State of Kerala v M/S.K.LINK HEALTH CARE (INDIA) PVT.LTD.

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT:** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **& THE HONOURABLE MR. JUSTICE ASHOK MENON** **TUESDAY, THE 5TH DAY OF JUNE 2018 / 15TH JYAISHTA, 1940** **OT.Rev.No. 58 of 2016** **T.A.(VAT)NO. 111/2010 OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM** **------------** ## **REVISION PETITIONER(S)/RESPONDENT/RESPONDENT/REVENUE :** **STATE OF KERALA, REPRESENTED BY THE DEPUTY COMMISSIONER(LAW), COMMERCIAL TAXES, ERNAKULAM.** **BY SR.GOVERNMENT PLEADER SRI.MOHAMMED RAFIQ** ## **RESPONDENT(S)/APPELLANT/APPELLANT/ASSESSEE :** **M/S.K.LINK HEALTH CARE (INDIA) PVT.LTD., 35/1854, A-7, SURABHI BUILDING, SOUTH JANATHA ROAD, PALARIVATTOM, PIN-682 025.** **BY SRI.T.M.SREEDHARAN, SENIOR ADVOCATE ADVS. SRI.V.P.NARAYANAN SMT.DIVYA RAVINDRAN** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 05-06-2018, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** **Msd.** **11.06.2018** **OT.Rev.No. 58 of 2016** ## **APPENDIX** ## **PETITIONER(S)' ANNEXURES :** |**ANNEXURE A:**|**A TRUE COPY OF THE PENALTY ORDER PASSED BY THE INTELLIGENCE**| |---|---| ||**OFFICER DATED 29.04.2009.**| |**ANNEXURE B:**|**A TRUE COPY OF THE ORDER OF THE DEPUTY COMMISSIONER**| ||**(APPEALS), COMMERCIAL TAXES, ERNAKULAM DATED 01.01.2010**| ||**IN STA 1636/2009.**| |**ANNEXURE C:**|**A CERTIFIED COPY OF THE ORDER OF THE TRIBUNAL**| ||**DATED 31.07.2015.**| |**ANNEXURE C(A):**|**A TRUE COPY OF ANNEXURE C.**| |**RESPONDENT(S)' **|**ANNEXURES :**| ## **NIL** **//TRUE COPY// P.S.TO JUDGE** **11.06.2018** **Msd.** ## **K. VINOD CHANDRAN & ASHOK MENON, JJ.** **---------------------------------O.T. [Rev.]. No.58 of 2016 ---------------------------------Dated this the 5[th] day of June, 2018** ## **O R D E R** ## K. Vinod Chandran, J. The State is the revision petitioner challenging the deletion of the entire penalty levied on the assesse, by the Tribunal. The penalty was levied on account of two defalcations noticed. The assessee had been selling its products to unregistered dealers, hence sub-section (3) of Section 40A of the Kerala Value Added Tax Act, 2003 [for brevity, the Act] mandates payment of tax on the Maximum Retail Price [M.R.P] as shown in the package of the produce. The said challenge does not survive now, since sub-section (3) of Section 40A **O.T. [Rev.]. No.58 of 2016** **2** of the Act has been deleted with effect from 01.04.2007. The relevant assessment year in this revision is 2007-2008 and by reason of the retrospective amendment the levy of tax on the MRP is not permissible. 2. The assessee sells its products through distributors who are billed at 20% below the M.R.P. Penalty was proposed for not collecting tax on the M.R.P and also for levying and remitting tax @4% while the tax payable was higher; the latter an allegation of mis-classification. The former defalcation does not survive but the latter on the ground of mis-classification does survive. The Tribunal relied on _**Chakkiath Brothers v. Assistant Commissioner [2014 (3) KLT 222]**_ to hold that a mere mis-classification cannot lead to initiation of penalty proceedings. The learned Government Pleader seeks to challenge the same on the ground that in **O.T. [Rev.]. No.58 of 2016** **3** the present case, it is not a mere misclassification. The assessee being aware of the fact that the products sold by the assessee are not drugs or medicines have classified the same under Entry 36 of Schedule III taxable at 4%. 3. The questions of law arising on the surviving issue is framed as follows: _“Whether on the facts and circumstances, the Tribunal was correct in deleting the entire penalty levied on the assessee; finding that mis-classification of goods is not a ground for invoking the penal provisions under Section 67 and is not the finding perverse?_ 4. The learned Senior Counsel appearing for the assessee would contend that the assessment for the relevant year has been completed and there is no cause for imposition of penalty. It is also submitted that the allegations raised being on mere mis-classification, it cannot lead to imposition of **O.T. [Rev.]. No.58 of 2016** **4** penalty. On the question of whether the goods are Ayurvedic medicaments or not, it is submitted that the Intelligence Officer has not cared to examine the product and has rejected the contentions of the assessee peremptorily without a proper consideration. The learned Senior Counsel also places reliance on the decision of the Hon'ble Supreme Court in _**Commissioner of Central Excise, Mumbai IV v. M/s.Ciens Laboratories [2013 (295) E.L.T. 3 (SC)]**_ . 5. The Intelligence Officer had initiated penalty proceedings by issuance of notice. The assessee had filed detailed objections claiming that there are two types of products dealt with by the assessee; being healthcare products and Ayurvedic products. The Ayurvedic products of the Company were named and it was contended that they were manufactured under the Ayurvedic system; with **O.T. [Rev.]. No.58 of 2016** **5** reference to the procedure as laid out in the classical texts of Ayurveda. The manufacturer of such Ayurvedic medicaments was said to be one M/s.Welex Laboratories (P) Ltd., Thane, Maharashtra, who had also been issued with a drug licence by the _Technical Officer [Ayurveda] and Licence Authority, Ayurvedic Food and Drug Administrator, Thane_ . 6. The learned Senior Counsel would plead that the assessee had been collecting tax at 4% and paying it to the State and there cannot be alleged any evasion of tax. The assessee had not collected anything more than the 4% as per the classification made by the assessee; of its products under Entry No.36 of Schedule III to the Act and hence there could be no contumacious conduct found on the assessee. 7. We are unable to agree with the contention **O.T. [Rev.]. No.58 of 2016** **6** raised by the assessee that since the assessee had been collecting tax at the lesser rate, as claimed by the assessee in the return, there can be no contumacious conduct found on the assessee for invocation of Section 67 of the Act. Section 67 speaks of imposition of penalty by the authorities, in the various instances enumerated thereunder. The quantum of penalty is relatable to the quantum of tax evaded where quantification is possible and otherwise not exceeding Rs.10,0000/-. That however will not depend solely on whether the assessee had collected tax more than that paid to the State. Any of the contingencies as noticed in Clause (a) to (l) of Section 67(1) of the Act would enable initiation of penalty proceedings. Penalty can also be levied _de hors_ the fact of collection of tax being in accordance with the return filed. Definitely collection of tax at a higher rate than **O.T. [Rev.]. No.58 of 2016** **7** that returned would result in invocation of Section 67; but in the present case we need not concern ourselves with that. 8. The further contention is with respect to the mis-classification being not liable to be treated as a contumacious attempt to evade tax based on the judgment in _**Chakkiath Brothers**_ [supra]. In _**Chakkiath Brothers**_ and also in the decisions of the Hon'ble Supreme Court relied on in the said case, there was a debatable issue and it was found that the Intelligence Officer could very well, on an examination of the books of accounts and the relevant records, assess tax at the correct rate and there is no ground for allegation of an attempt to evade tax based merely on a misclassification. _**Cement Marketing Co. of India Ltd. v. Assistant Commissioner of Sales Tax, Indore & Ors. ((1980) 1 SCC 71)**_ held that if the assessee **O.T. [Rev.]. No.58 of 2016** **8** does not include a particular item to tax under a _bona fide_ belief that he is not liable so to include it, the return filed cannot be condemned as a 'false' one, which finding alone would invite imposition of penalty. On facts, it was held that “imposition of penalty is penal in character and unless the filing of an inaccurate return is accompanied by a guilty mind, the Section cannot be invoked for imposing penalty” (sic). The principle was reiterated in _**E.I.D Parry (I) Ltd v. Assistant Commissioner of Commercial Taxes ((2000) 2 SCC 321)**_ . 9. The specific contention taken by the learned Government Pleader is based on the specifications in the official website of the assessee Company as extracted by the Intelligence Officer. The penalty order indicates that the official website of the assessee contained the following recital: **O.T. [Rev.]. No.58 of 2016** **9** _“A distributor must not claim or advertise the K Link products as medicines which can treat or cure any disease.”_ The assessee Company has specifically forewarned the distributors from claiming the product to be a medicine. The specific license produced by the assessee of the manufacturer was also looked into. It was found that the drug manufacturing licence produced by the assessee specifically indicated that the dosage is as per the advice of the physician. The assessee did not have a case that the products claimed by the assessee to be medicines, were sold under the prescription of a physician. Admittedly it was sold directly to the consumer. 10. But for the bland assertion that the commodity has been manufactured as per the classic texts of Ayurveda, nothing was produced before the **O.T. [Rev.]. No.58 of 2016** **10** Assessing Officer as to the ingredients and the product specification of the goods dealt with by the assessee. There was also no reference to the classical texts of Ayurveda or the specific product as discernible from the text as being produced by the manufacturer or dealt with by the assessee. The objection of the assessee to the proposal also at best reveals a treatise on Ayurveda, without any reference to the specific products; but for reciting the names under which the products are marketed. 11. _**M/s.Ciens Laboratories**_ [supra] was a case in which the Hon'ble Supreme Court was concerned with the product by name 'Moisturex' which the excise authorities asserted is an extract for care of skin, while the assessee claimed it to be used in the cure of certain ailments of the skin. The assessee in the aforesaid case also had a **O.T. [Rev.]. No.58 of 2016** **11** contention that the presence of pharmaceutical substances, in the product will change the identity of the product, since such constituents are used not for care of the skin, but for cure of certain diseases relating to skin. The Hon'ble Supreme Court examined heading 33.04, on which the excise authorities relied on as also 30.03, on which the assesse based its contentions. The chapter note explaining heading No.30.03 was as under: _“This heading covers medicinal preparations for use in the internal or external treatment or prevention of human or animal ailments. These preparations are obtained by mixing together two or more substances. However, if put up in measures doses or in forms or packings for retail sale, they fall in heading 30.04._ _The heading includes:_ _(1) Mixed medicinal preparations such as those listed in an official pharmacopoeia, proprietary medicines, etc., including those in the form of gargles, eye drops, ointments, liniments, injections, counter-irritant and other preparations not falling in heading 30.02, 30.05 or 30.06.”_ **O.T. [Rev.]. No.58 of 2016** **12** 12. The Hon'ble Supreme Court held that 'Moisturex' is not primarily intended to protect the skin from sun, tan or dryness but is intended for treating or curing the dry skin conditions and for a few other skin complaints like fissures in feet, dry scaly skin and so on and so forth. The reliance placed by the learned Senior Counsel is on paragraph 19, which we extract hereunder: _“19. Thus, the following guiding principles emerge from the above discussion. Firstly, when a produce contains pharmaceutical ingredients that have therapeutic or prophylactic or curative properties, the proportion of such ingredients is not invariably decisive. What is of importance is the curative attributes of such ingredients that render the product a medicament and not a cosmetic. Secondly, though a product is sold without a prescription of a medical practitioner, it does not lead to the immediate conclusion that all products that are sold over/across the counter are cosmetics. There are several products that are sold over-the counter and are yet, medicaments. Thirdly, prior to adjudicating upon whether a product is a medicament or_ **O.T. [Rev.]. No.58 of 2016** **13** _not, Courts have to see what the people who actually use the product understand the product to be. If a product's primary function is “care” and not “cure”, it is not a medicament. Cosmetic products are used in enhancing or improving a person's appearance or beauty, whereas medicinal products are used to treat or cure some medical condition. A product that is used mainly in curing or treating ailments or diseases and contains curative ingredients even in small quantities, is to be branded as a medicament.”_ 13. The first principle as laid down by the Hon'ble Supreme Court is that when a product contains pharmaceutical ingredients that have therapeutic, prophylactic or curative properties, the proportion of such ingredient, is not invariably decisive. What is significant is the curative attribute of such ingredients that renders the product to be a medicament as distinguished from a cosmetic or as in this case a healthcare food supplement. The aforesaid guiding principle is laid down on a reading of the specific Chapter **O.T. [Rev.]. No.58 of 2016** **14** heading 30.03 as extracted herein before. We do not find any such details having been supplied by the assessee, in the instant case before the Assessing Authority to warrant an examination as to whether the specific products of the assessee are medicament; much less arrive at such a finding. 14. In this context, we have to notice Serial No.23 under the Rules of Interpretation of Schedules as appended to the Act. Item 23 reads as hereunder: _“23. Entry 36 in third schedule does not include food or beverages such as dietetic, diabetic or fortified foods, food supplements, tonic beverages, aqueous distillates or aqueous solutions of essential oils suitable for medicinal use, soaps or other products containing added medicaments, and blood albumin not prepared for therapeutic or prophylactic uses.”_ The entry specifically excludes dietetic, diabetic or fortified foods, foods and the mere presence of medicament would not enable inclusion under Entry **O.T. [Rev.]. No.58 of 2016** **15** 36 of Schedule III. Pertinent is also the fact that the assessee never pointed out the ingredients of the products with reference to the classical texts of ayurveda or their prophylactic or therapeutic qualities as enumerated in any authoritative literature. 15. The second guideline as laid down by the Hon'ble Supreme Court is that the sale of a product by prescription of a medical practitioner alone would not be conclusive to consider whether the product is a cosmetic or medicament. In the present case the assessee had produced a license claimed to be that of the manufacturer, who is engaged in manufacture of Ayurvedic medicaments. The license specifically showed that the products are to be sold only under the prescription of a medical practitioner. The products of the assessee admittedly were not sold under such prescription **O.T. [Rev.]. No.58 of 2016** **16** and were directly sold to the consumer. The Intelligence Officer specifically noticed that the product description with reference to the classical text of Ayurveda was not placed before the Intelligence Officer by the assessee. The assessee merely makes a broad statement about Ayurveda and the products having been manufactured as per the procedure prescribed in the classical texts. 16. The third principle as laid down by the Hon'ble Supreme Court is with respect to the purpose for which the product is purchased and the use to which it is put; whether it be for 'care' or 'cure'. There is absolutely no evidence produced by the assessee with respect to that and we have to notice, at the risk of reiteration, that the assessee in its own website had cautioned the distributors from advertising the products as medicinal items, which takes it away from the **O.T. [Rev.]. No.58 of 2016** **17** definition of medicament. Evidently, the products of the assesse, if at all can be categorised as products containing medicament could be only for 'care' and not for 'cure'. The burden to prove the curative properties with reference to authoritative texts, the ingredients and the product description is of the assessee; which the assessee failed to discharge. 17. One other contention raised by the learned Senior Counsel was that since the assessment has been completed, there is no scope for an imposition of penalty. We have to notice that the Act contemplates a self assessment under Section 21 and speaks of re-assessment only under specific contingencies based on the provisions as has been noticed under Section 21 itself. Quite true, the Intelligence Officer on detection of the offense ought to have immediately informed the Assessing **O.T. [Rev.]. No.58 of 2016** **18** Officer. The Intelligence Officer initiated penalty proceedings under Section 67 and concluded the same; which cannot be faulted. The mere fact that subsequently the assessment had become final by passage of time cannot stand in the way of the penalty order being interfered with. 18. We answer the question framed in favour of the Revenue and against the assessee in so far as the penalty with respect to the mis-classification. Since we have not interfered with the Tribunal's order deleting the quantification of tax evaded, based on the M.R.P, we direct the Intelligence Officer to examine the invoices and determine the quantum of tax evaded on mis-classification in accordance with such invoices and the returns filed by the assessee. Considering the peculiar circumstances of the case, we are also inclined to reduce the penalty to the actual amount of tax **O.T. [Rev.]. No.58 of 2016** **19** determined as attempted to be evaded. The revision is partly allowed leaving the respective parties to bear their costs. **K. VINOD CHANDRAN, JUDGE.** **ASHOK MENON, JUDGE.** sp/06/06/18