1. M/s. DXN Herbal Manufacturing (India) Pvt. Ltd. [DXN for short], with their factory at Pondicherry, are engaged in the manufacture of 'Reiki Gano' [RG for short] and 'Ganocelium' [GL for short] capsules.
Their certificate of registration with the department was obtained upon declaration that they were manufacturing the said products as Ayurvedic Proprietary Medicines [APM for short] falling under SH 3003.39 of the Schedule to the CETA 1985. The company is a part of DXN Group of Companies, Malaysia. M/s. DXN are the appellants in Appeal No.365/2005. Dr. Lim Siow Jin, CEO and Director of the company is the appellant in Appeal No. 366/2005. M/s. Daehsan Trading (I) Pvt. Ltd. [Daehsan for short] and M/s. Roshan Commercial Trades (P) Ltd. [Roshan for short] are the marketing agents for DXN's products. They are the appellants in Appeal Nos. 367/2005 & 368/2005 respectively. The appellant in Appeal No. 369/2005, Shri K. Thevaraj, is a Director of Daehsan.
2. From the results of the investigations made by officers of the Directorate-General of Central Excise Intelligence [DGCET], it appeared to the department that M/s. DXN, Pondicherry had classified RG & GL capsules as APM under SH 3003.39 and were paying duty of excise thereon by assessing the goods under Section 4 of the Central Excise Act during the period March to July, 2002; that, prior to the said period, they were importing RG and GL in bulk quantities from Malaysia and marketing the same in India as food supplements classifiable under SH 2108.99 and assessable to duty of excise on the basis of Maximum Retail Price [MRP] under Section 4A of the Central Excise Act, subject to abatement in terms of Notification No. 13/2002-C.E. (N.T.), dated 1-3-2002; that M/s. DXN themselves had declared to various Govt. bodies in Pondicherry that they were manufacturing food supplements from natural mushrooms; that their marketing agency viz. M/s. Daehsan had also declared in their literatures and pamphlets accompanying the products that the products were meant for general health and not a curer of any specific disease; that the stockists/distributors of M/s. DXN had also admitted having distributed the products without any therapeutic claim thereon; that M/s. Daehsan had obtained drug licence in respect of the same products from the Drug Control Authority, Tamilnadu on the basis of forged clinical trial reports; that M/s. DXN (Pondicherry) had also fraudulently obtained drug licence in respect of the same products from the Food and Drugs Administration, Pondicherry by misdeclaring the ingredients of the products; that, all over the world except in India, RG & GL were being marketed as food supplements only; that the actual ingredients of RG and GL were 'Ganoderma' and 'Shiitake', of which there was no mention in ayurvedic texts; that RG & GL capsules had no therapeutic or prophylactic value and were not used as medicaments and that both the products were appropriately classifiable as food supplements under SH 2108.99 and hence required to be assessed to duty of excise in terms of Section 4A read with Notification No.13/2002-C.E. (N.T.). During the investigative stage, M/s. DXN paid Rs. 50.00 lakhs towards duty on their past clearances of RG and GL capsules. From September, 2002, they are paying duty, under protest, on MRP of the goods in terms of Section 4A. On the basis of the investigative results, the department issued a show cause notice dated 31-7-2003 to M/s. DXN and other appellants for recovery of differential duty on the clearances of goods for the period March to July, 2002 from M/s. DXN by invoking the extended period of limitation for imposing penalties on the noticees and for confiscating the goods seized from M/s. DXN's factory and other premises during the course of investigation. Another notice was issued subsequently seeking to vacate the above protest for the period, September, 2002 to June, 2003. For invoking the larger period of limitation, the first notice alleged, against M/s. DXN, mis-declaration of facts with intent to evade payment of duty. The show-cause notice relied upon voluminous documents recovered by the investigators from various premises, statements/letters of a few executives of M/s. DXN, some functionaries of M/s. Daehsan, distributors/stockists of DXN products, drug control authorities and experts. M/s. DXN contested the allegations raised in the show-cause notice. Their defence was adopted by their co-noticees.
Some of the persons whose statements/letters were relied upon in the show-cause notice were cross-examined before the adjudicating authority. Learned Commissioner of Central Excise, in adjudication of the disputes, passed an order after due process of law, the operative part of which reads as under: (1) I order that the products Reiki Gano (RG) and Ganocelium (GL) capsules be classified as 'food supplement' under Chapter sub-heading 2108.99 of the Central Excise Tariff Act, 1985 and assessable under Section 4A of the Central Excise Act, 1944 for payment of Central Excise Duty.
(2) I demand the Central Excise duty of Rs. 2,03,04,544/- (Rupees two crores three lakhs four thousand five hundred and forty four only) cleared during the period from March, 2002 to July, 2002 under proviso to Section 11A(1) of Central Excise Act, 1944 from DXN with appropriate interest under Section 11AB of Central Excise Act, 1944 and appropriate Rs. 50,00,000/- paid by DXN vide TR 6 challan No. nil dated 12-8-2002 towards the aforesaid duty.
(3) I vacate the protest and regularize the payment differential duty including the duty of Rs. 3,42,91,224/- (Rupees three crores forty-two lakhs ninety-one thousand two-hundred twenty-four only) paid by M/s. DXN under protest for the clearances of RG & GL from September, 2002 onwards, (4) I impose penalty of Rs. 2,03,04,544/- (Rupees two crores three lakhs four thousand five hundred forty-four only) on DXN under Section 11AC of the Central Excise Act, 1944 and Rs. 1,00,000/- (Rupees one lakh only) under Rule 25 of the Central Excise Rules, 2002.
(5) I order confiscation of the excisable goods viz. 13563 bottles of RG90, 18553 bottles of GL90, 30183 bottles of RG30 and 31994 bottles of GL30 totally valued at Rs. 3,55,93,450/- manufactured and cleared by DXN to Roshan and detained/seized on 8-8-2002 at their warehouse at Chennai under Rule 25 of the Central Excise Rules, 2002. However, I impose a redemption fine of Rs. 35,00,000/- (Rupees thirty-five lakhs only) in lieu of confiscation and as the said goods have been provisionally released on execution of bond/bank guarantee, the same may be restored.
(6) I order confiscation of the excisable goods viz. 5788 bottles of RG90, 5734 bottles of GL90, 8250 bottles of RG30 and 6492 bottles of GL30 totally valued at Rs. 1,11,61,000/- manufactured and cleared by DXN and detained/seized on 8-8-2002 at the warehouse of Daehsan, Chennai under Rule 25 of the Central Excise Rules, 2002. However, I impose a redemption fine of Rs. 10,00,000/- (Rupees ten lakhs only) in lieu of confiscation and as the said goods have been provisionally released on executions of bond/bank guarantee, the same may be enforced.
(7) I also order confiscation of the excisable goods viz. 2331 bottles of RG90, 5439 bottles of GL90, 10939 bottles of RG30 and 10892 bottles of GL30 totally valued at Rs. 74,09,376 /- manufactured and cleared by DXN and detained/seized on 4-9-2002 at Daehsan, Branch Office, New Delhi under Rule 25 of the Central Excise Rules, 2002. However, I impose a redemption fine of Rs. 8,00,000/- (Rupees eight lakhs only) in lieu of confiscation and as the said goods have been provisionally released on execution of bond/bank guarantee the same may be enforced.
(8) I order confiscation of the excisable goods viz. 62000 bottles of RG90, 60750 bottles of GL90, 88800 bottles of RG30 and 65600 bottles of GL 30 totally valued at Rs. 15,44,70,060/- manufactured and kept ready for despatch by DXN and detained/seized on 12-8-2002 at the factory of DXN, Pondicherry and released as per the directions of the Hon'ble High Court of Judicature, Chennai in W.P. Misc. Petition No. 52354/2002 in W.P. 35179/2002 under Rule 25 of the Central Excise Rules, 2002. However, I impose a redemption fine of Rs. 1,50,00,000/-(Rupees one crore fifty lakhs only) in lieu of confiscation and as the said goods have been provisionally released on execution of bond/stock security the same may be enforce.
(9) I impose a penalty as below on the following noticees under Rule 26 of Central Excise Rules, 2002: (a) Dr. Lim Siow Jin, CEO & Director, DXN - Rs. 25,00,000/- (Rs. twenty-five lakhs only) (b) M/s. Daehsan Trading (India) Pvt. Ltd. - Rs. 25,00,000/- (Rs. twenty-five lakhs only).
(c) M/s. Roshan Commercial Trades (P) Ltd. - Rs. 25,00,000/- (Rs. twenty-five lakhs only).
(g) Shri K. Thevaraja, Director, Daehsan - Rs. 10,00,000/- (Rupees ten lakhs only).
3. M/s. DXN are aggrieved by paragraphs 1 to 4 and 8 of the above order while the other appellants are challenging the respective penalties imposed on them by the Commissioner.
4. Heard both sides. Learned Counsel for the appellants submitted that M/s. DXN had commenced commercial production in March, 2002 only after obtaining drug licence from the Foods and Drugs Administration, Pondicherry and that the licence stood invalidated upto 31-12-2005. As the goods were manufactured under valid drug licence, it was not open to the department to classify them differently. M/s. DXN never claimed the products to be food supplements. On the other hand, they had cleared the goods as APM and the consumers identified the goods for their medicinal, properties. The stockists/distributors, on cross-examination, had deposed that RG and GL had both preventive and curative properties and were sold on that basis only. The customers counted the products as ayurvedic medicaments. Learned Counsel argued that the important factor to be considered while classifying the products under the CETA was how the goods were known in common parlance. In this context, he relied on the following decisions of the Supreme Court: (i) Commissioner v. Sharma Chemical Works [wherein it was held that the main criterion for determining classification of goods was normally the use it was put to by the customers who used it].Naturalle Health Products (P) Ltd. v. Collector [wherein it was held that the common parlance test would have to be resorted to for finding out whether a product was treated as ayurvedic medicine by the public] (iii) Commissioner v. Vicco Laboratories [wherein it was held that the department's burden of classifying a product must be discharged by proving as to how it was understood by its consumers in common parlance].Dabur (India) Ltd. v. Commissioner 2005 (182) E.L.T. 290 (S.C.), [wherein it was held that a product must be classifiable according to the popular meaning given to it by its users, rather than scientific/technical meaning.
Learned SDR contested the Counsel's claim that RG and GL capsules were understood as ayurvedic medicaments by the users thereof. She submitted that both the products were presented in the market by stockists/distributors, as food supplements only and were accepted as such by the buyers. Therefore, in common parlance, the products were known as food supplements. Learned SDR, in this context, relied on the very decisions cited by learned Counsel (vide supra).
5. Learned Counsel referred to a good number of Bills of Entry covering importation of RG and GL powders in bulk by M/s. DXN for a period subsequent to the period of dispute and submitted that the imported goods had been classified by the customs authorities under SH 3003.39 of the First Schedule to the Customs Tariff Act. All such Bills of Entry had been finally assessed and the above classification was not questioned by the department. The imported goods were repacked into capsules and cleared from the Pondicherry factory. There was no reason why these products should be differently classified under the Central Excise Tariff Act. Learned SDR argued that, classification of goods under the CETA being independent of that under the CTA, the classification done under the latter Act was not necessarily to be followed under the former.
6. Learned Counsel relied on a certificate dated 14-2-2002 issued by the Port Health Officer, Chennai, which, for the purpose of customs clearance of a consignment of the above goods, certified that RG/GL powder was not an article of food and hence did not come within the purview of the Prevention of Food Adulteration Act, 1954. Relying on this certificate, learned Counsel challenged the classification of the subject products as food supplements. It was also pointed out by learned Counsel that the Drug Control authorities in Gujarat and Kerala had seized the DXN products in 2001 under Section 22 of the Drugs and Cosmetics Act, 1940, alleging that the goods despite being drugs were not covered by valid drug licence. In this connection, reference was made to mahazars evidencing seizures. Learned Counsel also relied on an order dated 31-5-2004 passed by the Kerala Sales Tax Appellate Tribunal in the case of M/s. Daehsan, who were assessees under the Kerala General Sales Tax Act for the assessment year 2000-01. The dispute before the Tribunal was whether RG and GL capsules sold by M/s. Daehsan [as dealers] were Ayurvedic Proprietary Medicines or food supplements.
The Tribunal, after considering the opinion of ayurvedic expert, came to the conclusion that the above goods were to be treated by the assessing authority as ayurvedic preparations and not as food supplements. Finally, learned Counsel referred to Note 16 to HSN Heading No. 21.06 and argued that food supplements intended for prevention or treatment of diseases or ailments stood excluded from the purview of the above heading and fell for inclusion in Chapter 30 of HSN corresponding to Chapter 30 of CETA Schedule. Referring to the Commissioner's finding that, prior to March 2002, M/s. Daehsan were marketing the subject goods as food supplements because they did not have a drug licence, counsel submitted that it was during those days that they were proceeded against by the Drug Control authorities in Gujarat and Kerala. Later on, M/s. Daehsan obtained an Ayurvedic Drug Licence and continued their business in accordance with law. Learned Counsel also referred to the expert opinion of Dr. K.S. Viswanatha Sharma, who had opined that 'Ganoderma' was an ayurvedic medicament, which could prevent and cure diseases. Counsel also claimed that there was sufficient evidence on record to show that 'Ganoderma' was available in India since ancient times. Relying on the expert's opinion, learned Counsel submitted that mushrooms figured in the original ayurvedic texts and hence the subject products merited classification as APMs under Heading 30.03 of the CETA Schedule.
7. Learned SDR filed a host of documents and, relying thereon, submitted that M/s. DXN had claimed their products to be food supplements before various other Government departments/bodies and obtained certificates on that, basis. These documents include (i) certificate of registration dated 17-1-2002 issued to M/s. DXN by the Deputy Commercial Tax Officer - Registrations, Pondicherry under the Central Sales Tax Act, (2) similar certificate under the Pondicherry General Sales Tax Act, (3) trade licence dated 30-3-2002 issued to M/s.
DXN by the Commissioner, Mannadipet Commune Panchayat, Pondicherry, under the Pondicherry Village & Commune Panchayats Act. (4) letter dated 25-3-2002 issued to M/s. DXN by the Electricity Department, Govt.
of Pondicherry, allowing power supply to the company for its proposed industry, (5) 'No Objection Certificate (NOC) dated 5-2-2002 issued by the Pondicherry Pollution Control Committee, Department of Science, Technology and Environment, Govt. of Pondicherry, granting clearance to the company for setting up such industry (6) permit dated 27-9-2001 issued to M/s. DXN by the Entrepreneurial Assistance Unit, Ministry of Commerce and Industry, Govt. of India, for setting up a unit for manufacture of 'food supplement capsules made from natural mushroom'; (7) provisional NOC issued to DXN by the Deputy Director of Industries & Commerce for setting up of manufacturing unit. (8) permit dated 26-3-2002 of the Commune Panchayat to DXN for construction of factory, and (9) permit dated 10-1-2002 issued to DXN by the General Manager, District Industries Centre, Govt. of Pondicherry for use of agricultural land for industrial purpose and for drawal of water from bore well for such purpose. The documents filed and relied on by the SDR also include a certificate issued in October, 2001 to M/s. Daehsan by the Director of Drugs Control, Tamil Nadu certifying that RG and GL were only food supplements. Reference was also made to a Bill of Entry dated 5-2-2002 filed by M/s. Daehsan, which covered import of goods declared as 'DXN RG' and 'DXN GL' and classified under Heading 21.06 of the CTA Schedule. Learned SDR also referred to the confessional statements of certain functionaries of M/s. DXN and M/s. Daehsan, wherein it was admitted that the goods in question were food supplements. Relying on a letter of the Director of Drugs Control, Tamil Nadu, addressed to the DGCEI, learned SDR submitted that M/s.
Daehsan had obtained a Drug Loan Licence from the Directorate of Drugs Control, Chennai in December, 2001 for manufacturing RG & GL as APMs; that the said licence was subsequently transferred to M/s. Roshan; that, in terms of such licence, M/s. Roshan started commercial manufacture of RG and GL as APMs through M/s. Madras Pharmaceuticals from February, 2002 and that what they did was only relabelling, as APM, of RG & GL capsules imported by Daehsan as food supplements. In this context, it was also reiterated that M/s. Daehsan had obtained the above licence on the basis of concocted clinical trial reports of two medical practitioners as well as on the basis of a baseless claim that the botanical names of what were said to be the ingredients [Chatraka and Buchatra] of RG and GL had been mentioned in Ayurvedic texts.
Learned SDR also referred to the opinion given by the Head of the Department, Ayurveda to the effect that Chatraka and Buchatra were basically food supplements, which could not, by themselves, be used independently to cure any disease. In support of her claim for classification of the subject products under Heading 21.08 of the CETA Schedule [corresponding to Heading 21.06 of the HSN], learned SDR relied on Note 16 under HSN Heading 21.06 as well as Note 1(a) in Chapter 30 of the CETA Schedule. Finally, learned SDR relied on the following decisions of the Tribunal: (ii) Collector v. Li Taka Pharmaceuticals Ltd. 2004 (175) E.L.T. 127 (Tri. Del.)--------------------------------------------------------------------------------21.08 Edible preparations, not elsewhere specified or included-------------------------------------------------------------------------------- 2108.10 - Preparations for Lemonades or other Bev- erages intended for use in the manufacture of-------------------------------------------------------------------------------- 2108.20 - Sharbat-------------------------------------------------------------------------------- 2108.30 - Prasad or Prasadam-------------------------------------------------------------------------------- 2108.40 - Sterilised or Pasteurised Miltone - Other-------------------------------------------------------------------------------- 2108.91 - Not bearing a brand name--------------------------------------------------------------------------------30.03 Medicaments (including veterinary medica- ments)-------------------------------------------------------------------------------- 3003.10 - Patent or proprietary medicaments, other than those medicaments which are exclusively-------------------------------------------------------------------------------- 3003.20 - Medicaments (other than patent or proprie- tary) other than those which are exclusively-------------------------------------------------------------------------------- 3003.31 - Manufactured exclusively in accordance with the formulae described in the-------------------------------------------------------------------------------- 3003.32 - Medicaments (including veterinary me- dicaments) used in bio-chemic system and not-------------------------------------------------------------------------------- 3003.39 - Other Note 1(a) in Chapter 30 of the CETA Schedule says that this chapter does not cover foods or beverages [such as dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters], which are classified under Section IV [Chapters 16 to 24]. Though there is no specific mention of "food supplements" in Section IV, information on the composition and use of these goods can be had from Note 16 under HSN Heading 21.06 [corresponding to Tariff Heading 21.08]. This Note reads as under: Preparations, often referred to as food supplements, based on extracts from plants, fruit concentrates, honey, fructose, etc. and containing added vitamins and sometimes minute quantities of iron compounds. These preparations are often put up in packagings with indications that they maintain general health or well-being. Similar preparations, however, intended for the prevention or treatment of diseases or ailments are excluded (Heading 30.03 or 30.04).
We find that, on the facts of this case, it is not in dispute that RG and GL are made from mushroom, a kind of plant. It has been pleaded by the appellants themselves that, in terms of composition and quality, there is no difference between RG/GL in capsules (goods under consideration) and RG/GL powder imported from Malaysia. From the documents recovered from the appellants' premises, the investigators found the nutritional content of RG and GL as shown below:-------------------------------------------------- RG GL--------------------------------------------------Protein 13.81 g 17.8 g--------------------------------------------------Carbohydrate 75.3 g 72.1 g--------------------------------------------------Fats 1.58 g 4.3g--------------------------------------------------Calcium 0.4 mg.
11.6 mg.--------------------------------------------------Potassium 124.9mg.
82.5 mg.--------------------------------------------------Iron 12.1 mg.
18.2 mg.--------------------------------------------------Sodium 16.89 mg.
10.0 mg.--------------------------------------------------Vitamin C 197.9 mg.--------------------------------------------------Vitamin B3 190.5 mg.--------------------------------------------------Moisture 5.77g--------------------------------------------------Fibre 3.47g--------------------------------------------------Calories 353.5 Cal 380.4 Cal The above composition of the subject products was confirmed by the appellant, Dr. Lim Siow Jin (CEO, DXN Group of Companies) himself in his statements, which were never retracted. He also stated that there was no change in nutritional content of the products while their classification was changed as APMs. A statement to this effect was given by Shri Abdul Rahaman Puvarasan B. Abdullah, Director, Daehsan.
Shri Abdul Rahman also stated that they had not claimed any therapeutic value on the capsules and that the products generally improved the immune system of the body. A statement to this effect was given by Shri K. Thevaraja (appellant), Director, Daehsan, also. These statements were not retracted and none of these persons who were at the helm of affairs of DXN/Daehsan was sought to be cross-examined before the adjudicating authority. Shri R. Shanmugasundaram, Branch Co-ordinator of M/s. Daehsan, Madurai, also, in his statement, stated that, though RG-90 and GL-90 were marketed by the company in 2001 as food supplements and in April - May, 2002 as APMs, there was no change in quality or quantity or in other respects. One Shri Orison J. Francis, distributor-cum-stockist of DXN products, also stated to the same effect. In his statement, Shri H. Shivakumar, another stockist for M/s.
Daehsan stated that RG/GL capsules contained polysaccharide, vitamin, minerals, etc., which gave energy to those who consumed these capsules.
Another DXN distributor, Shri S. Balakrishna also stated likewise.
Statements were given by some other stockists/distributors also and these were also to the effect that RG and GL capsules were marketed as food supplements only. Some of these statements also contained the averment that there was no change in the products or in the marketing pattern with the change of classification, by DXN, of the goods from food supplements to APMs. Retraction of these statements by the stockists/distributors (in cross-examination) two years later can hardly change the established composition of the products vide table supra. Upon consulting chemical literature, we find that 'polysaccharides' (mentioned by Shivakumar, Balakrishna and others in their statements) are carbohydrates and that calcium, potassium, iron and sodium are 'minerals' (mentioned by Shivakumar, Balakrishna and others in their statements). Test reports of M/s. SGS (India) Pvt Ltd. relied on by DXN themselves indicate the presence of fats and proteins in RG/GL powders. The undisputed composition of the goods which makes them fit for use as general health supplements or tonics is substantially congruous with the description of 'food supplements' given under Note 16 ibid.
8.1 The dispute now shifts to the last sentence of Note 16 which reads as: Similar preparations, however, intended for the prevention or treatment of diseases or ailments are excluded (Heading 30.03 or 30.04).
M/s. DXN have claimed in their appeal that RG/GL can prevent, mitigate and cure diseases. But they have not named any disease. It was also argued by learned Counsel for the appellants that the products in question had both preventive and curative properties and that the buyers treated the goods as ayurvedic medicines. In this connection, learned Counsel referred to what was deposed by some stockists/distributors when cross-examined. However, he has not specified any disease or ailment which could be prevented or cured by means of the above products, nor has any of the said witnesses so specified. When one claims a certain product to be a medicament with prophylactic or therapeutic property, one has got to specify the disease or ailment which can be prevented or cured by means of such product and must also prove this claim. This imperative requirement remains unfulfilled in this case. M/s. DXN themselves do not have a case that RG/GL can be used to prevent or cure any particular disease or ailment. Had it been their case, they would have shown that their products were sold in retail under doctor's prescription. Shri Surya Prakash Rao, authorized signatory of M/s. Daehsan stated that there was no curative property in RG & GL capsules and that the products were not sold under doctor's prescription. He was not cross-examined. Shri D.Premkumar, Assistant Factory Manager, DXN (Pondicherry) himself stated that they had no pharmacopocial standards for RG & GL capsules. This statement was not retracted, nor was Shri Premkumar sought to be cross-examined. Moreover, the preponderance of evidence on record supports the Revenue's claim that the products were actually projected in the market as food supplements and not as medicaments. M/s. Daehsan as marketing agents of DXN issued guidelines in writing to their distributors, reading as under: Do not make any claims. Herbal food supplements are strictly classified as foods and regulated as such. Extra care must be done to avoid making specific claim about what the products can do to the body. Any food may be categorized as a drug if it is claimed that the product is for treatment, cure, prevention and mitigation of a disease. The important word is disease.
When a product is offered as a specific treatment for a disease, it becomes a drug.... It is very important to bear in mind that you are recommending a food supplement and that you do not intend to be misconstrued as recommending a drug.
The above documentary evidence of DXN having emphatically held out through their marketing agency (Daehsan) and the latter's stockists/distributors before the general public that their products viz. RG & GL capsules were strictly herbal food supplements and recommended as drugs stands unrebutted and overrides am oral evidence to the contra given by any Daehsan functionary or stockist/distributor in cross-examination. It is trite law that documentary evidence would prevail over oral evidence.
8.2 Before various public authorities also, M/s. DXN declared their industrial activity as manufacture of "food supplements". The certificate of registration dated 17-1-2002 issued by the Central Sales Tax authorities to M/s. DXN mentions their business as "manufacture of food supplement capsules made from natural mushroom". This certificate indicates that it is valid from 17-1-2002 till its cancellation. M/s.
DXN have not claimed that the above certificate was cancelled at any point of time. The trade licence issued to M/s. DXN by the Commissioner, Mannadipet Commune Panchayat under the Pondicherry Village and Commune Panchayat Act on 30-3-2002 is also in respect of "manufacture of food supplement capsules made from natural mushroom".
This licence is seen to be valid upto 31-3-2003 covering the entire period of dispute. It is noticed that, on 24-9-2004, the Panchayat upon the licensee's application altered the name of the goods to "ayurvedic drug" in the licence. This amendment, however, has no retrospective effect, nor any impact on the Revenue's evidence in this case. The letter dated 25-3-2002 issued to the party by the Electricity Department, Govt. of Pondicherry granting power supply to their factory also indicates that the power supply was made available for the "manufacture of food supplement capsules made from natural mushroom".
The NOC dated 5-2-2002 issued by the Pondicherry Pollution Control Committee to M/s. DXN is also in respect of "manufacture of food supplement capsules made from mushroom powder". The name of the products in this document also is seen to have been amended as "ayurvedic drug (mushroom)" by the said authority on 21-9-2004 upon the party's request. This amendment is also as inconsequential as the aforesaid amendment of Panchayat's licence. The letter dated 27-9-2001 issued to M/s. DXN by the Entrepreneurial Assistance Unit under the Ministry of Commerce and Industry, Govt. of India, is the acknowledgement of receipt of Industrial Entrepreneurial Memorandum for the "manufacture of food supplement capsules made from natural mushroom". With reference to this IBM acknowledgement, the Deputy Director of Industries and Commerce issued a provisional NOC to the party to set up a medium scale unit in Pondicherry for the "manufacture of food supplement capsules made from natural mushroom". Here, again, we notice a change of nomenclature allowed by the Assistant Director of Industries & Commerce, who, with reference to DXN's letter dated 8-6-2004, wrote to them saying that he had no objection for change of the products' name from "capsule made from natural mushroom'" to "ayurvedic drugs". This, again, has no relevance to the period of dispute in this case. The permission issued by the panchayat on 26-3-2002 to M/s. DXN is for the construction of factory as per approved plan, for the "manufacture of food supplement capsules made from natural mushroom". The letter dated 10-1-2001 issued to the party by the District Industries Centre, Govt. of Pondicherry granting permission for use of agricultural land for industrial purpose also mentions such purpose as manufacture of "food supplement capsules made from natural mushroom". All these constitute irrebutable evidence of M/s. DXN having set up their factory for the manufacture of food supplement capsules from natural mushroom, with the requisite clearance/licence permission/NOC from the governmental bodies/departments/agencies concerned. DXN cannot turn their back on the stark reality of having acted upon, and derived the benefit of, such licence, permission etc. during the period of dispute.
8.3 According to the tests laid down by the Hon'ble Supreme Court to identify an ayurvedic medicine, a given product can be held to be ayurvedic medicine classifiable under Heading 30.03 of CETA Schedule if (a) it is treated as ayurvedic medicine by the public and (b) its ingredients find mention in authoritative textbooks on ayurvedic medicines vide Naturelle Health Products arid other judgments cited in para (4) of this order. We shall proceed to apply the first test (common parlance test) now. It is an admitted fact that M/s. DXN were importing RG and GL powders and marketing the same in India as food supplements prior to the period of dispute. Their Managing Director, Shri Lee Hock Lye has stated that, even during the period of dispute, they have not advertised that the RG/GL capsules have therapeutic properties. Their Chief Executive Officer, Dr. Lim has also stated to this effect. Shri Abdul Rahman Puvarasan B. Abdulla, Director & Country Manager, Daehsan (sole selling agents for DXN, Pondicherry) has also stated that they have not advertised the subject goods as medicines or products, with therapeutic value. Shri Surya Prakasa Rao, Authorised Signatory of Daehsan (Andhra Pradesh) has stated that they were marketing RG and GL capsules as food supplements till DXN changed the classification of the products as APM. None of these statements was ever retracted. The stockists/distributors of the DXN products also stated that they were marketing the goods as food supplements till the change of classification announced by DXN. None of them has resiled from this position even when cross-examined. Thus it is abundantly clear that, till they started manufacturing RG and GL capsules as APMs, M/s. DXN were advertising and marketing the items in India as food supplements only. In fact, they did not want the consumers in the country to use the items as drugs, which is evident from the instructions their selling agents (Daehsan) issued to their distributors, [see the text of these instructions given in para (8.1) of this order]. Thanks to the conduct of M/s. DXN and their selling agents and distributors, the products inevitably came to be accepted as food supplements in the society of consumers. But, suddenly, DXN made a volte-face and started manufacturing the same products as APMs in March, 2002. But vox populi cannot be expected to change at this speed.
In any case, M/s. DXN have not established that their change of nomenclature of the products from food supplements to ayurvedic drugs was accompanied by a corresponding change in common parlance also. On the other hand, it is on record that M/s. DXN made various public authorities act upon their declaration that they were setting up an industrial unit in Pondicherry for manufacturing food supplements from natural mushroom vide para (8.2) of this order. These public authorities like Commune Panchayat Commissioner were given to believe, over the entire period of dispute, and coterminously with the common parlance, that M/s. DXN were manufacturing food supplements in their Pondicherry factory. We, therefore, reject the appellants contention that the subject products were known in common parlance as ayurvedic medicines. That mushroom products are known as food supplements in commercial parlance is also obvious from an advertisement by M/s. PM Herbals Private Limited, Velachery, Chennai (copy produced by SDR), which places 'Shitake', 'Agaricus' and other mushroom products under the category of "food supplement". This ad is reproduced below: 8.4 Coming to the second test, we note that M/s. DXN declared the product ingredients viz. Ganoderma and Shiitake as Chatrakh and Bhuchatra respectively before the Food and Drugs Administration Pondicherry for obtaining drug licence for manufacturing RG and GL capsules. They declared likewise before the Central Excise authorities also for obtaining registration with the Department. Ld. Commissioner, in the impugned order, has found no mention of Ganoderma and Shiitake in any authoritative textbook on Ayurvedic medicines, prescribed under the Drugs & Cosmetics Act, 1940. He has also enquired as to whether these ingredients of the subject products have clinical applications.
In this context, Ld, Commissioner appears to have held that the source of both the ingredients is the Reishi mushroom bofanically known as "Ganoderma lucidum". This finding, which appears to be based on the technical literature submitted by the assessee, also gets support from the statement of Shri Abdul Rahman Puvarasan Abdulla, Director, Daehsan (marketing agents for all products, in India, of DXN Malaysia and DXN Pondicherry) who stated to the effect that GL and GL capsules were manufactured from different parts of the body of the same mushroom viz.
Ganoderma lucidum available abundantly in Malaysia. He also stated that both the capsules were meant to be mixed with water and taken as a diet supplement. After consulting literature on the subject and considering oral evidence of experts and others, Ld. Commissioner has come to the conclusion that Ganoderma does not cure any disease and that it only adds nourishment to rejuvenate the body health system. We have not found good reason to disagree with this conclusion. M/s. DXN have heavily relied on the opinion of Dr. K.S. Vishwanatha Sharma in support of their contention that Ganoderma is an ayurvedic medicine capable of preventing and curing diseases. We have also perused the opinion given by Dr. K.S. Viswanatha Sharma. As rightly observed by the Commissioner, the expert's opinion does not categorically say that the ingredients of the subject goods have preventive or curative properties. Learned Counsel referred to a book titled "Ganoderma Lucidum - Mystical Remedy of the Ancients'" and authored by Dr. Clarence S. Stanislaus M.B.B.S.This book discusses "pharmaceutical properties" of the mushroom. But it also contains a disclaimer which reads thus: "Despite all the possible health benefits that can be obtained from Ganoderma Lucidum (Ling Zhi), it is not intended to replace the recommendations of a medical doctor.
Patients with specific problems should always consult their physician".
This book, which essentially deals with the "health benefits" of Ganoderma, recommends that "patients with specific problems" (i.e., people with diseases) consult a medical doctor. In any case, learned Counsel has not claimed that this book is, or has referred to, any authoritative ayurvedic textbook. No authoritative ayurvedic text has been shown by the appellants, which contains mention of the ingredients of RG & GL capsules.
8.5 Dr. D. Athisayaraj, Head of Siddha/Ayurvedic Department, Aringnar Anna Govt. Hospital of Indian Medicine, who had originally recommended classification of RG & GL capsules as APMs, later on, confessed that the recommendation made by him was not correct as it was based on bogus clinical trial reports. He was cross-examined before the adjudicating authority. It appears from his depositions (in cross-examination) that he did not consider 'Ganoderma' and 'Shiitake' as ayurvedic medicines.
Further, from a letter written by the Director of Drugs Control, Tamil Nadu, in reply to certain queries made by DGCEI, it appears that the opinion offered by the Head of the Department of Ayurveda regarding the nature of RG & GL capsules was communicated to the investigating agency. This opinion reads as under: These items (Chatraka & Buchatra) are basically food supplements may be used to give therapeutic value with some other drug to be given for identified diseases and that these items cannot be used independently to cure any disease It is clear from the above opinion that "Chatraka" & "Buchatra", which were claimed by M/s. DXN to be present in the subject products, do not have therapeutic value of their own. A test report on samples of RG & GL capsules, issued by the National Botanical Research Institute (NBRI) Lucknow stated that, according to Bhavaprakasa Nigantoo, "Chatrakh" and "Bhuchatrak" were used as synonyms and attributed to Agaricus campestris Linn. (Family Agaricacea) and do not fall under the category of APM. This report of NBRI contradicts DXN's claim that "Chatraka" & "Buchatra" have medicinal properties. The NBRI report further indicated that certain samples of RG capsules, contained 100% 'Ganoderma' and no other ingredients, as against DXN's claim that the product was a mixture of 'Ganoderma' and 'Shiitake'. Yet another observation made in the report is that the botanical name of 'Shiitake' is Lentinula Edodes. But no sample of the DXN's products was found to match with authentic (standard) sample of Lentinula Edodes, which indicated the absence of Shiitake in the sample tested. The NBRI report goes a long way to disprove DXN's claim regarding the composition and properties of the subject products. It also shows that, by declaring Ganoderma and Shiitake (botanically known as Ganoderma Lucidum and Lentinula Edodes respectively) as Chatrakh and Bhuchatra (both botanically known as Agaricus campestris) before the Drug Control/Central Excise authorities, M/s. DXN were misdeclaring the ingredients of RG and GL.
Insofar as identification of mushrooms in terms of botanical names is concerned, NBRI's authority is indubitable. We also note that the appellants have not questioned the authenticity of the NBRI report. The voluminous literature (on mushrooms) produced by DXN is no rebuttal of NBRI's findings, nor does it establish that the ingredients of RG and GL find mention in authoritative ayurvedic texts. The DXN capsules do not pass the second test.
8.6 It is on record that the drug licence was issued to M/s. DXN by the Food and Drugs Administration (FDA) Pondicherry as recommended by an ayurvedic expert, Dr. D. Athisayaraj. The Asst. Commissioner, FDA, Pondicherry has admitted this fact in his statement. The expert's opinion was, in turn, based on two clinical trial reports. One of these reports stood in the name of Dr. P. Selvakumar, AMO, Nagipattinam, who later on informed that he had not given any clinical trial report to any person or authority and that the signature and seal shown as his in the document were actually not his and were forged. He also stated that, being a probationer, he was not competent to issue such report.
The second clinical trial report was in the name of Dr. S.S.Raviselvan, AMO, Aringnar Anna Govt. Hospital, Chennai. Though Dr.
Raviselvan admitted having issued the report, he stated that the report was issued at the request of Daehsan personnel without conducting any clinical test. We note that neither of these doctors was sought to be cross-examined in this case. M/s. DXN have not chosen to salvage the above clinical trial reports from the prospect of decrial. We further note that Dr. Athisayaraj, having come to know the faulty nature of the clinical reports produced by M/s. DXN, confessed that he had wrongly recommended issuance of drug licence to them for manufacture of RG & GL capsules as APMs. Further, he wrote to the Drug Control Authority to cancel the licence. It is also noticed that the above licence was issued to DXN without verification of RG & GL formula with the prescribed ayurvedic texts. The licence was granted by FDA, Pondicherry, merely following the precedent of the Drug Control Authority, Tamil Nadu, having issued a similar licence to M/s. Daehsan.
The Asst. Commissioner, FDA, Pondicherry has admitted these facts in his statement. Significantly, he also was not sought to be cross-examined before the adjudicating authority. It is also noticed that the drug control authorities are taking action against the licensees under the Drugs & Cosmetics Act in the aforesaid circumstances. We are of the view that, in the above facts and circumstances, M/s. DXN are not entitled to ask for classification of their products as APMs on the strength of their drug licence, which was obtained in a fraudulent manner. A document obtained by fraud cannot give rise to any right or benefit in law. This is the legal position settled by the Hon'ble Supreme Court in New India Assurance Co. v.Kamla and Ors. In that case, the main issue which was considered by their Lordships, with reference to relevant provisions of the Motor Vehicles Act, 1988, was as to whether a fake driving licence would get legally sanctified by reason of its renewal by the statutory authority. Their Lordships gave their ruling in Para 13 of their judgment as under: The observation of the Division Bench of the Punjab and Haryana High Court in National Insurance Co. Ltd. v. Sucha Singh 1994 ACJ 374 (P&H) that renewal of a document which purports to be a driving licence, will robe even a forged document with validity on account of Section 15 of the Act, propounds a very dangerous proposition. If that proposition is allowed to stand as a legal principle, it may, no doubt, thrill counterfeiters the world over as they would be encouraged to manufacture fake documents in a legion. What was originally a forgery would remain null and void forever and it would not acquire legal validity at any time by whatever process of sandification subsequently done on it. Forgery is antithesis to legality and law cannot afford to validate a forgery.
Following the above ruling of the apex court, we hold that it is not open to M/s. DXN to claim classification of their products as APMs on the strength of their drug licence.
8.7 We have also taken note of Ld. Counsel's argument that as the Customs authorities have classified under Heading 30.03 RG/GL Powder imported by M/s. DXN subsequent to the period of dispute, they are also entitled to have the subject products classified in similar manner under the CETA Schedule, It is evident from the facts and circumstances of the case that M/s. DXN were claiming classification of the imported goods as medicaments under the above tariff entry on the strength of their drug licence which was fraudulently obtained on the basis of the forged/faulty clinical trial reports. The assessing officer of customs appears to have fallen into their trap, oblivious of the fact that the same commodity imported by the appellants prior to the period of dispute had been classified as food supplement under the Customs Tariff Act. In any case, we do not think that the Central Excise authorities are precluded from classifying a product independently under Central Excise Tariff Act. In our view, they are entitled to ignore the classification done by the assessing officer of customs inasmuch as such classification was vitiated by the above circumstances. We, therefore, are not inclined to accept Ld. Counsel's plea to follow the Customs' precedent in the matter of classification of the subject products under the CETA Schedule.
8.8 Yet another document relied on by Ld. Counsel is a judgment of the Kerala Sales Tax Appellate Tribunal. The question before the Tribunal was whether RG/GL capsules were APMs falling under Entry 141 of the First Schedule to the Kerala General Sales Tax Act. After considering certain literature and an expert's opinion on the subject, the Tribunal held the goods to be APMs. The Tribunal observed that the goods were not known as 'food supplements' like Horlicks, Bournvita etc. in the common parlance. We are afraid, we are unable to take the above order of the Sales Tax Appellate Tribunal under the Sales Tax Act, as a precedent for classification of the goods under the Central Excise Tariff Act. That Tribunal, in the facts of that case, found that the goods were not known as food supplements in the common parlance. On the other hand, we have found, on the facts and evidence on record in this case, that RG/GL capsules were known as food supplements in the common parlance. The finding recorded by the STAT on a pure question of fact need not be followed by the CESTAT while dealing with similar, question. Moreover, the issue before the Sales Tax Appellate Tribunal pertains to a period which is irrelevant to the classification dispute on hand in the instant case. The Sales Tax Appellate Tribunal's judgment, therefore, has no persuasive effect on us.
8.9 Ld. Counsel has also relied on a certificate issued by the Port Health Officer, which was issued to the Customs in respect of a sample drawn from one of the consignments of RG powder. The certificate stated that the said item was not an article of food and hence did not come within the purview of the Prevention of Food Adulteration Act. This document does not help the assessee's case inasmuch as the question before us is not whether the subject goods are articles of food or not.
The question is whether they are food supplements. 'Food supplements' are not same as 'food'.
9. For the reasons noted by us hereinbefore, we hold that the DXN products viz. RG Capsules and GL Capsules are appropriately classifiable as 'food supplements' under SH 2108.99 of the CETA Schedule and assessable under Section 4A of the Central Excise Act for payment of duty.
10. The SCN in this case invoked the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, alleging that M/s. DXN Pondicherry had intentionally misdeclared and misclassified RG & GL as APM with intent to obtain Central Excise registration for manufacture of APM as well as to evade payment of Central Excise duty. We have already noted that the drug licence was obtained by M/s. DXN from FDA, Pondicherry on the basis of forged/faulty clinical trial reports. The evidence gathered by the investigators from Dr. D. Athisayaraj, Dr. P. Selvakumar, Dr. S.S.Raviselvan and Shri Dheenadayalan, Asst. Commissioner, FDA Pondicherry has established the fraud committed by M/s. DXN. We have already held in the facts and evidence on record that it was not open to DXN to claim classification of the goods as APM on the strength of their drug licence vide para (8.6). When they declared Ganoderma and Shiitake as Chatrakh and Bhuchatra before the Drug Control/Central Excise authorities after having declared RG/GL capsules as food supplements before a host of other governmental agencies and having groomed the products as food supplements in the public mind, they knew very well that Chatrakh and Bhuchatra were food supplements only. As we have already indicated vide para (8.5), such declaration was a misdeclaration. DXN misdeclared food supplements classifiable under SH 2108.90 as ayurvedic proprietary medicines under SH 3003.39. This misdeclaration was obviously made with intent to evade payment of Central Excise duty leviable on food supplements. In the circumstances, we do not find fault with the Commissioner having invoked the extended period of limitation against M/s. DXN. Accordingly, we sustain the demand of duty raised on the assessee in respect of RG & GL capsules removed from their factory from March to July, 2002. From our findings already noted, it would follow that the Commissioner's order vacating the protest registered by M/s. DXN while paying duty on the products for the subsequent period is sustainable.
11. Having upheld the invocation of the extended period of limitation against the assessee, we have to sustain penalty on them under Section 11AC of the Central Excise Act. However, it is too harsh to impose on them the maximum penalty (equal to duty) prescribed under the provision. In the facts and circumstances of the case, we reduce this penalty to Rs. 25,00,000/- (Rupees Twenty-five lakhs only), while setting aside the penalty of Rs. 1 lakh imposed on the assessee under Rule 25 of the Central Excise Rules, 2002.
12. The Commissioner has confiscated RG & GL capsules (in bottles), valued at Rs. 15,44,70,060/-, which were manufactured and kept by M/s.
DXN in their factory vide para (8) of the operative part of the impugned order. These goods had been detained/seized by the investigators. There is no evidence to indicate that M/s. DXN had attempted to remove these goods clandestinely or that these goods had been kept unaccounted. Even the SCN had not alleged so. Perhaps, it could be said that, had the goods not been seized, they would have been removed as ayurvedic drugs with short-payment of duty. But a penal measure such as confiscation cannot be justified on speculative grounds. In the circumstances, the above confiscation cannot be sustained and the same is set aside.
13. In the facts and circumstances of the case, we are of the view that the penalties of Rs. 25 lakhs each imposed on Dr. Lim, M/s. Daehsan and M/s. Roshan are also too harsh to match the offence found against them.
We reduce these penalties to Rs. 5,00,000/- each. (Rupees Five lakhs only). For the same reason, the penalty of Rs. 10 lakhs imposed on Shri K. Thevaraja gets reduced to Rs. 1,00,000/- (Rupees One lakh only).
14. In the result, the impugned order gets affirmed except in respect of the confiscation ordered in para (8) of its operative part and the Rule 25 penalty ordered in para (4) thereof, and subject to the modification made herein as to quanta of penalties on the appellants.
The appeals stand disposed of.