Case: M/S. Colfax Laboratories (India) Limited and Another Vs. The State of Goa and Others

The 1st petitioner is a company registered under the Companies Act, 1956 (the Company for short). The Company is having a factory at Curti, Ponda, Goa, where it manufactures After Shave Lotions, which are liable to excise duty under the Medical and Toilet Preparations (Excise Duty) Act, 1955 (the Act for short). Until around 1984 the Company classified the After Shave Lotions manufactured by it as toilet preparations under Item 4 of the Schedule to the Act. By a letter dated January 14, 1985, the Company applied to the Commissioner of State Excise, Government of Goa forn of its product Old Spice After Shave Lotion as medicinal preparation under the Act. The said application was entertained by the then Commissioner of State Excise who vide her order dated March 23, 1985d Old Spice After Shave Lotion as medicinal preparation for levy of excise duty under the Act. By another order dated June 12, 1985, the Commissioner of State Excise further classified Old Spice After Shave Lotion under Item 1(i)(b) of the Schedule to the Act2. In 1989 another company by name M/s. PJM Pharmaceuticals Private Limited (M/s. PJM, for short) made an application to the Commissioner of State Excise dated February 2, 1989 to manufacture, inter alia, its product Blue Stratos After Shave Lotion under Loan Licence of the company. The said M/s. PJM intimated to the Commissioner of State Excise that the duty payable shall be under Item 1(i)(b) of the Schedule3. By a demand dated March 13, 1991, issued under Rule 12 of the Medicinal and Toilet Preparations (Excise Duties) Rules, 1965 (the Rules for short), the company was called upon to make payment of an alleged short levy of Rs. 92,43,684.08 in respect of Blue Stratos After Shave Lotion cleared between April 1989 to March 11, 1991. Similarly, by a demand dated May 15, 1991, the company was called upon to pay Rs. 17,73,18,361.20 ps. in respect of Old Spice After Shave Lotion cleared between April 1, 1985 to May 15, 1991. The said demand notices appear to have been issued on the basis that After Shave Lotions are toilet preparations and as such duty payable is 100% ad valorem and not under Item 1(i)(b) of the Schedule. However, these were ex parte demands without prior show cause notices or an opportunity of hearing. The company challenged the said demand notices by two separate Writ Petitions bearing Nos. 101 of 1991 and 351 of 1991 in this Court. By orders dated August 22, 1991 and September 23, 1991, this Court, inter alia, directed the Excise Commissioner to treat the said demand notices dated March 13, 1991 and May 15, 1991, as show cause notices and to supplement the same by any additional ground or materials if he chose to do so and to thereafter serve a supplementary memorandum and also to take final decision in the matter after giving an opportunity of hearing to the company4. Pursuant to the orders passed by this Court, the Excise Commissioner issued supplemental memoranda dated September 6, 1991 and September 30, 1991. The company filed replies to both the supplemental memoranda taking a stand, inter alia, that their After Shave Lotion had to be classified as medicinal preparations. By two separate orders both dated November 7, 1991, the Commissioner held that under the Act he has no powers to decide the issue of classification of goods and that the said issue of classification i.e., whether the said goods are to be treated and continued to be treated as genuine medicinal or toilet preparations for the purposes of the Act needs to be referred to the Central Government for its decision undere (2) of Rule 68 after taking advice from the Standing Committee constituted undere (1) of the said Rules. The Commissioner further held that the notices issued under Rule 12 in respect of Old Spice were unreasonably delayed as issued after six years of the clearances being made and therefore barred by limitation. In respect of Blue Stratos, the Commissioner held that the demand, if any, (after the question of classification was decided by the Central Government) would be only raised as it was a case of inadvertence and/or misdescription within the meaning of Rule 11, for a period of six months prior to the issue of the notice5. Against the said order dated November 7, 1991, the Secretary (Finance) has filed appeals under Rule 127 of the Rules to the Government of Goa, being Appeal Nos. 1 of 1991 and 2 of 1991. The said Appeals are pending before the Government of Goa6. The company has filed this petition under Article 226 of the Constitution questioning the legality and validity of the orders of the Commissioner dated November 7, 1991 insofar as they purport not to decide the correct classification of After Shave Lotions manufactured by the company and to refer the issue of classification of the goods to the Central Government for taking the advice of the Standing Committee under Rule 68 of the Rules. The company has also questioned the action of the State Government in filing the appeals under Rule 127 mainly on the ground that such appeals are not maintainable. The company has also challenged the competence of the State Government to hear the appeals on the ground of bias mainly on the basis of certain debates which took place on the floor of the Legislative Assembly of Goa.

Reasoning:
8. Although there was virtual agreement between the learned Counsel for the parties as far as interpretation of Rule 68 is concerned, there is serious dispute about the jurisdiction of the authorities under the Act to classify a preparation either as medicinal preparation or toilet preparation9. On plain reading of the provisions of Rule 68, it is seen that the Standing Committee cannot assume jurisdiction to decide the classification of the product unless the product is as such capable of being misused or consumed as an alcoholic beverage. On closer examination of Rule 68 in the context of Rule 60, it is clear that the object of constituting the Standing Committee is to decide the classification of a product provided the product is as such capable of being misused or consumed as an alcoholic beverage. Thus the scope of Rule 68 is confined only to the question whether the medicinal preparation is either restricted preparation ord medicinal preparation. As far as the present case is concerned, admittedly, all the After Shave Lotions are denatured and so are incapable of being consumed as alcoholic beverages and the Standing Committee could, therefore, not decide the issue of classification. Moreover, the jurisdiction of the Standing Committee is purely advisory and it gives its advice only on a motion by the Central Government. In other words, unless such motion is made by the Central Government, the classification cannot be decided by the Standing Committee. It is also evident from Rule 68 that even after the Standing Committee gives such advice, it is left to the Central Government to make such decision in respect thereof as it thinks fit. We have, therefore, no hesitation to accept the submission that the Excise Commissioner was in error in referring the issue of classification of the companys product to the Central Government for decision as per Rule 68 of the Rules15. On examination of the provisions of the Act and the Rules, it is clearly seen that the Act is a specific Act dealing with levy of excise duty on medicinal and toilet preparations, inter alia, containing alcohol. The Act is a taxing statute, which contains charging section and provides machinery for collection of duty. Section 3 of the Act read with Rules 44, 72, 74 and 81 provides for levy of excise duty on dutiable goods at the rates specified in the Schedule16. It is also not disputed before us that the Excise Officer appointed under the Act, which term also includes Excise Commissioner, is duty bound to assess the dutiable goods under the Act so as to determine the appropriate rate of duty as per the charging section 3 read with the Schedule. The Act and the Rules also provide for a complete machinery for issue, grant, renewal, alteration, suspension and cancellation of the licence to manufacture dutiable goods. It cannot be gainsaid that for assessment of dutiable goods under the Act and in order to determine the appropriate rate of duty as per the charging section, it is necessary for the Excise Officer to determine the classification of the dutiable goods. We, therefore, find considerable substance in the submission of Mr. Hidayatulla that the Excise Officer is competent to determine the classification of the goods for the purpose of levy of duty under the Act and the Rules18. We are afraid that the contentions raised by Mr. Andhyarujina are liable to be rejected for more than one reason. In the first place, we are unable to accept the interpretation put by Mr. Andhyarujina on Rule 94 of he rules. But before we advert to the said Rule 94, we would like to demonstrate that the assumption of Mr. Andhyarujina that there is independent machinery under the Drugs Act for classification of the goods is not well founded. On the other hand, on a careful scrutiny of the Drugs Act, we find, in fact, there is no machinery provided for classification of the goods under the Drugs Act. The object of the Drugs Act is to regulate the import, manufacture, description and sale of drugs and cosmetics. The Drugs Act mainly deals with the standards of quality of drugs and cosmetics. It will be useful to make a reference to some important provisions of the Drugs Act. Section 3(b) defines a drug while section 3(aaa) defines cosmetic. Though the definition of drug is similar to the definition of medicinal preparation under the Act, it is seen that the definition of toilet preparation is much narrower than the definition of cosmetic under the Drugs Act20. After a careful scrutiny of the provisions of the Drugs Act and Rules framed thereunder, we do not find any provision providing machinery for an assessment of the product either as a drug or cosmetic. Mr. Andhyarujina was unable to show any specific provision in that behalfOn a bare reading of the said Rule, it is clearly seen that it has been enacted with a view to ensure that the patent or proprietary medicines contain constituent ingredients in therapeutic/prophylactic quantities and are safe and stable etc. and does not deal with classification of the product. A combined reading of Part VII of the Drugs and Cosmetics Rules reveals that the nature of inquiry mainly pertains to standards of quality of drugs. There is no provision for classification under the Drugs Act and the licence is granted based on the claim made by the applicantWe have, therefore, no hesitation to reject the argument of Mr. Andhyarujina that there is an independent machinery provided under the Drugs Act for classification of the goods and that the authorities under the Act are bound by such classification. In our opinion, such an interpretation will render the entire machinery for assessment of duty as well as licensing set up under the Act and the Rules completely redundant. It is well settled that the courts will not favour an interpretation, which has the effect of taking away the jurisdiction of the competent authority, unless the same in expressly provided for in law. Merely because there is some similarity in the definition of drug in the two enactments, the definition under the Drugs Act cannot be applied for the purpose of determining the nature of the product for the purposes of the Act, as, in our opinion, such function is required to be performed by the authorities under the Act in accordance with the Rules and the provisions framed thereunderOn a plain reading of the Rule, it is seen that a licence under the Act shall not be granted unless the applicant holds a requisite licence under the Drugs Actnot possible to accede to the argument of Mr. Andhyarujina. In the first place, we find that a literal interpretation of Rule 94 would lead to absurd consequences since an applicant for a licence to manufacture toilet preparation under the Act would also require to hold a licence for manufacture of medicinal preparation under the Drugs Act for the Rule refers to holding of a requisite licence for manufacture of medicinal preparation only and not to cosmetic or toilet preparation. Thus an applicant, who is desirous of obtaining a licence for toilet preparation, will have to hold a licence for drug although he intends to manufacture only toilet preparation. It is true that the word requisite suggests a meaning properly required, but it does not and cannot mean appropriate or matching or corresponding or analogous. In our opinion, Rule 94 cannot be considered in such manner as to make nugatory the entire machinery of the Act. To our mind, Rule 94 merely provides that an applicant desirous of obtaining a licence under the Act should also possess a licence under the Drugs Act, which is necessary to ensure the standard and quality of the product of the applicant. There is one more reason for not accepting the interpretation suggested by Mr. Andhyarujina, because if what Mr. Andhyarujina says is correct, then even if the product is a toilet preparation, the authority under the Act will be required to treat it as a medicinal preparation if the applicant has managed to acquire or obtain a drug licence under the Drugs Act. Such construction would thus completely defeat the object of the Act. Therefore, we have no hesitation to hold that the authorities under the Act are sufficiently empowered to classify the goods for the purpose of assessment and levy of the duty prescribed under the Act23. We have already indicated that the Excise Commissioner has completelyd his mind on the main issue of jurisdiction and, therefore, in our opinion, it is necessary to remand the entire matter to the Excise Commissioner for deciding the same in accordance with lawTo our mind, the finding as regards the issue of limitation cannot be separated in the manner suggested by Mr. Hidayatulla. In our view, having regard to the facts and circumstances and the controversy raised by the parties, it is desirable to remand the whole case to the Commissioner for a fresh decision in accordance with law. Needless to say that the Commissioner will also be required to decide the question of classification, since we have already recorded that it is the Excise Commissioner, who has jurisdiction to decide the question24. As we are setting aside the impugned orders and remitting the cases to the Excise Commissioner, the appeals filed by the respondents before the Government of Goa do not survive. However, we would like to record that the issue of maintainability of the appeals was not pressed by the learned Counsel for the petitioners, though he has made some submissions on the issue of bias. It was argued before us that the State Government is already committed to recover the amounts and, therefore, there is real apprehension of bias on the part of the State Government and on that ground, the power of the State Government to decide the appeals was questioned. Having regard to the order, which we propose to pass, these arguments have become academic and it is not necessary to express any opinion on this aspect. Before we conclude, we may also mention that the respondents have filed an interim application making a grievance that the petitioners are recovering the excise duty at the rate of 100% ad valorem although they are actually paying the duty at the rate of Rs. 10/per proof liter on the basis that their product is medicinal preparation and on that basis, a direction is sought against the petitioners to deposit the amount in this Court.Mr. Hidayatulla has strongly refuted the allegations made by the respondents. According to Mr. Hidayatulla, this is only a notionalp shown in the sales invoices and the petitioners are not recovering the excise duty at 100% ad valorem as alleged by the respondents.We do not wish to express any opinion on this controversy, since it is for the Excise Commissioner to decide this question. But we make it clear that thep shown by the petitioners is only a notionalp as per their own contention and, therefore, in case the Excise Commissioner comes to the conclusion that the classification submitted by the petitioners is wrong and the petitioners product is liable to be taxed as an toilet preparation, the Excise Commissioner shall ignore this notionalp and shall levy the duty in accordance with the provisions of the Act.