Introduction:

In the case titled M/s Hindustan Unilever Ltd. v. Commercial Taxes Department [Value Added Tax Appeal No. 73 of 2019], the Madhya Pradesh High Court delivered a significant ruling clarifying the tax classification of White Petroleum Jelly of IP grade, manufactured under a valid drug license. The bench comprising Justices Vivek Rusia and Jai Kumar Pillai held that White Petroleum Jelly I.P., being a medicated formulation manufactured under the statutory drug regime, qualifies as a “drug” under Entry 19-A of Part II, Schedule II of the MP VAT Act and is therefore not liable to the higher VAT rate applicable to cosmetic products. This ruling brings clarity to the longstanding ambiguity between the classification of such medicated products under commercial tax laws and has substantial implications for manufacturers, tax authorities, and consumers.

The background of the case involves the appellant, M/s Hindustan Unilever Ltd., which manufactured and sold White Petroleum Jelly of IP grade under a valid drug license. The appellant contended that the product falls squarely under Entry 19-A, Part II, Schedule II of the MP VAT Act, which deals with “drugs and medicines.” Consequently, it claimed applicability of the lower VAT rate of 4% up to 31.07.2009 and 5% thereafter under the VAT Act, along with exemption under the Entry Tax Act, since the product is non-taxable under Schedule III. However, the assessing authority treated the product as a cosmetic and toilet article, subjecting it to the residuary VAT rate of 12% and 10% under the Entry Tax Act, arguing that the product is saleable as a beauty product without prescription, and is widely available in general stores rather than exclusively through medical channels.

Following the initial assessment, the appellant filed two first appeals before the Additional Commissioner of Commercial Tax, both of which were dismissed, affirming the classification of White Petroleum Jelly as a cosmetic. Undeterred, the appellant approached the Commercial Tax Appellate Board, reiterating its claim that the product should be treated as a drug under Entry 19-A and is eligible for exemption under the Entry Tax Act. The appellant relied heavily on the Supreme Court precedent in Ponds India Ltd. v. Commissioner of Commercial Tax (2008) 113 STJ 355 (SC), wherein the apex court recognized that White Petroleum Jelly I.P., manufactured under a valid drug license, qualifies as a drug and not a cosmetic.

Arguments:

During the hearings, the appellant, represented by Shri P.M. Choudhary with Shri Prasanna R. Bhatnagar, emphasized that White Petroleum Jelly I.P. is a medicated product intended for skin care and protection, containing active ingredients for treating or preventing specific dermatological conditions. The appellant argued that the statutory recognition of White Petroleum Jelly as a drug under IP grade and manufacture under a valid drug license renders it eligible for lower taxation and exemption under the Entry Tax Act. It submitted that categorizing the product as a cosmetic would be contrary to legislative intent and judicial pronouncements, and would impose an unwarranted financial burden on the manufacturer. The appellant highlighted that the product’s therapeutic purpose and its regulatory compliance under drug licensing norms distinguish it from cosmetic or beauty products.

Conversely, the Commercial Taxes Department, represented by Shri Bhuwan Gautam, contended that the appellant is a manufacturer of cosmetic and toilet products and not primarily engaged in the manufacture of drugs. The department argued that although the product is manufactured under a drug license, it is not prescribed by medical practitioners nor sold exclusively through medical stores. It further submitted that White Petroleum Jelly is readily available in general stores and is widely used for skin care and cosmetic purposes, thereby justifying its classification as a cosmetic. The department maintained that there is no separate entry in either the VAT Act or Entry Tax Act specifically for White Petroleum Jelly, and in the absence of a statutory specification, taxing authorities were justified in treating it under the residuary entry applicable to cosmetic and toilet products.

Judgement:

Upon evaluating the submissions and legal precedents, the bench closely examined the relevant provisions of the MP VAT Act and Entry Tax Act. The Court noted that while the assessing authority relied on general observations regarding the product’s saleability in general stores, such convenience of purchase does not alter its medicated nature. Section Entry 19-A of Part II, Schedule II of the MP VAT Act specifically covers drugs and medicines manufactured under a valid drug license, including light liquid paraffin of IP grade and White Petroleum Jelly I.P. The Court observed that the appellant’s product was duly manufactured and marketed under a valid drug license, meeting all statutory criteria, and therefore unequivocally qualifies as a drug.

The Court further analyzed the precedential value of the Supreme Court decision in Ponds India Ltd. It noted that the High Court’s interpretation of the prior apex court judgment by the Commercial Tax Board was misplaced. The bench emphasized that the apex court had categorically held that White Petroleum Jelly I.P., manufactured under a drug license, is a drug and not a cosmetic, and any contrary classification by taxing authorities or appellate bodies cannot override this binding precedent. The Court underscored that the inclusion of White Petroleum Jelly I.P. under the drug category in Entry 19-A is consistent with the statutory intention of differentiating between medicated products and purely cosmetic or beauty products.

In dismissing the department’s contention, the Court observed that the product’s availability in general stores does not convert it into a cosmetic. The medicinal or protective purpose of White Petroleum Jelly, coupled with its regulated manufacture under a valid drug license, firmly establishes its status as a drug. Moreover, the Court found that taxing the product at higher VAT or Entry Tax rates under the cosmetic category would be arbitrary, contravening both statutory provisions and judicial precedent. The Court also clarified that the appellant is not liable to pay interest under Section 18(1)(a) of the MP VAT Act due to the misclassification by the tax authorities.

The bench highlighted that the definition of drugs under Entry 19-A of Part II, Schedule II is broad and inclusive, expressly covering light liquid paraffin and White Petroleum Jelly of IP grade. It further emphasized that the objective of this classification is to provide a uniform and rational tax treatment for medicated products, ensuring that manufacturers operating under valid drug licenses are not unfairly burdened by taxes applicable to non-medicated or cosmetic items. By aligning with the apex court’s findings in Ponds India Ltd., the Madhya Pradesh High Court reinforced the principle that statutory and judicial recognition of a product’s medicated status must prevail over revenue authorities’ administrative interpretations.

In conclusion, the Madhya Pradesh High Court quashed the impugned orders of the Commercial Tax Board and held that White Petroleum Jelly I.P. is a “drug” under Entry 19-A of Part II, Schedule II of the MP VAT Act, manufactured under a valid drug license, and is thus entitled to a lower VAT rate of 4% to 5% as applicable, along with exemption under the Entry Tax Act. The judgment provides clarity for manufacturers, prevents arbitrary tax impositions, and reaffirms adherence to binding Supreme Court precedent. The decision also serves as a guideline for taxing authorities in distinguishing medicated products from cosmetic products, ensuring consistency in tax administration.