Duty free shops must comply with Drugs and Cosmetics Act, 1940 despite customs barrier exemption : Bombay HC

The Bombay High Court held that Duty Free Shop operators cannot claim automatic exemption from domestic regulatory laws merely because their operations occur beyond the customs barrier. While fiscal exemptions may apply, substances regulated under laws like the Drugs and Cosmetics Act, 1940 remain subject to full regulatory control.

Background & Facts

The Dispute

The petitioners, Mumbai Travel Retail Limited and Flemingo Dutyfree Shop Private Limited, operate Duty Free Shops (DFS) at the Departure Terminal of Chhatrapati Shivaji Maharaj International Airport, Mumbai. They import and sell nicotine pouches under brand names "ZYN" and "FOX", claiming these are "tobacco free nicotine pouch" products meant exclusively for outbound travelers and not for domestic consumption or sale in India. The petitioners contended that since the DFS operates within the customs barrier of the international airport, domestic laws including the Drugs and Cosmetics Act, 1940 do not apply to their business activities.

Key Facts

• The nicotine pouches contain 3 mg to 6 mg of nicotine per pouch as admitted by respondents
• Products are imported from M/s Swedish Smokeless Solutions AB, Sweden
• Products are stored in a Special Warehouse operated under a licence from Jurisdictional Commissioner of Customs under section 58-A of the Customs Act, 1962
• Petitioners admit they do not hold any import licence or Registration Certificate under the Drugs and Cosmetics Act, 1940 for importing or selling the product
• Petitioners claim the products are meant only for consumption by outbound travelers in the International Departure Terminal and thus constitute re-export
• On 3rd October 2025, a complaint was lodged by "Mothers Against Vaping" (MAV) raising health hazard concerns
• On 10th October 2025, Respondent No. 4 (Assistant Drugs Controller) issued Notice No. F.No.ARPT/WH/MISC/81/2025-DFS calling for details on legality and authorization of sale
• Petitioners submitted reply dated 15th October 2025 asserting DFS operates beyond customs frontier and domestic regulatory regime would not apply
• On 10th November 2025, Respondent No. 4 called for Bill of Entry and connected documents including exemption notification
• On 13th November 2025, Petitioners forwarded relevant Bill of Entry (No. 5386403 dated 29-10-2025) while reiterating their position
• On 15th December 2025, Respondent No. 4 issued communication alleging Bill of Entry only mentioned brand name "ZYN" without specifying "Nicotine Pouches"
• On 26th December 2025, Respondent No. 4 issued reminder notice due to lack of reply
• On 2nd January 2026, Petitioners addressed letter stating product description in Bill of Entry was based on supplier's invoice and classified under head '24049100' of DGFT Notification dated 9th February 2022
• On 5th March 2026, Respondent No. 3 conducted investigation at Petitioners' DFS
• On 2nd April 2026, Respondent No. 3 issued impugned order banning sale of nicotine pouches in DFS at Terminal 2, holding sale contravened Drugs and Cosmetics Act, 1940
• On 8th April 2026, Assistant Commissioner, DFS Bond issued communication informing Petitioners that nicotine pouches were "Drugs" under section 3(b) of Drugs and Cosmetics Act, 1940 requiring valid Registration Certificate and import licence
• On 24th June 2026, Court passed ad-interim order restraining respondents from initiating coercive action against existing stock but suspending further import

Procedural History

• 3rd October 2025: Complaint lodged by "Mothers Against Vaping" (MAV)
• 10th October 2025: Notice issued by Respondent No. 4 (Assistant Drugs Controller) bearing No. F.No.ARPT/WH/MISC/81/2025-DFS
• 15th October 2025: Petitioners submitted reply to the notice
• 10th November 2025: Respondent No. 4 called for Bill of Entry and connected documents
• 13th November 2025: Petitioners forwarded Bill of Entry No. 5386403 dated 29-10-2025
• 15th December 2025: Respondent No. 4 issued communication regarding Bill of Entry description
• 26th December 2025: Respondent No. 4 issued reminder notice
• 2nd January 2026: Petitioners addressed letter to Respondent No. 4 regarding product description
• 5th March 2026: Respondent No. 3 conducted investigation at Petitioners' DFS
• 2nd April 2026: Impugned order dated 2nd April 2026 banning sale of nicotine pouches issued by Respondent No. 3
• 8th April 2026: Communication from Assistant Commissioner, DFS Bond regarding nicotine pouches being "Drugs"
• 24th June 2026: Ad-interim order passed by Court restraining respondents from coercive action against existing stock
• 7th August 2026: Matter reserved for judgment
• 22nd September 2026: Judgment pronounced

The Parties' Positions

Petitioners' Position:

• Goods stored in customs warehouses and sold in DFS do not attract customs tariff/indirect tax as transaction occurs within customs barrier
• Since nicotine pouches are not sold to domestic consumers, they do not merge with "mass of goods" in India
• Product would neither attract customs duty/tax nor be subjected to domestic regulatory regime
• Unless product transcends customs barrier, regulatory authorities (including Respondent No. 3) lack authority to seize product or insist on licence
• Reliance on Supreme Court decisions in Garden Silk Mills Limited & Anr. v. Union of India & Ors. and M/s. Hotel Ashoka (Indian Tour Dev. Cor. Ltd) Vs. Assistant Commissioner of Commercial Taxes & Anr.

Respondents' Position:

• Any transaction involving product on Indian soil and within territorial waters of India subject to country's regulatory regime
• Product requiring licence outside customs frontier would also require licence within DFS
• Selling product in DFS deemed to have been done within India
• 'Nicotine' considered as Active Pharmaceutical Ingredient (API) under Section 3(b) of Act of 1940
• Import, sale or stocking in India without valid licence prohibited under Section 11 of Customs Act, 1962
• Reliance on judgment in Glamstone Cosmetics Pvt. Ltd. Vs. Union of India & Ors. (Supra)

Relief Sought

Petitioners sought: (a) Writ of mandamus declaring Drugs and Cosmetic Act 1940 and Rules 1945 do not apply to petitioner's business/activities at DFS or nicotine pouches sold there (b) Restraining respondents from applying Drugs and Cosmetic Act, 1940 and Rules, 1945 to petitioner's business/activities at DFS (c) Restraining respondents from interfering with petitioner's supply, display, distribution and/or sale of nicotine pouches at DFS (d) Writ of certiorari to quash and set aside impugned Communications dated 08 April 2026 read with 02 April 2026 (e) Pending hearing, restrain respondents from applying Drugs and Cosmetic Act, 1940 and Rules, 1945 to petitioner's business/activities at DFS (f) Stay effect, implementation and operation of impugned Communications dated 08 April 2026 read with 02 April 2026 (g) Restrain respondents from interfering with petitioner's supply, display, distribution and/or sale of nicotine pouches at DFS

The Legal Issue

The Court framed two precise legal questions for consideration: (1) Whether all transactions conducted within a Duty Free Shop beyond the customs barrier enjoy absolute immunity from domestic regulatory regime or whether such immunity is restricted solely to fiscal levies like customs duty and indirect tax; and (2) Whether "Nicotine Pouch" falls within the definition of "drug" under section 3(b) of the Drugs and Cosmetics Act, 1940, thereby making import licence and/or registration mandatory even for dealing with the product within the customs barrier of the International Departure Terminal.

Arguments Presented

For the Petitioner

Petitioners relied on Supreme Court precedents in Garden Silk Mills Limited & Anr. v. Union of India & Ors. and M/s. Hotel Ashoka (Indian Tour Dev. Cor. Ltd) Vs. Assistant Commissioner of Commercial Taxes & Anr. to argue that goods stored in customs warehouses and sold in Duty Free Shops do not attract customs duty or indirect tax as transactions occur within the customs barrier. They contended that since nicotine pouches are sold exclusively to outbound travelers and not to domestic consumers, the products do not merge with the "mass of goods" in India and thus escape domestic regulatory control. Petitioners further argued that unless a product transcends the customs barrier, regulatory authorities like Respondent No. 3 lack jurisdiction to seize the product or insist on licences under the Drugs and Cosmetics Act, 1940. They emphasized that the impugned communications dated 2nd April 2026 and 8th April 2026 were issued without jurisdiction and legal authority.

For the Respondent

Respondents, led by Additional Solicitor General Mr. Anil Singh, argued that any transaction involving the product taking place on Indian soil and within India's territorial waters would be subject to the country's regulatory regime, regardless of location within a Duty Free Shop. They maintained that products requiring licences outside the customs frontier would equally require such licences within the DFS, as selling in the DFS constitutes a transaction within India. Respondents specifically contended that 'nicotine' qualifies as an Active Pharmaceutical Ingredient (API) under Section 3(b) of the Drugs and Cosmetics Act, 1940, making its import, sale, or stocking in India without a valid licence prohibited under Section 11 of the Customs Act, 1962. They urged the Court to follow its own coordinate bench decision in Glamstone Cosmetics Pvt. Ltd. Vs. Union of India & Ors. which held that regulatory laws apply fully to goods imported into India, even if intended for re-export.

The Court's Analysis

The Court began by examining the first issue regarding immunity of DFS operations from domestic laws. It noted that the precedents relied upon by petitioners (Garden Silk Mills and Hotel Ashoka) dealt exclusively with taxable events for assessing customs duty and sales tax/VAT, and did not confer blanket immunity from domestic regulatory or public health laws. The Court found these authorities inapposite to the question of whether DFS operations enjoy exemption from laws like the Drugs and Cosmetics Act, 1940.

Turning to its own coordinate bench decision in Glamstone Cosmetics Pvt. Ltd. Vs. Union of India & Ors., the Court held that the definition of "import" under Section 2(23) of the Customs Act, 1962 ("bringing into India from a place outside India") applies once goods enter the territorial waters of India, not merely at the port of arrival or warehousing. Consequently, goods become "imported goods" under Section 2(25) upon entering territorial waters, even if not cleared for home consumption. The Court emphasized that Section 2(33) defining "prohibited goods" incorporates prohibitions "under the Customs Act or any other law for the time being in force," making Section 10 of the Drugs and Cosmetics Act, 1940 applicable to imports. Thus, goods imported into India, even for warehousing or re-export, are subject to the full domestic regulatory regime, with exemption limited only to fiscal measures like customs duty.

"We, accordingly, hold that import of goods into India, even if it is for the limited purpose of warehousing or re-export, would not enjoy any immunity from the application of the domestic laws. Such goods would be subject to the law of the land and would be governed by the regulatory regime in force even if the transaction takes place in the DFS, beyond the customs barrier. The exemption, if any, would be limited to the fiscal measures such as levy of customs duty/tax/MVAT etc. As such, if an item is restricted or prohibited under 'any other law for the time being in force' it would constitute 'prohibited goods' under Section 2(33) of the Act of 1962 and hence, the domestic regulatory regime will apply in full force to such goods brought into the DFS within the Indian territorial jurisdiction."

Regarding the second issue on whether nicotine pouches constitute a "drug" under Section 3(b) of the Drugs and Cosmetics Act, 1940, the Court acknowledged that Section 3(b) contains four categories: (i) medicines for internal/external use, (ii) substances affecting body structure/function as notified, (iii) drug components, and (iv) diagnostic/treatment devices. The Court noted that Respondent No. 3's impugned order failed to specify under which category nicotine pouches fell, and no Central Government Notification covered the product. Critically, the petitioners had not provided product specifications to respondents, making it impossible for the Court to determine whether the product qualified as a "drug" based on therapeutic use or fell under Schedule D/K exemptions. The Court expressly stated it lacked the expertise to conduct such factual inquiry and held that this question could not be adjudicated in the writ petition, leaving it open for decision in an appropriate proceeding.

"Whether a specific composition is a 'drug' under Section 3(b) having a therapeutic use or if it qualifies under Schedule-D/Schedule K exemptions would require factual inquiry. This Court does not have the expertise either to embark on such a factual inquiry or to express any opinion in the matter. Therefore, these are not matters that can be determined or adjudicated in a Writ Petition in exercise of jurisdiction under Article 226 of the Constitution."

The Court further observed that since petitioners had not furnished product specifications to respondents, the impugned communication could not be faulted for lacking reasons, though this alone might not prevent authorities from reconsidering the ban if better particulars were provided.

The Verdict

The Court ruled in favor of respondents on the first issue, holding that DFS operations do not enjoy immunity from domestic regulatory laws like the Drugs and Cosmetics Act, 1940, with exemption limited to fiscal measures. On the second issue, the Court declined to make a finding due to insufficient product specification, leaving the question open. Consequently, the impugned communications dated 2nd April 2026 and 8th April 2026 were not set aside but petitioners were granted liberty to make representations before the appropriate authority (including CDSCO) within 4 weeks of the judgment's upload to show the product is either not a "drug" under Section 3(b) or covered under Schedule D/K exemptions. Any such representation must be considered on merit and disposed of by a reasoned order within 30 days of receipt, with a personal hearing if necessary. No costs were awarded.

What This Means For Similar Cases

Regulatory Authority Extends Beyond Customs Barrier

The judgment establishes that Duty Free Shop operators cannot claim automatic exemption from substantive regulatory laws merely because their operations occur within the customs barrier of an international airport. While fiscal exemptions for customs duty and taxes may apply, products regulated under laws governing public health, safety, or other substantive domains remain fully subject to domestic regulatory control. Practitioners must now advise clients operating in DFSs to comply with all applicable domestic laws, not just customs regulations, when dealing with products that fall under specialized regulatory regimes.

Product Specification is Jurisdictionally Critical

The Court's refusal to determine whether nicotine pouches constitute a "drug" under Section 3(b) of the Drugs and Cosmetics Act, 1940 underscores the necessity of precise product characterization in regulatory disputes. Authorities must specify under which statutory category a product falls when asserting regulatory control, and businesses must maintain detailed specifications to challenge such classifications. This creates an evidentiary burden on both regulators and traders to establish the precise nature and intended use of products before jurisdictional questions can be resolved.

Structured Remedy for Regulatory Clarity

Instead of issuing a final determination on the product's classification, the Court crafted a procedural mechanism allowing petitioners to seek clarification from the appropriate authority (CDSCO) within a defined timeline. This approach recognizes the Court's limitations in technical matters while providing a clear path for resolution: representations must be filed within 4 weeks, authorities must decide within 30 days of receipt, and personal hearings must be granted if necessary. Practitioners should note this template for future cases where courts lack expertise to resolve factual-scientific questions but wish to provide effective relief.