# SARABHAI M. CHEMICALS v. COMMISSIONER OF CENTRAL EXCISE, V ADO DARA

- **Citation:** [2004] Supp. 6 S.C.R. 1010
- **Court:** Supreme Court of India
- **Decided:** 2004-12-16
- **Case number:** Civil Appeal Nos. 2736-2738 of 1999
- **Bench:** S.N. Varia Va, Dr. Ar. Lakshmanan, S.H. Kapadia
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/sarabhai-m-chemicals-v-commissioner-of-central-excise-v-ado-dara-20262
- **Pages:** 21

## Headnote

Central Excise Act, 1944-Section 11A(J)-Central Excise Rules,
1944-Rule 9(2)-Excise Duty-Exemption from-Of bulk drug-By NotiC fication-Product certified ds bulk drug by Drugs Controller-Exemption
granted-Classification List and monthly returns filed by manufacturer
approved by the Revenue-Demand of Duty by Revenue at belated stage
denying exemption on the ground that certain amount of the goods were
sold to the non-pharma concerns-Appeal to Tribunal-Difference of
D opinion on the point to /imitation between Judicial Member and Technical
Member-Matter referred to Third Member-Matter dismissed on the point
of limitation as well as merit-On appeal, held : Third Member rightly
decided the question of limitation as well as merit-Demand rightly raised
by Revenue as manufacturer last the benefit of exemption Notification
because certain quantity of the goods was admittedly diverted to nonE pharma concern-However the demand was time barred-No case was
made out for invoking proviso to Section 11A(J) for extended period of
limitation-Drugs (Price Control) Order, 1979-Section 2(a).
Appellant was manufacturer of bulk drugs. It used to manufacture
F Ascorbic Acid and Salts ofl.P. (Vitamin 'C') as well as sorbitol Solution
U.S.P. By a Notification, the bulk drugs ·as- d.eflned in the Notification
were exempted from levy of excise duty. Appellant claimed exemption
in respect of its products. It obtained certificates from Drugs Controller
in respect of the claim. In the Classification List exemption was sought
on the basis of the certificates. The Classification Lists were approved
G
by the Department. Appellant cleared the goods upon submission of the
gate passes wherein they had disclosed the names of the consignees.
Appellant also submitted its monthly returns on excisable goods manufactured by it in the prescribed RT.12 Forms, giving the particulal's of
the goods removed, gate passes under which the goods were removed
H etc.
1010
. ..,
' ......
SARABHAI M. CHEMICALS v. C.C.E., VADODARA
1011
Three show-cause notices were issued to the appellants after a A
period of one year on the ground that appellant had wrongly availed
nil rate of duty in respect of its clearances by not bringing to the notice
of the department the fact that certain qualities of sorbitol solution and
Vitamin 'C' had been sold to non-pharma concerns. Knowing fully well
that the commodities would not be normally used as drugs or medicines B
by its customers and demanded excise duty u/s. llA(l) of Central Excise
Act, 1944. The demand was confirmed by the Department.
In appeal before Custom, Excise, Gold (Control) Appellate Tribunal, Judicial Member was of the view that as the show cause notices were
time barred and no case was rriade out for invoking extended period of C
limitation and hence set aside the show cause notices. Technical Member
disagreed with the Judicial Member. In view of difference of opinion,
the matter was referred to the Third Member to decide whether the
demand was time barred. He agreed with the Technical Member and
accordingly dismissed the appeals.
In appeal to this Court appellant contended that the Third Member
after concurring with the Technical Member on the question of limitation should have referred the matter back to Division Bench to decide
on merits, and dismissal of appeal without going into the merits was
erroneous; that since the Drugs Controller had issued the certificate in
favour of the appellant certifying the product as a bulk drug, its product
met the requirement laid down in the exemption Notification and no
further requirement remained to be complied with; that the word !Normally' used in the Notification means "under normal circumstances"
D
E
and the same would rule out individual end use of the product; that the p
Notification did not require production of end use certificate by the
assessee and in absence of such provision Department was not entitled
to insist on production of end use certificate; that it was not open to the

## Text

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A
B
SARABHAI M. CHEMICALS
V.
COMMISSIONER OF CENTRAL EXCISE, V ADO DARA
DECEMBER 16, 2004
(S.N. VARIA VA, DR. AR. LAKSHMANAN
AND S.H. KAPADIA, JJ.]
Central Excise Act, 1944-Section 11A(J)-Central Excise Rules,
1944-Rule 9(2)-Excise Duty-Exemption from-Of bulk drug-By NotiC fication-Product certified ds bulk drug by Drugs Controller-Exemption
granted-Classification List and monthly returns filed by manufacturer
approved by the Revenue-Demand of Duty by Revenue at belated stage
denying exemption on the ground that certain amount of the goods were
sold to the non-pharma concerns-Appeal to Tribunal-Difference of
D opinion on the point to /imitation between Judicial Member and Technical
Member-Matter referred to Third Member-Matter dismissed on the point
of limitation as well as merit-On appeal, held : Third Member rightly
decided the question of limitation as well as merit-Demand rightly raised
by Revenue as manufacturer last the benefit of exemption Notification
because certain quantity of the goods was admittedly diverted to nonE pharma concern-However the demand was time barred-No case was
made out for invoking proviso to Section 11A(J) for extended period of
limitation-Drugs (Price Control) Order, 1979-Section 2(a).
Appellant was manufacturer of bulk drugs. It used to manufacture
F Ascorbic Acid and Salts ofl.P. (Vitamin 'C') as well as sorbitol Solution
U.S.P. By a Notification, the bulk drugs ·as- d.eflned in the Notification
were exempted from levy of excise duty. Appellant claimed exemption
in respect of its products. It obtained certificates from Drugs Controller
in respect of the claim. In the Classification List exemption was sought
on the basis of the certificates. The Classification Lists were approved
G
by the Department. Appellant cleared the goods upon submission of the
gate passes wherein they had disclosed the names of the consignees.
Appellant also submitted its monthly returns on excisable goods manufactured by it in the prescribed RT.12 Forms, giving the particulal's of
the goods removed, gate passes under which the goods were removed
H etc.
1010
. ..,
' ......
SARABHAI M. CHEMICALS v. C.C.E., VADODARA
1011
Three show-cause notices were issued to the appellants after a A
period of one year on the ground that appellant had wrongly availed
nil rate of duty in respect of its clearances by not bringing to the notice
of the department the fact that certain qualities of sorbitol solution and
Vitamin 'C' had been sold to non-pharma concerns. Knowing fully well
that the commodities would not be normally used as drugs or medicines B
by its customers and demanded excise duty u/s. llA(l) of Central Excise
Act, 1944. The demand was confirmed by the Department.
In appeal before Custom, Excise, Gold (Control) Appellate Tribunal, Judicial Member was of the view that as the show cause notices were
time barred and no case was rriade out for invoking extended period of C
limitation and hence set aside the show cause notices. Technical Member
disagreed with the Judicial Member. In view of difference of opinion,
the matter was referred to the Third Member to decide whether the
demand was time barred. He agreed with the Technical Member and
accordingly dismissed the appeals.
In appeal to this Court appellant contended that the Third Member
after concurring with the Technical Member on the question of limitation should have referred the matter back to Division Bench to decide
on merits, and dismissal of appeal without going into the merits was
erroneous; that since the Drugs Controller had issued the certificate in
favour of the appellant certifying the product as a bulk drug, its product
met the requirement laid down in the exemption Notification and no
further requirement remained to be complied with; that the word !Normally' used in the Notification means "under normal circumstances"
D
E
and the same would rule out individual end use of the product; that the p
Notification did not require production of end use certificate by the
assessee and in absence of such provision Department was not entitled
to insist on production of end use certificate; that it was not open to the
Department to raise the dispute at belated stage by invoking Rule 9(2)
of Central Excise Rules; that the appellant had filed Classification List G
and monthly Returns in RT-12 Forms from time to time which were
duly approved and the goods were cleared after approval of the DepartRtent; and that the appellant bonafide believed that the goods were
covered by the exemption Notification.
Allowing the appeals, the Court
H
1012
SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.
A
HELD : 1. Appellants had conceded before the Tribunal of having
B
cleared 3.87% of the total clearances to non-pharmaceutical companies
who could not have used the said solution as drugs or medicines. Moreover, the department has not demanded the duty in respect of quantity
sold to pharmaceutical concerns for pharmaceuticals or medical purposes. In the circumstances, the Third Member was right in holding that
the appellant had failed to comply with the statutory requirement of the
exemption Notification. [1023-F-G; 1024-A]
2.1. The bulk drug is defined under Section 2(a) of the Drugs
(Prices Control) Order, 1979 to mean any substance including pharmaC ceutical, chemical biological or plant product which is used as such or
an ingredient in any formulation. A substance may have several uses
other than in drugs/pharmaceuticals. The eligibility for exemption under
the exemption Notification requires the substance (sorbitol solution) to
be actually used in manufacture of drugs/medicines/pharmaceuticals. A
D sorbitol solution could be called a drug for the purposes of exemption
only when it is actually used as drug or as an ingredient in any formulation. The Notification gave exemption to only those substances, which
are, in reality, drugs and not to the substances, which are not drugs even
though they are capable of acting as drugs. Therefore, the exeipption
E
was extendable to sorbitol solution, cleared by the appellant, wh'!° used
in the manufacture of drugs, medicines, pharmaceuticals. By dh.1erting
a specified quantity ofsorbitol solution etc., the appellant lost the ~nefit
of exemption and in the circumstances, the department was right in
raising the demand. [1025-G-H; 1026-A-B-C-D]
F
2.2. In the explanation to the Notification, there are two expressions, namely "normally used" and "used as such". Both these expressions have to be read injuxta positions. If so read, it becomes clear that
the expression "used as such" in the proviso qualifies the actual use and
not the capability of use. These words are by way of emphasis. They are
a condition to be actually satisfied before the exemption can be availed
G and granted. Consequently, every manufa.cturer of a bulk drug cannot
seek the benefit of exemption under the said Notification merely by
reason of "normal use" of the drug. The words "normal use" indicate
the possible use whereas the expression "used as such" indicates the
actual use. The certificates issued by the Drugs Controller shows that
, H they did not deal with uses other than "normal uses" of such bulk drugs.
......
SARABHAI M. CHEMICALS v. C.C.E., VADODARA
1013
In the circumstances, the Tribunal was right in holding that the benefit A
of the exemption was available only to those drugs which went into the
stream of diagnosis, treatment etc. and not to the use of any other profit
making activity. [1026-G-H; 1027-A]
3.1. Reopening of approvals/assessments is different from raising
of demand in relation to the extended period of limitation. Under Section llA(l) of the Central Excise Act, 1944, a proper officer can reopen
B
the approvals/assessments in cases of escapement of duty on account of
non-levy, non-payment, short-levy, short-payment or erroneous refund,
subject to it being done within one year from the relevant date. On the
other hand, the demand for duty in relation to extended period is C
mentioned in the proviso to Section 1 lA(l). Under that proviso, in cases
where excise duty has not been levied or paid or has been short-levied
or short-paid or erroneously refunded on account of fraud, collusion or
willful mis-statement or suppression of facts, or in contravention of any
provision of the Act or Rules with intent to evade payment of duty, D
demand can be made within five years from the relevant date. In the
present case, the Court is concerned with the proviso to Section llA(l).
[1027-D-E-F)
3.2. There was no willful suppression of facts on the part of the
r
appellant as the appellant had filed the Gate Passes, Invoices and monthly E
returns, indicated the names of the consignees from which it was. possible for the Department to infer sale of sorbitol solution to non-pharma-
'
ceuticals companies and yet no steps were taken by the department to
raise the demand in time and, therefore, there was no willful suppression
F
of material facts for invoking the proviso to Section llA(l). In the
present case, the demands raised by the department in the impugned
three show-cause notices were time barred. The material placed,_ on
record shows filing of Gate Passes, Invoices, Classification List. They
indicated the names of the consignees. A mer~. reading of these names
would indicate that Sorbitol Solution was sold to non-pharmaceutical
companies. Despite such disclosure, the department approved the ClasG
sification List as well as RT-12 returns. There was no reopening of the
approvals and assessments within the stipulated period. In the circumstances, the Judicial Member of the Tribunal was right in holding that
no case was made out for invoking the extended period oflimitation. The
end use was built in the exemption Notification. Therefore, the Depart- H
1014
SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.
A
ment could have demanded duty within one year from the relevant date
under section llA(l). However, this was not done. In the absence of
evidence of suppression of facts, the Judicial Member was right in
setting aside the show-cause notices. [1029-D-E; 1028-E-FJ
B
3.3. Although on merits the Department succeeds, these appeals
need to be allowed as the impugned show-cause notices-cum-demands
were time barred and as no case is· made out by the. Department for
invocation of the proviso to Section llA(l) of the Act. [1029-F]
Cosmic Dye Chemical v. Collector of Central Excise, Bombay, (1995)
C 75 ELT 721 and Pushpam Pharmaceuticals Company v. Collector of
Central Excise, Bombay, (1995) 78 ELT 401, relied on.
D
Jayant Vitamins Limited v. Union of India, (1991) 53 ELT 278,
distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2736-2738
of 1999.
From the Judgment and Order dated 11.1.98 of the Central Excise
Customs and Gold (Control) Appellate Tribunal, New Delhi in F.O. Nos.
E 41-43/99-C in A. Nos. E/736/91-C, E/738/91-C and E/747 of 1991-C.
Ravindra Narain, Ms. Sonu Bhatnagar, Ajay Aggarwal and Rajan
Narain for the Appellant.
F
R. Venkataramani V. Ramasubramanian, P. Parmeshwaran and B.
Krishna Prasad for the Respondent.
The Judgment of the Court was delivered by
KAPADIA, J.: These appeals under section 35L(b) of Central Excise
G Act, 1944 are directed against a majority decision dated 11.1.1999 passed
by the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi,
by which common order, the Appeal Nos.E-736/91-C, E-738/91-C and E/
747/91-C filed by the appellant were dismissed.
H
The facts, briefly, stated are as follows:
p
'
SARABHAI M. CHEMICALS v. C.C.E., VADODARA [KAPADIA, J.] 1015
Mis Sarabhai M. Chemicals, the appellant herein, is a manufacturer of A
bulk drugs in India. It manufactures Ascorbic Acid and Salts ofl.P. (Vitamin
'C') as well as Sorbitol Solution U.S.P. The said goods fall under chapter
heading 29 of Central Excise Tariff Act, 1985.
By notification no. 234/86 dated 3.4.1986, the Central Government B
exempted the bulk drugs as defined in the said notification from payment
of excise duty. The appellant submitted its classification list for approval
claiming exemption under the said notification. By letter dated 17.4.1986,
the Assistant Collector permitted the appellant to clear the bulk dru_gs under
the above notification subject to production of a certificate from the Drugs
Controller, Government of India. The appellant obtained certificates from C
the Drugs Controller dated 17.4.1986, 15.5.1986, 21.5.1986 and 6.8.1990,
in respect of their claim for exemption under the aforestated notification.
In the classification list, exemption was sought by the appellant under
notification no. 234/86 on the basis of certificates received by the appellant
from the Drugs Controller, Government of India. The classification lists D
were scrutinized, verified and approved by the Assistant Collector. The
appellant cleared the goods upon submission of the gate passes in which they
disclosed the names of the consignees. The appellant also submitted its
monthly returns on excisable goods manufactured by it in the prescribed RT12 forms, which gave the particulars of the goods removed, gate passes
under which the goods were removed etc.
E
Three show-cause notices were received by the appellant on 30.12.1987,
6.4.1988 and 20.6.1988 from Collector of Central Excise, Vadodara, denying the exemption under notification no. 234/86. All the three show-cause
notices alleged that the appellant has wrongly availed nil rate of duty in p
respect of its clearances by not bringing to the notice of the department the
fact that certain quantities of sorbitol solution and vitamin "C" had been sold
to non-pharma concerns knowing fully well that the commodities would not
be normally used as drugs or medicines by its customers. By the said showcause notices, the appellant was asked to show-cause inter alia as to why
excise duty should not be recovered under section 11-A(l) of the said Act G
read with rule 9(2) of the Central Excise Rules, 1944. The said three showcause notices related to the period, April 1986 to November 1986, March
1984 to February 1986, and April 1986 to 30th April, 1987. The grounds
for demand stated that on verification of the records of the appellant, it was
noticed by the department that the appellant had cleared sorbitol solution H
1016
SUPREME COURT REPORTS (2004] SUPP. 6 S.C.R.
A to cigarette manufacturers, which fact was not brought to the notice of the
department at the time of clearance.
B
c
D
E
F
By its reply dated 2.3.1988, 18.7.1988 and 6.10.1988 respectively, the
appellant submitted that the Drugs Controller to the Government of India
had issued a certificate certifying sorbitol solution etc. as a Bulk Drug after
scrutinizing and examining the product; that the sorbitol solution manufactured by the appellant met the requirement of the said notification; and that
the word "normally" used in the notification did not restrict the exemption
based on individual end use. It was urged that ifthe intention was to restrict
use of sorbitol solution by dr~g manufacturing units only for diagnosis,
treatment, mediCation or in prevention of diseases or as an ingredient in any
formulation then the Legislature would have used the word "exclusively"
instead of the word "normally"; that the notification did not require the
appellant to ascertain the end use at the time of clearance of a bulk drug
from the factory and that once the certificate from the Drugs Controller was
issued in terms of the notification no. 234/86, no further requirement remained to be complied with in the matter of availing exemption under the
notification. It was argued that the proviso to the notification did not leave
any scope for further enquiry regarding the end use of the product on the
part of the proper officer to grant exemption to the product which was
certified as 'bulk drug' by the Drugs .Controller. It was submitted that the
Government did not intend to put the burden of production of end use
certificate on the appellant; that had the Government intended to do so, some
such provision would have been made in the notification. It was further
submitted that the certificate granted by the Drugs Controller was final for
all clearances of bulk drugs for exemption. It was submitted that the demand
()f duty by the department on sorbitol solution was without jurisdiction and
without any authority of law; that it was based on misinterpretation of the
word "normally" used in the notification and consequently, the demand
notice was bad-in-law and a nullity. It was submitted that a conjoint reading
of the proviso and the explanation given in the ~otification indicated that
when the Drugs Controller issues a certificate under the notification to the
G effect that the goods in question were hulk drugs as1jiven in the explanation,
the goods were entitled to exemption. On the point of limitation, it was
submitted that the appellant had filed their classification list to which the
department had never objected. It had filed RT-12 assessments and the same
were approved by the department from time to time. The appellant bonafide
H believed that the goods in question fell under the said notification. The
SARABHAI M. CHEMICALS v. C.C.E., VADODARA [KAPADIA, J.] 1017
appellant was allowed to clear the goods by the department and conseA
quently, invocation of rule 9(2) of the Central Excise Rules by the department was not warranted, as there was no violation of rule 9(1 ). It was argued
that the normal trade pattern of putting sorbitol solution in the market was
through distributors and consequently it was impossible to get an end use
certificate at the time of clearance of the consignments at the factory gate. B
By orders dated 23.11.1990, 22.11.1990 and 23.11.1990, the Collector
rejected the contentions of the appellant and confirmed the demands in all
the three notices.
Being aggrieved by the three orders passed by the Collector, the C
appellant filed three separate appeals, referred to above, before the Customs,
Excise Gold (Control) Appellate Tribunal, New Delhi (hereinafter referred
to as "the Tribunal"). The appellant argued the matter before the Tribunal
on the point oflimitation as well as on merits. The Judicial Member (J.M.)
took the view that the above show-cause notices were time barred and no
case was made out for invoking the extended period of limitation as the
demands mentioned in the three show-cause notices have been worked out
from the gate passes without further investigation by the department with
the consignees mentioned in the gate passes. According to the J.M., the
matter was squarely covered by the judgment of the Madhya Pradesh High
Court in Jayant Vitamins Ltd. v. Union of India reported in ( 1991) 53 EL T
278. The J.M. observed that crucial point was-Whether the app'!llant has
suppressed any facts or had cleared the goods by misrepresentation, fraud
or collusion? According to the J.M., the appellant bonafide believed that
their product was covered by the exemption notification and on the strength
of the certificate from the Drugs Controller and their classification list, duly
approved by the department, they had cleared the goods and, therefore, the
department was precluded from invoking the proviso to section 1 lA(l) of
the said Act, 1944. In the circumstances, the J.M. set aside the show-cause
notices-cum-demands as time barred and allowed all the three appeals filed
by the appellant. However, in his concluding paragraph, the J.M. clarified
that the appeals stood allowed only on the question of limitation and that
he was not recording any order on the merits of the case.
D
E
F
G
The Technical Member (T.M.) disagreed with the J.M. holding that the
product cleared to a pharmaceutical factory alone became "bulk drugs"; that
"bulk drugs" cleared to a pharmaceutical factory alone could be manufacH
1018
SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.
A tured and sol.d for diagnosis or treatment or prevention of diseases in human
beings and animals; that the appellant was well aware that if they sold their
product to a non-pharmaceutical company (consumer), it was evidently
intended for non-medicinal use and, therefore, would not be covered by the
exemption notification. It was observed that mere obtaining a certificate
B
c
from the Drugs Controller by itself would not absolve the appellant, when
they knowingly sold a specified quantity to non-pharmaceutical concerns
being fully aware that those customers are not going to use the product as
drugs or medicines. The T.M. further observed that since the language of
the notification was clear and since it did not admit any ambiguity, there
was no merit in the plea of the appellant that they bonafide believed that
the items were covered by the exemption notification. It was further held
that in the present case, the department did not demand duty from the
appellant in respect of the quantity sold to pharmaceutical concerns, but the
department had demanded duty only in respect of the quantity of sorbitol
solution and vitamin 'C' sold to non-pharmaceutical concerns. On facts, the
D T.M. came to the conclusion that the appellant had deliberately continued
to take benefit of the exemption notification even in respect of the quantity
about which they were aware would not constitute a drug or medicine in
the normal course. That it was evidently done with the intention to sell to
the non-pharmaceutical concerns, which fact was withheld from the departE
F
ment. It was further held that indication of names of the consignees on the
gate passes was by itself not sufficient to exclude the extended period of
time available to the department. Accordingly, the T.M. dismissed the
appeals.
In view of difference of opinion, the matter was referred by the
President of the Tribunal to a Third Member to decide~Whether the demand was time barred? By the impugned judgment dated 11.1.1999, the
Third Member, concurring with the T.M., came to the conclusion that the
appellant had wrongly taken the benefit of exemption notification to the
extent of sorbitol solution being removed to those, who were not the manufacturers of medicines and who had nothing to do with the diagnosis,
G treatment, mitigation or prevention of diseases. It was held that when the
appellant diverted their consignments of bulk drugs to non-pharmaceutical
concerns, they were not complying with the statutory requirements of the
exemption notification. According to the Third Member, "bulk drugs" were
products which were normally used for diagnosis, treatment, mitigation or
H prevention of diseases in human beings or animals; that they were to be
SARABHAI M. CHEMICALS v. C.C.E., VADODARA [KAPADIA, J.] 1019
normally used for specified purposes and that they had to be actually used A
as bulk drug or as an ingredient in any formulation. It was observed by the
Third Member that the appellant had admitted that certain quantity of
sorbitol solution, in respect of which duty has been demanded, was cleared
in favour of non-pharmaceutical concerns and in the circumstances, the
Third Member agreed with the T.M. and accordingly dismissed the appeals. B
by drl?ging aggrieved by the majority decision, the assessee has come to this
Court by way of appeal under section 35L(b) of the Central Excise Act,
1944.
Two points arise for determination, one is on merits and other is on C
limitation.
Mr. Ravindra Narain, learned advocate appearing on behalf of the
appellant submitted, at the outset, that, the impugne~ majority decision was
patently erroneous. In this connection, it was urged that the J.M. had decided
the question of limitation in favour of the appellant holding the demands
to be time barred and, therefore, he did not decide the question of the
applicability of the exemption notification. It was urged that when the T.M.
disagreed with the J.M. on the question of limitation, the matter was referred
to the Third Member, who while concurring with the T.M., on the question
of limitation, erroneously dismissed the appeals instead of referring them
back to the Division Bench to decide the question on merits. In the circumstances, it was urged that the impugned majority decision dated 11.1.1999
dismissing the appeals, without going into merits, was patently erroneous.
D
E
On the question of applicability of the exemption notification, Mr. F
Ravindra Narain, learned advocate appearing on behalf of the appellant,
submitted that the appellant had obtained a certificate from the Drugs
Controller to the effect that the sorbitol solution was a bulk drug within the
meaning of "bulk drug" given in the explanation to the notification as they
were normally used for diagnosis, treatment, medication or prevention of
diseases in human beings. They were normally usable as "bulk drug" or as G
an ingredient in any formulation. Since the Drugs Controller had issued the
certificate in favour of the appellant certifying sorbitol solution as a bulk
drug, the appellant's product met the requirement laid down in the exemption notification. According to the learned advocate, the word "normally"
as used in the notification has to be assigned a dictionary meaning to mean H
1020
SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.
A "under normal circumstances" or "ordinarily". The word "normal'', according to the learned advocate, is to be read as opposed to the word "exceptional". According to the learned advocate, in using the word "normally",
one is referring to something which is opposed to abnormal or exceptional.
Accordjng to the learned advocate, the word "normally" used in the notiB fication cannot restrict the exemption. That the word "normally" would rule
out individual end use of the product. According to the appellant, if it was
c
the intention of the Legislature to restrict use of sorbitol
manufacturing units only for diagnosis, treatment, medication etc., nothing
prevented the Legislature from using the word "exclusively" instead of the
word "normally". According to the appellant, the exemption notification did
not require the manufacturers to ascertain the end use at the time of clearance
of bulk drug from the factory. It was urged that once the certificate from
the Drugs Controller was issued in terms of the notification no. 234/86, no
further requirement remained to be complied with in the matter of taking
exemption in the notification. There was no requirement of production of
D end use certificate by the assessee in the said exemption notification and in
the absence of such provision, the department was not entitled to insist on
production of the end use certificate. In the circumstances, it was submitted
that the demand of duty made by the department on the bulk drug, manufactured by the appellant, sorbitol solution was without jurisdiction and
E
F
G
without authority of law. The authority had wrongly denied legitimate
exemption to the appellant and, therefore, the demand notices were bad-inlaw and nullity.
On the question of limitation, it was submitted on behalf of the appellant that they were manufacturing bulk drugs for which they have filed
classification list from time to time under Chapter 29 (Tariff Item 29.42).
The department had approved the classification lists. On approval, the
appellant had cleared the goods. The department had never objected to such
clearances. The appellant was not asked to clear the goods under provisional
assessment. The appellant has been filing RT-12 forms from time to time.
These forms were approved by the department from time to time. According
to the appellant, as per the proviso to the exemption notification, the manufacturer who sought to take exemption was required to furnish a certificate
from the Drugs Controller, to the effect that the drug for which exemption
was claimed was a bulk product within the meaning of "bulk drugs" given
in the explanation to the notification. It was ·submitted that on conjoint
H reading of the proviso and the explanation, once a certificate of the Drugs
...
SARABHAI M. CHEMICALS v. C.C.E., VADODARA [KAPADIA, J.] 1021
Controller was produced in connection with the goods in question, they were A
entitled to exemption. It was urged that where two interpretations of the
notification exist, the benefit should accrue to the assessee. It was urged that
in the present case, the appellant believed that sorbitol solution and vitamin
'C' stood covered under the exemption notification no. 234/86 and the
appellant was allowed to clear the said goods by the department. Therefore, B
it was not open to the department to raise the dispute at a belated stage, by
invoking rule 9(2) of the Central Excise Rules, 1944, particularly, when.
there was no violation of rule 9(1). It was further contended that the normal
trade pattern of putting sorbitol solution LP. in the market was through the
distributors and, therefore, it was difficult for the appellant to obtain an end c
use certificate at the time of clearance of the said goods at the factory gate.
Lastly, it was urged that out of quantity, on which duty has been demanded,
only 29850 Kgs. have been cleared to non-pharmaceutical units, namely,
soaps, ceramics, rubber and cigarette units which represented 3.87% of the .
total clearances during the period in dispute and, therefore, 96% of the total
clearances was to the pharmaceutical concerns and in the circumstances, the
department was not right in invoking the extended period of limitation.
Mr. R. Venkataramani, learned senior advocate appearing on behalf of
the department submitted that the Third Member to whom the reference was
made has recorded a finding that the appellant has not contested the matter
on merits. He pointed out that the Third Member.to· whom the reference was
made concluded that the appellant had availed of the benefit of the exemption notification in respect of the μuantities of sorbitol solution cleared in
favour of non-pharmaceutical corvipanies. Learned senior advocate submitted on behalf of the department th~t they were not demanding duty in respect
of the quantity sold to pharmaceutical concerns for pharmaceutical or
medicinal purposes. The department was demanding duty only in respect
of that quantity of sorbitol solution which admittedly has been sold to nonpharmaceutical companies, knowing fully well that they would not be used
as drugs or medicines. In the circumstances, it was urged that both the
questions, of limitation and applicability of exemption notification, have
been decided by the impugned decision and in the circumstances, there was
no merit in the contention advanced on behalf of the appellant that the Third
Member should have referred back the matter to the Division Bench for
deciding the question on merits.
D
E
F
G
On the question of applicability of the notification, learned senior H
1022
SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.
A
advocate appearing on behalf of the department submitted that the word
"bulk drug" is defined under section 2(a) of the Drugs (Prices Control)
Ord_er, 1979, enacted in exercise of the powers conferred under section 3
of the Essential Commodities Act, 1955. It was urged that the explanation
to the exemption notification no. 234/86 has borrowed the definition of
B
'bulk drug' from section 2(a) of the Drugs (Prices Control) Order, 1979 to
mean any substance including pharmaceutical, chemical, biological or plant
product conforming to pharmacopoeia) standards accepted under the Drugs
& Cosmetics Act, 1940, which is used as such or as an ingredient in any
formulation. It was submitted that the certificate issued by the Drugs
c
Controller, in the present case, was a reproduction of the explanation to the
notification. The said certificate did not deal with the uses other than the
"normal uses" of such bulk drugs. It was urged that there are distinct
categories of bulk drugs, namely, the class of drugs, which are normally
used for diagnosis, prevention and mitigation of diseases and "used as such",
as opposed to other classes which are not normally used but which are also
D capable of being used for the diagnosis, treatment etc. In the circumstances,
it was urged that there was no need for using the word "exclusive" as is
canvassed on behalf of the appellant. It was submitted that the key expression in the notification, namely, "normally used" and "used as such" should
be given their purposive meaning in order to facilitate the taking of the
E
benefit of exemption as also to prevent the abuse of the exemption. The
words "normally used" indicated 'bulk drugs' whose predominant use is for
the diagnosis, treatment etc. and which were otherwise capable of being used
for other purposes. These bulk drugs stood apart from drugs which may not
be normally used in diagnosis, treatment, prevention or mitigation of diseases. The latter class of drugs did not fall within the scope of exemption
F notification. Similarly, the first category of drugs referred to above, if and
when diverted for other uses, would also get excluded. In the circumstances,
the department was right in raising the demand on the appellant.
G
On the question of limitation, it was urged on behalf of the department
that under the Self Removal Procedure, unlike the physical control procedure, the gate passes -were not required to be endorsed at the time ofremoval.
The gate passes used by the appellant were pre-authenticated by the proper
officer. The gate passes were required to be supported by the RT-12 returns
(monthly returns) to be submitted in terms of rule 1730 (3). It was submitted
that rule l 73B required filing of classification list and rule l 73C required
H filing of a price list. All that the proper officer was required to do, when
SARABHAI M. CHEMICALS v. C.C.E., VADODARA [KAPADIA, J.] 1023
RT-12 returns were filed, was to endorse, approve or disapprove the above
list. Therefore, the completion of assessment under the Self Removal Procedure did not relieve the assessee, where exemption was claimed, from
giving all details relevant for the purpose of endorsing the contents of the
gate passes. It was submitted that clearance to a non-pharmaceutical user
without giving further details, except the name of the consignee, would
amount to suppression of facts. In the alternative, it was submitted that even
assuming for the sake of arguments that the proper officer was either remiss,
negligent or in default in not asking for further information, at the time of
endorsing the RT-12 returns every month, the omission on the part of the
assessee in not disclosing the end use cannot be condoned. The law allows
A
B
c
a period of five years to trace the wrong in any manner. In this connection,
reliance was also placed on section 1 lA of the Act. In any event, the
satisfaction of the proper officer, even when there is no full disclosure,
cannot be said to be final and beyond review. It cannot debar the department
from reopening the approvals and assessments. The assessee cannot be
permitted to take advantage of its own illegal act. In the circumstances, it D
was urged that no inference is called for in the present case.
We do not find any merit in the preliminary submission made on behalf
of the appellant. In the present case, we are concerned with exemption
notification. It is well settled that an exemption notification has to be strict\y
interpreted. The conditions for taking the benefit of the exemption have to
be strictly interpreted. In the present case, the Third Member has rightly
rejected the contention advanced on behalf of the appellant that more than
one view was possible on interpretation of exemption notification no. 234/
86. The Third Member has recorded a finding that the appellant has not
disputed that a certain quantity of sorbitol solution and vitamin 'C' stood
cleared to non-pharmaceutical units, namely, soaps, ceramics, rubber and
cigarette units. The appellant had conceded before the Tribunal of having
cleared 3.87% of the total clearances to non-pharmaceutical companies who
could not have used the said solution as drugs or medicines. Moreover, in
E
F
the present case, the department has not demanded the duty in respect of
quantity sold to pharmaceutical concerns for pharmaceuticals or medicinal G
purposes. In the present case, the dispute was not whether the appellant was
entitled to the benefit of the exemption notification in respect of the entirety
of goods manufactured and cleared during the period in question, but the
dispute was regarding the taking of exemption benefit under the notification
in respect of the quantum of bulk drugs cleared to consumers other than the H
1024
SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.
A
pharmaceutical concerns. In the circumstances, the Third Member was right
in deciding the question oflimitation as well as the question of applicabiiity
of exemption notification no. 234/86. In any event, the said two questions
are interlinked and, therefore, we do not find any merit in the preliminary
objection raised on behalf of the appellant.
B
c
D
E
F
G
H
Before going into the question of applicability of the exemption notification and in order to understand the arguments advanced before us, we
quote herein below the notification no. 234/86-CE dated 3.4.1986:
"G.S.R. 593(E):-In exercise of the powers conferred by subrule ( 1) of rule 8 of the Central Excise Ru Jes, 1944, the Central
Government hereby exempts bulk drugs, falling under Chapter 28
or Chapter 29 of the Schedule to the Central Excise Tariff Act, 1985
(5 of 1986), from the whole of the duty of excise leviable thereon
under section 3 of the Central Excises and Salt Act, 1944:
Provided that the manufacturer furnishes to the proper officer,
a certificate from the Drugs Controller to the Government of India,
within such period as the said officer may allow, to the effect that
the drugs or chemicals which are claimed for exemption under this
notification are the bulk drugs within the meaning of the bulk drugs
given in the Explanation to this notification, and are normally used
for the diagnosis, treatment, mitigation or· prevention of diseases
in human beings or animals, and used as such or as an ingredient
in any formulation.
Explanation:- In this notification, "bulk drugs" means any chemical or biological or plant product, conforming to pharmacopoeia)
standards, normally used for the diagnosis, treatment, mitigation or
prevention of diseases in human beings or animals, and used as
such or as ingredient in any formulation."
(Emphasis supplied by us)
To understand the controversy, we also quote hereinbelow the certificate dated 17.4.1986 issued by the Drugs Controller:
"This is to certify that the undermentioned Bulk Drugs manufactured by Mis Sarabhai M. Chemicals, a Divn. of Ambalal Sarabhai
-
SARABJ-IAI M. CHEMICALS v. C.C.E., VADODARA [KAPADIA, J.] 1025
Enterprises Ltd., Baroda, under the Drug Licence number as shown A
against each are the bulk drugs which can be used in the manufacturer of formulation i.e. drugs which are used for the diagnosis,
treatment, mitigation or prevention of diseases in human beings or
animals, and used as such or as an ingredient in formulations.
B
Sr. No.
Name of Bulk Drugs
Licence No.
l.
Ascorbic acid l.P.
Form 28 No. G/22
(Vitamin C)
dated 17.3.1981
2.
Vitamin C 'coated'
- do -
c
(Ascorbic acid 'coated')
3.
Sodium ascorbate U.S.P.
- do -
4.
Sorbitol Solution U.S.P.
Form 25 No. G-55
D
on 17.3.1981"
A bare reading of the notification no. 234/86 indicates that the exemption in favour of bulk drugs falling under chapter 28 or chapter 29 of the,
schedule annexed to the Central Excise Tariff Act, 1985 is not an unconditional exemption. The said notification had a proviso. Under the proviso, E
the manufacturer was required to furnish to the Competent Authority a
certificate from the Drugs Controller to the effect that the drug for which
exemption was claimed was a ''bulk drug" within the meaning of the
expression "bulk drug" given in the explanation to the notification and,
which was normally used for diagnosis, treatment etc.