Supreme Court disposes of Cadila Healthcares dispute with Gujarat Tax Department on Kadiprol

New Delhi, July 14, 2022 :

The Supreme Court of India has closed the proceedings of a long-pending dispute between the Gujarat sales tax office and drug major Cadila Healthcare on whether the latter’s product Kadiprol should be assessed as a poultry feed or a medicine, while keeping the larger question on the Common Parlance Test open.

The dispute, which went over several years, came to the Supreme Court as the Gujarat Sales Tax office filed an appeal against a High Court order in favour of Cadila Healthcare, last year. The dispute is related to the Deputy Commissioner of Sales Tax issuing a Determination Order by which it was held that Kadiprol would be covered as “Drug and Medicine” under the Schedule II Part A of the GST Act.

Cadila filed an application before the Deputy Commissioner to determine the rate of tax on Kadiprol sold under its invoice dated March 20, 1989. It also filed an application before the Assistant Commissioner, Food and Drugs Control Administration (FDCA), Gujarat, seeking whether the company is required to obtain a license under the Drugs and Cosmetics Act, 1940 for manufacturing the product.

The FDCA informed the company that the license for manufacturing of Kadiprol is not required under the Drugs and Cosmetics Act, 1940. However, the tax office in an order in April 16, 1990, held that the product contains some preventive medicine and therefore, categorised as a drug as per the GST Act. A tribunal also upheld the order of the Deputy Commissioner, following which the company filed a reference application with the Tribunal and moved to the High Court.

The High Court, in an order favourable to the company, said that the product would be converted as Poultry Feed under the GST Act. The State Tax office approached the Supreme Court with an appeal against this order.

A division bench of Supreme Court, comprising Justice M R Shah and Justice Sanjiv Khanna, hearing both the parties, observed that the issue is in the academic interest with no revenue implication as there are no tax dues and therefore there is zero tax effect, closed the proceedings keeping the larger question on the Common Parlance Test open, to be considered in an appropriate case in a like matter.

Common Parlance Test refers to the common man’s understanding of a word or product, which could be used to determine the classification of a product while levying tax, according to experts.

The tax department said that every 100 gram of Kadiprol contains emporium (amprolium) hydrochloride 25 mg and vitamin K3 25 gram and the product was used to provide protection against Coccidiosis due to an anti-coccidial property of emporium and the vitamin K prevents loss of blood by ensuring adequate availability of prothrombin, thus supplementing the anti-coccidial action for emporium.

The product also eliminates sub clinical coccidian infection and improves the health of blood and therefore, the predominant purpose for which the product was used by persons rearing poultry is to eliminate sub clinical coccidian infection, argued the tax department. The indirect effect of the product is only consequential and may be to improve the health of the poultry or help in growth of poultry, but that does not dilute the main purpose of the ingredients, the composition as well as the purpose for which it was administered, it added.

Cadila Healthcare, vehemently opposing the appeal, said that there is no existing tax demand on the company related to the issue and even all the assessments under the GST Act are also closed, and therefore as such the issue involved in the appeal would be academic.

It also argued that the words “Poultry Feed” has acquired a definite connotation in livestock farming and the feed simplicities is essential for maintenance of poultry, the concentrates such as vitamins in the food stuff enable the poultry to maintain energy. To make a poultry financially viable, it is necessary to supply balanced poultry feed to increase the production of eggs or fat and growth if the poultry is kept for consumption of its meat, it argued.

According to a circular from the Department of Revenue, Government of India, in December 31, 2018, clarifying the GST rates and classification of goods, clarifies that the HS code 2309 for animal feed supplements may cover only such product, which in the form supplied, are capable of specific use as food supplement for animals and not capable of any general use.

If the vitamins, provitamins are supplied in a form in which they are capable of general use, i.e. in the form in which it could be used as inputs or raw materials for further processing, instead of being ready to use, then these would be classifiable under HS code 2936.

The HS code 2309 covers vitamins and provitamins which improve digestion and, more generally, ensure that the animal makes good use of the feeds and safeguard its health. On the other hand, HS code 2936 covers vitamins and provitamins which are medicinal in nature and have much higher concentration of active substance. Pharmabiz