Parke Davis India Ltd. vs Collector Of Central Excise on 26 February, 1991

0
69
Customs, Excise and Gold Tribunal – Delhi
Parke Davis India Ltd. vs Collector Of Central Excise on 26 February, 1991
Equivalent citations: 1991 ECR 154 Tri Delhi, 1991 (55) ELT 272 Tri Del


ORDER

S.L. Peeran, Member (J)

1. Both these appeals are pertaining to common issue and are, therefore, taken up for disposal as per law.

2. Appeal No. E/640/87-C is arising from Order-in-Original No. V:ADJ:(68)/15-86/58, dated 19-1-1987 passed by the Collector of Central Excise by which he has confirmed the Show Cause Notice, dated 27-9-1984 for recovery of Central Excise duty of Rs. 43,782.25 under the provisions of Section 11A on the ground that the product Potassium Mercuric Iodide Concentrated Solution (hereinafter called the product) is not entitled for exemption from payment of duty in terms of Notification No. 62/78, dated 1-3-1978 and amended Notification No. 104/82, dated 28-2-1982 and Notification No. 197/82, dated 22-6-1982. The period covered in this show cause notice is 14-10-1983 to 10-1-1984.

3. The appellants have filed Appeal No. 3696/87-C aggrieved by the Order of the Collector of Central Excise (Appeals), Bombay passed in Order-in-Appeal No. M-277/BII-178/87, dated 10-6-1987 by which he has confirmed the Order-in-Original passed by the Assistant Collector by his Order, dated 13-10-1984. The question that arises for consideration in these appeals is the eligibility of exemption Notification No. 104/82-C.E., dated 28-2-1982 as amended by Notification No. 197/82, dated 22-6-1982 in respect of product ‘Potassium Mercuric Iodide Concentrated Solution (hereinafter referred to as ‘product’) manufactured and cleared by the appellants without payment of duty.

4. (i) The facts of the case in Appeal No. 3696/87-C are that the appellants filed a classification list with the Department on 3-6-1981 declaring that the ‘product’ is exempted from payment of duty. The Department is said to have approved the said classification list on 23-3-1982 and exempted the said product from payment of excise duty. Thereafter a sample was drawn on 28-4-1982 and the result was communicated to the appellants on 11-8-1982 which read as “The sample is in the form of yellow colour liquid. It is an inorganic chemical”.

(ii) The appellants thereafter filed a fresh classification list on 12-8-1983 after amendment of Notification No. 62/78 by Notification No. 104/82, dated 28-2-1982 and further amendment by Notification No. 197/82, dated 22-6-1982. They also submitted a copy of certificate granted by Joint Commissioner, Food and Drug Administration, Maharashtra State, Bombay in support of their contention that the product is a bulk drug. It is stated by them that the Department after careful consideration of the matter approved their classification list on 24-8-1983 and exempted the product from payment of duty.

(iii) It is stated by them that the Department again drew samples for chemical tests on 28-4-1982. Thereafter the Department informed them by their letter, dated 10-2-1984 that the product is not exclusively used as a drug as per the chemical examiner’s report. Thereafter, the appellants were issued with Show Cause Notice-cum-Demand Notice, dated 7-3-1984 issued by Superintendent of Central Excise wherein it has been alleged as follows :-

(a) That the appellants were manufacturing the goods not elsewhere specified covered under T.I. 68 of CET of First Schedule of Central Excises and Salt Act, 1944; and also manufacture the said product and cleared it claiming the exemption of duty. The said exemption from the whole of duty of excise was being claimed by virtue of Entry No. 21 “All drugs, medicines, pharmaceuticals and drug intermediates not elsewhere specified” of the Schedule to the Notification No. 104/82 of 28-2-1982 as amended from time to time. The entire quantity of said product was cleared without payment of duty for the manufacture of “Neko Soap”. It was alleged that under Notification No. 197/82, dated 22-6-1982, an explanation to Serial No. 21 with a definition of “bulk drug” has been introduced and the said product does not conform to all the conditions stipulated in the said explanation introduced and therefore they were not entitled for exemption. The Show Cause Notice alleged that the appellants had contravened the provisions of Rule 8(i) of Central Excise Rules, 1944, under which Central Government had issued Notifications No. 104/82, dated 28-2-1982 and 197/82, dated 22-6-1982 and had cleared 9666.670 kgs. valued at Rs. 16,51,931.24, and this duty involved is Rs. 1,49,839.94 for the period from 22-6-1982 to 30-9-1983 which had been cleared without payment of duty. It was alleged that the appellants had mis-declared the said product as drug and suppressed the correct information leading to wrong classification.

(iv) The appellants submitted their reply on 28-5-1984 by which they have explained that the product is covered by the said Notification and exempted from payment of duty. They have relied on the certificate issued by the Joint Commissioner, Food and Drugs Administration, Maharashtra State, Bombay. They have relied on the approval of classification which was granted to them. They have also contended that the RT-12 had also been fully finalised for the relevant period. Under the circumstances, they have submitted that there cannot be any suppression of facts as alleged by the Department and contended that the demand was barred under Section 11A of the Act. They further contended that the product is bulk drug which is used for the treatment of skin, dis-infection, ringworm, lupus and also as an adjunct in the treatment of syphilis eligible for exemption under the said Notification. They have relied on the British Pharmaceutical Codex (B.P.C.) 1954 which has given its uses as under :-

“Red Mercuric Iodide when dissolved with the aid of four-fifths of its weight of potassium Iodide in water or alcohol has an anti-bacterial action, but is irritant to the tissues except then dilute. Solutions containing 1 in 5,000 to 1 in 2,000 are used for application to wounds and strengths of 1 in 10,000 to 1 in 5,000 as vaginal douches, alcoholic solution containing 1 in 2,000 to 1 in 500 are used for surface sterilization of the hands and skin. An ointment containing 1 or 2 per cent in Benzoinated Lard has been used in the treatment of ring-worm and lupus, stronger ointments are irritant and may produce vesication. Red mercuric iodide in solution with potassium iodide is sometimes given by mouth in doses of 2 to 4 milligrams as an adjunct in the treatment of syphilis.”

(v) The Assistant Collector who adjudicated the issue rejected their contentions and held that the product is not at all a drug as claimed by them and it is correctly classifiable under Tariff Item 68 and therefore it is not entitled for exemption from payment of duty under the said Notifications. He has held that the product is used as a chemical and as ingredient in the formulation of Neko soap and not as a drug. On the basis of the said finding, he has concluded that the assessee had filed wrong declaration to the effect that the product is drug at the time of filing of the classification list and got the same approved as exempt under the said Notification and therefore the extended period of 5 years under the proviso to Section 11A of the Act was attracted and, therefore, he confirmed the demand.

(vi) The Collector of Central Excise before whom they had filed the appeal rejected their contentions and confirmed the order passed by the lower authorities. The Collector (Appeals) has also held in the impugned order that the product is classifiable under T.I. 68 but without the exemption benefit as envisaged under the said Notification, as the product is not a bulk drug and conforming to the explanation appended to the Notification.

5. The appeal No. E/640/87-C arises from the Show Cause Notice, dated 27-9-1984 issued by Superintendent of Central Excise raising the demand for a sum of Rs. 43,782.25 for the clearances of the said product during the period 1-10-1983 to 30-4-1984. The Show Cause Notice has been issued under proviso to Sub-section (1) of Section HA of the Act with the same allegation as in the earlier Show Cause Notice in respect of appeal No. E/3696/87-C. The appellants have submitted the same reply. The adjudication was done by the Collector of Central Excise, Bombay-II and passed the order in original, dated 19-1-1987 rejecting the contentions of the appellants and held inter alia as herein :-

“The company has referred to the extracts of British Pharmacopoeia as well as Martindale Extra Pharmacopoeia wherein it is claimed that the product is mentioned as a ‘bulk drug’. The relevant extracts are reproduced in the preceding paragraphs. About this contention it is to be noted that a product can be considered to be a “drug” only when the same is manufactured in accordance with the specifications laid down in the relevant Pharmacopoeia. The concentration of Mercuric Iodide solution to be used as a drug mentioned in the Pharmacopoeia ranges from 0.02 to 0.05%. When used in the ointments, the prescribed level is 1 or 2%. In the British Pharmacopoeia ‘Neko’ soap is mentioned as a “proprietary preparation” containing Red Mercuric Iodide 1%. It thus follows that Red Mercuric Iodide itself cannot be considered as a drug, unless it is prepared as per the specifications laid down in the relevant Pharmacopoeia and only then it can be used as a durg. Higher concentrations can lead to poisoning. Therefore, the company has to prove that the product under assessment is in fact manufactured with permissible concentration under Pharmacopoeia. The evidence is to the contrary. The company has declared the product as “Concentrated Solution of Mercuric Iodide”. The company holds a drug licence from the Drug authority of the State Government for manufacturing the said solution for Neko soap with concentration of 33.3% WAV. As discussed above ‘Neko soap’ which is a proprietary preparation mentioned in the Martindale Extra Pharmacopoeia contains only 1% Red Mercuric Iodide. Therefore, highly concentrated solution of Red Mercuric Iodide in solution wth Potassium Iodide, being not manufactured in accordance with the specifications laid down in British Pharmacopoeia as well as Martindale Extra Pharmacopoeia or any other Pharmacopoeia does not merit reconsideration as “bulk drug”. In the concentration in which it is cleared it can neither be used as such or as an ingredient in any formulation. The proprietary preparation, viz. Neko soap, in which the chemical used is suppossed to contain only 1% concentration, while the product offerred for assessment is of very high concentration. Therefore, I hold that the product is not eligible for concession under Notification 62/78 as amended by Notification 197/82.”

6. The appellants have contended before us in these appeals that the product is a bulk drug basing their reliance on the extract from the British Pharmaceuticals Codex 1954 which is extracted above and also from the extract of the information pertaining to the product as appearing in Martindale Extra Pharmacopoeia (26th Edition) at page 906 which is re-produced below :-

“Red Mercuric Iodide resembles mercuric chloride in its actions and uses. Because of its sparing solubility, solutions in water or alcohol are obtained by the addition of a nearly equal weight of Potassium Iodide to form the soluble complex salt, mercuric potassium iodide, K2 H4 1 4 = 786.4. Solutions containing 0.02 to 0.05% have been used for applications to wounds and strengths of 0.01 to 0.02% as vaginal douches; alcoholic solutions containing 0.05% to 0.02% have been used for skin disinfection. Ointments containing 1 or 2% have been used in the treatment of ringworm and lupus, stronger ointments are irritant.

Red Mercuric Iodide in solution with Potassium Iodide has been given by mouth, in doses of 2 to 4 mg as an adjunct in the treatment of syphilis.”

7. They have also relied on the information on the product appearing at page 465 of the “National Formulary (10th Edition) published by the American Pharmaceutical Association which is noted below :-

“Potassium Mercuric Iodide, dried at 120° for 4 hours, yields not less than 98 per cent and not more than 1,02 per cent of K2Hg14.

Description – Potassium Mercuric Iodide occurs as odorless, yellow crystals, deliquescent in air. It is neutral or alkaline to litmus.

Solubility – Potassium Mercuric Iodide is very soluble in water. It is soluble in alcohol, in ether, and in acetone.

Identification –

A:    Dissolve about 20 mg. of Potassium Mercuric Iodide in 1 ml. of water and add 1 ml. of chloroform and 0.5 ml. of ferric chloride T.S. : the chloroform shows the characteristic colour of iodine.
 

B : Dissolve about 100 mg. of Potassium Mercuric Iodide in 2 ml. of sodium hydroxide T.S. and add a few drops of formaldehyde T.S.: a black precipitate of metallic mercury is produced.
 

C : Heat Potassium Mercuric Iodide in a test tube just to the point of fusion : it becomes red, and upon cooling again assumes a yellow colour. At higher temperatures volatilizaton of mercuric iodide occurs.
 

Loss on drying - Dry about 2 Gm. of Potassium Mercuric Iodide, accurately weighed, at 120° for 4 hours: it loses not more than 4 per cent of its weight, page 690.
 

Assay - Accurately weigh about 500 mg. of Potassium Mercuric Iodide, previously dried at 120° for 4 hours and transfer to a 250 ml., round-buttom flask. Continue the assay as under Thimerosal, page 606, beginning with "Add 50 ml. of water...." Each ml. of 0.1 N ammonium thiocyanate is equivalent to 39.32 mg. of KeHg1 4.
 

Packaging and storage - Preserve Potassium Mercuric Iodide in well-closed, light-resistant containers."
 

8. Apart from the technical literature on which reliance has been placed which is extracted above, they have also submitted that the product has been considered as a drug under the Drugs and Cosmetics Acts and Rules and the same is also manufactrued under the strict control of the said licence. They have contended that the product is an active ingredient in the manufacture of Neko medicated soap. Mercuric Iodide is an antiseptic (or anti-bacterial) action. They have contended that in merck index the therapeutic category of Mercuric Iodide Red, which is active ingredient of Neko medicated soap, is mentioned as Topical Antiseptic. They have contended that the Mercuric is almost insoluble in water. For effective anti-microbial action and proper distribution in formulations, including soap, it is necessary to bring Mercuric Iodide into solution. Solution in water is obtained by the addition of a nearly equal weight of Potassium Iodide. Such a solution, containing Mercuric Iodide and potassium Iodide, each at 33.3% WAV, was used by them in the manufacture of Neko medicated soap. They have contended that the product has no anti-microbial action and its role is merely to bring Mercuric Iodide, the active drug into solution. In view of this, they have contended that the product, containing Mercuric Iodide Concentrated Solution, containing Mercuric Iodide as basic active drug, is a bulk drug which is used as an active ingredient in the manufacture of Neko medicated soap. Neko medicated soap is combination of Mercuric Iodide with a neutral soap which on hydrolisis renders the mercury salt soluble. This soap is designed for disinfecting rather than for detergent purposes. The Neko soap is recommended for disinfecting the hands after examination of cases of communicable diseases. The soap is also invaluable in the post-mortem or dissecting room. The said soap is also useful for freeing the hair from parasites, for checking dandruff and allaying the irritation of prickly heat. They have relied on the letter dated 13-12-1968 of the Directorate of Drugs Control Administration which clarified that if Mercuric Iodide is included as an ingredient in the manufacture of Neko soap then the said soap would be considered as a medicated soap and controlled under the Drugs and Cosmetics Rules. Therefore, they have contended that the soap being a medicated soap and the product having all the medicinal qualities has to be considered as a bulk drug within the definition of “Bulk Drug” appearing in the said Notification. They have assailed the Collector (Appeals)’s finding in which, he has observed that the Neko soap in which the said product is used is supposed to contain only 1% concentration while the product offered for assessment is a very high concentration. On this finding, the appellants contend that the bulk drug cannot be used as such in a product. The dosages/concentration of all bulk drugs, including that of the said product, mentioned in the Pharmacopoeias are meant for formulations. In other words, the choice on dosage/concentration of all bulk drugs including that of the said product, is dictated by the end-use. They have further contended that the said product containing 33.3% of Red Mercuric Iodide was not used for direct application but was used as an active ingredient in the manufacture of the formulation, namely, Neko medicated soap. They contended that it would be incorrect to compare the concentration of the said product with the concentration mentioned under ‘uses’ in the Pharmacopoeia. They have contended that the said product was blended with a very large quantity of soap base and hence concentration in the final product i.e. Neko medicated soap came down to 1% as claimed. Under the circumstances, the finding of the Collector (Appeals) was not correct.

9. As regards the time-bar issue they have contended that there was no suppression in the case as the Department was well aware of the manufacture of the product and also use in the formulation of Neko soap. They have contended that the Department had approved the classification list on two occasions. They had been filing RT-12 returns and the same were finalised. Therefore, there was no suppression and large period cannot be invoked in this case.

10. We have heard Shri D.B. Sharoff, learned Advocate for the appellants and Shri M. Jayaraman, learned SDR for the Revenue and have carefully considered the submissions made by them and also perused the records. The Notification No. 197/82-C.E., dated 22-6-1982 is reproduced below –

“In exercise of the powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, the Central Government hereby makes the following amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 104/82-C.E., dated the 28th February, 1982, namely –

In the said notification –

(a)    in the Schedule for Serial Number 21 and entries relating thereto, the following serial number and entries shall be substituted, namely -
 "21. All bulk drugs, medicines and drug intermediate not elsewhere specified".
 

(b)    after the proviso, the following explanation shall be inserted, namely -
 "Explanation. - In Serial Number 21, 'bulk drugs' mean any chemical or biological or plant product, conforming to pharmacopoeial standards, used for diagnosis, treatment, mitigation or prevention of diseases in human beings or animals, and used as such or as in ingredient in any formulation".
 

The explanation of 'bulk drug' given in the above notification includes chemicals conforming to pharmacopoeial standards used as such or as an ingredient in any formulation.
 

Notification No. 104/82-C.E., dated 28-2-1982 is reproduced below -
  

“In exercise of the powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, and in supersession of the notification of the Government of India in the Ministry of Finance (Department of Revenue and Insurance) No. 55/75-C.E., dated the 1st March, 1975, the Central Government hereby exempts goods of the description specified in the Schedule annexed hereto, and falling under Item No. 68 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944), from the whole of duty of the excise leviable thereon.

 

The Schedule 
 

1   to 20-                    X  X  X
 

21. All drugs, medicines, pharmaceuticals and drug intermediates not elsewhere specified.
 

Provided that food products and food preparations specified in this Schedule shall not include boiled sweets, toffees, caramels, candies, nuts (including almond) and fruit kernels coated with sweetening agent".
 

11.    Now it has to be seen as to whether the said product conforms to definition of bulk drug within the ambit of the explanation given to the notification. If it satisfies the definition of the bulk drug as appearing in the explanation then the product will be entitled for the exemption claimed by the appellants and the demands made in the show cause notice and confirmed in the impugned order will be unsustainable.
 

12. The definition of Red Mercuric Iodide appearing in the pharmacopoeia has been reproduced above. As can be seen from the said literature, the mercuric iodide is practically insoluble in water and, therefore, other media like alcohol, casteroil, ether and oily oil are used for its solubility. It is also readily soluble in solution of iodides. As the use of the Red Mercuric Iodide solution in the literature indicates that solution in water of alcohol are obtained by the addition of nearly equal weight of potassium iodide to form a soluble complex salt, Mercuric Potassium Iodide. The appellants are manufacturing this product in concentrated solution. It is their contention that the same is utilised as an ingredient in the manufacture of Neko soap. The product when cleared has a concentration of 33.3% of WAV in the solution. In the manufacture of the soap 1% of which is mixed with other ingredients, the formulation of the soap is done independently under the licence and the soap is cleared as a medicated soap which falls within T.I. 68. There is no dispute with regard to use of this product as an ingredient in the manufacture of the Neko soap which is a medicated soap which is cleared under T.I. 68. So long as Neko soap has been considered as a medicated soap and recognised in the formulatory as well as under the Drug licence, the active ingredient which goes to the manufacture of the soap has got to be considered as a drug. The manufacturers of the drug and medicines will be buying ingredient only in bulk and the same will be utilised as per the formulations. The fact that the concentrated solution of the product containing 33.3% WAV of Potassium Mercuric Iodide and its use only to the extent of 1% as an ingredient to the manufacture of the soap will not in any way be excluded from the explanation of the bulk drug from the Notification, as held by the Collector (Appeals) in the impugned order. All bulk drugs will be of very high concentration. Merely, because the bulk drugs are in high concentration and while formulating the drug, a small quantity is used, it will not in any way lose the property of a drug as held by the Collector (Appeals). The learned Counsel had relied on the case of Citric India Limited, Nasik v. Collector of Central Excise, Pune as reported in 1985 (22) ELT 447 to emphasise this point. The reading of paras 3 and 4 as noted below will also help by clarifying the Collector’s finding :-

“3. The Collector held the term ‘pharmaceutical’ to refer to drugs manufactured according to a pharmacopoeial standard which are used for diagnosis, treatment, mitigation or prevention of diseases. In view of this, he would not consider citric acid a pharmaceutical as it was only a basic chemical and was not used directly as a drug or drug-intermediate. Its use was only as a vehicle and as an ingredient of a compound just like other chemicals and substances like alcohol, sodium and potassium which though mentioned in various pharmacopoeias were not regarded as drugs. Furthermore, the Collector said that according to Merck Index, the predominant use of citric acid was as an acidulant in beverages, confectionary, effervescent powders and tablets, in processing cheese, to adjust the pH of foods, in the manufacture of alkyd resins, as mordant to brighter colours, in electroplating, in special inks, as sequestering agent to remove trace metals etc. Its use as a pharmaceutical was not indicated. The Collector gave as his opinion that all products specified in the Indian pharmacopoeia are not pharmaceuticals and the fact that a product is manufactured according to a pharmacopoeial standard does not mean that it was a pharmaceutical. He, of course, accepted that M/s. Citric India Limited manufactured the citric acid under licence issued by the Food and Drug Administration; but this was only to facilitate its use as an ingredient in the manufacture of drugs.

4. We reject the contention of the department and rule that citric acid is a pharmaceutical and should be classed as a pharmaceutical notwithstanding its use as an acidulant, in dye manufactures, food processing and metal treatment. The Collector was incorrect when he said that citric acid was not used as a pharmaceutical; it has wide uses as a pharmaceutical. It is further used in the formulation of citrates, a salt formed by citric acid with a base; salts are the general form in which medicines are administered in modern medical therapy. The Collector objects because citric acid is not used directly as a drug or drug-intermediate. There are not many substances which are used directly as a drug or a drug-intermediate. Most of them are used in combinations or after modifications or in the form of salts, because their administration, absorption, etc. etc. have to be carerfully regulated to obtain the optimum effect. To look for direct use of a chemical or a substance or a drug in modern medicine is futile. If by this, the department means use as a single chemical substance, the answer is the same. A number of substances forming the ingredients of one pharmaceutical prescription are the rule today. And we do not see why a drug or a pharmaceutical must be a single chemical/substance. There are no such rules in medical science.”

13. The product conforms to the definition of bulk drug. It may be a chemical but it does conform to pharmacopoeial standards and it has been used as an ingredient in the formulation of medicated soap which is undisputedly manufactured as per the drug licence for utilisation in the treatment and prevention of skin diseases. The literature clearly supports the contentions of the appellants and they are entitled to exemption from the payment of duty under the said Notification.

14. The demands are also time-barred and there is no suppression or mis-representation in this matter since the appellants have been manufacturing this item for a long time and they have been filing the classification lists which have been approved from time to time. The RT-12 have all been filed which have been finalised and therefore the Department cannot be said to be not aware of the manufacture and clearances of this product. The Department should have made investigations at the time of the filing of the classification and before its approval. The fact that the appellants had submitted the copy of the drug licence and all other correspondence in this matter is not disputed by the Department. Therefore, it cannot be contended that the appellants have suppressed or mis-declared as alleged in the Show Cause Notice. In view of our findings, the appellants are entitled to succeed on merits and as well as on time-bar with consequential relief if any.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

* Copy This Password *

* Type Or Paste Password Here *