Classification of Poultry Feed vs. Drug and Medicine: Insights from State Of Gujarat v. Cadila Healthcare Ltd. (2022 INSC 676)

Introduction

The Supreme Court of India delivered a pivotal judgment in the case of State Of Gujarat v. Cadila Healthcare Ltd. (2022 INSC 676) on July 11, 2022. This case primarily revolved around the correct classification of the product “KADIPROL” under the Goods and Services Tax (GST) Act. The State of Gujarat contended that “KADIPROL,” a product sold by Cadila Healthcare Ltd., should be categorized as “Drug and Medicine” under Entry 26(1) of Schedule II Part A of the GST Act, while Cadila Healthcare Ltd. maintained that it should be classified as “Poultry Feed” under Entry 25 of Schedule I.

The crux of the dispute lay in determining the appropriate tax category for “KADIPROL,” which is used in poultry farming. The High Court of Gujarat had previously ruled in favor of the respondent—Cadila Healthcare Ltd.—classifying “KADIPROL” as “Poultry Feed.” The State of Gujarat, dissatisfied with this decision, appealed to the Supreme Court seeking a reclassification of the product.

Summary of the Judgment

The Supreme Court examined the arguments presented by both parties, focusing on the nature and primary purpose of “KADIPROL.” The State of Gujarat argued that the product's main ingredients and their intended use—preventing diseases like coccidiosis in poultry—classified it as a medicinal product rather than a nutritional supplement. On the other hand, Cadila Healthcare Ltd. contended that “KADIPROL” is marketed and used as a dietary supplement to enhance poultry health and productivity, fitting the definition of “Poultry Feed.”

After a thorough analysis, the Supreme Court acknowledged the complexity of the issue but ultimately opted not to overturn the High Court's decision. The Court noted that while there are merits to both arguments, the matter held academic interest with no immediate revenue implications, leading to the dismissal of the appeal without altering the existing classification.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to support the legal reasoning:

Eskayef Limited v. Collector Of Central Excise (1990): Established that products used for preventing and treating diseases in poultry should be classified as “Drug and Medicine,” even if they have indirect benefits like improved egg production.
Glaxo Laboratories (India) Ltd. v. The State Of Gujarat (1979): Addressed the classification of non-nutritional additives in poultry feed, emphasizing their medicinal properties over nutritional value.
State of Gujarat v. Pfizer Ltd. (1991): Reinforced the stance that products without predominant nutritional value cannot be classified as poultry feed if their primary purpose is medicinal.
Collector of Central Excise, Kanpur v. Krishna Carbon Paper Co. (1989) and Plasmac Machine Manufacturing Company Pvt. Ltd. v. Collector of Central Excise, Bombay (1992): Highlighted the importance of common parlance in interpreting tariff classifications.
Sun Export Corporation v. Collector of Customs, Bombay (1997): Initially held that benefit of exemption should go to the assessee in cases of ambiguity, which was later limited by subsequent judgments.
Commissioner of Customs (Import) Mumbai v. Dilip Kumar and Company (2018): Overruled aspects of Sun Export, emphasizing strict classification over broad interpretations.

Legal Reasoning

The Supreme Court scrutinized the High Court's reliance on previous judgments without a detailed examination of the specific facts of the current case. It acknowledged that “KADIPROL” contains medicinal ingredients aimed at preventing diseases in poultry, which aligns with the classification of “Drug and Medicine.” However, the court recognized that the High Court categorized it as “Poultry Feed” based on its use as a dietary supplement aimed at enhancing poultry productivity.

The Court identified that the High Court did not thoroughly address the Tribunal’s and Deputy Commissioner's findings nor provide substantial reasoning for deviating from established precedents. Nonetheless, acknowledging the academic nature of the dispute and the absence of immediate tax implications, the Supreme Court chose not to overturn the High Court’s decision but left the broader question of classification open for future cases.

Impact

This judgment underscores the nuanced approach the judiciary may take in cases involving classification under tax laws. While it did not set a new precedent, the decision highlights the importance of detailed reasoning when deviating from established case law. The acknowledgment of the ongoing debate surrounding the classification of products with both medicinal and nutritional attributes suggests that future litigations may further clarify the boundaries between “Poultry Feed” and “Drug and Medicine.” Additionally, by leaving the classification issue open, the Court paves the way for more refined interpretations that balance regulatory objectives with industry practices.

Complex Concepts Simplified

1. Schedule I and Schedule II Parts of the GST Act

The GST Act categorizes goods into different schedules for tax purposes. Schedule I typically includes items subject to lower tax rates or exempted from taxes, while Schedule II Part A covers categories like “Drug and Medicine” which are often subject to specific tax treatments based on their usage and classification.

2. Common Parlance Test

This is a legal principle used to interpret the meaning of terms in law based on their ordinary and widely understood meanings in everyday language. The Test aims to align legal interpretations with common usage among consumers and industry players.

3. Prevalence of Ingredients vs. Intended Use

Determining the classification of a product often involves assessing whether its primary purpose is based on its ingredients (medicinal properties) or its intended use (nutritional supplementation). This assessment dictates its categorization under relevant tax schedules.

Conclusion

The Supreme Court's decision in State Of Gujarat v. Cadila Healthcare Ltd. underscores the complexities involved in classifying products that straddle multiple categories, such as “KADIPROL,” which serves both medicinal and nutritional purposes in poultry farming. While the Court chose not to overturn the High Court's classification due to the academic nature of the dispute and lack of immediate tax implications, it highlighted the necessity for detailed, fact-specific reasoning in future cases.

Key takeaways include the importance of balancing legislative intent with practical usage, the application of the common parlance test, and the critical examination of ingredient composition versus product purpose in classification disputes. This judgment paves the way for more nuanced and detailed analyses in similar future litigations, ensuring that classifications are both legally sound and practically relevant.