White Petroleum Jelly IP Is A 'Drug,' Not A 'Cosmetic' For Tax Purposes If Made Under Drug License: Madhya Pradesh High Court

White Petroleum Jelly is a 'Drug,' Not a 'Cosmetic' for Tax Purposes, Rules MP High Court

Indore, MP - In a significant ruling on product classification under tax laws, the Madhya Pradesh High Court has held that 'White Petroleum Jelly of IP grade' manufactured under a valid drug license must be classified as a "drug and medicine" and not as a cosmetic. The decision, delivered by a division bench of Justice Vivek Rusia and Justice Jai Kumar Pillai, provides major relief to Hindustan Unilever Ltd. (HUL) and clarifies the tax treatment for products with both medicinal and skincare properties.

The court quashed the orders of the Madhya Pradesh Commercial Tax Appellate Board, which had subjected the product to a higher tax rate by classifying it as a cosmetic under the residuary entry of the MP VAT Act, 2002.

The Core of the Dispute

The case revolved around the correct tax classification of the non-perfumed variant of White Petroleum Jelly I.P., which HUL manufactures under a valid drug license. HUL contended that the product falls under Entry 19A of the MP VAT Act, which covers "Drugs and medicines... medicated ointments produced under drug license," attracting a lower tax rate of 4-5%.

However, the Commercial Tax Department argued that since the product is used for general skincare, not prescribed by doctors, and sold over the counter, it should be treated as a cosmetic. The department classified it under the residuary entry, imposing a higher tax rate of 12% under the VAT Act and 10% under the Entry Tax Act.

Arguments Before the Court

Hindustan Unilever's Stance: Senior Advocate Shri P.M. Choudhary, representing HUL, argued that the product's classification as a "drug" is settled law, citing the Supreme Court's landmark judgment in Ponds India Ltd. v. Commissioner of Commercial Tax (2008) , which dealt with the very same product. He emphasized that a specific legislative entry for drugs must prevail over a general entry for cosmetics. HUL clarified that it manufactures two distinct variants: a non-perfumed, medicated version (the subject of the dispute) and a perfumed version, on which it duly pays the higher tax rate applicable to cosmetics.

The State's Counter: Shri Bhuwan Gautam, Government Advocate for the state, contended that HUL is primarily a cosmetics company and that the product's common parlance understanding is that of a skincare item for "care," not "cure." He relied on the Supreme Court's decision in Heinz India Ltd. v. State of Kerala , where Nycil prickly heat powder was classified as a cosmetic based on its marketing and consumer perception.

High Court's Analysis and Precedents

The High Court meticulously analyzed the functional utility of White Petroleum Jelly, noting its therapeutic uses for healing minor cuts, burns, and skin ailments, apart from its moisturizing properties. The bench observed that while it is a skincare product, its purpose is to prevent and mitigate skin-related ailments, not merely for beautification.

The court heavily relied on established Supreme Court precedents to arrive at its conclusion:

• Ponds India Ltd. (2008): The bench noted that the Supreme Court had already held White Petroleum Jelly I.P. to be a medicament, shifting the burden onto the revenue to prove otherwise.
• Commissioner of Central Excise v. Hindustan Lever Ltd. (2015): The court cited this judgment to underscore the "functional test." It reiterated the principle that the primary purpose of the product determines its classification. The court highlighted the Supreme Court's observation: "A product that is used mainly in curing or treating ailments or diseases and contains curative ingredients even in small quantities, is to be branded as a medicament."
• Reckitt Benckiser (India) Ltd. (2023): The court also referred to the case involving Dettol, where the Supreme Court classified it as a medicine based on its dominant use as an antiseptic.

Distinguishing the Heinz India Ltd. case relied upon by the state, the bench pointed out that the tax entry in the Kerala law was materially different, as it specifically included "medicated talcum powder" under the cosmetics category. The MP VAT Act has no such specific inclusion for White Petroleum Jelly under cosmetics.

The Final Verdict

The High Court answered the substantial questions of law in favour of HUL, stating:

"...we hereby answer the question in favour of the assessee. That a White Petroleum Jelly of IP grade manufactured and sold by appellant under a valid drug licence is liable to be classified as a category of drug and medicine under Entry 19-A of Part II, Schedule II of the MP VAT Act."

The court concluded that the Commercial Tax Appellate Board was not justified in ignoring the binding precedent set by the Supreme Court in the Ponds India case. Consequently, the court quashed the appellate board's order and held that HUL was not liable to pay the differential tax or the interest levied on it. The ruling reinforces the principle that manufacturing under a drug license and the product's functional utility are key determinants in tax classification disputes, overriding common parlance arguments when strong legal precedents exist.