<b>Brief case:</b> Test to separate cosmetics and drugs

A weekly selection of key court orders

When question arises as to whether a product sold over the counter is cosmetic or medicine for tax purposes, the issue cannot be decided under the central excise law.  The question arose last week in the case of Johnson & Johnson versus CIT when the revenue authorities imposed 12.5 per cent tax on two products, ‘Shower to Shower’, a prickly heat powder, and ‘Listerine’ mouthwash.  They maintained that these were not medicines, entitling lower levy. The Tax Board upheld the view, against which the company appealed to the high court. It argued they have medicinal value as shown in the licence granted to it and are special products for specific purposes.  It further submitted that similar products like Nycil, Vicks and others have been granted tax benefits by other courts. The revenue authorities contended that the presence of a small percentage of  chemicals does not make the products medicine. They are available in ordinary shops and are not understood as medicines in common parlance. Agreeing with the revenue authorities, the court dismissed the appeal of the company. However, it dismissed the appeal of the authorities which argued that Savlon was also a cosmetic. The judgment said that it is an anti-septic formulation with curing properties and hence a medicine. Ultimately it is the state law which decides the issue. 

 
Motor Vehicles Act rule foxes judges
 
A typing error or a clerical mistake in the schedule of the Motor Vehicles Act for calculating compensation has confounded judges of the tribunals and appellate courts for over two decades. The Supreme Court has called it bad arithmetic , impossible to follow and should be corrected. But the law makers have not done so till now. The Calcutta High Court last fortnight again expressed its “embarrassment” at the existence of the erroneous schedule which the Supreme Court termed "redundant, irrational and unworkable”. In this case, National Insurance Co Vs Mainak Ghosh, a woman employee was killed in a road accident. Her son and husband moved the accident tribunal which awarded them Rs 23 lakh. The insurance company appealed to the high court arguing that the calculation was wrong in view of her age, life expectancy and dependency. The high court referred to the schedule for computing damages but avoided it due to the mistakes. It upheld the order of the tribunal and ordered the insurer to pay the compensation after a few modifications.

 

Arbitration award set aside
 
The Delhi high court last week set aside the award of a three-member arbitral tribunal which wrote 400 paragraphs of arguments of both sides but gave no reasons for its series of conclusions. The court stated that “such an award would, undoubtedly, be opposed to the fundamental policy of Indian law”. The high court also found “irreconcilable inherent contradictions” in the award. In this case, National Highways Authority of India vs M/s Jivanlal,  the contract was for maintenance and collection of toll on NH-8A. NHAI conducted decoy checks and found that there was huge pilferage in toll collection and deposits. It terminated the contract and demanded Rs 10 crore from the contractor. The latter made 16 counter demands, leading to arbitration. The tribunal found the decoy reports unreliable and passed its award on all issues. However, the high court set them aside. 

 
Credit notes get tax benefit
 
The Supreme Court last week set aside the judgment of the Karnataka high court and ruled that a trade discount granted after the sale was eligible for tax benefit under the Karnataka VAT Act. In this case, Southern Motors vs State of Karnataka, the dealer in motor vehicles raised tax invoices on the purchasers as per the policy of manufacturers. After the sales were completed, credit notes were issued to the customers granting discounts. It retained only the net amount, that is, the amount shown in the invoice less the sum of discount disclosed in the credit note. The revenue authorities however disallowed the deduction of post-sale discounts, which was approved by the high court. Reversing the ruling, the Supreme Court stated that trade discount could be allowed, subject to proof, even if it was given after the original sale. Trade discount is an admitted practice in commerce, and its computation may depend on various factors. The deduction cannot be denied on the ground of omission in the tax invoice/bill of sale at the time of the original transaction, though actually granted in future.  Otherwise it would amount to ignoring “the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory.”  A similar ruling was made in the appeal of Samsung India Electronics Ltd.

 
Deposit collectors get PF cover
 
The Bombay high court has ruled that if a bank has authority, supervision and control over “pigmy” deposit collectors, the bank should contribute to their employees’ provident fund. The bank cannot camouflage payment of wages in the guise of commission, the high court stated in the case, Pachora Coop Bank vs EPFO. The pigmies regularly visit traders, housewives, students and others to collect small funds perennially, under the direction of bank officers. The bank in this case argued that they are not covered by the PF law as they are not employees, work on commission which vary according to performance and are not covered by the definition of workmen in the Industrial Disputes Act. The high court rejected the argument and reading the appointment letter in this case, dismissed the bank’s petition. In view of hundreds of such cases pending, the court also laid down guidelines in such instances.

 
Restraint on sale of medicine
 
The Delhi high court last week restrained M/s East West Pharma from using the trade mark ‘Dom’ for its medicine  used for stomach infection, nausea and vomiting. The order was passed on an  application moved  by Morepen Laboratories Ltd which claimed that the rival’s brand name  which was deceptively similar would be confused with its Dom DT used for the same ailments. They are sold over the counter ordinarily though they should  be prescribed by a physician.  Morepen argued that it had registered its trade mark and it was in use since 1995. By passing off the medicine with similar name, it was losing financially.  Agreeing with it, the judgment noted that while infringement of this type in non-medicinal products results only in financial loss, in the case of medicines, it might have disastrous effect on public health and even result in deaths.