Gujarat vs. Cadila Healthcare: Supreme Court Ruling on Poultry Feed Taxation

The case of State of Gujarat vs. Cadila Healthcare Ltd. is a significant judgment concerning the classification of a product for taxation purposes under the Gujarat Sales Tax Act (GST Act). The Supreme Court was tasked with determining whether the product ‘KADIPROL’ should be classified as a ‘Poultry Feed’ under Entry 25 of Schedule I, which would make it tax-exempt, or as a ‘Drug and Medicine’ under Entry 26(1) of Schedule II Part A, which would attract taxation.

Background of the Case

The dispute arose when Cadila Healthcare Ltd. sought a determination under Section 62 of the GST Act regarding the taxation of KADIPROL. The Deputy Commissioner of Sales Tax ruled that the product contained preventive medicinal properties and should be taxed as a ‘Drug and Medicine.’ This ruling was upheld by the Sales Tax Tribunal.

Cadila Healthcare challenged the decision in the Gujarat High Court, which ruled in favor of the company and classified KADIPROL as ‘Poultry Feed,’ making it tax-exempt. The State of Gujarat appealed the decision to the Supreme Court.

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Arguments by the Petitioner (State of Gujarat)

The State of Gujarat, represented by Ms. Aastha Mehta, argued:

• The High Court erred in overturning the findings of the Tribunal and the Deputy Sales Tax Commissioner, who had classified KADIPROL as a ‘Drug and Medicine.’
• The High Court failed to provide proper reasoning for disregarding the expert literature and classification adopted by lower authorities.
• KADIPROL contains Amprolium Hydrochloride (25gm) and Vitamin K3 (250gm), which are used to prevent coccidiosis in poultry.
• The product’s primary purpose is to prevent and treat diseases in poultry, which qualifies it as a ‘Drug and Medicine’ rather than simple nutrition.
• The presence of medicinal components in KADIPROL aligns it with other drugs classified under Entry 26(1) of Schedule II Part A of the GST Act.
• Similar cases in the past, such as State of Gujarat vs. Pfizer (India) Ltd., ruled that products with medicinal properties, even if used in poultry, should be classified as ‘drugs.’

Arguments by the Respondent (Cadila Healthcare Ltd.)

Cadila Healthcare, represented by Ms. Kavita Jha, countered:

• The High Court rightly classified KADIPROL as ‘Poultry Feed’ under Entry 25 of Schedule I, making it tax-exempt.
• Veterinary products have evolved, and many supplements that enhance poultry health and productivity are classified as feed.
• KADIPROL was not marketed as a medicine but as an additive in poultry feed.
• The Gujarat VAT Act exempts ‘Poultry Feed’ under Entry 48 Schedule I, and similar classifications should apply under the GST Act.
• Applying the Common Parlance Test, KADIPROL is widely recognized in the poultry industry as feed, not medicine.

Supreme Court’s Observations

The Supreme Court, comprising Justices M.R. Shah and Sanjiv Khanna, reviewed the arguments and noted:

• The product was sold in 100gm sachets and was not directly consumed by poultry but mixed with feed.
• The Tribunal and Deputy Commissioner relied on expert literature to classify it as a drug, but the High Court did not provide a detailed analysis while overturning this classification.
• The Court acknowledged that poultry feed now includes a variety of additives, but the predominant purpose must be considered.
• Similar cases, including Glaxo Laboratories (India) Ltd. vs. State of Gujarat, emphasized that products with a medicinal purpose should be classified as drugs.

Final Judgment

The Supreme Court disposed of the appeal, stating:

“As the issue in question is of academic interest and there is no revenue implication as there are no tax dues, we close the present proceedings keeping the larger question on the Common Parlance Test open to be considered in an appropriate case.”

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Key Takeaways

• Classification of products for taxation: The decision highlights the complexity of determining whether a product is a drug or poultry feed.
• Common Parlance Test: How products are understood in trade plays a crucial role in tax classification.
• Evolution of veterinary supplements: Modern poultry feed often contains additives, making classification disputes more common.
• Judicial restraint: The Supreme Court avoided ruling definitively on the issue due to the lack of pending tax dues.

Conclusion

The judgment in State of Gujarat vs. Cadila Healthcare Ltd. highlights the challenges in classifying veterinary products under tax laws. While the Supreme Court did not give a conclusive ruling, it left open the larger issue of how similar products should be taxed in the future. This case will likely serve as a reference for future disputes on tax classification in the veterinary and pharmaceutical industries.

Petitioner Name: State of Gujarat.
Respondent Name: Cadila Healthcare Ltd..
Judgment By: Justice M.R. Shah, Justice Sanjiv Khanna.
Place Of Incident: Gujarat.
Judgment Date: 10-07-2022.

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