Non-Maintenance of Records Makes Pharma Test Samples Liable to Excise Duty: SC

This came as the Supreme Court has dismissed the appeals filed by Hicure Pharmaceuticals, affirming the Karnataka High Court's decision that excise duty is payable on pharmaceutical samples removed for in-house and external laboratory testing where the manufacturer failed to maintain the mandatory statutory records. The Court held that in the absence of prescribed records, such removals are deemed to be clearances for home consumption, attracting excise duty under the Central Excise law.

Hicure Pharmaceuticals, a pharmaceutical manufacturer located in Dharwad, Karnataka, was issued a show-cause notice by the Central Excise Department for the period between January 2001 and September 2003. Following adjudication, the Assistant Commissioner of Central Excise found that the company had removed pharmaceutical samples both for in-house quality testing and for testing at outside laboratories without maintaining proper statutory records. Consequently, excise duty of ₹33,488 was demanded on in-house samples valued at ₹2,09,301, along with an additional demand of ₹6,226 for samples sent to outside laboratories. The Commissioner (Appeals) upheld this order.

However, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reversed the decision, holding that the medicines became marketable only after completion of in-house testing and that packaging was incomplete when the samples were drawn. Based on the Tribunal's decision, the company received a refund of ₹1,29,453. Subsequently, the Department issued a notice seeking recovery of the refunded amount and challenged the Tribunal's order before the Karnataka High Court. The High Court allowed the Department's appeal, leading Hicure Pharmaceuticals to approach the Supreme Court.

Hicure Pharmaceuticals contended that the pharmaceutical samples removed for quality testing had not attained marketability at the time they were drawn because the manufacturing process was incomplete until testing and subsequent packaging were completed. The company relied on the Tribunal's reasoning that medicines could not be treated as finished excisable goods before successful quality testing.

It also argued that the High Court had wrongly entertained the Department's appeal under Section 35G of the Central Excise Act because the dispute allegedly related to valuation of goods, which according to the company fell outside the scope of that provision. The appellant further attempted to distinguish its case from earlier precedents relied upon by the Revenue, maintaining that the nature of pharmaceutical testing was different and that the goods were not marketable before completion of quality control.

The Central Excise Department argued that there was no dispute that the company had removed samples both for in-house testing and for testing through external laboratories. However, the assessee had failed to maintain the statutory records prescribed under Chapter 11 of the CBEC Supplementary Instructions governing removal of samples.

The Department maintained that manufacturers are required to prepare invoices, make entries in daily stock accounts, maintain complete records of receipt and utilisation of samples, and pay the appropriate duty before removal unless specifically exempted. Since no proper records regarding the value, movement or destruction of the samples had been maintained, the Department argued that such removals must be treated as clearances for home consumption. It further relied upon the Supreme Court's earlier judgment in

ITC Ltd. v. Collector of Central Excise, which held that non-maintenance of records justified levy of excise duty on goods removed for quality control testing.

The Supreme Court observed that the High Court had correctly recorded the undisputed factual position that the pharmaceutical samples were indeed removed for both in-house testing and testing by outside laboratories, and that the assessee had admittedly failed to maintain records regarding the value and movement of those samples. The Court held that once statutory records are absent, the samples have to be treated as goods removed for home consumption, making the question of whether they had attained marketability largely irrelevant.

The Court emphasised that Chapter 11 of the CBEC Supplementary Instructions specifically requires manufacturers to maintain records, prepare invoices and account for removal of samples intended for testing. Referring extensively to its earlier decision in ITC Ltd., the Court reiterated that non-maintenance of records entitles the Department to levy excise duty because otherwise manufacturers could avoid duty merely by claiming that goods were removed for testing.

The Bench further noted that despite repeated queries during the hearing, the appellant was unable to produce any evidence whatsoever showing compliance with the prescribed record-keeping requirements. The Court also rejected the contention that the Department's appeal before the High Court was not maintainable under Section 35G of the Central Excise Act, holding that the appeal was validly instituted and was not barred by the exclusion clause.

Dismissing the appeals, the Supreme Court upheld the Karnataka High Court's judgment and confirmed the levy of excise duty on the pharmaceutical samples.

To view the order, click the link below: