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TMI Blog2024 (5) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Kits are imported, manufactured, and sold under Drug Licenses issued by the competent authority and they have been paying Value Added Tax (VAT). The grievance of the petitioners is that the Revenue authorities are seeking to impose VAT at the rate of 12.5% instead of at 4%, meant for "drugs", by not treating the Diagnostic Kits as "drugs". 4. In exercise of the powers conferred under Section 17 of the Jammu and Kashmir Value Added Tax Act, 2005, the Government of Jammu and Kashmir issued a Notification under SRO 167 dated 16th June 2005 containing the Schedules which prescribe the rates on which various commodities/articles are to be taxed. As per Schedule A, commodities falling under it are to be taxed at the rate of 0%, in respect of Schedule B commodities, at the rate of 1%, and for Schedule C commodities, at the rate of 4%, and for Schedule D commodities, at the rate of 12.5%. 5. According to learned counsel for the petitioners, the Diagnostic Kits namely, (i) Hepatitis HBS AG Device Card, (ii) HIV Device Card, (iii) Pregnancy Device Card, and (iv) VDRL Device Card are chargeable at the rate of 4% of VAT, as these are "drugs" falling within Entry No. 48 of Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a drug license issued by the Drug Controller to manufacturers of drugs. (c) These drugs are imported on the License issued by the Drug Controller for import of Drugs under the Drugs and Cosmetics Act. (d) They fall within the definition of "drug" under the Drugs and Cosmetics Act. (e) They fall within the scope of "drugs" in Entry 48 of Schedule C of SRO 167 which has adopted the definition of "drug" as given under the Drugs and Cosmetics Act. (f) They are known and understood as drugs in common parlance by the manufacturers, sellers, doctors, pathologists, and patients. (g) Diagnostic tests are done using Diagnostic Kits by diagnostic laboratories on medical prescription which are meant for diagnosis of diseases. (h) Packing and labeling on it describe it as a Diagnostic Reagent/Diagnostic kit for diagnosis of a particular disease. It has the date of manufacturing and the date of expiry as in the case of any drug or medicine. (i) All medical literature describes it as a drug meant for diagnosis of certain diseases in human beings. (j) These are not sold in the market as chemicals or reagents. Rather, they are sold in the market only as Diagnostic Kits for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D are chargeable @ 12.5%. 12. The petitioners have also questioned the competency of the PA (Technical) in issuing any clarification under Section 87 of the VAT Act, as it is only the Commissioner who is competent to issue such a clarification. 13. It is the case of the petitioners that it is not correct on the part of the Commissioner to clarify that the Diagnostic Kits are reagents/ chemicals and other substances and are packed in convenient combinations. Petitioners contend that while it is true that Diagnostic Kits are manufactured out of reagents/chemicals and other substances, yet Diagnostic Kits are manufactured by medical formulation / preparation and are distinct from different reagents/chemicals out of which, these are manufactured. The Diagnostic Kits, the end product of a combination of the reagent/chemicals are a unique product having a distinct purpose, names, uses, and characters and these are sold in the market by the dealers with Drugs License for use in diagnosis for certain diseases on the prescription of doctors. They are not basic reagents/chemical or other substances simpliciter, but these are product of combined chemicals and reagents which has unique char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-speaking order without proper reasons as to why the aforesaid items cannot be treated under Entry 48 of Schedule C. 18. It has been also submitted that these Diagnostic Kits have been treated by manufacturers, importers, exporters, and sellers as "drugs" by obtaining the necessary license under the Drugs and Cosmetics Rules, in the support of which the licenses issued to the petitioners by the Drug Controller have been annexed. 19. The petitioners have also stated that the Directorate General of Health Services Drug Control Section, Nirmal Bhawan New Delhi in the reply to a query had categorically stated that In Vitro Diagnostic Kits are drugs under the Drugs and Cosmetics Act. 20. It has been also stated by the petitioners that in other States all these items are treated as drugs and charged accordingly. The petitioners, accordingly, have sought for quashing the aforesaid clarifications and for a declaration that Diagnostic Kits as mentioned above are "drugs" which are liable to be taxed @ 4% under the VAT Act as being covered by Entry 48 of Schedule C to SRO 167 dated 16th June, 2005. 21. Learned counsel for the respondents have contested the petitions and have contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument of the petitioners hinges on the definition of "drug" as provided under the Drugs and Cosmetics Act, 1940, we will analyze and examine the aforementioned definition clause. Section 3 (b) of the Drugs and Cosmetics Act of 1940 defines "Drug" as follows: Section 3: In this Act, unless there is anything repugnant in the subject or context,- (b) "drug" includes - i) 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 insects like mosquitoes; (ii) 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; (iii) all substances intended for use as components of a drug including empty gelatine capsules; and (iv) such devices intended for internal or external use in the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commonly understood, is treated as drug, if it is used for diagnostic purposes. However, the real difficulty emerges when "Diagnostic Kit" which is not commonly understood as "medicine" is claimed to be "medicine" to bring within the meaning of "drug". 31. What is a "Diagnostic Kit"? "Diagnostic Kit" means "a product containing reagents and other items necessary to conduct a test to detect the presence of or to measure a given Biomarker in a given Patient Sample", and it means an In Vitro Diagnostic product. [See: https://www.lawinsider.com/dictionary/diagnostic-kit]. In Vitro means a process taking place outside a living body, in a scientific apparatus as opposed to In Vivo, a process taking place inside the body [Oxford Advanced Learners Dictionary, 10th Edn., 2020]. 32. The contention of the petitioners is that "Diagnostic Kit" consists of a combination of reagents and other chemicals and substances which is used for diagnostic purposes. While there cannot be any doubt about the existence and use of chemicals and other substances in a combined or compound form in the Diagnostic Kit, yet, Diagnostic Kit is not merely the products of a combination of reagent or chemicals and suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as drugs as per sub-section (iv) of Section 3 (b) of the Act (provided these are specified as such by the Central Government), though both the "medicines" and "devices" may be used for diagnostic purpose. The existence of these two sub-sections under the same section of the statute clearly indicates that "medicines" are different from "devices", though both are "drugs" within the meaning of Section 3 (b). If we try to comprehend "Diagnostic Kits" vis-à-vis "medicines" and "devices", there cannot be any doubt that "Diagnostic Kits" would be more akin to "devices" rather than "medicines". When any particular item is compared with two competing substances for the purpose of classification, the item can be clubbed with the substance with which the item bears more resemblance. 36. In the present context, "Diagnostic Kits" bears more resemblance with "devices" rather than "medicines". Thus, seen from this perspective, "Diagnostic Kits" cannot be considered to be "medicine" and can be considered to be "device". In such an event, the "Diagnostic Kit" will not come under the definition clause of sub-section (i) of Section 3 (b) but would come under sub-section (iv) of Section 3 (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, Diagnostic Kit is a wholesome and composite product consisting not only of the chemical reagents and other non-chemical substances which are used in the kit, but the apparatus which holds the reagents and chemicals and other non-chemical substances, like polythene materials. The chemical reagents found in the Diagnostic Kit cannot be used independently and without the existence of the apparatus or the device. Thus, there should not be any confusion about the apparatus or the device which is an integral part of the chemical reagent used along it to form the Diagnostic Kit, with the mere container containing a medicine as in the case of a cough syrup or tablets. Devoid of the physical device or apparatus and other non-chemical components of the Kit, the reagents/chemicals contained in the Diagnostic Kit cannot be used independently or separately unlike in the case of the medicine like cough syrup or tablet stored in a container. The apparatus of the Diagnostic Kit has no independent existence without the reagents/chemicals it holds. For example, cough syrup is sold in bottle/container, but the cough syrup is to be used independent of the bottle/container. The bottle/container is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consciously included syringes and dressings also within the meaning of drugs and medicines. Nobody in his normal senses would treat syringes or dressings to be "drugs" or "medicines". Everybody would treat a syringe to be a medical tool to inject medicines in the body and dressing to be materials to protect wounds. By any stretch of imagination, they are treated as drugs or medicines in common parlance, yet the rule making authorities deemed it fit to categorize these as drugs or medicines for the purpose of levy of tax under the VAT under Entry 48 of Schedule 'C'. There could be certain reasons for doing so. We may only speculate that as these articles are so commonly used with treatment of patients and used along with medicines and drugs that these are treated as "drugs" or "medicines" for the purpose of VAT. However, we are not concerned with such classification as it is within the wisdom of rule making authority. 44. What is notable is that the petitioners have not brought to the notice of this Court any material to show that Diagnostic Kits are considered to be "medicines" or "drug" by the medical practitioners, pathologists, patients and in medical literature. 45. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances and for the reasons discussed above, we dispose of this writ petition with the direction to the respondents authorities to examine if the aforesaid devices namely, (i) Hepatitis HBS Ag Device Card, (ii) HIV Device Card, (iii) Pregnancy Device Card and (iv) VDLR Device Card have been notified by the Central Government in the Official Gazette after consultation with the Drugs Technical Advisory Board as "drugs" within the meaning of Section 3 (b) (iv) of the Drugs and Cosmetics Act, 1940. If it is found to be so, the above mentioned four Diagnostic Kits have to be treated as "drugs" falling within Entry 48 of Schedule C of SRO 167 dated 16th June, 2005 and charged VAT accordingly @ 4% with prospective effect from the date such notification is issued. Otherwise, being not "drugs", the aforesaid "Diagnostic Kits" would fall under the residuary Entry 165 of Schedule D of SRO 167 of 16th June 2005 and attract VAT at the rate of 12.5%. 50. Having arrived at this conclusion, it may not be necessary for us to dwell upon other contentions urged before us. 51. The impugned clarifications No. 09 of 2007 dated 18.06.2007 and No. 130/Clari/1176/CCT dated 25.09.2007 are to be read a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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