Judgment:
1. The issue for consideration in these 36 appeals is whether the appellants are entitled to the benefit of exemption Notification No.77/86-Cus., dated 17-2-1986.
2. The appeals arise against the order-in-appeal dated 30-5-1988 passed by the Collector (Appeals), Madras rejecting the appellants 36 refund claims amounting to Rs. 22,26,780/-.
(a) The appellants imported Phenol USP Grade from West Germany and the consignment was classified under sub-heading 2907.11 of the First Schedule to the Customs Tariff Act, 1975 for the purposes of levy of Customs duty. For the purposes of levy of countervailing duty the goods were classified under sub-heading 2907.10 of the Schedule to the Central Excise Tariff Act, 1985. Sub-heading 2907.11 of the Customs Tariff Act reads as "Phenol (hydroxybenzene) and its salts". Sub-heading No. 2907.10 of the Central Excise Tariff refers to "Phenols and its salts". By virtue of Notification No. 136/86-Cus., dated 17-2-1986 (as amended), the effective rate of duty payable on Phenol was 50% ad valorem plus Rs. 5/- per Kg. and under Notification No. 111/87-Cus., dated 1-3-1987, the effective auxiliary duty payable thereon was 40% and Countervailing duty payable on Phenol was 15% ad valorem. The appellants filed various refund claims claiming re-assessment of Phenol USP Grade, for purposes of Customs duty under sub-heading 3003.39 of the Customs Tariff and for purposes of countervailing duty under sub-heading No. 3003.19 of the Central Excise Tariff. Sub-headings are as under:-3003.39 30.03 : Medicaments (excluding goods of Heading No. 30.02, 30.05 or 30.06) consisting of two or more constituents which have been mixed together for therapeutic or prophylactic uses, not put up in measured dose or in forms or packings for retail sale.3003.19 30.03 : Medicaments (including veterinary medicaments) - Patent or proprietary medicaments, other than those medicaments which are exclusively Ayurvedic, Unani, Siddha, Homoeopathic or Bio-chemic.
The effective rate of Customs duty on medicaments falling under Chapter 30.03 was 60% ad valorem, as per Notification No. 77/86-Cus., dated 17-2-1986.
4. The appellants' contention in the refund applications was that they were entitled to the exemption under Notification No. 77/86-Cus., dated 17-2-1986 by which effective rate of Customs duty 60% ad valorem and auxiliary duty at the rate of 40% was payable. It was their contention also that the goods were exempted from payment of countervailing duty as they were entitled to the benefit of exemption Notification No.25/67-C.E., dated 4-3-1967.
5. The Assistant Collector rejected the refund applications by order dated 11-11-1987 and the appellants preferred appeals to the Collector (Appeals) who dismissed them on the grounds inter alia that there was no evidence showing that the goods imported namely Phenol have either prophylactic or therapeutic value and also there was no evidence showing the predominant use of the Phenol as drugs. He also rejected the claim of the appellants regarding the availability of Notification No. 25/67-C.E. Hence the present appeals.
6. Shri M. Chandrasekharan, learned Counsel appearing for the appellants submits that in view of the fact that the appellants accept the classification of the goods under Chapter 29 of the Customs Tariff Act, they are covered by Notification No. 77/86-Cus., dated 17-2-1986 which covers "Pharmaceutical Chemicals i.e. chemicals having prophylactic or therapeutic value and used solely or predominantly as drugs, not elsewhere specified". He contends that the goods are Pharmaceutical Chemicals according to the Indian Pharmacopeia, British Pharmacopeia and US Pharmacopeia. He placed before us relevant extracts from Indian Pharmacopeia, British Pharmacopeia and US Pharmacopeia showing the uses of Phenol as "antiseptic; topical, antipruritic; pharmaceutical aid (preservative)". The learned Counsel submits that he has placed all the relevant evidence before the lower authorities to show that the goods imported are Pharmaceutical Chemicals and he also submits that the appellants have actual user licence; they are licensed to make drugs; the appellants manufacture aspirin 80% out of which is Phenol and the appellants do not use the imported goods for any other purposes except in the manufacture of Aspirin. He submits that in India Phenol is used solely as drug and Indian Pharmacopeia treats it as drug. In support of this contention, he relied on the decision reported in 1986 (25) E.L.T. 906 (M/s. Rakesh Enterprises v. Union of India). In this case, the Bombay High Court has held that Phenol USP is a drug and drug intermediate. He also relied upon another decision of the Bombay High Court in the case of M/s. Kumar Prabhulal Shah and Others v. Union of India [1987 (28) E.L.T. 193] wherein it was held that Phenol is a bulk drug. The learned Counsel also draws our attention to another decision of the Bombay High Court in the case of Leukoplast (India) Ltd. v. State of Goa [1988 (36) E.L.T. 369A], wherein it was held that the definition of drug given in the Drugs and Cosmetic Act 1940 is relevant for determining its meaning in the trade and submits that the definition of imported goods reflects the popular meaning that the goods imported are drugs.
7. The learned Counsel submits that the Collector (Appeals) has erred in coming to the conclusion that the literature produced by the appellant shows that Phenol USP is used as a disinfectant and in cosmetics and Toiletries and there is no evidence of its predominant use as drugs. He contends that the Collector (Appeals) has come to this conclusion relying upon a stray sentence in the extract from Martindale's "The Extra Pharmacopeia - 1982" (28th Edition) at page 571 that "Use of phenol in cosmetics and toiletries is restricted in Great Britain under the Cosmetic Products Regulations 1978".
8. Shri V. Chandrasekaran, the learned Departmental Representative submits that Customs Notification No. 77/86-Cus., dated 17-2-1986 imposed three conditions to be satisfied before an assessee can claim the benefit of that notification: (a) that the Pharmaceutical Chemicals have prophylactic or therapeutic value.
(a) The assessee has not conclusively proved therapeutic value or prophylactic value of phenol and he would submit that it is only a prophylactic acid.
(b) The assessee has not proved that phenol is solely or predominantly used as a drug and in fact, phenol has other uses such as use in carbolic soap and in cosmetics and toiletries.
(c) Phenol is specified in pharmacopeia, and therefore none of the conditions set out in Notification No. 77/86-Cus., dated 17-2-1986 are satisfied and therefore, he would submit that the appeals should be rejected.
9. In reply, Shri M. Chandrasekaran, learned advocate submits that the Collector has rejected the claims of the appellants only on the ground of lack of evidence of the predominant use of the goods (evidence has been produced by the appellants) and that the order of the Collector must stand or fall only by the findings in the impugned order and cannot be bolstered by any fresh reasons.
10. We have carefully considered the submissions of both sides and perused the records.
11. The Notification under which the appellants claim benefit reads as follows. Effective rates of basic customs duty on goods specified in column (3) of the Table below are as specified in column (4) thereof: "In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts goods specified in column (3) of the Table hereto annexed and falling under Heading No. or sub-heading No. of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) specified in the corresponding entry in column (2) of the said Table, when imported into India, from so much of that portion of the duty of customs leviable thereon which is specified in the said First Schedule as is in excess of the amount calculated at the rate specified in the corresponding entry in column (4) of the said Table, where the standard rate of duty is leviable.
Provided that nothing contained in this notification shall affect the exemption granted under any other notification of the Government of India, for the time being in force, from the duty of customs specified in the said First Schedule in respect the goods referred to in this notification.SI. No.Heading No. or subheading Description of goods Rate of duty No. of the First Schedule5.
29 Pharmaceutical Chemicals 60% ad valorem 12. Regarding the prophylactic/therapeutic value of the goods, we have before us, extracts from Indian, British and US pharmacopeia which establish that phenol has such value. The extract from Pharmacopeia of India Vol. I Third Edition at page 381 categorises phenol as "antiseptic; topical, antipruritic; pharmaceutical aid (preservative)".
At page 341 of the 1980 Edition of British Pharmacopeia, the uses of phenol have been shown as "Antiseptic; antimicrobial preservative; antipruritic". In the 1982 (28th Edition) of Martindale's Pharmacopeia "The Extra Pharmacopeia" (at page 571), the uses of phenol are shown as "phenol is a disinfectant effective against vegetative Grampositive and Gram-negative bacteria but only very slowly effective against spores and acid-fast bacteria. It is also active against certain viruses.
Aqueous solutions of 0.2 to 1% are bacteriostatic while stronger solutions are bactericidal; this action varies with the organism, strength of solution, and temperature.
When strong solutions of phenol are applied to the skin of mucous membranes, the surface becomes white and opaque owing to precipitation of proteins and a slough is formed; after preliminary slight irritation, the area becomes numb due to paralysis of the sensory nerve endings.
Weaker solutions (up to 2%) have been used as dressing for small wounds. A 0.5 to 1% solution has been used for its local anaesthetic effect to relieve itching. A 0.2 to 0.5% solution with glycerol may be Used as a mouth-wash or gargle and dilute solutions of alkaline phenates are used similarly but they are unlikely to have a significant antimicrobial effect.
In dentistry. Liquefied Phenol has been used as an obtundent or analgesic for sensitive dentine. A 5% solution of phenol may be used to devitalise the pulp in deciduous teeth.
The antibacterial and caustic properties of phenol are greatly reduced if it is dissolved in alcohol, glycerol, or fixed oils.
Phenol Glycerin diluted with glycerol is employed as a paint in inflammatory conditions of the mouth and throat and in infections of the middle and external ear. Oily Phenol Injection is injected into the tissues around internal haemorrhoids as an analgestic thrombotic agent.
Phenol 30 to 125 mg is administered intrathecally as a 5% w/w solution in glycerol (Phenol and Glycerol Injection 0.5 to 2 ml) for the alleviation of spasticity and severe intractable pain in malignant neoplasm and solutions of 5 to 20% in lophendylate Injection or glycerol have been used intrathecally for the reduction of disabling spasticity. Aqueous solutions of phenol 6% have also been used for chemical sympathectomy. Solutions containing 5% phenol have been used as disinfectant for excreta.
Molluscum contagiosum could be treated by pricking liquefied phenol into each lesion with a sharpened stick.
A mixture of pehnol, water, liquid soap, and croton oil containing approximately 50% of phenol was used for chemical face peeling in the treatment of facial wrinkling. The liquid was applied to the face after through cleansing and left for 24 hours under an occlusive dressing. In a group of about 1575 patients there was no evidence of systemic toxicity. Hypertrophic scarring occasionally occurred.
Liquefied phenol applied to the nail-bed, nail-fold, and sulci was highly successful for destroying the matrix after removal of ingrowing nails.
Enlarged prostate. Fifty patients with benign enlargement of the prostate received an average of 3.2 intraprostatic injections each of 2 to 3 ml of a solution containing; phenol 0.6 ml. glacial acetic acid 0.6 ml. glycerol 1.2 ml. water to 28 ml. Of 29 available for followup.
13 had a normal urine stream for 3 years or more and 12 for 1 to 3 years. Histologically there was evidence of haemorrhage or gross necrosis and scarring, but no evidence of inflammation. The procedure was valuable for selected patients with acute retention.
Haemorrhoids. In a controlled study in 60 patients with internal haemorrhoids, the overall results were satisfactory after 6 months in about one-half the patients treated by injections of 3 to 5 ml of 5% phenol in almond oil or by injection of oil alone, and excellent in three-quarters of patients treated by rubber ring ligation. Phenol injections were very effective in controlling bleeding.
Hydrocele. A solution containing phenol 2.5% dextrose 25% and glycerol 25% was used for the treatment of hydrocele and epididymal cysts-5ml was injected for cysts of up to 15 ml. and up to 20 ml for those of 400 to 600 ml; repeated injections might be needed.
13. According to New Webster's Dictionary of the English Language, the word "prophylactic 'means' preventive, defending from or warding off disease" and the word "therapeutic 'means' curative". The certificate of the Drugs Controller, Govt. of Karnataka dated 16th July, 1987 is as follows:- "This is to certify that Phenol is included in the monograph of India Pharmacopea, (I.P.) Page No. 301/British Pharmacopea (B.P.) Page No. 341, and its uses mentioned in the monograph are antiseptic, topical antipruritic and pharmaceutical aid (Preservative). Monograph or Phenol appears in the United States Pharmacopea also.
M/s. Shrishma Fine Chemicals and Pharmaceuticals, (K) Ltd., Doddaballapur, Bangalore District, are manufacturing Salicylic acid starting from Phenol which in turn is converted to acetyl salicylic acid. (Aspirin)." This certificate clearly shows that phenol has prophylactic/therapeutic value. It is pertinent to point out here that this certificate has not been challenged by the respondents.
14. Further, in Butterworths Medical Dictionary at pages 1295-1296, it is laid down that "because of its local anaesthetic properties, phenol is of value in treatment of Urticarial skin conditions. It is also used in mouth washes and gargles. It may also be used locally as a 'Cauterising agent'." 15. All this would conclusively establish that phenol has prophylactic/therapeutic values.
16. Regarding sole or predominant use of phenol as a drug, the first point to be noted is that phenol USP Grade (imported by the appellants) has to be manufactured according to standards prescribed in the international Pharmacopeias. It is accepted universally as being suitable for use as a drug and it is predominantly used as a drug.
Phenol, having been included in the Pharmacopeia of India, Britain and the United States of America, it is beyond all doubt that it is a drug or drug intermediate. The appellants are an industry manufacturing bulk drugs and medicines operating under a valid licence. The goods in question have been imported under Actual user conditions, and they are used in manufacture of bulk drugs for which only raw materials having prophylactic/therapeutic values can be used.
17. The Bombay High Court in the case of Rakesh Enterprises v. Union of India. [1986 (25) E.L.T. 906] has held that "phenol USP must be treated as a drug because of its inclusion in the Pharmacopeia and as phenol USP can be used as an intermediate for the manufacture of drugs, it can also be described as a drug intermediate". This view has been followed by the Bombay High Court in the case of Kumar Prabhulal Shah v. Union of India [1987 (28) E.L.T. 193]. It has been held in the case of Trichem Laboratories, Bombay v. Collector of Customs, Bombay [1984 (17) E.L.T. 185] that all those substances which find use as a drug intermediate also find many more different uses.
18. The pharmaceutical chemical phenol is also not elsewhere specified.
Hence the conditions for availability of benefit under Notification 77/86-Cus., dated 17-2-1986 are satisfied in entirety.
19. The Collector (Appeals) has rejected the claim of the appellants without any basis. He appears to have relied upon a sentence in Martindale's 'The Extra Pharmacopeia' at page 571 that "the use of phenol in cosmetics and toiletries is restricted in Great Britain under the Cosmetic Products Regulations 1878" to hold that "the literature produced by the appellants shows that phenol USP is used as a disinfectant and in cosmetics and toiletries and other fields". He has not considered either the evidence in the various pharmacopeias that phenol has prophylactic/therapeutic value or the certificate issued by the Drug Controller, Government of Karnataka or the judgment of the Bombay High Court in the case of Kumar Prabhulal Shah holding that phenol is a drug.
20. As regards the claim for classification of Phenol USP under sub-heading No. 3003.19 of the Central Excise Tariff Schedule with the benefit of duty exemption in terms of Central Excise Notification No.25/67 as amended by Notification No. 78/86, during the course of his arguments, the Counsel for the appellants gave up the plea because it appeared that no relief was due on these lines. This was for the reason that Heading No. 30.03 under which the aforesaid sub-heading falls covers "Medicaments (including veterinary medicaments)". Statutory note No. 2 to Chapter 30 defines "medicaments" as "goods (other than foods or beverages such as dietetic, diabetic or fortified foods, tonic beverages) not falling within Heading No. 30.02 or 30.04 which are either: (a) products comprising two or more constituents which have been mixed or compounded together for therapeutic or prophylactic uses; or (b) unmixed products suitable for such uses put up in measured doses or in packings for retail sale or for use in hospitals;" In the instant case, in response to questions from the Bench, the Counsel conceded that the requirements of the above definition are not complied with. Now, Notification No. 25/67 exempts pharmacopeial preparations containing single therapeutic agents and falling under sub-heading No. 3003.19 of the Schedule. Since the subject Phenol USP does not, even according to the Counsel, qualify for classification under this heading, it follows the notification in question would not apply. In the circumstances, the claim for classification under sub-heading 3003.19 with the benefit of duty exemption in terms of Central Excise Notification No. 25/67 as amended by Notification No.78/86 is not tenable and is rejected.
21. In the light of the above discussion, we hold that the goods imported arc "Pharmaceutical Chemicals, that is, chemicals having prophylactic or therapeutic value and used solely or predominantly as drugs, not elsewhere specified" entitled to the benefit of Notification No. 77/86-Cus., dated 17-2-1986. In the result, the order of the Collector (Appeals) is modified to this extent. The claim for classification under subheading 3003.19 of the Central Excise Tariff Schedule and for the benefit of Central Excise Notification No. 25/67 as amended by Notification No. 78/86 is dismissed.
22. The Appeals are partially allowed in the above terms with consequential relief to the appellants.