Madras High Court Upholds 14.5% VAT On Vestige's Food Supplements, Rejects Ayurvedic Medicine Claim

The Madras High Court on 24 July held that products purchased and sold as food supplements cannot later be classified as proprietary Ayurvedic medicines merely to claim a concessional rate of Value Added Tax (VAT).

A Division Bench of Justices G. Jayachandran and N. Mala dismissed the tax revision filed by Vestige Marketing Private Limited and upheld the levy of 14.5% VAT on the products, holding that the company had purchased the goods as food supplements under the Central Sales Tax (CST) regime and could not subsequently change their classification to Ayurvedic medicines to claim the lower tax rate of 5% under the Puducherry Value Added Tax Act. The judges held:

“If the products are drugs or medicines the dealer of the products, ought to have obtained license under the Drugs and Cosmetic Act, as well as the CST registration to deal must have covered 'Drugs/Medicine'. In the instant case, the Revision Petitioner hold CST registration to deal with only six products, which includes food supplements but not drugs."

The dispute concerned products including Vestige Spirulina Capsules, Noni Capsules, Ganoderma Capsules, Amla Capsules, Aloe Vera Capsules, Neem Oil and Flax Capsules.

Vestige contended that the products were proprietary Ayurvedic medicines manufactured by licensed manufacturers and were therefore eligible for taxation at 5%. It argued that the products were manufactured under valid Ayurvedic drug licences and that it was not required to obtain a separate drug licence in Puducherry for selling Ayurvedic medicines.

The Commercial Tax Officer rejected the claim and classified the products as food supplements falling under the residuary entry, attracting VAT at 14.5%. The assessment was later affirmed by the Appellate Authority and the Sales Tax Appellate Tribunal, following which the company approached the High Court.

Before the High Court, Vestige argued that the Tribunal had ignored judicial precedents while classifying the products and that the manufacturer's licences were sufficient to establish that the goods were Ayurvedic medicines.

Rejecting the submissions, the Court noted that the company itself had purchased the products as food supplements under its CST registration and had declared them in the same manner for inter-State purchases. It observed that the company could not later claim that the same products were Ayurvedic medicines only to avail the benefit of a lower tax rate. It further held that classification of a product depends on its nature and intended use, and not merely on the fact that it was manufactured by a licensed drug manufacturer.

Further, it held that the manufacturer's licence alone was insufficient to classify the products as medicines and that Vestige had failed to establish that the products had therapeutic qualities or were intended for diagnosis, treatment, mitigation or prevention of disease. It observed:

“The case of the assessee who wants to change the character of the commodities purchased as food supplements sold as such without undergoing any change is not permissible.”

The Bench also observed that products purchased and sold without any change must ordinarily retain the same character throughout the transaction. It held:

“...the products first should satisfy that it is useful for treatment of disease and marketed as drugs in compliance with the provisions of Drugs and Cosmetic Act. In the absence of satisfying these requirements, the assessee cannot claim the products purchased as food supplements but sold to the customers as medicines.”

Accordingly, the High Court dismissed the tax revision and upheld the classification of the products as residuary goods taxable at 14.5%.

For the Petitioner: V. Sundareswaran.

For the Respondent: J. Kumaran, Additional Government Pleader (Puducherry).