# MEDLEY PHARMACEUTICALS LTD v. COMMNR. OF

- **Citation:** [2011] 1 S.C.R. 741
- **Court:** Supreme Court of India
- **Decided:** 2011
- **Case number:** Civil Appeal No. 3626 of 2005
- **Bench:** D.K. Jain, H.L. Dattu
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/medley-pharmaceuticals-ltd-v-commnr-of-27237
- **Pages:** 29

## Headnote

......
Central Excise Act, 1944:
c
Object of the Act - Discussed.
s.3 - "Physician Samples" manufactured and distributed
as free samples - Liability to pay excise duty - Held: Liable
to excise duty - Excise is a duty on manufacture, duty is
D
payable whether goods are sold or not - Sale is not
necessary condition for charging excise duty -
The
distribution of physician sample serves as a marketing tool
in the hands of pharmaceutical company- It is not mandatory
for the company to distribute the physician samples of every
E
· drug they manufacture .:.. Prohibition on the sale of physician
samples intended for distribution to medical practitioner as
free samples by rule 65(18) of Drugs Rules. -shall have no
., . ...(
bearing or effect on the levy of excise duty - Constitution of
India, 1950 - Seventh Schedule, List I, Entry 84 - Drugs and
Cosmetics Act, 1940 - Drugs and Cosmetics Rules, 1945 -
F
r.96(1)(ix) - Central Excise Valuation Rules, 1975
Central Excise Valuation Rules, 1975:
s.6(b)(ii) - Valuation of Physician's samples - Held: To
G
~-
be valued on pro-rata basis - Central Excise Act, 1944.
Drugs and Cosmetics Act, 1940:
Object of the Act - Discussed.
741
-Ii-
742
SUPREME COURT REPORTS
[2011) 1 S.C.R.
A
Prohibition on tbe sale of physician samples intended for
distribution to medical practitioner as free samples by rule
65(18) of Drugs Rules - Effect on the levy of excise duty -
Held: Shall have no bearing or effect on the levy of excise
duty since excise is duty on manufacture and duty is payable
B . whether or not goods are sold - The Cf;lntra/ Excise Act and
the Drugs Act and the Rules made thereunder, operate in
entirely two different fields having different objects, purposes
and schemes - The conditions or restrictions contemplated ...
+ .
by one statute should not be lightly and mechanically
c imported and applied to fiscal statue for non levy of excise
duty, thereby causing a Joss of revenue - Interpretation of
statutes.
Drugs and Cosmetics Rules, 1945:
D
Rule 96(1 )(ix) - Labeling - Label "Physician Samp/esNot to be sold" - Process of labeling is distinct or different
from the overprinting on the label of a physician's sample -
Manufacture for the purpose of the Central Excise Tariff Act
cannot be said to be incomplete until 'Physicians Sample-Not -
E to be Sold' is printed on the label - Drugs and Cosmetics Act,
1940.
Precedent:
Doctrine of merger - Held: In case, the appeal is
F dismissed without reasons, such order entail application of the
doctrine of merger, wherein the superior court upholds the
decision of the lower court from which the appeal has arisen
- Doctrines.
G
The questions which arose for consideration in the
instant appeals were whether "Physician Samples"
~
manufactured and distributed as free samples are liable
to excise duty in view of the fact that they are statutorlly
prohibited from being sold under the Drugs and
H Cosmetics Act, 1940 and the Rules made thereunder and
-
MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
7 43
CENTRAL EXCISE AND CUSTOMS, DAMAN
if physician's samples are held to be excisable, then what A
is the appropriate method of valuing physician samples
for the purpose of excise duty.
Disposing of the appeals and remitting the matter to
adjudicating authority, the Court
HELD: 1. A duty of excise is a tax upon the goods
and not upon sales or proceeds of sale of goods. In terms
of Entry 84, List I of Seventh Schedule to the
Constitution, taxable event in respect of excise is
B
. manufacture or production. Since excise is a duty on c
. manufacture, duty is payable whether the goods are sold
or not. Therefore, sale is not necessary. condition for
charging excise duty. Marketability is an essential criteria
· for charging duty. The test of marketability is that the
· product w~ich is m~de liable to duty must be marketable 0
in the condition in which it emerges. The word
'marketable' means saleable or suitable for sale. It need
not in fact be marketed. The article should be capable of

## Text

_Characters 0–39,932 of 55,902. This is a partial read: ask again with offset=39932 for what follows._

[2011] 1 S.C.R. 741
MEDLEY PHARMACEUTICALS LTD.
A
_ _,j.
v.
THE COMMISSIONER OF CENTRAL EXCISE AND
. CUSTOMS, DAMAN
(Civil Appeal No. 3626 of 2005)
.. JANU~RY 14, 2011
B
[D.K. JAIN AND H.L. DATTU, JJ.]
......
Central Excise Act, 1944:
c
Object of the Act - Discussed.
s.3 - "Physician Samples" manufactured and distributed
as free samples - Liability to pay excise duty - Held: Liable
to excise duty - Excise is a duty on manufacture, duty is
D
payable whether goods are sold or not - Sale is not
necessary condition for charging excise duty -
The
distribution of physician sample serves as a marketing tool
in the hands of pharmaceutical company- It is not mandatory
for the company to distribute the physician samples of every
E
· drug they manufacture .:.. Prohibition on the sale of physician
samples intended for distribution to medical practitioner as
free samples by rule 65(18) of Drugs Rules. -shall have no
., . ...(
bearing or effect on the levy of excise duty - Constitution of
India, 1950 - Seventh Schedule, List I, Entry 84 - Drugs and
Cosmetics Act, 1940 - Drugs and Cosmetics Rules, 1945 -
F
r.96(1)(ix) - Central Excise Valuation Rules, 1975
Central Excise Valuation Rules, 1975:
s.6(b)(ii) - Valuation of Physician's samples - Held: To
G
~-
be valued on pro-rata basis - Central Excise Act, 1944.
Drugs and Cosmetics Act, 1940:
Object of the Act - Discussed.
741
-Ii-
742
SUPREME COURT REPORTS
[2011) 1 S.C.R.
A
Prohibition on tbe sale of physician samples intended for
distribution to medical practitioner as free samples by rule
65(18) of Drugs Rules - Effect on the levy of excise duty -
Held: Shall have no bearing or effect on the levy of excise
duty since excise is duty on manufacture and duty is payable
B . whether or not goods are sold - The Cf;lntra/ Excise Act and
the Drugs Act and the Rules made thereunder, operate in
entirely two different fields having different objects, purposes
and schemes - The conditions or restrictions contemplated ...
+ .
by one statute should not be lightly and mechanically
c imported and applied to fiscal statue for non levy of excise
duty, thereby causing a Joss of revenue - Interpretation of
statutes.
Drugs and Cosmetics Rules, 1945:
D
Rule 96(1 )(ix) - Labeling - Label "Physician Samp/esNot to be sold" - Process of labeling is distinct or different
from the overprinting on the label of a physician's sample -
Manufacture for the purpose of the Central Excise Tariff Act
cannot be said to be incomplete until 'Physicians Sample-Not -
E to be Sold' is printed on the label - Drugs and Cosmetics Act,
1940.
Precedent:
Doctrine of merger - Held: In case, the appeal is
F dismissed without reasons, such order entail application of the
doctrine of merger, wherein the superior court upholds the
decision of the lower court from which the appeal has arisen
- Doctrines.
G
The questions which arose for consideration in the
instant appeals were whether "Physician Samples"
~
manufactured and distributed as free samples are liable
to excise duty in view of the fact that they are statutorlly
prohibited from being sold under the Drugs and
H Cosmetics Act, 1940 and the Rules made thereunder and
-
MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
7 43
CENTRAL EXCISE AND CUSTOMS, DAMAN
if physician's samples are held to be excisable, then what A
is the appropriate method of valuing physician samples
for the purpose of excise duty.
Disposing of the appeals and remitting the matter to
adjudicating authority, the Court
HELD: 1. A duty of excise is a tax upon the goods
and not upon sales or proceeds of sale of goods. In terms
of Entry 84, List I of Seventh Schedule to the
Constitution, taxable event in respect of excise is
B
. manufacture or production. Since excise is a duty on c
. manufacture, duty is payable whether the goods are sold
or not. Therefore, sale is not necessary. condition for
charging excise duty. Marketability is an essential criteria
· for charging duty. The test of marketability is that the
· product w~ich is m~de liable to duty must be marketable 0
in the condition in which it emerges. The word
'marketable' means saleable or suitable for sale. It need
not in fact be marketed. The article should be capable of
being sold. to consumers, as it is without anything more.
The essence of marketability of goods is neither in the
E
form nor. in the shape or condition in which the
manufactured article is found. It is the commercial identity
of the article known to the market for being bought and
sold. The fact that the product in question is generally not
being bought or sold or has no demand In the market,
would be irrelevant [Paras 7, si-[753-A-C; 754-C-E]
F
.
.
' Sh.inde Brothers v. Deputy Commissioner AIR 1967 SC
1512; CCE v. Acer lnc/ja Ltd. 2004 AIR SCW 5496; Indian
Cable Co. Ltd, v: GCE 1994(74). ELT 22(SC) - relied on.
Ram Krishna Ramanath Agarwal v. Secretary, Municipal G
Commissioner, Kamptee 1950 SCR 15; Province of Madras
v .. Boddu Paidanna and Sons (1942) FCR.90 - referred to.
2.1. The main object or real purpose of the. Drugs and
Cosmetics Act,· 1940 and Rules m~de t~ereunder; Is to
H
744
SUPREME COURT REPORTS
[2011] 1 S.C.R. .
A regulate the manufacture of drugs in order to maintain the
standard or quality of drugs for sale and distribution as
a drug. Therefore, any requirement or condition imposed
by the Drugs Act and Rules made thereunder, is in
furtherance of its object of regulating and maintaining the
8 quality of Drugs. The primary object of the Central Excise
Act, 1944 is to raise revenue by imposing duty on goods
that are manufactured. The scope of the Excise Act
extends to the event of manufacture of goods, for the levy
of excise duty. These two Statutes and the Rules made
C thereunder, operate in entirely two different fields having
different objects, purposes and schemes. The conditions
or restrictions contemplated by one statute should not be
lightly and mechanically imported and applied to fiscal
statue for non levy of excise duty, thereby causing a loss
of revenue. Therefore, the prohibition on the sale of
D Physician Samples intended for distribution to medical
practitioners as free samples by Rule 65 (18) of the Drugs
Rules shall have no bearing or effect upon the levy of
excise duty under the Act, since excise is a duty on
manufacture, duty is payable whether or not goods are
E sold. Excise duty is payable even in case of free supply,
since sale is not a necessary condition for charging duty
under the Act. The Revenue is only concerned with the
manufacture of the goods and the possibility of
marketability of the goods. When the product is
F manufactured by a Pharmaceutical Company, it is for the -
purpose of sale i.e;, every such product including
Physician Sample is capable of being sold in the open
market, but the pharmaceutical company makes the
choice to distribute the same as a free sample. In other
G words, it is not mandatory for the pharmaceutical
company to distribute free physician samples of every
drug tlley manufacture. This choice mad• by the
-pharmaceutical companies in terms of Rule 96 (1) (Ix) of
the Drugs Rules by overprinting words 'Physician's
H sample-Not to be sold' on the label of the drugs will not
---+
MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
7 45
CENTRAL EXCISE AND CUSTOMS, DAMAN
come in the way of the Revenue from levying excise duty A
on the drugs so manufactured. [Paras 23-27] [760-E-F;
761-A-D-G-H; 762-A-C]
Union of India v. Delhi Cloth and General Mills AIR 1968
SC 922; Union Carbide India Ltd. v. Union of India (1986) 2
8
SCC 547; Bhor Industries Ltd. ·V. Collector of Centra/Excise,
Bombay (1989) 1 SCC 602; Hindustan Polymers v. CCE
(1989) 4 SCC 323; A.P. State Electricity Board v. CC£,
Hyderabad, (1994) 2 SCC 428; Indian Cable Company Ltd.,,
Calcutta v. Collector of Central Excise and Others (1994) 6
SCC 610; Triveni Engineering & Industries Ltd. v: CC£,
C
(2000) 7 SCC 29; Union of India v. Sonic Electrochem (P) .
Ltd., (2002) 7 SCC 435; ITC Ltd. v. Collector of Central
Excise, Patna, (2003) 1 SCC 678; Cadila Laboratories (P) Ltd
v. CC£, Vadodara, (2003) 4 SCC 12; Hindustan Zinc Ltd. v.
· CCE, (2005) 2 SCC 662; Dharampal Satyapal v. CC£,
D
(2005) 4 SCC 337; Gujarat Narmada Vallef Fertilizer Co. Ltd.
v. Collector of Excise and Customs (2005) 7 SCC 94;
Moriroku UT India (P) Ltd. v. State of Uttar Pradesh and Ors.
(2008) 4 SCC 548; State of Bihar v. Shree Baidyanath
Ayurved Bhawan (P) Ltd. (2005) 2 SCC 762; Kedia
E
Agglomerated Marbles Ltd. v. CC£, (2003) 2 SCC 494; CC£
v. Shree Baidyanath Ayurved Bhavan Ltd., (2009) 12 SCC
419 - relied on.
2.2. Although it is correct to say that the manufacture
F
of patent and proprietary drugs is complete only after the
labelling is completed, for the purpose of levy of excise
duty, however, a perusal of the labelling provisions in the
Drug Rules shows that they deaf with the name of drug,
contents of the drug. name and address of manufacturer,
a distinctive batch number (details of manufacture of drug . G
· is recorded and available for inspection as a particular
batch), preparation of drug, date of manufacture and date
·of expiry of drug, its storage conditions, etc., which ar~.
in aid of the object of the Act, v1z. promoting the use ()J ,
goo.d .quality drugs, and e.nsuring th~t drugs that do ndt H ·
- -
.
' .
.
.
.
.
746
SUPREME COURT REPORTS
[2011] 1 S.C.R.
A live upto quaUty do not find their way into the market.
Rule 96(1 ){ix) of the Drug Rules states that while
complying ·r!ith the labelling provisions under clauses (i)
i:o (viii) of Rule 96 (1 ), the manufacturer must further
overprint on the label 'Physician's Sample-Not to be Sold',
B in case they are to be distributed free of cost as
physicians samples. Further, the bare perusal of Rule 96
shows that its heading bears 'Manner of Labelling• and
clause 1 of this Rule contemplates or govern the manner
of labelling in a way that the particulars on the label of
c the container of a drug shall be either printed or written
in indelible ink and shall appear in conspicuous manner.
This gives ample clarification that the process of labelling
is distinct or different from the overprinting on the label
of a physician's sample, and, therefore, it is incorrect to
0 state that the manufacture for the purpose of the Central
Excise Tariff Act Is not completed until 'Physicians
Sample - Not to be Sold' is printed on the label. [Para 28]
[762-E-H; 763-A-C}
2.3. The primary reason of distributing free_physician
E samples by the manufacturer of pharmaceutical drugs
.appears to be only for the purpose of advertising of the
product anct' thereby enhancing the sale of the product
In the open market. It was shown by research that the
market of a pharmaceutical company Is enhanced
F substantially by the distribution of free physician
samples. In other words, the distribution of such
physician samples serves as a marketing tool In the
hands of the pharmaceutical companies [Para 29) [763D-El
G
Characteristics of RecifJients of Free Prescription Drug
Samples: A Nationally ReW;~sentative Analysis, 98 Am. J.
Pub. Health 284 (2008) - referred to.
3. This Court has consistently held that the medical
H supplies supplied to the Doctors are liable to excise duty.
~-'
MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
7 4 7
CENTRAL EXCISE AND CUSTOMS, DAMAN
This Court, in catena of cases, has opined that in case,
A
_,j..
the appeal has been dismissed in the absence of detailed
reasons or without reasons, such order will entail the
application of the doctrine of merger, wherein the ·
superior court upholds the decision of the lower court
from which the appeal has arisen. It is settled law that this
B
Court should follow an earlier decision that has
withstood the changes in time, irrespective of the
•
~
rationale of the view taken. [Paras 32, 34) (764-G-H; 765·
_ A-B; 766-E-F]
Rarlbaxy Laboratories Ltd. v. Commissioner of Central C
Excise, Pune, (2003) 9 SCC 199; Bharat Heavy Electricals
Ltd. v. Commissioner of Customs & Central Excise (2003) 9
SCC 185; V.M. Sa/gaocar & Bros.(P) Ltd. v. C./. T., (2000) 5
SCC 373; Kunhayammed v. State of Kera/a (2000) 6 SCC;
Waman Rao v. Union of India, (1981) 2 SCC 362 -
rel~ed D
on.
4. The physician's samples have to be valued on prorata -basis. Cl)F- 41] [769-D]
E
Commissioner of Central Excise, Calicut vs. Trinity
Pharmaceuticals Pvt. Ltd., reported as 2005 (188) ELT 48 -
relied -on.
"···
Delhi Cloth' and General Mills v. Joint Secretary 1978(2)
ELT (J121); Amar Lal v. CCE, (2004) 172 ELT 466; Pfizer v. · F
Commissioner of Central Excise 2002 (146) ELT; Hindustan
Petroleum Corporation Ltd. v. CCE (2907) 210 ELT 407
(CESTAT; Himalaya Drug Company v. C.C.E. (2005) 187
, ELT 427 - held Inapplicable.
Case Law Reference: .
AiR 1967 SC 1512
·AIR sew 5496
1950 SCR 15
relled on
relied on
referred to
Para 7
Para 7
Para 7
G
H
748
SUPREME COURT REPORTS
(2011) 1 S.C.R.
A
(1942) FCR 90
referred to
Para 7
1994(74) ELT 22(SC)
relied on
Para 8
4-...
AIR 1968 SC 922
relied on
· Para 9
B
(1986) 2 sec 547
relied on
Para 10
(1989) 1 sec 602
relied on
Para 11
(1989) 4 sec 323
relied on
Para 12
~ .
(1994) 2 sec 428
relied on
Para 13
c
(1994) 6 sec 610
relied on
Para 14
c2000) 1 sec 29
relied on
Para 15
'
c2002) 1 sec 435
relied on
Para 16
D
(2003) 1 sec 678
relied on
Para 17
c2003) 4 sec 12
relied on
Para 18
(2005) 2 sec 662
relied on
Para 19
E
(2005) 4 sec 337
relied on
Para 20
(2005) 1 sec 94
relied on
Para 21
(2008) 4 sec 548
relied on
Para 22
~'
F
c2005) 2 sec 762
relied on
Para 23
c2003) 2 sec 494
relied on
Para 25
(2009) 12 sec 419
relied on
Para 25
(2003) 9 sec 199
relied on
Para 30
G
. .,,...
(2003) 9 sec 185
relied on
Para 31
A-
(2000) 5 sec 373
relied on
Para 32
(2000) 6 sec 359
relied on
Para 33
H
(1981) 2 sec 362
relied on
Para 34
~ -{
-.,.
MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
749
CENTRAL EXCISE AND CUSTOMS, DAMAN
2005 (188) ,ELT 48
relied on
Para 41
A
1978(2) ELT (J121)
· held inapplicable
Para 35
(2004) 172 ELT 466
held inapplicable
Para 36
2002 (146) ELT 477
held inapplicable
Para 37
B
(2007) 210 ELT 407
held inapplicable
Para 38
(2005) 187 ELT 427
held inapplicable
Para 39
CIVIL APPELLATE JURISDICTION: Civil Appeal No.3626 c
of 2005.
From the Judgment & Order dated 03.12;2004 of the
Customs, Excise and Service Tax Appellate Tribunal, West
Zonal Bench, Mumbai in Appeal Nos.,E/549/03.
WITH
D
C.A. No. 1354-1355 of 2010.
S. Ganesh, Pratap Venugopal, Manoj Sanklecha, Surekha
Raman, Ramdas Gadiyar, Ananjay Singh; Namrata Sood (for
E
K.J. John & Co.) for the Appellant.
·, _.,.
R.P. Bhatt, Sunita Rani Singh, Rekha Pandey, B. Krishna ·
Prasad for the Respondent.
T~e Judgment of the Court was delivered by
'"
H.L. DATTU, J. 1. A group of three appeals is filed by the
appellant- Medley Pharmaceuticals Ltd., under Section 35 L.
(b) of the Central Excise Act, 1944 (hereinafter referred to as
F
'the Act'). In Civil Appeal No.3626 of 2005, the appellant calls
G
in question the correctness or otherwise of the order passed
by Customs Excise and Service Tax Appellate Tribunal
(CESTAT) (in short, "The Tribunal") in Appeal No. E/549 to E
551/2003-Mum, dated 3.12.2004. By theimpugned order, the.
Tribunal has confirmed the order passed by Commissioner of
H
750
SUPREME COURT REPORTS
[2011] 1 S.C.R.
A Customs and Central Excise, Valsad dated 30.12,2002. In this
appeal, the appellant has raised the following question of law
for our consideration and decision:-
· "Whether Physician samples manufactured and distributed
B as free samples have to be assessed on the basis of cost of
manufacture plus normal profits, if any, earned on the sale under
Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 (for
short, "Rules 1975") upto 1st July, 2000 and thereafter, on
>..
application of Rule 8 of Central Excise Valuation Rules, 2000
'
c (for short, "Rules 2000") i.e. on cost of manufacture plus 15%
profit basis and not on pro-rata basis as has been done by the
Revenue?"
2. The Commissioner, while passing the order in Original
No. 01/MPNalsad/2002 dated 30.12.2002, has held that the
D value should be determined under Rule 4 of Rules 1975. In the
appeal filed by the appellant, the Tribunal, following the judgment.
in the case of Mayo India Ltd. and Cheryl Laboratories (P) Ltd.,
held that the value of Physician samples should be determined
in accordance with the principle laid down in Rule 6(b)(i) read
E with Rule 7 of the Rules 2000. After coming to the aforesaid
conclusion, the Tribunal has accepted the method of
assessable value adopted by the Commissioner, though it was
under Rule 4 of the Rules 1975.
~,
F
3. Ip Civil Appeal Nos. 1354-1355 of 2010, the appellant
is aggrieved by the final order passed by the Tribunal, bearing
No.A/490/WZB /AHDl2009 dated 27th February, 2009 and the
order No.Hf853/WZB/AHD/2009 dated 4th August, 2009
passed on the rectification application in Appeal No. E/384/
G
2005. By the impugned order, the Tribunal dismissed the
..._
appellant's appeal and upheld the order passed by the
_J._ '
Commissioner of Central Excise (Appeals) dated 24th
November, 20.P4 holding that for the purpose of payment of
Excise duty, Physician samples have to be valued for the
period post 1st July, 2000 upto December, 2001 on pro-rata
H basis on the value of trade packs under Rule 4 read with Rule
MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
151
CENTRAL EXCISE AND CUSTOMS, DAMAN [H.LDATTU, J.]
11 of the Central Excise Valuation (Determination .of Price of A
Excisable Goods) Rules 2000. The Tribunal, while rejecting the
application filed for rectification of the order dated 27th
February, 2009, held. that merely because a product is
statutorily prohibited from being sold, would not mean that the
prod1,Jct is not capable of being sold. In this appeal, the
B
appellant has raised the following questions of law for our.
consideration and decision. They are:-
(A}
Whether "Physician Samples" are excisable goods
in view of the fact that they are statutorily prohibited
C
from being sold under the Drugs and Cosmetics
Act, 1940 (in short, "Drugs Act") and the Rules
made thereunder?
(B)
If physician's samples are held to be excisable,
then what is the appropriate method of valuing
D
physician samples for the purpose of excise duty?
4. Shri $. Ganesh, learned senior counsel for the appellant,
submitted that the Physician Samples of Patent and proprietary
medicines come into existence as a manufactured product only
E
when the same are labeled and packed for the purpose of sale
and distribution. Our attention is invited to Note 5 of Chapter
-~ _..,.,.
30 of Central Excise Tariff Act, 1985, wherein it is provided that
packing and labeling would amount to manufacture. Therefore,
it is contended that the Physician Samples of Patent and
proprietary Medicines become manufactured goods only when
F
the same are packed and labeled. It is further contended that
the physician samples of patent and proprietory medicines, at
the time they are manufactured, are statutorily prohibited from
-.1·
being sold by virtue of Section 18 of the Drugs Act read with ·
• _J__
Rule 65( 18) of the Drug Rules and the breach of the Drug Rules
G
invites prosecution under Section 27(d) of the Drugs Act, and
also invites penalty under Section 27(c) of the Drugs Act. It is
further submitted that the two conditions that require to be
satisfied for levy of excise duty are existence of manufacturing
process and as a result of such process, goods are produced
H
-, .
752
SUPRE:ME COURT REPORTS
[2011] 1 S.C.R.
A which are capable, in the ordinary course, of being taken to the
market for being bought and sold .. lt is further submitted that the
word 'excisable goods' has been construed to mean not only
goods specified in the Schedule to the Central Excise Tariff Act,
1985, but also goods which are capable of being sold i.e.
B marketable. In the present case, the 'Physician Samples' are
statutorily prohibited from being sold and therefore, do not
satisfy the twin test required to make physician samples
excisable goods.
}.
1
5. Shri R. P. Bhatt, learned senior counsel for the Revenue,
C justifies the reasoning and conclusion reached by the Tribunal.
6. In pith and substance, the submission of learned senior
counsel Shri Ganesh is that the physician samples of patent
and proprietary medicines are statutorily prohibited from being
D sold by virtue of Rule 65(18) and Rule 95 and Rule 96 (1) (ix)
of the Drugs Rules. It is contended that every drug intended for
distribution as physicians sample while complying with the
labeling provisions under Drugs and Cosmetic Rules further
bear on the label of the container the words "Physician's
e Sample- Not to be Sole!' requires to be over printed and further,
the sale of such Physician samples is expressly prohibited
under Rule 65 (18) of the Drug Rules. He contends that patent
and proprietory drugs are excisable only after the labeling is
_... -'
complete. Since these physician samples cannot be sold in the
F market after the completion of the labeling in view of the
statutory prohibition, the physician samples are not marketable
and hence, no excise duty is leviable on their manufacture.
7. The Central Excise Act, apart from others, provides for
charging of duty, valuation etc. Section 3 of the Act is the
G charging provision. It states, there shall be levied and collected
in such a manner as may be prescribed duties on excisable
goods which are produced or manufactured in India. Basic
excise duty and special excise duty are levied under the
charging provision at the rates specified in First and Second
· H Schedule to Central Excise Tariff Act, 1985. The duty is on
MEDLEY PHARMACEUTICALS·L TD. v. COMMNR. OF
753
CENTRAL EXCISE AND CUSTOMS, DAMAN [H.L DATIU, J.)
excisable goods which are manufactured or produced in India.
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This Court in Shinde Brothers vs. Deputy Commissioner, AIR
. 1967 SC 1512 has held that excise duty is imposed on goods,
and the taxable event for the levy is manufacture or production
·of the goods. A duty of excise is a tax upon the goods and not
upon sales or proceeds of sale of goods. In terms of Entry 84, .8
List I of Seventh Schedule to the Constitution, taxable event in
respect of excise is manufacture or production {See CCE vs.
_..(
Acer India Ltd., 2004 AIR SCW 5496): The levy is on the
manufacture or production of goods. The collection is shifted
to stage of removal. Since excise is a duty on manufacture, duty c
is payable whether or not goods are sold. Therefore, sale is
not necessary condition for charging excise duty. This Court in
. the case of Ram Krishna Ramanath Agarwal Vs. Secretary,
Municipal Commissioner, Kamptee 1950 SCR 15, has
referred to the distinction made by the Federal Court between
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the duty of excise and a tax on sale in Province of Madras vs.
Boddu Paidanna and Sons (1942) FCR 90, wherein it is
observed:
· " Plainly, a tax levied on the first sale must, in the nature
_ - of things, be a tax on the sale by the manufacturer or E
producer; but it is levied upon him qua seller and not qua
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manufacturer or producer. It may well be that a
manufacturer or producer is sometimes doubly hit, .. If the
taxpayer who pays sales tax is also a manufacturer or
producer of commodities subject to a central duty of F
excise, there may no doubt be overlapping in one sense,
but there is no overlapping in law. The two taxes which
he is called on to pay are economically two separate and
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distinct imposts. There is, in theofY., nothing to g,revent
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the Central Legislature from img,osing a dutv of excise G
on a commodi(X as soon as it comes into existence no
matter what haQ.Q.ens to it afterwards, whether it be sold
consumed, destro'[.ed, or given awa'[.... It is the fact of
manufacture which attracts the dut'{, even though it ma'[. -
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be collected later. In the case of a sales tax, the liability
to tax arises on the occasion of a sale and a sale has
no necessary connection with manufacture or production."
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8. The consistent view of this Court is that for the purpose
of levy of excise duty, an article must satisfy two requirements
to be 'Goods' i.e. (a) it must be movable and (b) it must be
marketable. In these appeals, we are primarily concerned
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whether the 'Goods' namely Physician samples of patent and
c proprietory medicines intended for distribution to the medical
practitioner as free samples, satisfies the test of 'Marketability'.
Marketability is an essential criteria for charging duty. The test
of marketability is that the product which is made liable to duty
must be marketable in the condition in which it emerges. The
word 'Marketable' means saleable or suitable for sale. It need
D not in fact be marteted. The article should be capable of being
sold to consumers, as it is without anything more. The essence
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of marketability of goods is neither in the form nor in the shape
or condition in which the manufactured article is found. It is the
commercial identity of the article known to the market for being
E bought and sold. The fact that the product in question is
generally not being bought or sold or has no demand in the
market, would be irrelevant. [See Indian Cable Co. Ltd. vs.
CCE, 1994(74) ELT 22(SC)]. We will now refer to some of the
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decisions of this Court, which have explained the concept of
F 'Marketability' for the purpose of the Act.
9. The Constitution Bench of this Court, in the case of
Union of India. vs. Delhi Cloth and General Mills, AIR 1968
SC 922, after referring to definition of 'excisable goods', stated:
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"These definitions makes it clear that to become goods
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an article must be something which can ordinarily come
to the market to be bought or sold".
10. A three Judge Bench of this Court in the case of Union
H Carbide India Ltd. v. Union of India, (1986) 2 SCC 547 has
MEDLEY PHARMACEUTICALS LTD. v. COfy'IMNR. OF
755
CENTRAL EXCISE AND CUSTOMS, DAMAN [H.L DATTU, J.]
discussed the concept of 'marketability' in order for the Revenue
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to impose excise duty as under:
"6. It does seem to us that in order to attract excise ·duty
the article manufactured must be capable of sale to a
consumer. Entry 84 of List I of Schedule VII to the
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Constitution specifically speaks of "duties of excise on
tobacco and other goods manufactured or produced in
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India ... :: and it is now well accepted that excise duty is
an indirect tax, in which the burden of the imposition is ·
passed on to the ultimate consumer. In that context, the c
expression "goods manufactured or produced" must refer
to articles which are capable of being sold to a consumer.
In Union of India v. Delhi Cloth & General Mills, AIR
1963 SC 791, this Court considered the meaning of the
expression "goods" for the purposes of the Central
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Excises and Salt Act, 1944 and observed that "to become
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'goods' an article must be something which can ordinarily
come to the market to be brought and sold~ a definition
which was reiterated by this Court in South Bihar Sugar
Mills Ltd. v. Uriion of India, AIR 1968 SC 922".
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11. In Bhor Industries Ltd. v,s. Collector of Central Excise,
Bombay, (1989) 1 SCC 602, it/was held:
-.......
"Excise is a duty on goods as specified in the Schedule.
The taxable event in the case of excise duties is the
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manufacture of goods. Under the Central Excise Act, as it
stood at the relevant time, in order to be goods as
specified in the entry, it was essential that as a result
manufacture goods must come into existence. For articles
to be goods these must be known in the market as such
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or these must be capable of being sold in the market as
goods. Actual sale in the marke.t is not necessary, user in
· the captive consumption is not determinative but the
articles must be capable of being sold in the marketor
known in the market as pds. It is, therefore, necessary
to find out whether there are goods, that is to say, articles
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as known in the market as separate distinct identifiable
commodities and whether the tariff duty levied would be
as specified in the Schedule. Simply because a certain
article falls within the Schedule it would not be dutiable
under excise law if the said article is not ·goods' known
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to the market. Marketability, therefore, is an essential
ingredient in order to be dutiable under the Schedule to
Central Excise Tariff Act, 1985."
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12. ln Hindustan Polymers v. CCE (1989) 4 SCC 323,
this Court observed:
"11. Excise duty is a duty on the act of manufacture.
Manufacture under the excise law, is the process or
activity which brings into being articles which are known
in the market as goods and to be goods these must be -
different, identifiable and distinct articles known to the
market as such. It is then and then only that manufacture
takes place attracting duty. In order to be goods, it was
essential that as a result of the activity, goods must come
into existence. For articles to be goods, these must be
known in the market as such and these must be capable
of being sold or are being sold in the market as such. In
order, therefore, to be manufacture, there must be activity
which brings transformation to the article in such a
manner that different and distinct article comes into being
which is known as such in the market."
13. In A.P. State Electricity Board vs. CCE, Hyderabad,
(1994) 2 SCC 428, this Court stated:
"Marketability is an essential ingredient in order to be
dutiable under the Schedule to the Act.. ..... The
·marketability' is thus essentially a question of fact to be
decided in the facts of each case. There can be no
generalization. The fact that the goods are not in fact
marketed is of no relevance. So long as the goods were
maf\etable, they are goods for the purposes of Section
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MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
757
CENTRAL: EXCISE AND CUSTOMS, DAMAN [H.L. DATTU, J.]
3. It is not also necessary that the goods in question
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should be generally available in the market. Even if the
goods are available from only one source or from a
specified market, it makes no difference so long as they
are available for purchasers ..... The marketability of articles
does not depend upon the number of purchasers nor is the
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market confined to the territorial limits of this country."
14. In Indian Cable Company Ltd . ., Calcutta vs. Collector
of Central Excise and Others, (1994) 6 SCC 610, this Court
has stated:
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"Marketability is a decisive test for dutiability. It only means
'saleable' or "suitable for sale". It need not be in fact
'marketed'. The article should be capable of being sold
or being sold, to consumers in the market, asit is --·
without anything more.·
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15. In Triveni Engineering & Industries Ltd. v. CCE,
. (2000) 7 SCC 29, this Court, while demonstrating the attributes
' of excisable goods un~er the excise law, has observed that:
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"13 .... The article in question should be capable of being
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brought and sold in the market -
a test which is too well
established by a series of decisions of this Court to be
elaborated here."
16. In Union of India v: Sonic Electrochem (P) Ltd., (2002) · F
7 sec 435, this court has held:
"9 .... It is difficult to lay down a precise test to determine
marketability of articles. Marketability of goods has certain
attributes. The essence of marketability is neither h the G
form nor in the shape or condition in which the
manufactured articles are to be found, it is the commercial
identity of the articles known to the market for being bought
and sold. The fact that the product in question is generally
not being bought and sold or has no demand in the market 'H
would be irrelevant."
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17. In the case of ITC Ltd. v. Collector of Central Excise,
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Patna, (2003) 1 SCC 678, this Court while applying the test of
marketability for the purpose of levy of excise duty on the
manufacture of the cigarette, has observed:
"17. From a conspectus of the aforesaid decisions, it
would be clear that for the purposes of levy of excise duty,
the test to be applied is whether the goods manufactured
are marketable or not. In the present case, the cigarette,
which is the end product of tobacco, is fit for consumption
before the same is removed for test. Packing of the
cigarettes cannot be said to be incidental ·or ancillary to
the manufacturing process, but the same may be incidental
or ancillary to its sale only. In case it is laid down that
i)acking of cigarettes is incidental or ancillary to the
completjon of manufactured products, the same may result
in evasion of excise duty as before packing the cigarettes
the same may be regularly supplied to each and every
employee for his consumption without payment of excise
duty thereon. The definition of "manufacture" under Section
2(f) very clearly includes process which is incidental or
ancillary to the completion of manufac.tu·red product.
Manufacture of cigarette is .completed when the . same
emerges in the form of-sticks of cigarettes which are sent
to the laboratory for quality control test. Sticks of cigarettes
can be consumed and manufacture of the end product i.e.
cigarette, which is commercially known in the market as
such,-is completed before its removal for test and after
testing only packing of the same, which is the requirement
of Rule 93 of the Rules, is done. Thus, we hold that sticks
of cigarettes which are removed for the purpose of test in
the quality control laboratory located within the factory
premises of the appellant Company are liable to exci_se
duty."
18. In the case of Cadila Laboratories (P) Ltd v. CCE,
H Vadodara, (2003) 4 SCC 12, this Court has held:
MEDLEY PHARMACEUTICALS LTD. v. COMMNR OF
759
CENTRAL EXCISE AND CUSTOMS, DAMAN [H.L DATTU, J.]
"9. Thus the law is that in order to be excisable, not only
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goods must be manufactured i.e. some new product
brought into existence, but the goods must be marketable.
By marketable it does not mean that the goods must be
actually bought and sold in the market. But the goods must
be capable of being bought or sold in the market. The law
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also is that goods which are in the crude or unstable form
and which require a further processing before they can be
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marketed, cannot be considered to be marketable goods
merely because they fall within the Schedule to the Excise
Act".
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19. In Hindustan Zinc Ltd. v. CCE, (2005) 2 SCC 662,
this Court observed:
"5. Excise duty is levied under Section 3 on goods
manufactured or produced in India. Thus, before excise
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duty is levied on an item, even if it is mentioned in the tariff,
two conditions have to be cumulatively satisfied, namely,
that the process by which an item is obtained is a process
of manufacture and that the item so obtained is
commercially marketable and bought and sold in the
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market or known to be so in the market.•
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20. In Dharampa/ Satyapa/ v. CCE, (2005) 4 SCC 337,
it was held by this Court:
"18 .... Marketability is an attribute of manufacture. It is an
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essential criteria for charging duty. Identity of the product
and marketability are the twin aspects to decide
chargeability. Dutiability of the product depends on whether
the product is known to the market. The test of marketability
is that the product which is made liable to duty must be
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marketable in the condition in which it emerges.
Marketable means saleable. The test of classification is,
how are the goods known in the market. These tests have
been laid down by this Court in a number of judgments
including Moti Laminates (P) Ltd. v. CCE (1995) 3 SCC
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23, Union of India v. Delhi Cloth & General Mills Co. Ltd.
(1997) 5 SCC 767 and Cadila Laboratories (P) Ltd. v.
ccE-c2003) 4 sec 12·
21. In Gujarat Narmada Valley Fertilizer Co. Ltd. vs.
8 Collector of Excise and Customs, (2005) 7 sec 94, it was
held that unless the product is capable of being marketed and
is known to those who are in the market, as having an identity
as a distinct and identifiable commodity, that the article is
subject to excise duty. Simply because certain articles fall within
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the Schedule does not make them marketable. Actual sale in
C market is not necessary, but the articles must be capable of
being sold in the market or known in the market as goods. .
22. In Moriroku UT India (P) Ltd. vs. State of Uttar
Pradesh and Ors., (2008) 4 sec 548, it was observed that
D excise duty is a levy on a taxable event of 'manufacture'. Liability
under excise law is event based on manufacture and
irrespective of whether the goods are sold or captively
consumed. Excise duty is not concerned with ownership or sale.
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23. Having said so in so far as exciseability of Goods for
the purpose of duty under the Act, we may notice the purpose
and object of Drugs Act. In our opinion, the main object or real
purpose of the Drugs Act, 1940 and Rules made thereunder,
is to regulate the manufacture of drugs in order to maintain the
F standard or quality of drugs for sale and distribution as a drug.
This Court in State of Bihar v. Shree Baidyanath Ayurved
. Bhawan (P) Ltd., (2~05) 2 SCC 762, has held:
"14. . . . The object of the Drugs Act is to maintain the
quality of drugs as drugs. Its use as any other commodity
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in the hands of the consumer is not regulated . .Hence, the
Drugs Act is relatable to Entry 19 of List Ill, which deals
with drugs and poisons, subject to Entry 59 of List l
regarding opium. Lastly, the said Act regulates the
manufacture of drug for sale and distribution as a drug."
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MEDLEY PHARMACEUTICALS LTD. v. COMMNR. OF
761
CENTRAL EXCISE AND CUSTOMS, DAMAN [H.L. DATTU, J.]
24. Therefore, any requirement or condition imposed by
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the Drugs Act and Rules made thereunder, is in furtherance of
its above stated object of regulating and maintaining the quality
of Drugs.
25. The primary object of the Act is to raise revenue by
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imposing duty on goods that are manufactured as mentioned
~bove (see Kedia Agglomerated Marbles Ltd. v. CCE, (2003)
2 sec 494). In other words, the scope of the Act extends to
-{ the event of manufacture of goods, for the levy of excise duty.
These two Statutes and the Rules made thereunder, operate c
in entirely two different fields having different objects, purposes
. and schemes. The conditions or restrictions contemplated by
one statute should not be lightly and mechanically imported and
· applied to fiscal statue for non levy of excise duty, thereby
· causing a loss of revenue. This Court in CCE v. Shree
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Baidyanath Ayurved Bhavan Ltd., (2009) 12 SCC 419 has
~· held:
"55. True it is that Section 3(a) of the Drugs and
Cosmetics Act, 1940 defines "Ayurvedic, siddha or unani
drug" but that definition is not necessary to be imported in
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the new Tariff Act. The definition of one statute having
different object, purpose and scheme cannot be applied
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mechanically to another statute. As stated above, the
object of the Excise Act is to raise revenue for which
various products are differently classified in the newTariff
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Act."
26. Therefore, the prohibition on the sale of Physician
Samples intended for distribution to medical practitioners as
free samples by Rule 65 (18) of the Drugs Rules shall have no
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bearing or effect upon the levy of excise duty under the Act,
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since excise is a duty on manufacture, duty is payable whether
or not goods are sold. Excise duty is payable even in case of
; free supply, since sale is not a necessary condition for charging
. duty under the Act.
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27. Even assuming that Shri. Ganesh is correct, when he
contends that physician samples are not allowed to be sold in
the open market in view of the statutory prohibition on their sale,
and hence are not marketable; the Revenue is only concerned
with the manufacture of the goods and the possibility of
B marketability of the goods.