1. These Nine appeals are filed by the same appellants. The issue being common, these are being disposed of by this single order.
2. The appellants manufactured Diagnostic Reagent Kits and Diagnostic Reagent Strips. The classification was under Tariff Heading 3822. The manufacture of such substances requires a licence to be taken under the Drugs and Cosmetics Act, 1940. The appellants were in possession of such a licence.
3. The Drugs and Cosmetics Act required compliance with the conditions prescribed in Rule 74 of the Drugs and Cosmetics Rules, 1945. Two of the sub-rules related to drawal of samples. Sub-rules (c) and (1) read as follows : "(c) the licensee shall either in his own laboratory or in any other laboratory approved by the licensing authority [under Part XV (A) of these rules] test each batch or lot of the raw material used by him for the manufacture of his products and also each batch of the final product and shall maintain records of registers showing the particulars in respect of such tests specified in Schedule U. The records or registers shall be retained for a period of five years from the date of manufacture.
(1) The licensee shall maintain reference samples from each batch of the drugs manufactured by him in a quantity which is at least twice the quantity of the drug required to conduct all the tests performed on the batch. In case of drugs bearing an expiry date on the label, the reference samples shall be maintained for a period of three months beyond the date of expiry of potency. In case of drugs where no date of expiry of potency is specified on the label the reference samples shall be maintained for a period of three years from the date of manufacture." 4. The assessees drew samples under both provisions. The samples drawn under sub-rule (c) of the manufactured products were subjected to the prescribed test. Only when the samples was found to be up to the prescribed standard, the batch from which the samples were drawn was accepted as fit for marketing. The sample, however, in the mean while had been fully consumed. The samples drawn under Sub-rule (1) were in a fully finished format, duly packaged and labelled. These samples were kept for three months beyond the expiry period of the contents thereof.
5. The first show cause notice was issued on 5-12-95 demanding duty of Rs. 1,80,924/- on such samples drawn during the period January, 1991 to March, 1995. It was also alleged that the assessees were liable to penalty for failing to maintain the details of these samples in the statutory registers prescribed under Rule 53 of the Central Excise Rules, 1944. It was alleged that in not declaring the drawal of the samples and in not paying duty, the assessees had suppressed facts and therefore the extended period was invoked. This notice was answerable to the Collector. After hearing the assessees the Collector adjudicated the case. Subsequently, a number of notices were issued periodically.
These were adjudicated by the Jurisdictional Assistant Commissioner in three Orders-in-Original confirming the duty as alleged in the respective show cause notices. In three Orders-in-Appeal the Commissioner (Appeals) had upheld the confirmation. The present appeals are against these orders of the Commissioner and of the Commissioner (Appeals).
6. Shri Willingdon Christian distinguished between the two kinds of samples. He submitted that the samples which were drawn from a batch immediately after the chemical manufacture thereof are subjected to vigorous testing. On the findings of the test the marketability or otherwise of the entire batch would be determined. The samples also gets fully consumed during this period. Shri Willingdon Christian submits that the licence under the Drugs and Cosmetics Act, is taken for "manufacture of drugs for sale". He submits that the sample is in the form of a capsule or a tablet or liquid which cannot be identified by its name or brand name and cannot be sold in the condition in which it is drawn. He submits that marketability is the sine qua non for duty to be attracted and at that stage the samples cannot be called as dutiable articles.Bhansali Engg.
Polymers Ltd. v. Commissioner of Central Excise, Indore - 1999 (35) RLT 809 (CEGAT) the samples of ABS Polymers were drawn in identical circumstances. In that situation the Tribunal held that the sample did not attract duty.
8. In support of his claim that the naked substances were not marketable, Shri Willingdon Chirstian also relied upon the Calcutta High Court's judgment in the case of Calcutta Clinical Research Associations Ltd. v. Union of India 1999 (109) E.L.T. 56 (Cal.). The High Court was examining the coverage of Section 2(f) of the Central Excise Act, and the legal fiction that labelling amounted to manufacture. The Court referred to the requirements of the Drugs and Cosmetics Act, 1940, which defined P or P medicines. The claim made before the Court was that labelling might be a process of manufacturer under the Drugs Act, but not under the Central Excise Act. The Court observed that P or P medicines could not be manufactured unless they confirmed with the provisions of the Drugs Act. The Hon'ble High Court held that in construing manufacture under the Central Excise Act, the definition of the Drugs Act, would be a material factor.
9. Shri A.K. Jain arguing for Revenue makes a claim that the judgment relates to P or P medicines whereas the substances covered in the present appeals are classifiable under Heading 38.22 being Miscellaneous Chemical Preparations and therefore the applicability of this judgment is in doubt. We do not agree. In terms Section 3(B)(iv) of that Act, the devices intended for internal and external use in diagnosis are also "Drugs" covered by the said Act. Therefore the judgment should not be taken to be applicable only to P or P Medicines but would equally apply to all substances which require licence in terms of the said Act.Bhor Industries Ltd. v. Collector of Central Excise 1989 (40) E.L.T. 280 (S.C.), the Supreme Court held that an article was not dutiable only because it was specified in the tariff but that marketability was an essential ingredient for durability. In a later judgment in the case of Moti Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad 1995 (76) E.L.T. 241 (S.C.), the Court quantified the expression "Produced or manufacture" so as to pass the test of marketability. Since the samples drawn under Part (c) of Rule 74 of the Drugs and Cosmetics Rules, 1945 were not packaged, which was the primary necessity for marketability, these samples did not attract duty at all.
11. As regards the samples drawn and store in fully manufactured and packaged condition under sub-rule (1) of the aforesaid Rules, it has come in the proceedings that these samples were kept for a period well beyond the date of expiry printed thereupon. The goods which have crossed the date of expiry cannot be marketed and applying the drawing test of marketability, the goods cannot be called to be dutiable goods.
Therefore the question of short payment or non-payment of duty upon them also does not arise.
12. Shri Willingdon also submits that Rules 9 and 49 of the Central Excise Rules, 1944, could not be attracted unless the goods were cleared from the factory. His point is valid, as far as the samples in fully manufactured and marketable condition are concerned. Shri AK Jain submits that the samples drawn from the batch being manufactured were consumed during testing and that captive consumption also attracts duty. We find that destruction of this sample renders the batch from which was drawn as fully manufactured (Chemically speaking). By the time the batch is declared to be so the sample ceases to exist and therefore it cannot be called as "an excisable product used captively." 13. In the judgment in the case of The Waxpol Industries Ltd. v.Commissioner of Central Excise 2000 (39) RLT 566 the Tribunal had held that since the samples were not taken outside the factory, no duty could be demanded thereupon. The same is the ratio of the judgment in the case of Bezal Pharma v. Collector of Central Excise, Mumbai 1998 (28) RLT 741 (CEGAT).
14. Therefore we hold that the demand of duty on the second variety of samples also did not sustain.
15. Since we have so, there is no need to go into the aspect whether the extended period was required to be invoked or not. During his arguments Shri Jain claimed that the samples which were manufactured packaged and retained had not been entered in the prescribed accounts and that would show the culpability of the appellants. We observe that in the show cause notice dated 5-12-95 answerable to the Collector, penalty has been proposed under Rule 173Q of the Central Excise Rules, and in the preceding paragraph the contravention of Rule 53, among other rules, has been alleged. We however, find that the ld.Commissioner has refrained from imposing a penalty on the observation that there was no clandestine removal. He had not gone into the technical contravention at all. On the other hand Shri Willingdon submits that in terms of several judgments including that reported in 1985 (19) E.L.T. 307 (Tribunal) [para 44], the non-imposition of penalty would indicate absence of mala fides thereby belying the change of suppression or misrepresentation. As we have observed above we need not go into the aspect of suppression and the extended period in view of our finding that in neither case, the Central Excise duty was leviable. In the other cases leading to the orders being passed by the Commissioner (Appeals), also penalties were not imposed.
16. In the result the appeals succeed and are allowed. Consequential relief to the extent warranted is ordered.