and that Sarabhai had deliberately continued to take benefit of the exemption notification even in respect of the quantity that it knew would not constitute a drug or medicine in the normal course. In view of the difference of opinion, the Third Member had to resolve; he concurred with the Technical Member, and said bulk drugs were products that were normally used for diagnosis, treatment, mitigation or prevention of diseases in human beings or animals.

Normal meaning of `normally'

Sarabhai was aggrieved by the majority decision at the Tribunal, and knocked the doors of the Supreme Court. The company's counsel, Mr Ravindra Narain, forcefully argued that the majority decision was `patently erroneous'. Mr Narain interpreted the word `normally' as used in the notification to mean `under normal circumstances' or `ordinarily', something opposed to exceptional or abnormal. He also submitted that only 29,850 kg had been cleared to non-pharmaceutical units such as "soaps, ceramics, rubber and cigarette units", and these represented 3.87 per cent of the total clearances during the period in dispute, with 96 per cent sent to pharmaceutical concerns.

Mr R. Venkataramani, representing the Revenue, pointed out that Department was not demanding duty in respect of the quantity sold to pharma concerns for medicinal purposes, but only in respect of sorbitol solution that admittedly was sold to non-pharma companies, "knowing fully well that they would not be used as drugs or medicines". He drew attention to the definition of `bulk drug' in the explanation to the notification as "any chemical or biological or plant product, conforming to pharmacopoeial standards, normally used for the diagnosis, treatment, mitigation or prevention of diseases in human beings or animals, and used as such or as ingredient in any formulation." This has been adopted from the Drugs (Prices Control) Order, he said.

The Drugs Controller's certificate was "a reproduction of the explanation to the notification," said Mr Venkataramani. And that the certificate did not deal with the uses other than the `normal uses' of such bulk drugs in diagnosis, treatment, prevention or mitigation of diseases. Thus, it was urged on behalf of the Department that the phrases `normally used' and `used as such' should be given their purposive meaning in order to facilitate the taking of the benefit of exemption as also to prevent the abuse of the exemption.

On Sarabhai's contention that it had provided all details to the Department, Mr Venkataramani submitted that clearance to a non-pharmaceutical user without giving further details, except the name of the consignee, would amount to suppression of facts. He also argued that even if the excise officer had been remiss, negligent or in default for not obtaining further information when endorsing the periodical returns filed by the company, "the omission on the part of the assessee in not disclosing the end use cannot be condoned."

`Used as such' points to actual use

Justices S. N. Variava, A. R. Lakshmanan and S. H. Kapadia heard the case, studied the certificate issued by the Drugs Controller, and opined that they did not find any merit in Sarabhai's argument that mere production of the certificate from the Drugs Controller was sufficient to attract the benefit of the exemption notification. "Sorbitol solution may have different uses. However, sorbitol solution got the benefit of exemption only when it was used actually in manufacture of drugs/medicines/pharmaceuticals," reads the judgment.

Exemption was, therefore, given to a drug, and not to sorbitol solution, which has uses other than in pharmaceuticals. By diverting sorbitol solution to makers of liquor, cigarettes and soap, the company "lost the benefit of exemption" said the court, while okaying the department's action of raising duty demand.

While discussing the lingo of the notification, the court highlighted the two expressions, `normally used' and `used as such', and said that these were to be read `in juxtaposition', for if you did so, it would become clear that `used as such' qualifies the actual use and not the capability of use. "Consequently, every manufacturer of a bulk drug cannot seek the benefit of exemption under the said notification merely by reason of `normal use' of the drug. The words `normal use' indicate the possible use whereas the expression `used as such' indicates the actual use." Thus, the decision of the Tribunal was also right, said the apex court.

Did Sarabhai suppress facts?

Then comes an interesting portion of the judgment that deals with the power of the Department to demand duty in relation to `extended period', as contained in Section 11A(1) of the Central Excise Act. But that is possible only in instances of "fraud, collusion or wilful misstatement or suppression of facts, or contravention of any provision of the Act or Rules with intent to evade payment of duty." The question arose whether there was any wilful suppression of facts on the part of Sarabhai.

The court observed that the company had filed a classification list that was duly approved by the Department. So were monthly returns filed by Sarabhai, and regularly assessed by the Department. After studying the gate passes, invoices and so on, with names of consignees, the court said: "A mere reading of these names would indicate that sorbitol solution was sold to non-pharmaceutical companies like Messrs Golden Tobacco Co Ltd. Despite such disclosure, the department approved the classification list as well as RT-12 returns." In the absence of evidence of suppression of facts, the Department could not invoke the `extended period of limitation', said the court.

Thus, the taxman simply lost the bus by not reopening the approvals and assessments within the stipulated period, and so the demands through the show-cause notices were time-barred.

Tailpiece

"Do you think cess was a right move by the FM?"

"Oh, I didn't know he plays chess!"

Detaxification@TheHindu.co.in

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