Hicure Pharmaceuticals Pvt. Ltd. v. Commissioner of Central Excise, Karnataka

What happened

The appellant is a pharmaceutical company in Dharwad District. By an order of 30 November 2005 for January 2001 to September 2003 the Assistant Commissioner, Hubli, rejected its claim that certain samples were cleared for in-house testing and testing by outside laboratories, because no proper records were maintained, and levied duty of ₹33,488 on the in-house samples valued at ₹2,09,301 and ₹6,226 on the samples sent to outside laboratories. The Commissioner (Appeals) upheld this, but the Tribunal set the order aside, saying it was only on scrutiny of records that the Department found out about the samples, and that goods attain marketability only after in-house testing. The appellant received a refund of ₹1,29,453, and a show-cause notice of 25 July 2008 sought its recovery. The Revenue appealed to the High Court under section 35G, which allowed the appeal relying on ITC Limited v. Collector of Central Excise, Patna, (2003) 1 SCC 678, and refused a recall application that said the appeal related to valuation and so was excluded from section 35G.

Questions before the court

• Is excise duty leviable on samples removed for testing when no records of the removal were kept?

Why the court ruled this way

The High Court recorded that it was undisputed that the samples were cleared for in-house testing and for laboratories outside, and that no accounts were maintained of their value or destruction (paragraph 9). ITC held that where no account of samples removed for quality control is maintained, duty is leviable on the entire stock sent (paragraph 10). The Supreme Court noted that the samples were in fact cleared and that no records of their value were kept (paragraph 11). In the absence of records the samples must be treated as goods removed for home consumption, so the Tribunal's finding on marketability begged the question (paragraph 12). From ITC it is clear that the Department was justified in levying duty where records are not kept, and the further question of marketability could not arise; the Tribunal cases relied on were distinguishable because records were kept there (paragraph 16). The appellant's counsel was repeatedly asked for records and could not show any (paragraph 17). The Department's appeal was maintainable under section 35G and was not hit by the exclusion clause (paragraph 17).

Controlling point

The Department was justified in levying duty on the samples because the assessee defaulted in maintaining records.

Order and next steps

The impugned orders of 18 August 2011 and 19 November 2011 were not interfered with, and the appeals were dismissed with no order as to costs. Pending applications stood disposed of.

Practical implications

A manufacturer that removes samples for testing should keep dated records of quantity, value, destination and destruction, because without them duty can be demanded on the samples as clearances for home consumption.

Limits of this ruling

• The decision rests on the undisputed absence of records; it does not hold that properly accounted samples attract duty.