CAPSULE SHELL – A DRUG?

[Mr. M. GOVINDARAJAN]

Drug

Section 3(b) of the Drugs and Cosmetics Act, 1946 defines the term ‘drug’ as including-

• all medicines for internal or external use of human beings or animals and all substances intended to be used for or in the diagnosis, treatment, mitigation or prevention of any disease or disorder in human beings or animals, including preparations applied on human body for the purpose of repelling inspects like mosquitoes;
• such substances (other than food) intended to affect the structure or any function of the human body or intended to be used for the destruction of (vermin) or insects which cause disease in human beings or animals, as may be specified from time to time by the Central Government by notification in the Official Gazette;
• all substances intended for use as components of a drug including empty gelatin capsules; and
• such devices intended for internal or external use in the diagnosis, treatment, mitigation or prevention of disease or disorder in human beings or animals, as may be specified from time to time by the Central Government by notification in the Official Gazette, after consultation with the Board.

Capsule

In the manufacture of pharmaceuticals, encapsulation refers to a range of dosage forms-techniques used to enclose medicines-in a relatively stable shell known as a capsule, allowing them to, for example, be taken orally or be used as suppositories. The two main types of capsules are:

• Hard-shelled capsules, which contain dry, powdered ingredients or miniature pellets made by e.g. processes of extrusion or spheronization. These are made in two halves: a smaller-diameter “body” that is filled and then sealed using a larger-diameter “cap”.
• Soft-shelled capsules, primarily used for oils and for active ingredients that are dissolved or suspended in oil.

Both of these classes of capsules are made from aqueous solutions of gelling agents, such as animal protein (mainly gelatin) or plant polysaccharides or their derivatives (such as carrageenans and modified forms of starch and cellulose). Other ingredients can be added to the gelling agent solution including plasticizers such as glycerin or sorbitol to decrease the capsule's hardness, coloring agents, preservatives, disintegrants, lubricants and surface treatment. Since their inception, capsules have been viewed by consumers as the most efficient method of taking medication.

Issue

The issue to be discussed in this article whether the capsule shell used for consumption of medicine amounts to drugs for the purpose of taxation with reference to the decided case law as detailed below-

In ‘Erawath Pharma Limited v. State of MP’ – 2018 (7) TMI 1971 - MADHYA PRADESH HIGH COURT the writ petition is a company registered under the Companies Act.  The petitioner is manufacturing process of Empty Har Gelatin Capsule (EHPMC) .  The petitioner is also manufacturing empty hard gelatin capsules (Empty Propyl Methyl Cellulose Capsule Shell).  The Controller, Food and Drug Administration, Madhya Pradesh has granted permission to the petitioner to manufacture the above said capsule shell as additional product under the Drugs Manufacturing Licence. 

The petitioner sought for a clarification/opinion under section 70 of the MP VAT Act, 2002 in respect of rate of tax of EHPMC capsule shell before the Commissioner, Commercial Tax, Indore.  Section 70 of the said Act empowers the Commissioner to pass an order for inclusion/exclusion of a particular entry in the matter of the rate of VAT.  The petitioner enclose along with the application-

• the details of manufacturing process in respect of EHPMC capsule Shell,
• details of manufacturing process in respect of Empty Gelatin Capsule Shell;
• details of process flow of EHPMC Capsule shell; and
• details of process flow of Empty Gelatin Capsule Shell;
• product flow chart of EHPMC Capsule Shell;
• composition certificate in respect of EHPMC Capsule Shell and Empty Gelatin Capsule Shell.

The petitioner made a prayer that EHPMC capsule should be taxable under the entry (Entry 19A of Part II of Schedule II) of Drugs and Medicines or any other entry and therefore the tax should be levied at 5%.  The petitioner contended before the Commissioner that the EHPMC capsules are being manufactured under Drug Licence and they are used for filling medicines, a patient consumes the capsule with drug and the EHPMC is covered under the Entry of Drug and medicine and therefore as the purpose the said capsule is like Gelatin capsule, it should be treated at par for the purposes of taxation like gelatin capsule shell only.  The petitioner raised various grounds before the Commissioner.   However the Commissioner held that the EHPMC cannot be included under the category of drug and medicine and the same is liable for tax @ 14%.

Against the order of Commissioner, the petitioner filed the present writ petition before the High Court.  The petitioner contended before the High Court that the EHPMC capsule shell are made of Hydroxy Propyl Cellulose and are used by pharmaceutical industries for filling medicines.  They are manufactured by means of a licence under the Drugs and Cosmetics Act.  The capsules are consumed with drugs by the patients and therefore covered under the entry of drug and medicine.  The petitioner relied on the judgments of the following cases-

• The State of Andhra Pradesh v. Raja Medical Stores – 1983 (2) TMI 262 - ANDHRA PRADESH HIGH COURT;
• Porrits and Spencer (Asia) Limited v. State of Haryana – 1978 (9) TMI 72 - SUPREME COURT;
• Rashtra Deep Laboratory v. Commissioner of Sales Tax- 1982 (4) TMI 267 - ALLAHABAD HIGH COURT;
• Ramavatar Budhaiprasad v. Assistant Sales Tax Officer – 1961 (3) TMI 55 - SUPREME COURT;
• Medicaps Limited v. State of MP – (2008) 13 STJ 161 (MP)

The High Court analyzed the provisions of respective laws and the judgments relied on by the petitioner.  The MP VAT Act has three schedules covering variety of products and application of tax.  Entry No. 19 and 19A of Part II of Schedule II of MP VAT Act, provides the tax rate for bulk drugs and drugs and medicines including vaccines, syringes, dressings, medicated ointments produced under drug licence and light liquid paraffin of IP Grade at 5%.

The High Court is of the opinion that merely because the capsules manufactured by the petitioner are being manufactured on account of the same in the drug licence, it can never be said that it is a drug.  The High Court pointed out the findings of the Commissioner, in his order, which is challenged that certain cosmetics are also manufactured under the drug licence and therefore, if the analogy given by the petitioner is accepted then all cosmetics will have to be included under the heading of ‘drug’.

The High Court held that since it is not established that the capsule in question is exclusively used for the purpose of drugs only the Commissioner was justified in rejecting the prayer of the petitioner and the entries under the VAT Act as reflected in the schedule are very clear, once the capsule manufacture by the petitioner is not included under the category of drugs, it has to be charged under the residual entry.  The High Court dismissed the writ petition holding that the capsule in question does not amount to drug.