The Supreme Court has upheld Pharmaceutical Sample Excise Duty on pharmaceutical samples removed for laboratory testing after finding that the manufacturer failed to maintain the mandatory records required under the Central Excise Rules. The Court ruled that once a manufacturer violates the prescribed record-keeping requirements, it cannot rely on the argument that the samples were not yet marketable. The judgment reinforces that proper documentation is a mandatory compliance requirement, not a procedural formality.
A Bench comprising Justice K.V. Viswanathan and Justice Arun Palli dismissed the civil appeals filed by Hicure Pharmaceuticals Pvt. Ltd. The appeals challenged an excise duty demand relating to pharmaceutical samples removed for in-house and external testing between January 2001 and September 2003. The Court relied on its earlier decision in ITC Ltd. v. Collector of Central Excise and affirmed the Karnataka High Court’s ruling.
Failure to Maintain Records Triggered Excise Duty
The company argued that the samples had not become marketable because they still required testing and final approval. It also claimed that the products were not fully packed when employees removed the samples for testing.
The Supreme Court rejected these arguments. It held that the issue of marketability becomes irrelevant when the manufacturer fails to maintain the records prescribed under the CBEC’s Supplementary Instructions and Rule 11 of the Central Excise Rules.
According to the Court, manufacturers must prepare invoices, record sample removals in the daily stock register, maintain proper accounts, and pay applicable duty unless a valid exemption applies. When they fail to follow these requirements, the law treats the samples as goods removed for home consumption.
Supreme Court Relied on ITC Ltd. Precedent
The Bench applied the principles laid down in ITC Ltd. v. Collector of Central Excise. That judgment established that non-maintenance of statutory records is sufficient to justify an excise duty demand on samples removed for testing.
The Court observed that Hicure Pharmaceuticals could not produce any evidence showing compliance with the prescribed procedure. Even after repeated questions during the hearing, the company failed to establish that it had maintained the required records.
As a result, the Court concluded that the company could not avoid excise liability by arguing that the goods lacked marketability.
Tribunal’s Reasoning Found Contradictory
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) had earlier ruled in favour of the company. It held that the medicines became marketable only after successful testing and completion of packing.
At the same time, the Tribunal criticized the Excise Department for claiming that the removals were undocumented because departmental officers had identified the samples while examining the company’s records.
The Supreme Court found this reasoning inconsistent. It explained that discovering the movement of samples through available documents does not prove compliance with the specific statutory records required under the Central Excise Rules.
Therefore, the Tribunal’s conclusion could not stand.
Earlier Tribunal Decisions Did Not Help the Company
Hicure Pharmaceuticals also relied on earlier Tribunal decisions that had favoured manufacturers in similar disputes.
The Supreme Court distinguished those decisions. It explained that the manufacturers in those cases had maintained the prescribed records. Consequently, the courts examined whether the goods had become marketable.
In contrast, Hicure Pharmaceuticals failed to maintain the mandatory documentation. Therefore, the Court held that those precedents did not apply.
Department’s Appeal Was Maintainable
The company also challenged the maintainability of the department’s appeal before the Karnataka High Court under Section 35G of the Central Excise Act.
It argued that the dispute related to the value of goods and therefore fell outside the scope of Section 35G.
The Supreme Court rejected this objection. It held that the department’s appeal satisfied the requirements of Section 35G and did not fall within any statutory exclusion.
Compliance Lessons for Manufacturers
The ruling sends a strong message to pharmaceutical manufacturers and other industries that remove samples for quality testing.
Businesses should maintain complete documentation whenever they remove products for laboratory analysis. They should prepare Rule 11 invoices, update daily stock registers, maintain value records, and preserve documentation showing the final use or destruction of testing samples.
The judgment also highlights that Pharmaceutical Sample Excise Duty disputes will primarily depend on compliance with statutory record-keeping requirements. Once manufacturers fail to maintain those records, courts are unlikely to consider arguments based on marketability alone.
