Supreme Court Of India: Drugs Manufactured And Distributed As Free “Physician Samples” Excisable, To Be Valued At Pro Rata Basis

Medley Pharmaceuticals Ltd. V. CCE, Daman and Ors., on 14 January, 2011.

Questions before the court:

1. Whether "Physician Samples" are excisable goods in view of the fact that they are statutorily prohibited from being sold under the Drugs and Cosmetics Act, 1940 (in short, "Drugs Act") and the Rules made thereunder?

2. If physician's samples are held to be excisable, then what is the appropriate method of valuing physician samples for the purpose of excise duty?

Decision of the court:

Holding the physian samples to be excisable the court held as follows:

Para 24: ‘Any requirement or condition imposed by the Drugs Act and Rules made thereunder, is in furtherance of its above stated object of regulating and maintaining the quality of Drugs. 25) The primary object of the Act is to raise revenue by imposing duty on goods that are manufactured as mentioned above (see Kedia Agglomerated Marbles Ltd. v. CCE, (2003) 2 SCC 494). In other words, the scope of the Act extends to the event of manufacture of goods, for the levy of excise duty. These two Statutes and the Rules made thereunder, operate in entirely two different fields having different objects, purposes and schemes. The conditions or restrictions contemplated by one statute should not be lightly and mechanically imported and applied to fiscal statue for non levy of excise duty, thereby causing a loss of revenue. This Court in CCE v. Shree Baidyanath Ayurved Bhavan Ltd., (2009) 12 SCC 419 has held: "55. True it is that Section 3(a) of the Drugs and Cosmetics Act, 1940 defines "Ayurvedic, siddha or unani drug" but that definition is not necessary to be imported in the new Tariff Act. The definition of one statute having different object, purpose and scheme cannot be applied mechanically to another statute. As stated above, the object of the Excise Act is to raise revenue for which various products are differently classified in the new Tariff Act." 26) Therefore, the prohibition on the sale of Physician Samples intended for distribution to medical practitioners as free samples by Rule 65 (18) of the Drugs Rules shall have no bearing or effect upon the levy of excise duty under the Act, since excise is a duty on manufacture, duty is payable whether or not goods are sold. Excise duty is payable even in case of free supply, since sale is not a necessary condition for charging duty under the Act.’

Para 29: ‘The primary reason of distributing free physician samples by the manufacturer of pharmaceutical drugs to us appears to be only for the purpose of advertising of the product and thereby enhancing the sale of the product in the open market. It has been shown by research that the market of a pharmaceutical company is enhanced substantially by the distribution of free physician samples. In other words, the distribution of such physician samples serves as a marketing tool in the hands of the pharmaceutical companies [See Sarah L. Cutrona et al., Characteristics of Recipients of Free Prescription Drug Samples: A Nationally Representative Analysis, 98 Am. J. Pub. Health 284 (2008)].’

As for the valuation, it has to be on a pro rata basis. The judgement reads:

Para 41: ‘Coming to the valuation of the physician samples for the purpose of levy of excise duty, in our view, this issue need not detain us long in view of the decision of this Court in the case of Commissioner of Central Excise vs. M/s. Bal Pharma [Civil Appeal No. 1697 of 2006]. This Court has upheld the conclusion of the Tribunal that the physician's samples have to be valued on pro-rata basis. The Tribunal, while arriving at the aforesaid conclusion, had relied upon its earlier decision in the case of Commissioner of Central Excise, Calicut vs. Trinity Pharmaceuticals Pvt. Ltd., reported as 2005 (188) ELT 48, which has been accepted by the department. Therefore, we hold that physician samples have to be valued on pro-rata basis for the relevant period.’