‘Medical Oxygen IP’ & ‘Nitrous Oxide IP’ Taxable as ‘Drug’: SC [Read Judgment]

The Supreme Court, while upholding the decision of the Andhra Pradesh High Court, has held that ‘Medical Oxygen IP’ and ‘Nitrous Oxide IP’ ought to be taxed as ‘drug’ under Entry 88 of Andhra Pradesh Value Added Tax (VAT) Act, 2005 and not as ‘unclassified goods’.

The respondent, Linde India Limited, is a registered company under the 2005 Act and is engaged in the manufacturing and trading of industrial gases as well as Medical Oxygen IP and Nitrous Oxide IP. On 12 December 2005, the Commercial Tax Officer communicated to the respondent that an outstanding tax liability was due and payable.

Consequently, the respondent filed an appeal before the Appellate Deputy Commissioner, wherein assessment by the Commercial Tax Officer was affirmed. Aggrieved by the order, the appellant filed the petition in Andhra Pradesh high court which was dismissed.

“Both “nitrous oxide” and “medical oxygen” are clearly identifiable and are used as surgical aids (Indian Oxygen Ltd. State of Karnataka; Southern Gas Ltd). Going by the user test and the functional test, it is evident that “medical oxygen” and “nitrous oxide” serve as medicines. As „medical oxygen IP‟ and „Nitrous Oxide IP‟ are used in the treatment and mitigation of disorders in human beings, and as they are generally understood in the trade to be surgical aids, both these substances would fall under the definition of drug ‟ under Section 3(b)(i) of the Drugs Act, and consequently, fall under Entry 88 of Schedule IV of the Act liable to tax only at 4%/5%,” the Andhra Pradesh High Court observed.

The division bench consisting of Justice D.Y. Chandrachud and Justice Ajay Rastogi while upholding the decision of the High Court said, “There is no doubt that Medical Oxygen IP and Nitrous Oxide IP are medicines used for or in the diagnosis, treatment, mitigation or prevention of any disease or disorder in human beings falling within the ambit of Section 3(b)(i) of the 1940 Act. We hold that Medical Oxygen IP and Nitrous Oxide IP fall within the ambit of Section 3(b)(i) of the 1940 Act and are consequently covered in Entry 88 of the 2005 Act.”