Shahnaz Ayurvedics' Products Are Ayurvedic Medicines, Not Cosmetics; CESTAT New Delhi Sets Aside Excise Duty Demand

The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the 18 disputed products manufactured by Shahnaz Ayurvedics are Ayurvedic Patent and Proprietary medicines and not cosmetics, and therefore the excise duty demand, interest and penalties raised by the Department cannot be sustained.

The bench comprising President Justice Dilip Gupta and Technical Member P.V. Subba Rao observed that the mere presence of excipients or fillers cannot take a product out of the category of Ayurvedic Patent and Proprietary medicines.

The dispute concerned the classification of 18 products manufactured by Shahnaz Ayurvedics (Dehradun), including Shabase, Shagrain, Shapeel, Sharose, Shalmond, Shawhite, Shamoon, Vegpeel, Shacomplex, Shamarrow and others.

The Department treated these goods as cosmetics and soap classifiable under Chapters 33 and 34 of the Central Excise Tariff and raised duty demands through show cause notices covering the periods from 25 July 2014 to 29 February 2016 and from 1 March 2016 to 31 January 2017, after the area-based exemption available to the Dehradun unit came to an end.

According to the Revenue, the products were marketed as beauty and personal care items such as creams, shampoos, lotions and medicated soaps, emphasising cosmetic benefits like fairness, skin glow and anti-wrinkle effect, and merely contained some ayurvedic ingredients without proven therapeutic or prophylactic use. It was argued that the goods were meant for beautification and personal grooming and were correctly classifiable as cosmetics.

Shahnaz Ayurvedics argued that the products were Ayurvedic Patent and Proprietary medicines classifiable under Chapter 30, that their active ingredients were drawn from authoritative Ayurvedic texts, and that the products were manufactured under licences granted under the Indian System of Medicine.

It was further submitted that the non-ayurvedic substances present in the products were only excipients, fillers, preservatives and stabilisers commonly used in pharmaceutical preparations and did not change the essential medicinal character of the product.

The tribunal noted that the Department had not disputed the detailed table produced by the appellant showing the active ingredients of each product, their medicinal properties, the authoritative Ayurvedic texts in which they were mentioned, and the licences obtained under the Indian System of Medicine.

The tribunal observed that pharmaceutical formulations normally contain non-active materials required to make the product usable, and classification cannot be decided merely on the presence of such excipients. The bench further observed:

"We find that in any pharmaceutical preparation, there are fillers and excipients which provide the bulk to the product. If the expression only such ingredients in section 2(h) (i) is read to mean that it cannot have any other non-active ingredient also, it will result in absurd conclusions..”

It added, "Even according to the Commissioner, the excipients used by the appellant have use both in pharmaceutical preparations and in cosmetics. The mere fact that there are also excipients in them does not take the disputed goods out of the purview of Ayurvedic PP medicines. It also needs to be noted that the appellant had obtained a licence under the Indian System of Medicine to manufacture them.”

On examining the labels and material on record, the Bench found that the disputed goods were marketed and sold as Ayurvedic Patent and Proprietary medicines and specifically indicated the ailments or conditions they were meant to treat or improve. The bench observed:

“what needs to be seen is how the disputed goods are being marketed and sold. The labels of the disputed goods leave no manner of doubt that they are being sold as PP Ayurvedic medicines specifically indicating the ailments or conditions which each of them claim to treat or improve… Such being the case, we find no reason to hold that the disputed goods are not Ayurvedic PP medicines.”

Holding that the classification of the 18 goods as cosmetics could not be sustained, the tribunal ruled that the consequential demand of duty, interest and penalties also could not survive. Both appeals were allowed and the orders passed by the Commissioner and Commissioner (Appeals) were set aside.

For Appellant: Vivek Kohli, Senior Advocate and Ashwani Sharma, Advocate

For Respondent: Din Dayal Mangal, Authorized Representative