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Dr. Reddy'S Laboratories Ltd. v. Commissioner Of Customs, Hyderabad
Structured Summary of the Opinion (per C.N.B. Nair, Member (T))
Factual and Procedural Background
Dr. Reddy’s Laboratories Ltd., Hyderabad imported consignments during 1994–1996 which were cleared without payment of duty as "Enzyme linked immunoabsorbent Assay Kits (ELISA KITS)" relying on exemption Notifications Nos. 208/81 (22-9-81), 13/95 (16-3-95) and No. 36/96 (23-7-96).
Revenue issued a show cause notice dated 23-9-1999 alleging that the consignments were actually raw materials/components for manufacture of ELISA kits and therefore liable to duty at 25%, and that the importer had evaded customs duty by misdeclaring the goods. The notice proposed recovery of duty under the proviso to Section 28(1) of the Customs Act, demand of interest under Section 28AB, confiscation under Section 111(m) and penalties under Sections 112/114A.
The Commissioner of Customs and Central Excise, Hyderabad upheld the charges by order-in-original No. 11/2000-Adjn. Cus., dated 10-1-2001, demanding duty of over Rs. 14 lakhs and imposing a penalty of Rs. 1 lakh. The present appeal challenges that adjudication.
Legal Issues Presented
- Whether the imported consignments were "ELISA KITS" as described by the importer and thus eligible for exemption under the relevant notifications, or whether they were raw materials/components for the manufacture of such kits and therefore liable to customs duty at 25%.
- Whether the Revenue could invoke the proviso to Section 28(1) of the Customs Act to extend the period for recovery (i.e., was recovery justified on the ground that duty was not levied by reason of collusion or any wilful misstatement or suppression of facts by the importer).
Arguments of the Parties
Appellant's Arguments
- The appellant consistently contended that the imports were bulk ELISA kits (bulk supplies of tests) which were later repacked into 48-test kits for sale to pathology laboratories (Path Labs).
- Counsel for the appellants relied on invoices, purchase orders and other import documents showing the transaction described in terms of numbers of "tests" (e.g., 12,500 tests; 25,000 tests), unit price per test (USD 0.19), and descriptions such as "test kits" or "combination of microwell plates of 48", arguing these documents show kits were supplied rather than individual raw ingredients.
- The appellants also raised a limitation defence: imports were during 1994–1996 whereas the show cause notice was dated 23-9-1999, more than three years after the last import; therefore the proviso to Section 28(1) (which permits extended recovery only in specific cases of collusion/misstatement/suppression) did not apply because there was no misdeclaration or suppression.
Revenue's Arguments (as reflected in the impugned order)
- The Commissioner found that the imported consignments consisted of ingredients and components in bulk (microtitre wells and reagents) meant for making ELISA kits — sufficient for conducting 25,000 tests — and concluded these were raw materials/components rather than finished test kits.
- The supplier described the consignment as a "bulk reagent shipment" and indicated the kits were to be packed by the importer under their own labelling and design; on that basis Revenue argued there was no entitlement to full exemption under the notifications for "test kits".
- The Commissioner further observed that there was no market for a bulky consignment usable to run 25,000 tests without repacking into smaller convenience sizes (48 tests), and treated the bulk consignments as raw material rather than finished kits entitled to exemption.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court examined the documentary record (purchase orders, invoices and other import documents) and the competing positions of Revenue and the importer on the characterisation of the imported goods.
On the merits (classification / entitlement to exemption):
- The court identified the narrow factual question as whether the imported consignments were ingredients/raw materials listed in the exemption notification (examples listed in Notification No. 36/96-Cus., dated 23-7-96) or whether they were test kits intended for use as such.
- The purchase orders and invoices repeatedly described the transaction in terms of numbers of "tests" (e.g., 12,500 tests, 25,000 tests), listed a "unit price" per test (USD 0.19) and used terminology such as "test kit" and "combination of microwell plates of 48". The documents did not itemise constituent ingredients or give prices/quantities for separate raw components.
- The court analysed the commercial practice: ELISA test kits, as traded, commonly come as combinations of microwell plates (48 tests), and laboratories separate out one plate and add reagents when performing tests. The court treated the phrase "test kit" in the notification as to be interpreted according to its meaning in trade and commerce rather than a formalistic manufacturer-packaged single-test conception.
- Applying the principle that statutory words should be given the meaning they bear in everyday trade and commerce, the court concluded that the appellant's imports were consistent with commercial transactions of test kits (albeit supplied in bulk packages to be repacked or used by purchasers) rather than raw ingredients for manufacture of kits.
On limitation (availability of proviso to Section 28(1) of the Customs Act):
- The court noted that imports took place during 1994–1996 while the show cause notice was issued on 23-9-1999 — about three years after the last import. Revenue sought recovery under the proviso to Section 28(1), which applies only where duty was not levied "by reason of collusion or any wilful misstatement or suppression of facts by the importer".
- The court found that appellants had declared and described the goods in import documents in the same manner as the commercial transaction — i.e., as a number of tests/test kits — and there was no evidence of misdeclaration, suppression of facts or fraud. Therefore the statutory condition necessary to extend limitation under the proviso was not satisfied.
The court combined these analyses to conclude there is no merit in the Revenue's characterisation and no basis to invoke extended recovery under Section 28(1)'s proviso.
Holding and Implications
Holding: The court decided in favour of the appellant on both the substantive classification/entitlement to exemption and on the limitation issue. The opinion states that the appeal is allowed and the impugned order is set aside.
APPEAL ALLOWED
Implications:
- Direct consequence: The order of the Commissioner (order-in-original No. 11/2000-Adjn. Cus., dated 10-1-2001) demanding duty and imposing penalty was set aside and the appellant is entitled to consequential relief, if any, arising from that set-aside.
- On limitation: The court held the proviso to Section 28(1) could not be invoked because the necessary factual basis (collusion or wilful misstatement/suppression) was not established.
- Broader precedent: The opinion applies the familiar principle of statutory construction that words used in tax/notification contexts are to be given the meaning they bear in trade and commerce; the opinion does not purport to establish any novel legal principle beyond this application, and does not record the creation of a new binding precedent beyond its own decision on the facts presented.
Disposition
The appeal was allowed and the impugned order set aside, with consequential relief to the appellant.
[Order per : C.N.B. Nair, Member (T)]. - Dr. Reddy’s Laboratories Ltd., Hyderabad imported during 1994 to 1996 some consignments and cleared them without payment of duty as “Enzyme linked immunoabsorbent Assay Kits (ELISA KITS)” which were exempt under Notifications Nos. 208/81, dated 22-9-81, 13/95, dated 16-3-95 and No. 36/96, dated 23-7-96. Subsequently, a show cause notice dated 23-9-99 was issued alleging that the imported consignments were raw-materials/components required for the manufacture of ELISA KITS which were liable to duty at 25% and that by misdeclaring the goods which were liable to duty as exempt goods, they had evaded customs duty. The notice, therefore, proposed recovery of the duty evaded under proviso to Section 28(1) of the Customs Act, demand of interest under Section 28AB of the Customs Act, confiscation of the imported goods under Section 111(m) of the Customs Act and imposition of penalty under Section 112/114A. In the adjudication proceedings the charges were upheld by the Commissioner of Customs and Central Excise Hyderabad under his order-in-original No. 11/2000-Adjn. Cus., dated 10-1-2001. Consequently, the Commissioner demanded a duty of over Rs. 14 Lakhs and imposed a penalty of Rs. 1 Lakh on the appellants. The present appeal challenges that order.
2. The finding of the Commissioner is that the imported consignments “consisted” of all the ingredients and components, in bulk quantity, (microtitre wells and reagents) meant for making ELISA kits. The Commissioner held that “consignments in bulk imported were sufficient for conducting 25,000 tests. He noted that the bulk ingredients were taken to the factory of the importer, the liquid reagents were filled into vials and microtitre wells and was individually packed into smaller packs of 48 tests. The Commissioner has noted as under :-
“The supplier has himself referred to the consignment as bulk reagent shipment. The supplier has also very clearly indicated that kits are to be packed by the importer (buyer) under their own labelling and design. Therefore, I have no doubt that the consignments under import cannot be treated as ELISA kits. Obviously there is no market for users who need a bulky consignment with which 25,000 tests could be performed. Convenient size for the users obviously happens to be 48 tests and the ingredients put together for enabling 48 tests represents a true ELISA kit. The other reasons and arguments given by the importer to establish that the bulk consignment was also ELISA kit, is totally unacceptable. Therefore describing and referring the goods under import as ELISA kits was incorrect and inappropriate. The supplier did not do so in his documents. Hence the impugned goods were truly not entitled to full exemption under the relevant notifications already referred to above as and when they were imported.”
3. The contention of the appellant all through is that what they had undertaken was bulk imports of ELISA kits. These bulk kits were thereafter re-packed into 48 test kits for sale to Path Labs for use in pregnancy tests. During the hearing of the case learned Counsel for the appellants took us through the invoice and other import documents and emphasized that what was ordered and supplied were certain number of test kits and not any ingredients or raw material for the manufacture of the test kits. He, therefore, submitted that the finding reached in the impugned order is grossly erroneous.
4. We have perused the records and considered the submission made by both sides. The dispute is about the eligibility of the imported goods for exemption. The goods exempted under different notifications issued from year to year are “enzyme linked Immunoabsorbent Assay Kits (ELISA KITS)”. The contention of the Revenue authorities is that goods in question were not test kits but ingredients/raw-materials for the manufacture of kits. The ingredients for the manufacture of ELISA kits as noted in the proceedings are Colour A, Colour B, Enzyme conjugate, Positive control, Negative control etc. Sl. No. 50 to exemption Notification No. 36/96-Cus., dated 23-7-96, which covers raw materials for the manufacture of ELISA KITS, lists the following items.
(i) “Plastic ELISA plates :
(ii) Deactivated positive control sera against human and animal diseases :
(iii) Enzyme horse raddish peroxidase;
(iv) Enzyme Alkaline phosphatase;
(v) Enzyme glucose oxidase;
(vi) Animal anti-human immunoglobins;
(vii) Protein A or Protein A Gold conjugates;
(viii) Polystyrene latex beads;
(ix) Deactivated enzyme labelled human anti HIV reagent.”
In view of the above, the question for determination is whether the imported consignments were these ingredients/raw materials or whether they were test kits. Sample purchase order dated 20-12-1995 states as under :-
“[We are pleased to accept your above cited quotation to the extent shown below. The Terms & Conditions mentioned overleaf from part of the contract. Please supply the following :
| Sl. No. | Description of the Material | ACC Unit | Quantity | Rate USD | Unit | Value USD |
| 1. | hCG PREGNANCY ENZYME IMMUNOASSAY AIRFREIGHT & HANDLING CHARGES TOTAL C&F HYDERABAD BY AIR USD AS PER |
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12500 TESTS |
0.19 |
TEST |
2375.00 212.00 ______ 2587.00 |
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| PREVIOUS PRICE -USD 0.19 PER TEST |
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(emphasis supplied)”
Similarly, invoices dated 17th April, 96 and 17th December, 96 etc. describe the goods under sale are as under :
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| Morewell Diagnostics GmbH Correspondence : Morewell Diagnostics GmbH Poatiwoh 8126 Zumikon, Switzerland | Administration : Morewell Diagnostics GmbH . 8132 Engg./Zurich, Switzerland Tel : (+41-1) 986 2626 Fax : (+41-1) 986 2630 | ||||||
| Invoice |
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| SOLD TO : |
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| Dr. Reddys Laboratories Ltd. Diagnostics Division 6-3-927/D Somallguda Raj Bhavan Road Hyderabad, India |
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DATE : 17 April 1996 YOUR ORDER 06, March 1996 P.O. Number DRL/PUR/MD/ 1996 TERMS Advance Payment | ||||||
| Ref No. 32332 |
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| Cat. No. | Description | Units | Unit Price Ex-Works | Total | ||||
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| 7001.48 | hCG Pregnancy Enzyme Immunoassay Bulk reagent shipment consisting of : . reagents. Lot : 10578 Exp : 05/97 | 25000 tests | USD 0.19 | USD 4,750.00 | ||||
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| Reagents will be paid and the kits will be packed by no buyer under their own labelling and design. |
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| Note : |
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| The buyer of the products is not in any way allowed to use the packaging, trade marks or the company name belonging to and registered by Morewell Diagnostics GmbH. Switzerland. |
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| Airfreight and Handling Charges exworks Zurich to Hyderabad Airport. Insurance coverages for the shipment is the full responsibility of the buyer. Keep Cool Between +2C and +8C |
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| USD 424.00 | ||||
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| Thank you for your order |
| Total : C&F USD 5,174.00 | |||||
| ZURCHER KANTONAL BANK, 0126 ZUMIKON, SWITZERLAND : ACC NO. 1310 00002.143 | ||||||||
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| Morewell Diagnostics GmbH Correspondence: Morewell Diagnostics GmbH Poatiwoh 8126 Zumikon, Switzerland | Administration : Morewell Diagnostics GmbH . 8132 Engg./Zurich, Switzerland Tel : (+41-1) 986 2626 Fax : (+41-1) 986 2630 | |||||||
| Invoice |
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| SOLD TO : |
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| Dr. Reddys Laboratories Ltd. Diagnostics Division 6-3-927/D Somallguda Raj Bhavan Road Hyderabad, India |
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DATE : 17 Dec. 1996 YOUR ORDER 24, Sept. 1996 P.O. Number DRL/PUR/MD/1996 TERMS Advance Payment | |||||||
| Ref No. 32476 |
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| Cat. No. | Description | Units | Unit Price Ex-Works | Total | |||||
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| 7001.48 | hCG Pregnancy Enzyme Immunoassay Test Kit consists of Combination of Microwell Plates of 48 Lot : 13548 Exp. 01/98 | 25000 tests | USD 0.19 | USD 4,750.00 | |||||
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| Airfreight and Handling Charges ex-work Zurich to Hyderabad Airport. |
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| USD 424.00 | |||||
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| Insurance coverage for the shipment is the full responsibility of the buyer. Keep Cool Between +2C and +8C |
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| Thank you for your order |
| Total : C&F USD 5,174.00 | ||||||
| ZURCHER KANTONAL BANK, 8120 ZUMIKON, SWITZERLAND : ACC NO. 1310 00002.143 | |||||||||
From the above purchase and import documents, it is clear that what has been ordered and supplied are a certain quantity of “tests” like 12500 tests, 25000 tests etc. Similarly, the goods under supply are also described as test kits consisting of “combination of microwell plates of 48”. “Unit price” is also shown as “USD 0.19”. These documents make no mention of any of the ingredients, the price of each of the ingredients or quantity of the ingredients. Thus, the buying and selling is undisputably in terms of certain number of “tests”. From these documents covering the purchase and sale, it is clear that what was transacted between the parties were certain number of tests or test kits and not ingredients/raw materials for preparing tests. It is only that the orders were for bulk supply of tests, and that they were accordingly packed. The buyer in turn was to repack the bulk packs into more convenient packs of 48 tests for supply to Path Labs. It is also clear that the test kits in question do not come as a single test kit for performing one individual test. It comes as combination of microwell plates of 48 tests, and before carrying out a test, the test laboratory separates out one plate and serves the required quantity of reagent into the plate and carries out the test. This is the commercial practice. The notification when it used the words ‘test kit’ it should be taken to mean test kit as understood and transacted in trade and commerce and not as individual test kits, so packed by the manufacturer, as held by the Commissioner. If the vialing of reagent and re-packing of kits is the standard practice in trade and commerce before sale to Path Labs, Revenue authorities would not be justified in holding that, unless the re-agents are packed into individual test kits, the imports will not come within the wording “test kits” used in the notification. For, it is well settled that tax authorities should take words of the statute to have the same meaning as they have in everyday trade and commerce so words have in trade and commerce. Viewed in accordance with this well understood principle of statutory construction, there could be no dispute that the appellant in the present case was importing certain number of ELISA kits and not ingredients or raw-materials for the kits.
5. The appellants have contested the demand on the ground of limitation also. We find merit in this contention. The imports took place during the period 1994 to 1996 and the show cause notice was issued only on 23-9-1999. Easily three years after the last of the imports. The purported short levy is sought to be recovered by availing of the extended period allowed under proviso to Section 28(1) of the Customs Act. That proviso is available to the Revenue only in cases “where any duty has not been levied …………… by reason of collusion or any wilful misstatement or suppression of facts by the importer …………” In the present case, the appellants had declared and described the goods in the import documents the same way as the goods were being transacted, i.e. as so many tests. The description of the goods was fully in accordance with the commercial transaction. Therefore, there could be no allegation that the appellants had made any misdeclaration or suppression of any facts or committed any fraud. The proviso was, therefore, clearly not available to the Revenue for recovery of duty, even if, there was a short payment.
6. In the view we have taken above, we hold in favour of the assessee both on merits and on the issue of limitation. Accordingly, the appeal is allowed, with consequential relief, if any, to the appellant, after setting aside the impugned order.
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