The New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has clarified that the classification of a product as a medicament (Chapter 30) or a cosmetic (Chapter 33) is determined by its primary function. If the product’s primary purpose is therapeutic or prophylactic, it is a medicament, even if it has subsidiary cosmetic benefits. Conversely, if its primary purpose is cosmetic, it is a cosmetic, even if it has subsidiary therapeutic properties.
Therefore, while granting excise duty exemption relief to Shahnaz Ayurvedics (appellant), the CESTAT ruled that the presence of excipients or other non-active ingredients not mentioned in authoritative Ayurvedic texts does not disqualify a product from being classified as a P&P Ayurvedic medicine, provided its essential character is derived from active ingredients prescribed in those texts.
Where products are manufactured under a license from the Indian System of Medicine, contain active ingredients from authoritative Ayurvedic texts, and are marketed and labelled with specific claims to treat or mitigate medical conditions, they are to be classified as P&P Ayurvedic medicines, added the Tribunal.
The Division Bench comprising Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) observed that the Commissioner had opined that since the products contained chemical ingredients not mentioned in Ayurvedic texts, they could not be considered P&P Ayurvedic medicines under the Drugs and Cosmetics Act, 1945. The Bench however found this reasoning flawed, observing that almost all pharmaceutical preparations, whether allopathic or ayurvedic, contain excipients, fillers, and binders to provide bulk and form (e.g., tablets, syrups).
The Bench noted that interpreting the law to exclude any non-active ingredient would lead to ‘absurd conclusions’, as the essential character of a medicine comes from its active ingredients, not the excipients. The fact that the appellant held a license under the Indian System of Medicine (ISM) to manufacture these products further supported their classification as medicines.
On the interpretation of Tariff Notes excluding Cosmetics from Chapter 30, the Tribunal reiterated that the word ‘subsidiary’ is crucial; if a product’s curative or prophylactic function is merely subsidiary to its primary cosmetic purpose, it remains a cosmetic. However, if the curative use is primary, the product is a medicament. Therefore, the key determinant is whether the primary function is medicinal or cosmetic, which is often discerned from how the product is marketed and perceived.
On the nature and marketing of the disputed products, the Tribunal examined a detailed chart submitted by the appellant, which listed the active ingredients of each product, their specific properties, the authoritative Ayurvedic texts they are mentioned in, and the corresponding ISM manufacturing licenses. The Tribunal found that the labels on the disputed goods clearly indicated that they were being sold as P&P Ayurvedic medicines, with specific claims about the ailments or conditions they treat or improve. Based on this evidence, which was not disputed by the Revenue, the Tribunal concluded that there was no reason to classify the goods as cosmetics instead of Ayurvedic P&P medicines.
Briefly, the appeals were filed by Shahnaz Ayurvedics against orders passed by the Commissioner and Commissioner (Appeals) concerning the classification of 18 of their products. The core of the dispute is whether these products are Patent and Proprietary (P&P) Ayurvedic medicines, classifiable under Chapter 30 of the Central Excise Tariff as claimed by the appellant, or cosmetics, classifiable under Chapters 33 and 34 as determined by the Revenue.
This classification controversy has a long history, starting in 1987 with the appellant’s Delhi unit, where an initial ruling was in their favour. After the withdrawal of an exemption for P&P Ayurvedic medicines in 1994, the appellant’s classification lists for their Delhi and NOIDA units were approved, categorizing the products as P&P medicines. A subsequent dispute raised in 1996 was decided in the appellant’s favour by the Allahabad High Court, a decision later upheld by the Supreme Court.
The current appeals relate to the appellant’s Dehradun unit, which began operations in 2004. For the first ten years, the goods were exempt from duty under an area-based exemption that ended on July 16, 2014. After the exemption period, the dispute re-emerged, leading to multiple Show Cause Notices (SCNs) and the impugned orders demanding duty and penalty.
Appearances:
Senior Advocate Vivek Kohli and Advocate Ashwani Sharma, for the Appellant/ Taxpayer
AR, Din Dayal Mangal, for the Respondent/ Department
