Under the sphere of indirect taxes established across the globe including India, the rate of tax on numerous products for levy of tax are dependent on the classification of the products under different categories, which is an indispensable part of the whole taxation mechanism. It is vital from both the perspective of the taxpayer’s and the tax collectors to have a specific category under which a good or service falls. The objective is to determine whether or not the said product/item would be laden by the levy of taxes and if so, under which classification the tax liability would fall. However, this is a superlative situation but in the real and practical sphere disputes pertinent to the classification of goods along with services have been in existence since its genesis. The erroneous arrangement of a product can have such serious repercussions like even closure of the industry due to variation of tax rates which is huge and the tax range is large. Thus, it becomes significant to have clear and conclusive classification of goods or services.
The classification of all kinds of “cosmetics and ayurvedic products” which have some therapeutic or prophylactic uses and can conceivably also be fall under “medicaments” which has always been a contentious concern in the taxation regime. This article would try to highlight and demystify the complex issue pertinent to this classification. As the definition of the term, “medicament” has not been explicitly provided anywhere in the Drugs and Cosmetics Act, 1940, the Delhi GST Act, 2017, the CGST Act, 2017, the IGST Act, 2017, the Customs Tariff Act, 1975, or Rules framed thereunder, the word must become true in its prevalent sense i.e. how the common man who uses it, comprehends it.
The term “medicament” as defined in the Oxford Dictionary as “a substance used for medical treatment”; whereas, the Drugs and Cosmetics Act, 1940, defines cosmetic under clause (aaa) of Section 3 as “any article intended to be rubbed, poured, sprinkled or sprayed on, or introduced into, or otherwise applied to, the human body or any part thereof for cleansing, beautifying, promoting attractiveness, or altering the appearance, and includes any article intended for use as a component of cosmetic”.
On the bare perusal of the definitions of “medicaments” and “cosmetics”, one school of thought contends that cosmetic product are used to improve the appearance of a person i.e. they enhance beauty. Whereas a medicinal product or a medicament is used to treat some medical illness. There could be instances while treating a particular medical problem, the appearance of the person may improve. What is decisive is the primary use of the product. For example, a particular product may be used for treating baldness. In case, if a person can grow hair on his head, his condition of baldness is cured and the person’s appearance may enhance. The product used for the purpose cannot be fall under cosmetic merely because it has eventually led to an improvement in the appearance of the person.
Here some judicial pronouncement by the courts which would clarify the instance more judicious in nature and help further in determining or classifying hand sanitiser which is prominently used during Covid-19 pandemic. In Paras Pharmaceuticals Ltd. v.CTT, the Trade Tax Tribunal tried to classify the product named “Boro Soft” either under cosmetic/ayurveda or medicaments. This trade tax revision is covered under Section 11 of the U.P. Trade Tax Act. The assessing authority on remand found that “Boro Soft” was a cosmetic and will fall within the entry of “All kinds of cosmetics and preparation” under the Notification dated 7-9-1991. The Joint Commissioner (Appeals), however, found that “Boro Soft” was used as medicine and that the Joint Commissioner (Drugs), Food and Drugs Control Administration, Gujarat had certified that the “Boro Soft” cream is an ayurvedic drug. The Tribunal allowed the second appeal filed by the Department. The appellant contended that it should be seen that whether the products were likely to be in common use by normal customers and relied on common parlance. Also placed on record material from the texts or Pharmacopoeia in support of each product which was subject-matter of the present appeal to show that the ingredients were independently mentioned in the ayurvedic texts. The respondent relied on Puma Herbal (P) Ltd. v. CCE, wherein the revision was dismissed since there was no material on record to show that product named “Boro Soft” was purchased and used as ayurvedic medicine. The certificates given by the Joint Commissioner (Drugs), Food and Drugs Control Administration were based on the ingredients of the cream as indicated on the wrapper and not of its use. The opinion of the Joint Commissioner of Drugs was not supported by any authoritative textbooks on ayurvedic medicines; however, the twin determination tests were reiterated which was laid down in CCE v. Richardson Hindustan Ltd. to determine the classification of an item in question.
Richardson provides two tests for determining the classification under ayurvedic medicaments, firstly, whether the item is commonly understood as a medicament which is called the common parlance test. For the said test, it will have to be seen whether in common parlance the item is accepted as a medicament. If a product falls in the category of medicaments, it will not be an item of common use. A user will use it only for treating a particular ailment and will stop its use after the ailment is cured. The extent or the quantity of the medicaments used in a particular product is not a decisive factor for its classification. The extent of medicinal ingredients used in a product is sometimes very low because excess or large use of them may be harmful to human body and as such they are required to be mixed up with what is in trade parlance.
In order to be a medicinal preparation of a medicament, it is not mandated that the item must be sold under a doctor’s prescription. It makes no difference if it is available across the counter in shops. The essential difference lies in the user’s perception of a particular product. If the user consumes the product primarily for cure from or treatment or mitigation of or for prevention of a specific skin disease or disorder, it should be treated as a medicament classifiable under Heading 3004 (unless, of course, it has been specifically included under Heading 3304).
Afterward in Akansha Hair & Skin Care Herbal Unit (P) Ltd., In re, where the applicant manufactures skincare preparations and wants an advance ruling on the classification of 33 of its products such as body wash, face wash, skin toner, talc, anti-pimple cream, anti-crack cream, etc. The applicant contended that its skincare preparations are ayurvedic medicaments. They are meant for therapeutic or prophylactic uses, put up in packaging for retail sale, and entirely correspond to the description of goods under HSN 3004. It relied on the authorities of Puma and Richardson judgments to substantiate its claims and the reliefs sought. However, it was found that as per the descriptions of the products printed on the labels of the products when packaged for retail sale and for information to the customer it is found that the products are used mostly for brightening the skin, controlling the excess oil secretion, keeping skin clean glossy and free of freckles and spots, beautifying the skin of sunburn and black patches, ensuring dazzling liveliness, enhancing glamour and beauty, preventing excessive perspiration, promoting feeling of freshness, increasing lustre of skin, keeping skin soft, fair, glowing, stop premature ageing and wrinkling of skin, preventing sunburn rashes, dryness, discolouration and burning sensation of skin, properly cleansing, exfoliating and moisturising the skin, helping for removal of make-ups and sunscreen which clogs pores, helping in the normal firming and toning of skin along with hydrating the skin to make it glow, fresh and smooth, helping to skin and tighten skin pores, makes skin soft and more elastic, reducing excess skin oil, protecting from sunburn injury.
It was held that “none of the above descriptions qualify for categorising the products as ‘medicaments’ or ‘medicines’ as they are not used in the diagnosis, treatment, mitigation, or prevention of disease or disorder in human beings; rather they are more in tandem with the definition of ‘cosmetics’ as we find in the Drugs and Cosmetics Act, 1940, because none of the problems that these products treat can be classified as ‘injury’ or ailment’. Thus, these products are not to be classified under Chapter 30 (Medicaments) but are to be classified under Chapter 33 (Cosmetics) or Chapter 34 (Soaps) and to be taxed accordingly.”
In the recent judgment by GST Appellate Authority for Advance Ruling (AAAR) Karnataka, in Ce-Chem Pharmaceuticals Private Limited, In re where it dealt with the classification of hand sanitiser. The appellant manufactures two products at a large scale largely to combat the unprecedented condition set by pandemic Covid-19: firstly, isopropyl rubbing alcohol IP; and secondly, chlorhexidine gluconate and isopropyl alcohol solution. The primary reason for the appellant’s claim to classify the impugned products under Chapter Heading 3004 is on account of its characteristics and operating procedure and the fact that they have been granted a licence to manufacture the same in terms of the Drugs and Cosmetics Act, 1940. In addition, they have placed reliance on judgments rendered in classification matters wherein it has been held that common parlance test takes precedence over scientific and technical specifications as well as the DGFT Notification which refers to the product “hand sanitiser” under Heading 3004.
For a product to be classified as a medicament, it is important that the product has either of the two qualities i.e. therapeutic or prophylactic. Even if a product is manufactured using ingredients regulated under the Drugs and Cosmetics Act and according to the formula prescribed in the Pharmacopoeia, it cannot be classified as a medicament under Heading 3004 unless it is meant for therapeutic or prophylactic uses. Its curative or preventive value must be substantial, and the product must be manufactured primarily to control or cure a disease, and the consumers use it primarily for treatment, mitigation, cure or prevention of specific disease or disorder. The AAAR Karnataka found that the alcohol-based hand sanitiser does not have either therapeutic or prophylactic properties. It is at best a substance which has disinfectant properties as it prevents the spread and transmission of germs/bacteria/viruses. Prevention of transmission of disease causing micro-organisms is not the same as preventing the onset or progression of a disease. A drug which is used for the prevention of the onset or progression of a disease or ailment can be called a drug having prophylactic properties. However, an alcohol-based hand sanitiser containing the drug isopropyl alcohol and chlorhexidine gluconate, is used for preventing the transmission of disease-causing germs/bacteria/viruses and this does make it a prophylactic drug. As already mentioned, the use of an alcohol-based hand sanitiser neither controls the diseases caused by the viruses/bacteria nor does it develop preventive characteristics inside the human body to fight the disease caused by the viruses/bacteria. It is merely a product recommended for use in hand hygiene practices.
Concluding by saying that concerning the provisions of GST Laws, relevant notifications read with section and chapter notes of the Customs Tariff Act, 1975 and relying upon the erstwhile judgments in conjunction with the recent decision of Authority for Advance Ruling in Akanksha Hair & Skin Care Herbal Unit (P) Ltd., it can be said that there is a very thin line of difference between the classification of “medicament” and “cosmetic” and one has to be very cautious while demarking the classification 0f these products. Whereas the rate of tax of products covered under the head of medicaments is 12%, the same product when seen with the eyes of cosmetics corresponds to 18% and even 28% in certain cases. What makes the difference is the perception with which one sees the product. Although the burden of proof that a product is classifiable under a particular tariff head is on the Department but the company must realise this fact that the gap of 6% to 16% may corroborate to be disastrous in case the litigation is decided in favour of the Revenue. Thus, classification of products should be done diligently keeping in view the abovementioned guiding principles and under professional guidance only.
U.P. Trade Tax Act, 1948, S. 11.
In re Ce-Chem Pharamaceuticals (P.) Ltd., (2021) 86 GST 143 (AAR).