Customs, Excise and Gold Tribunal - Mumbai
Blue Cross Laboratories Ltd. vs Commr. Of C. Ex. on 29 August, 2006
ORDER
R.K. Abichandani, J. (President)
1. This reference arises from the divergent views on the question whether the value of physician's samples which are supplied free should be assessed on comparable basis with identical medicaments manufactured and sold for commercial purposes or that their valuation be assessed by adopting the costing method as done by the assessee on the basis of Rule 6(b)(ii)"of the Central Excise (Valuation) Rules, 1975.
2. The assessee is a manufacturer of P&P medicines falling under Chapter Heading 3003.10 of the Schedule to the Central Excise Tariff Act. The Revenue considered the adoption of costing method for the assessable value of various physician samples of the medicines to be lower than the value charged for the clearance of normal sales packs of identical medicines, and objected to the assessee's resorting to the provisions of Rule 6(b)(ii). In the show cause notice issued on the assessee, it was alleged that there was a short payment of Rs. 5,66,046/- as worked out in Annexure 'A' thereto, in respect of the removals effected between August 1998 and January 1999.
2.1 The adjudicating authority on the basis of the material on record, found that there was no major difference between the physician's samples and the regular goods of the same quality because it was noticed that most of the medicaments, both in retail strips as well as physician's samples, were put in similar laminated foils. The packing for retail sales was in foils of 10 tablets each packed in cardboard boxes whereas, the physician's samples were cleared in an outer casing of laminated paper and inner packing of aluminium foil. It was, therefore, held that there was no justification in claiming different price for physician's samples from the medicaments sold in retail under MRP. Against the order confirming the demand, the Appellate Commissioner while dismissing the appeal held that the normal price in respect of the subject medicines for which the samples were supplied was available under Section 4(l)(a) and that there was no justification for not applying the said value. It was, however, observed that, even otherwise, if the provision of Section 4(1)(a) was to be ignored, while establishing the assessable value for physician's samples and determining the price in terms of requirement of Section 4(l)(b) of the Act, the nearest ascertainable equivalent as determined under the Central Excise (Valuation) Rules would still be the same. It was, therefore, held that the normal price which was available under Section 4(1)(a) of the Act shall constitute the nearest ascertainable equivalent applicable to the physician's free samples.
3. When the assessee's appeal came up for consideration against the impugned order, the Tribunal noticed divergent views expressed in the earlier decisions of the Tribunal and therefore, referred the matter to the Larger Bench for resolving the conflict between them.
3.1 While referring the matter, the Division Bench noticed the decision of the Tribunal in Chen/1 Laboratories (P) Ltd. v. Collector of Central Excise, Hyderabad in which it was held that the value of physician samples was to be arrived at on the basis of the value of comparable goods in terms of Rule 6(b)(i) of the said rules. This decision was followed in Commissioner of Central Excise, Mumbai-l v. Charak Pharmaceuticals reported m and also in Crossland Research Laboratories Ltd. v. Commissioner (Appeals) Central Excise & Customs rendered on 2-9-2005 [2006 (205) E.L.T. 653 (Tribunal)] (Order Nos. A/1076 to 1085/WZB/05-C/I. It was also noticed that the opposite view was projected in Commissioner of Central Excise, Calicut v. Trinity Pharmaceuticals Pvt. Ltd. and Sun Pharmaceutical Industries v. Commissioner of Central Excise, Surat-II in which it was held that the value of physician free samples in smaller pack cannot be compared with that of the bigger pack and as such the value cannot be increased based upon the price of commercial packs. It was held that the physician's samples and the normal packs cannot be considered as "comparable goods", inasmuch as, except quality of the product all other factors including packing, printing, labelling etc. are not comparable.
4. The learned authorized representative appearing for the assessee and the learned Counsel appearing as an intervener have contended that Chapter Note 5 of Chapter 30 (Pharmaceutical Products) defined manufacturing in the context of such products and, therefore, until labelling or re-labelling or repacking into retail packs was done, the final product of such medicaments will not come in to existence. Therefore, the labelling and packing done for the purpose of free physician's samples would bring about a final product different from the commercial packings of identical medicine. It was contended that the proper method to be adopted for working out the value of such free samples was that of costing, and the assessable value of such samples cannot be determined with reference to the price of the commercial packs which differed in the quantity of such medicines. It was submitted that the final product as packed in the free samples was different from the identical product which was not so packed. It was argued that the free samples which were of four tablets were contained in a packing of smaller size than the size of the commercial packs containing ten tablets. Furthermore, even the labels were different since on the physician's samples it was printed that they were not for sale and were free physician's samples. It was also submitted that in the regular packs, the MRP of the medicine was printed while in the free samples there was no such printing. The authorized representative also submitted that Rule 4 of the said rules did not apply to such physician samples which were not to be sold. It was contended that Rule 4 was applicable only when the goods were to be sold.
5.1 The learned authorized representative for the assessee placed reliance on the following decisions in support of his submissions:
(a) The decision of the Tribunal in Commissioner of Central Excise, Calicut v. Trinity Pharmaceuticals Pvt. Ltd. (supra) was cited to point out that after noticing the decisions in Commissioner of Central Excise, Mumbai-I v. Charak Pharmaceuticals (supra) and Cheryl Laboratories (P) Ltd. v. Collector of Central Excise, Hyderabad (supra), the Tribunal came to the conclusion that even though, the Revenue in its appeal relied on two decisions of the Tribunal, the Tribunal was of the view that the physician's samples and the goods cleared in wholesale cannot be considered as comparable goods, in view of the Supreme Court's decision that comparable goods should be as far as possible identical goods.
(b) The decision of the Tribunal in Sun Pharmaceutical Industries v, Commissioner of Centra! Excise, Surat-II (supra) was cited in support of the contention that value of smaller pack by applying Rule 6(b)(ii) was upheld. (It will be noticed that in this case it was found that P&P medicaments in normal pack as well as in physician's sample packs were sold to the wholesaler distributors who thereafter distributed the physician samples free of cost).
(c) The decision of the Supreme Court in CCE, Meerut v. Universal Glass Ltd. was cited to point out from para 19 of the judgment that where there was no comparable price available for determining the normal value under Rule 6(b)(i), the only alternative was to decide the value under Rule 6(b)(ii) by adopting the best judgment principle based on the cost of production and the profits which the assessee would have earned. In that case it was found that there was no other manufacturer of similar bottles.
(d) The decision of the Madhya Pradesh High Court in Gwalior Rayon Mfg. (Wvg.) Co. v. Union of India (UOI) and Ors. which upheld the validity of Rule 6(b)(i), was cited to point out that it was held in the context of the said rule that the expression "comparable goods" in the rule indicated that the goods taken into account for determining the assessable value should be comparable with the excisable goods and if there is any difference in the material characteristics of the excisable goods and the comparable goods, it has to be obliterated, by taking into account all the relevant factors and making such adjustment as may be reasonable for that purpose in order to find out the "nearest ascertainable equivalent". It was held in para 21 of the judgment that Sub-clause (ii) provides that if the value cannot be reasonable determined under Sub-clause (i) of Rule 6(b) then the cost of production or manufacture including the profits, if any, which the assessees would have normally earned on the sale of such goods, is to be treated as the value of the excisable goods.
(c) The decision of the Supreme Court in Ujagar Prints v. Union of India (UOI) and 1989 (39) E.L.T. 493 (SC) were relied upon to point out that the method of determination of the assessable value was, to take into account the value of the grey cloth in the hands of the processors plus the value of the job work done plus the manufacturing profit and manufacturing expenses.
(f) The decision of the Tribunal in Medley Pharmaceuticals Ltd. v. CC & CCE Valsad was cited by the intervening Counsel to point that Rule 4 will not apply where the date of delivery is not known. In para 3 of the judgment it was observed therein that, if a trade pack containing ten tablets was sold for Rs. 10/-, a physician sample containing four tablets would work out to be Rs. 4/-. In that case it was agreed that the value of the physician's samples was to be determined under the said Rules, but the contention was that it was required to be determined under Rule 6(b)(ii) under costing method and not under Rule 4. In para 10 of the judgment, the Tribunal observed that even though the Commissioner had cited Rule 4 as the correct rule, he had determined the value under Rule 6(b)(i) only. It was observed that the method adopted by the Commissioner cannot be faulted and that for a moment if we substitute Rule 4 in the impugned order with Rule 6(b)(i), the result would be the same.
(g) The decision of the Tribunal in CCE 6" CC v. Mayo India Ltd. , was cited for the same proposition the Rule 4 will not apply where the date of delivery was not known. The Tribunal observed in the para 3 that the correct valuation is to be on the basis of comparable goods after making adjustments for quality or any other factor.
6. The learned authorized representative for the department contended that the goods were comparable and therefore the assessable value of the regular retail packs should be adopted as the assessable value of the free samples. He pointed out from the orders of the authorities below that there was no difference between the excisable goods which were in the retail packs and those in the free samples. He relied upon the ratio of the decision of the Tribunal in Cheryl Laboratories (P) Ltd, (supra) in other decision, that followed it.
7. Admittedly, the medicines which were sold in commercial basis and which were contained in the free medical samples were identical. The learned authorized representative for the assessee, in fact, demonstrated before us the regular packs containing ten tablets meant for retail sale and the physician's samples of the same medicine "MEFTAL" which were to be supplied free to doctors. From the record it appears that even the adjudicating authority had a look at these packs. We noticed that the tablets are put in similar aluminium foils both in regular packs as well as the physician's samples, and both the packs contained they contained the requisite writings about the composition etc. of the medicines. The only difference in the packs was in their size because there are placed ten tablets in a regular retail pack while four in the physician's sample. The colour scheme is also different. The physician's sample is placed in a catch cover on which also there is an, endorsement that it was physician's sample not to be sold besides the other required data which was required to be printed in accordance with law for indicating the composition of the medicine etc.
8. The starting point for the discussion, therefore, is that both the packs contained identical medicine but the physician's sample was smaller since four tablets were put in it while the larger regular commercial pack had ten. On the basis of this difference, it has been stoutly argued that these are totally distinct products and there cannot be a comparison for the purpose of working out the value of samples.
8.1 Under Section 4(l)(b) of the Central Excise Act, it has been provided that where the normal price of the goods was not ascertainable for the reason that such goods are not sold, or for any other reason, the nearest ascertainable equivalent thereof, determined in such manner as may be prescribed, will be the value on which the duty of excise will be chargeable. In the context of this provision, Rule 3 of the said rules provided that the value of any excisable goods shall, for the purpose of Clause (b) of 4(1) of the Act, be determined by the proper officer in accordance with these rules contained in Chapter 11.
8.2 Admittedly, the physician's samples were not sold, but they were supplied free, unlike in Sun Pharmaceutical Industries (supra) in which the physician's samples were sold to the distributors and therefore, there was a price indicated for such samples. In that appeal the Tribunal in paras 2(b)(iii) and 3(ii) of the order emphasized that it was a case where physician's samples were actually sold to the distributors before they were given free by the distributors. It was, therefore, held that when the sale price of physician's samples to the wholesale dealers was not impugned, the same was required to be accepted under Section 4(l)(a) of the Act. Therefore, this decision though projected to be laying down proposition of law contrary to the ratio of Cheryl Laboratories (P) Ltd. supra, in no way advances any proposition inconsistent with the one adopted in Cheryl Laboratories (P) Ltd., Charak Pharmaceuticals and Crosslands Research Laboratories Ltd., and therefore cannot be of any assistance to the assessee.
9. Rule 6(b) of the said rules gets attracted only if the value of the assessable goods under assessment cannot be determined under Rule 4 or Rule 5 Since much controversy has centered around Rule 6(b), it is reproduced here-under:
Rule 6. If the value of the excisable goods under assessment cannot be determined under Rule 4 or Rule 5 and -
(a) x x x x x x
(b) where the excisable goods are not sold but are used or consumed by him or on his behalf in the production or manufacture of other articles, the value shall be based -
(i) on the value of the comparable goods produced or manufactured by the assessee or by any other assessee:
Provided that in determining the value under this Sub-clause the proper officer shall make such adjustments as appear to him reasonable, taking into consideration all relevant factors and, in particular, the difference, if any, in the material characteristics of the goods to be assessed of the comparable goods;
(ii) if the value cannot be determined Sub-clause (i), on the cost of production or the manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods.
9.1 It will be noticed from Rule 6(b)(i) that it refers to the value of comparable goods produced or manufactured by the assessee or by any other asseessec. By itself, Rule 6(b) would apply only where the goods are not sold by the assessee, but are used or consumed by him or on his behalf in the production and manufacture of other article. However, the method adopted under this rule becomes relevant in cases where the value of excisable goods cannot be determined under the rules (even where there is no captive consumption), by virtue of Rule 7, which lays down that if the value of the excisable goods cannot be determined under any of the Rules 4 to 6, the proper officer shall determine the same according to best of his judgment. For this purpose he may have regard, among other things, to any one or more of the methods provided for in the rules. Therefore, the proper officer can resort even to a combination of the methods, if the facts of the case so warrant.
9.2 Rule 4 refers to the determination of the value of excisable goods which are not sold to be made in the context of the value of such goods sold by the assessee, and provides for adjustments only on account of the difference in the dates of delivery of the goods. Therefore, if the excisable goods are identical with the goods which are sold by the assessee, then they will be valued on the basis of the value of the goods so sold. Since there is reference of adjustment only on the basis of difference in dates of delivery, it would appear that no other difference is contemplated under Rule 4 and the excisable goods contemplated which are not sold, should be the identical to the goods which are sold. On the other hand Rule 6(b)(i) speaks of "comparable goods" and also provides for wider adjustments, as may appear to be reasonable to the proper officer, after taking into consideration all the relevant factors and in particular, the difference, if any, in the material characteristics of the goods to be assessed and of the comparable goods. This provision allows comparison of material characteristics to be made and therefore, the goods need not be identical. Under the proviso, adjustments contemplated, obviously refer to those which are warranted by the differences in the material characteristics, if any, of the excisable goods. No straight-jacket formula can be laid down for indicating the type of adjustments which are required to be made; but the guidelines provided by the said proviso indicate the nexus between the adjustments and the difference in the characteristics of the goods excisable not sold and the comparable goods. If the value of the excisable goods under assessment cannot be determined under Sub-clause of clause (b) of Rule 6, meaning thereby that where there is no value of comparable goods available and therefore no scope for the proper officer to make adjustments as per the proviso to Sub-clause (i) of Sub-clause (b) of Rule 6, then only the costing method can be resorted to under Sub-clause (ii) of Sub-clause (b) of Rule 6, but not otherwise.
10. Where the medicines put in the retail packs and free physician's samples are identical in the material characteristics as well in quantity, then there would be no scope for any doubt in working out the value of the excisable goods not sold, namely, free physician's samples on the basis of value of such medicines which are sold by the assessee, as provided by Rule 4. The only adjustment contemplated in that rule would be on account of the difference in the dates of delivery which can be made in cases where there is such difference in the delivery dates. However, when the physician's sample differs in quantity though identical in essential characteristics of the medicine, keeping in view Chapter Note 5 of Chapter 30, which includes labelling, repacking etc. in the manufacturing process, these nonetheless would be "comparable goods" within the meaning of Rule 6(b)(i) of the said rules and there would be no scope for adopting the costing method contemplated by Sub-clause (ii) of Sub-clause (b) of Rule 6 in respect of such physician's samples. The material characteristics of the goods are virtually identical because the identical medicine which is packed in the retail packs is packed in the physician's sample. Though manufacturing process gets an extended meaning by virtue of Chapter Note 5 of Chapter 30, it cannot be said that the medicine was not manufactured before it was packed. The material characteristics of the medicine whether in physician's sample or in retail pack do not at all change by virtue of the provisions of Note 5 of Chapter 30. Moreover, the medicine, having been already manufactured even before the packaging, could be consumed as such medicine even before its removal. Once taken out of the packages it was difficult to relate medicine from one package to the medicine from the other type of package, as was amusingly demonstrated in the court. The only adjustments in such cases would therefore be in the context of the proviso to Sub-clause (i) of Rule 6(b), as discussed above.
11. For the foregoing reasons, the decisions in Cherly Laboratories (P) Ltd., Charak Pharmaceuticals and Grasslands Reserch Laboratories Ltd. holding that the provisions of Rule 6(b)(i) would apply in such cases where physician's samples are supplied free lay down the correct legal position. The decision in Sun Pharmaceutical Industries Ltd. does not lay down any contrary proposition since it was rendered in the context of the sale of physician's samples where the price was available. The decision in CCE, Calicut v. Trinity Pharmaceuticals (P) Ltd. while taking note of the ratio of Charak Pharmaceuticals and Cheryl Laboratories (P) Ltd. does not controvert the ratio and simply holds that the Tribunal did not consider the goods as comparable. Reliance placed on the decision of the Supreme Court in CCE, Meerut-V v. Universal Glass Ltd. (supra) did not warrant any such conclusion. In Universal Glass Ltd. (supra), in Para 16 of the judgment, it was observed that the comparable goods under Rule 6(b), should be, as far as possible identical goods and that simply because two goods are known by the same name or by the same genre, does not mean that they are comparable goods. In the case before the Supreme Court, the size and the shape of the bottles were different and it was observed that the shape and the size of the bottle supplied to JIL cannot be compared with the shape and size of the bottles of Hamdard, Dabur, Maza, Kissan etc. Even the thickness of the glass of the bottles supplied to a liquor manufacturer would be different from the thickness of the glass bottles supplied to a manufacturer of drugs/food products. It was held that Rule 6(b)(i) casts a duty on the department to approve the assessable value and it was for the department to find out whether there are goods comparable to the assessee's goods. There is nothing in this decision which would affect the ratio laid down in Charak Pharmaceuticals and Cheryl Laboratories (P) Ltd. and therefore, the bench was not justified in Trinity Pharmaceuticals (P) Ltd. in brushing aside the well considered opinion of the Tribunal expressed by the co-ordinate benches in these cases. The decision in Trinity Pharmaceuticals (P) Ltd. therefore does not lay down the correct law and to the extent that it decides against the ratio of the decisions in Cheryl Laboratories (P) Ltd., (Charak Pharmaceuticals) and Grasslands Research Laboratories Ltd., is hereby over ruled.
The reference stands disposed off accordingly. The matter will now be placed before the concerned division bench for decision on the merits of the appeal in accordance with law and in the light of this judgment.
(Dictated and pronounced in the open Court on 29-8-2006)