1. These two appeals have been filed against the decision of the Commissioner of Central Excise and Customs, Aurangabad made in Order-in-Original No. 17/CEX/2001 dated 24.10.2001 confirming show cause notice dt. 3.4.2000 and demanding duty of Rs. 19,33,473/- and demand of reversal of modvat credit of Rs. 10,37,930/-; imposing penalty of Rs. 25,51,294/- under Section 11AC of the Central Excise Act, and Rs. 50,000/- under Rule 173Q of the Central Excise Rules. The other appeal is filed by the Manager of the office of the assessee against imposition of penalty of Rs. 10,000/- imposed under Rule 209A of the Central Excise Rules.
2. The appellant is manufacturing Pharmaceutical products and has its factory at Nasik. It availed modvat credit on various inputs used in the manufacture of medicines. Manufacture and sale of drugs is controlled in India by the Act known as the Drugs and Cosmetics Act, 1940 and the Rules framed thereunder. In terms of Rules 71(7), 74(o), 76(2) and 78(p) of the Drugs and Cosmetics Rules, 1945, the Appellants have to draw samples of the products manufactured by them, mention particulars of such samples like two ingredients of the samples along with raw materials out of which such samples have been produced etc. in terms of the Rules mentioned therein. It is also the duty of the manufacturer of such drugs to safely keep the test report. In terms of Schedules M & U of the Rules as contained in the above batch of the goods manufactured by the assessees and also maintenance of the records of the same. The show cause notice dt. 3rd April 2000 was issued to the assessee proposing to reverse the modvat credit to the tune of Rs. 10,37,930/- utilised by the Appellants in respect of inputs utilised for the production of the goods which went through the quality control test and notice also proposed recovery of duty of Rs. 19,33,473/- in respect of the samples of the final product. The period in dispute is April 1995 to December 1999. The notice also proposed to impose penalties on the assessee under Rule 173Q as well as the other appellant under Rule 209A of the Central Excise Rules. The assessee's reply dated 11^th May, 2000 invited the attention of the adjudicating authority about various provisions of the Drugs & Cosmetics Act & Rules as mentioned above. The Commissioner rejected the reply and the contentions raised by the assessee. Hence confirmed the duty and imposed penalty as described in the earlier portion of this order.
Hence, these two appeals.
3. Shri M.P. Baxi Ld. Counsel for the Appellants argued that whoever wishes to produce drugs as defined under the Drugs & Cosmetics Act, has to comply with the stringent provisions of the above Act and Rules made thereunder in respect of the testing of the raw materials as well as finished products. He invited our attention to various provisions of the Rules which are described earlier. The relevant extracts of the Rules including the Schedules are as follows: 7. Raw materials--The licensee shall keep an inventory of all raw materials to be used at any stage of manufacturing of drugs and maintain records as per Schedule U. (vi) released from Quarantine by quality control personnel through written instructions; (viii) so arranged that all rejected material are conspicuously identified and raw destroyed or returned to the suppliers as soon as possible and records maintained thereof.
9. Batch Manufacturing Records--The licensee shall maintain batch manufacturing record as per Schedule U for each batch of the drug produced. Manufacturing records are required to provide a complete account of the manufacturing history of each batch of a drug showing that it has been manufactured, tested, and analysed in accordance with the manufacturing procedures and written instructions as per the master formula.
11. Reprocessing and recovery--(a) If a product batch has to be reprocessed, reprocessing procedure should be authorised and recorded. An investigation should be carried out into the causes necessitating reprocessing and appropriate corrective measures should be taken for prevention of recurrence.
16. The Quality Control System--Quality Control Department--Every manufacturing establishment shall have a quality control department supervised by approved expert staff directly responsible to the management but independent of other departments. The quality control department shall control all raw materials, monitor all in-process quality checks and control the quality and stability of finished products.
The quality control department shall have the following principal duties:- (i) to prepare detailed instructions, a writing for carrying out each test and analysis: (v) To release or reject each batch of finished product that is ready for distribution; 21. Counter signature of the head of the testing units or other approved person-in-charge of testing for having verified the batch records and for having released the batch for sale and distribution, the quantity released and date of release.
26. Counter Signature of head of the testing unit or person-in-charge of testing for having verified the documents and for having released the product for sale and distribution, the quantity released and date of release.
Records in respect of each raw material shall be maintained indicating the date of receipt, invoice number, name and address of manufacturer / supplier, batch number, quantity received, pack size, date of manufacture, date of expiry, if any, date of analysis and release / rejection by quality control, analytical report number, with special remarks, if any, quantity issued, date of issue and the particulars of the name and batch numbers of products for the manufacture of which issued and the proper disposal of the stocks.
He emphasises before us that unless the above mandatory provisions of law are complied with a person cannot manufacture the product called drug within the meaning of the above Act and sell the same in the market as a product. He further stated that in the case of Bayer Diagnostics India Ltd. v. Commr. of C.Ex. & Customs, Vadodara [2001 (133) ELT 140 (Tri-Mumbai) in which case in similar circumstances it was held that samples of drugs could not be identified by name or brand name and not saleable in condition in which it is drawn. He also invited our attention to the judgment of the Calcutta High Court in the case of Calcutta Clinical Research Association Ltd. v. U.O.I. [1999 (109) ELT 56 (Cal.) where the Ld. Single Judges of the said High Court held as follows: "7. The manufacturer or producer had to comply with the requirements of Drugs Act because Mr. Roy Chowdhury contended that no patent medicine could come into the market unless it had so complied and these goods would not be marketable without such compliance. Mr. Roy Chowdhury drew my attention to certain observations in Craies on Statute Law, Sixth Edition, at page 145. It appears to me that manufacture of patent and proprietary medicine can only be completed when it is in accordance with the provisions of Drugs Act. There cannot be manufacture of patent and proprietary medicines unless they are in accordance with Drugs Act. Indeed, Section 18 of the Drugs Act prohibits manufacture and sale of drugs unless certain things are contained in the labels of such drugs. Therefore, it appears to me that the definition of the Drugs Act is relevant even prior to the introduction of Sub-clause (iii) of Section 2(f) of the Central Excise and Salt Act, 1944. In the case of Mayor of Portsmouth v. Smith (1885) 10 AC 364 (HL) at p. 371 Lord Blackburn had observed: "Where a single section of an Act is introduced into another subsequent Act, it must be read in the sense which it bore in the original Act from which it was taken, and consequently it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other sections are not incorporated into the new Act. I do not mean that if there was in the original Act a section not incorporated, which came by way of a proviso or exception on that which was incorporated that should be referred to; but all others, including the interpretation clauses, if there be one, may be referred to." Therefore, in my opinion it is not possible to rule out the definition provided in the Drugs Act, 1940 in construing what is manufacture of patent and proprietary medicine. In that view of the matter I am of the opinion that labelling is manufacture, when labelling is completed, manufacture is completed, it is in this context relevant also to refer to the observations of the Supreme Court in the cases relied on by Mr. Dutta. In this case of S.B. Sugar Mills v. Union of India - 1978 (2) ELT (J 336) = AIR 1968 SC 922 it was observed by the Supreme Court at p. 928 of the report.
"The Act charges duty on manufacture of goods. The word "manufacture" implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. The duty is levied on goods. As the Act does not define goods, the Legislature must be taken to have used that word in its ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the Act was brought out in AIR 1963 SC 791." Therefore, it is in order to be bought and sold in the market in case of the patent and proprietary medicine there must be labelling and such labelling is, therefore, manufacture. Quite apart from that question independent of the Drugs Act and independent of Sub-clause (iii) of Section 2(f) of the Central Excises Act, 1944. I am of the opinion that in view of the peculiar nature of the patent and proprietary medicines labelling is a process incidental to or ancillary to the completion of manufacture of that product. From that point of view in any opinion the imposition of levy in this case was valid. Unlabelled medicines are not and cannot be described as patent and proprietary medicine. Mr. Dutta's second contention therefore fails." As against this the Ld. DR reiterated the findings recorded by the lower authority.
5. The Appellant is manufacturing P or P medicines. The Drugs & Cosmetics Act, 1940 was passed by the Parliament to regulate the import, manufacture, distribution and sale of Drugs & Cosmetics. Being a regulatory legislation the Parliament has prescribed in Chapter IV thereof the standards of quality, Misbranded Drugs and Adulterated Drugs, Spurious Cosmetics etc. The Act also provides for procedure for inspection and also provides for report by the Government Analyst.
Section 27 of the said Act specifically provides for penalty for manufacture and sale of drugs in contravention of this Chapter. Rule 85 of the Rules provides for cancellation of the licence in case the licensee failed to comply with the provisions of the Act or Rules made thereunder. The relevant provision is set out below: Rule 74--Conditions of licence in [Forms 25 and 25-F]--A licence in [Forms 25 and 25-F] shall be subject to the conditions stated therein and to the following further conditions, namely:- (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 or registers showing the particulars in respect of such tests as specified in Schedule U. The records or registers shall be retained for a period of 5 years from the date of manufacture.
(l) 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 cases of drugs where no date of expiry of potency is specified on the liable, the reference samples shall be maintained for a period of three years from the date of manufacture; (o) The licensee shall comply with the requirements of "Goods Manufacturing Practices" as laid down in Schedule M.The Clauses (c & l) provide for testing of each batch or lot of the raw materials used by the manufacturer for the manufacture of the final product and also of each batch of final product and shall maintain records of registers showing the particulars in respect of such tests specified in Schedule U. The said clause also provides for retention of Registers for five years. Clause (l) provides for maintenance of reference samples from each batch of the drugs manufacture by him in a quantity which is at least twice the quantity of the drug required to conduct the test. The reading of Clauses (c & l supra) forces us to say that only such of the samples which are found to be in conformity with the prescribed standard could be marketed. In fact this has been emphasised in the above way in Para 4 of the Order of the Tribunal in the case of Bayer Diagnostics India Ltd. v. Commr. of Cen. Ex. & Customs, Vadodara (supra). In the show cause notice at Pages 23 & 24 of the Paper Book, reference has been made to the statement of Mr. Bhat having admitted that the company were drawing the samples of fully manufactured packed goods for Q.C. purposes and also admitted that the inputs on which credit is availed is also utilised for Q.C. purposes.
He also stated that on the samples of finally packed goods, the company did not pay any central excise duty because they were not marketable.
The assessing authority has taken this as a ground for denying the modvat as also charging for duty purposes.
6. It may be emphasised here that the show cause notice at Para 6 reads as under:- "Whereas it also appears that the C.Ex. duty of Rs. 19,33,473/- evaded by the assessee on the samples of final products cleared by them during the period from April 95 to Dec 99 is required to be recovered from them under the provisions of proviso to Section 11A(1) of C.Ex. Salt Act, 1944 read with Rule 9(2) of C.Ex.Rules, 1944. Similarly, the proportionate modvat credit of Rs. 10,37,930/- not reversed by the assessee on the inputs utilised for the quality control purposes needs to be recovered from them under Rule 57I read with proviso to Section 11A(1) of the C.Ex.Act, 1944." The findings of the adjudicating authority at Paras 8 & 9 are as follows: "8. I find that the input used for testing the quality of the input for either accepting the input or rejecting it, is not a process in or in relation to manufacture of the final product. It is a process wherein the quality of inputs is tested and the quantity used for such purpose is not going for manufacturing the final product. The inputs, if found not suitable, they are rejecting the same, therefore it is definite that quantity taken therefrom for quality test is not used in the factory. Similarly the inputs which are, accepted on the grounds of their quality, the quantity of such inputs used for testing is not going in or in relation to the manufacture of the final product as the test conducted for accepting the input supplied to them. The inputs used for such quality tests are thus not used in or in relation to the manufacture of final product. Therefore, provisions of erstwhile Rule 57D are not attracted in this particular case. The case laws cited by the assessee are thus not relevant for the facts in this case.
Therefore, the assessee should not have taken the credit on such inputs used for quality tests and therefore they are required to reverse the modvat credit involved on such inputs.
9. As regards the duty demanded on samples, taken out after labelling and packing of the medicines, I find that the medicines are packed with appropriate label showing batch no., date of manufacture, expiry, etc. and at this stage they are in fully manufactured condition and are ready for marketing and this is the RG-1 stage in case of medicines. Therefore samples in question taken out after packing, labelling showing batch no., date of manufacture, expiry & other particulars are in fully manufactured condition and are ready for marketing. Therefore, the same should have been accounted for in the RG-1 and duty should have been discharged on such quantity." Rule 74(c) of the Drugs and Cosmetics Rules prescribes that each batch of raw materials used by a manufacturer for manufacture of the final product and each batch of final product shall be tested and a record maintained thereof. The conversion of the inputs into "finished products" cannot be denied by any person. The product is not sold because of the embargo as envisaged under Rule 74(c) of the Drugs and Cosmetics Rules.
7. If in a case the raw materials are converted into the finished product and the samples are tested in terms of Rule 74(c) of the Drugs & Cosmetics Rules, on such examination it is found to be not in conformity within prescribed standards, then such entire batch of the final products so manufactured are destroyed. Supposing the raw materials is also tested in terms of Rule 74(c) and they are not in conformity with the prescribed standards, they are also destroyed.
8. The argument of the Learned Counsel as regards the destruction of the raw material as well as the manufactured products is that such destroyed or to be destroyed products fall within the provisions of Rule 57D of the Central Excise Rules which provides for non denial of modvat credit in respect of waste and by-products. As far as the imposition of duty is concerned, the argument of the learned Counsel for the Appellants is that such product can never be sold in the market and he relies on the observations of the Tribunal in the above decision of Bayer Diagnostics India Ltd. case (supra). The maintenance of records as envisaged under Schedule M and U are reflected in Clause (7) and Sub-clauses (iv), (v), (vi), (vii), (viii), (ix), (x) of Clause 16 in Schedule M and Clauses (21), (22) & (26) of Part I and Part III to Schedule U. Particulars are to be recorded in the analytical records mentioned in Part III. The combined reading thereof we come to a conclusion that where the manufacturer undertakes test of inputs before the actual use and is destroyed, the credit cannot be denied. The Order of the Calcutta Bench of the Tribunal in the case of Commissioner of Customs & Central Excise, Bhubaneshwar v. Birla Tyres [2001 (138) ELT 168 (Tri-Kolkata) has been cited with which we agree.
9. The Appellants also relied on the judgment of the Hon'ble Calcutta High Court in the case of Calcutta Clinical Research Association Ltd. v. Union of India [1999 (109) ELT 56 (Cal.)] referred to in earlier portion of this order. In the Bayer Diagnostics India Ltd. case (supra), the Tribunal has followed the said judgment of the Calcutta High Court referred to above even though question raised regarding exigibility of duty on the product was upheld by the Hon'ble Calcutta High Court in the said case. The observation of the compliance of the Drugs Act, for purpose of marketability has been referred to, we therefore feel that unless a manufacturer of a drug complied with the provisions of the Rules framed under the Drugs and Cosmetics Act, there cannot be any transaction of sale in the market, of such goods. Once it is held that the goods are not held to be marketable, then there cannot be any levy of excise duty.
10. Another facet of the case which came during the concise arguments in this case is the judgment of the Hon'ble Supreme Court rendered in the case of I.T.C. Ltd. v. Collector of Central Excise [2003 (151) ELT 246 (S.C.)] where the question which arose was whether certain sticks of cigarettes which are drawn for test purposes could be included for purpose of exigibility of excise duty. The Hon'be Supreme court in paragraphs 17 & 18 thereof have held as follows:- "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 cigarette 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 packing of cigarette is incidental or ancillary to the completion of manufactured products, the same may result into 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 manufactured 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 cigarette 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 excise duty.
18. Coming now to the second question, it may be stated that learned counsel appearing on behalf of the Revenue could not dispute the proposition that the quantity of cigarette sticks that is destroyed in course of quality control test is not liable to excise duty. He, however, submitted that no evidence whatsoever was adduced on behalf of the appellant-Company either before the assessing authorities or the Tribunal to show that any cigarette stick was destroyed in the process of quality control test, much less cigarette sticks of any particular quantity inasmuch as, undisputedly, for major period no account at all was maintained and for some period, though account was maintained in relation to the quantity of cigarette sticks sent to the laboratory for testing, but no account was maintained as to how much quantity was destroyed during the process of testing. It was pointed out by learned Additional Solicitor General that though in the show cause notice the appellant-Company was specifically called upon to show cause for non-maintenance of account in relation to the sticks of cigarette sent for quality control test, but in spite of that it failed to produce any account whatsoever to show as to how much quantity of cigarette sticks was sent for quality control test during different periods, much less producing any account in relation to the destruction of the cigarette sticks during the course of testing. At this stage, Shri Ganesh submitted that the matter should be remitted either to the Tribunal or the assessing authority for affording opportunity to the appellant to produce the accounts and then record a finding as to how many cigarette sticks were destroyed during the course of testing. In our view, no useful purpose will be served by remitting the matter on this question, firstly, because even according to the show cause reply filed by the appellant-Company before the assessing authorities, it had not maintained any account in relation to the destruction of cigarette sticks during he course of quality control test and, secondly, no reason was assigned for not producing any account either before the assessing authority or before the Tribunal in spite of the fact that it was clearly stated in the show cause notice that the appellant-Company was not maintaining any such account. In view of the non-maintenance and non-production of accounts in relation to the destruction of cigarette sticks during the course of testing, we are of the opinion that excise duty was leviable on the entire stock of cigarette sticks sent to the laboratory for quality control test." The above decision has held that the same will be exigible to tax. From the reading of the said two paragraphs, it will be very clear that the fact situation in the instant case and ITC's case are entirely different. It must be taken note of that in the case of cigarettes, it is a physical controlled commodity. It is not so in the instant case.
Secondly provisions of another Act of regulatory nature, namely, the Drugs and Cosmetics Act and Rules framed thereunder did not arise in that case. In fact the first sentence of Para 18 of the said judgment may be in favour of the Appellants. Of course, it is made by way of concession by the Counsel for the Revenue. As stated earlier, the situation in both cases i.e. the instant case and ITC's case are entirely different. In view of the above, we are of the view that the Appellants have made out a case, that the impugned Order confirming the demand is wrong in law. The denial of modvat credit in respect of storage of the inputs for manufacturing samples and destruction of inputs before its use in the production of the final product complying with the provisions of the Drugs & Cosmetics Act and Rules thereunder made is also wrong in law.