Supreme Court Upholds Excise Duty On Pharmaceutical Samples Removed For Testing Over Record-Keeping Lapse

The Supreme Court has held that a taxpayer who fails to maintain the prescribed records for pharmaceutical samples removed for testing cannot avoid excise duty by contending that the goods had not attained marketability.

It upheld the excise duty demand against Hicure Pharmaceuticals Pvt. Ltd.

A bench of Justice K.V. Viswanathan and Justice Arun Palli applied its earlier decision in ITC Ltd. v. Collector of Central Excise to the facts of the case. Referring to that ruling, the bench observed, "It is clear from ITC (supra), that in case of non-maintenance of records in relation to removal of samples, the Department was justified in levying excise duty. For this very reason, on facts, we find that the further question that the goods were not marketable also cannot arise since the assessee defaulted in maintenance of records. The cases of the Tribunal, referred to by the counsel for the appellant, are distinguishable since records were maintained in the said cases."

The dispute relates to the period between January 2001 and September 2003. During scrutiny of the company's records, the department found that Hicure Pharmaceuticals had removed samples of medicines for in-house quality testing and for testing through outside laboratories.

According to the department, the company had neither maintained proper records relating to those removals nor paid excise duty on the samples. The adjudicating authority confirmed duty demands of ₹33,488 on samples used for in-house testing and ₹6,226 on samples sent to outside laboratories.

The Commissioner (Appeals) upheld the adjudicating authority's order. On further appeal, the customs, excise and service tax appellate tribunal ruled in favour of the company.

The tribunal held that the medicines attained marketability only after in-house testing. It also found that even packing was not complete when the samples were drawn. The tribunal further observed that it was contradictory for the Department to claim that the samples had not been entered in the records. At the same time, the department said their removal had come to light during scrutiny of those very records.

The department challenged the tribunal's decision before the Karnataka High Court under Section 35G of the Central Excise Act. Relying on the Supreme Court's decision in ITC Ltd., the High Court reversed the tribunal's ruling.

The High Court noted that the assessee had not maintained accounts regarding the value of the samples sent for in-house testing or testing outside the premises. It also found that no accounts had been maintained regarding the destruction of those samples. The High Court noted that the First Appellate Authority had relied on the CBEC's Supplementary Instructions to hold that, in the absence of the prescribed records, such clearances were liable to be treated as removals for home consumption.

Before the Supreme Court, the assessee argued that the samples had been removed only for quality testing. It also contended that the Department's appeal before the High Court was not maintainable under Section 35G of the Central Excise Act because it related to the value of the goods.

The court found that there was no dispute that samples had been cleared both for in-house testing and for testing through outside laboratories. It also noted that it was not disputed that the assessee had failed to maintain records regarding the value of those samples.

Rejecting the tribunal's reasoning, the bench observed, "In the absence of records, the samples will have to be considered as goods being removed for home consumption. Hence, the finding of the Tribunal that goods attained marketability only after in-house testing really begs the question."

The bench said that, in the absence of the prescribed records, the assessee could not avoid excise duty by raising the plea that the goods had not attained marketability. Applying its earlier decision in ITC Ltd., it rejected the contention.

The court then examined the CBEC's Supplementary Instructions governing removal of samples for testing. The instructions require manufacturers to maintain proper accounts of samples. They must also prepare invoices under Rule 11, make entries in the daily stock account, and pay the applicable duty before removal for testing, unless exempted.

The court noted that the adjudicating authority had concluded that the samples had not been properly accounted for in the prescribed registers. It had therefore treated them as goods removed for home consumption without payment of duty.

The bench also recorded that despite repeated queries during the hearing, the appellant failed to produce any evidence showing compliance with the prescribed procedure.

It observed, "We repeatedly asked the learned counsel for the appellant as to whether any records were maintained in accordance with the prescribed procedure for substantiating the claim that the goods and the products were in fact sent for sampling. Learned counsel for the appellant was not able to show any shred of evidence."

The court also rejected the appellant's objection to the maintainability of the Department's appeal before the High Court.

It held, "We also find no merit in the argument that the department's appeal was not maintainable under Section 35G of the Act. The appeal fell within the parameters of the said Section and was not hit by the exclusion clause."

Finding no reason to interfere with the High Court's judgment, the bench dismissed the civil appeals.

For Appellant: Advocates Abdul Azeem Kalebudde, P. R. Ramasesh

For Respondent: Additional Solicitor General Raghvendra P. Shankar, ; Advocates Gurmeet Singh Makker, Advocate-on-Record; Pallavi Mishra, Nikhil Aradhe,Padmesh Mishra, Advocate;Raman Yadav