Customs, Excise and Gold Tribunal - Bangalore
Smithkline Beecham Asia Ltd. And Ors. vs Commissioner Of Central Excise on 27 February, 2004
Equivalent citations: 2004(186)ELT40(TRI-BANG)
ORDER K. C. Mamgain, Member (T)
1. These are eight appeals filed by the respective appellants against Order-in-Original No.93/02-RP Dated. 01.03 passed by the Commissioner of Central Excise, Visakhapatnam-II.
2. The facts in brief are that M/s Smithkline Beecham Asia Ltd (hereinafter referred to as SBAL) is a 100% subsidiary of M/s Smithkline Beecham Plc. United Kingdom (hereinafter referred as SBPIC) and they have been given right to use the ENO trade mark for the product ENO fruit salt manufactured in India. M/s Southern Drugs and Pharmaceuticals (hereinafter referred to as SDP) is a partnership firm with Shri K.Raghavendra Rao as the main partner. M/s SBAL entered into a Memorandum of Understanding with M/s SDP for setting up of a plant for manufacture of ENO fruit salt at Dowlaiswaram, Accordingly, M/s SDP obtained Central Excise registration for manufacture of different varieties of ENO. M/s SDP filed declaration under Rule 173B of Central Excise Rules classifying ENO under sub-heading No. 3003.10 of Central Excise Tariff Act and price declaration under Rule 173C of Central Excise Rules declaring the assessable value based on the cost of the raw material plus conversion charges and manufacturing profit in accordance with the principles laid down by the Supreme Court in the Ujagar Prints Case. In their declaration, for marketing pattern it was mentioned that the ENO fruit salt, which attracts CED on clearance from the factory is transferred to the godwon of M/s SBCH, Rajahmundry in terms of MOU. The Central Excise officers of Rajahmudry investigated the valuation adopted by SDP for payment of duty and in the course of investigation, they came to the conclusion that M/s SBAL, the principal and M/s. SDP the so called job worker and M/s Smithkline Beecham Consumer Healthcare Ltd (Hereinafter referred to as 'SBCH'), the so called consignment agent are related persons as per Sec.4 of Central Excise Act. The assessable value arrived at by M/s SDP under Rule 6(b)(ii) of Central Excise Valuation Rules, 1975 does not reflect the value of cost of designing, drawing and other engineering charges provided in establishing the plant, cost of training the personnel for the plant, cost of supervision, control and testing, cost of manufacturing technology, insurance, consideration for buying back the machinery, charges for storage and publicity to make the goods ready for delivery and marketable. Therefore, it appears that the price charged by M/s SBAL from their dealers / customer through the depot of SBCH could be the value under Sec.4 of Central Excise Act in respect of the goods for the purpose of discharging duty liability. Based on these conclusions the officers seized the goods valued at Rs. 2,58,01,751/- involving duty of Rs. 41,28,279/- which were subsequently released provisionally. From 05.03.2001, Central Excise Duty of ENO fruit salt is being paid on wholesale price adopting the wholesaler price as assessable value in their price declaration dtd.05.03.2001 by M/s SDP under protest. Therefore, in the show cause notice differential duty of Rs. 4,32,19,642/- for the period from March 2000 and January 2001 was proposed to be recovered. On adjudication the Commissioner came to the conclusion that M/s SDP is not an independent or real manufacturer. M/s SDP and SBAL entered into a MOU to set up a plant for manufacture of ENO salt. The funds may have come from banks or generated on their own, yet the know-how and all technical assistance to set up the plant has come from M/s SBAL. There is no inference that M/s SBAL was paid for any such assistance. The entire project itself is, from the beginning, tailor-made for manufacture of ENO fruit salt. All the clauses in the MOU taken together show that M/s SDP can never be considered an independent job worker. There is collaboration between the two for manufacture of goods for M/s SBAL and such relations is not on principle to principle basis. M/s SBAL is held to be the legal manufacturer of goods and their sale price will be the basis for assessment. Since SBAL is the legal manufacturer, therefore the issue whether M/s SDP and M/s SBAL were related or not is not the basis to demand. He, therefore, confirmed the demand of Rs.4,32,19,642/- under Sec. 11A of the Central Excise Act and imposed a penalty of equivalent amount under Sec. 11AC on M/s SBAL besides charging interest under Sec. 11AB. He also imposed penalty of Rs. 5 lakhs each on M/s SBCH under Rule 209A, Shri Raghavendra Rao, Managing Partner of M/s SDP under Rule 209A. He also imposed penalty of Rs.1 lakh each on Shri Nandan Das Gupta, Director, M/s SBAL; Shri P.N. Haridas, Company Secretary, M/s SBAL; Milan Chakravarthi, General Manager, M/s SBCH and R. Seshadri, Manager (Accounts), M/s SBCH under Rule 209A.
3. Shri G. Shivadass, Advocate appeared for the appellants and Smt Radha Arun, Ld. SDR appeared for the Revenue.
4. Shri Shivadass, the Ld. Advocate for the appellants stated that M/s SDP is a partnership firm with with Shir K. Ragavendra Rao and Shri B.Laxman Prasad as the main partners. This firm was earlier in the name of M/s Southern Packaging who were undertaking job work of repacking ENO fruit salt manufactured and supplied by M/s SBCH into small sachets of 5 gms. Around July 1998, M/s SBAL was on the look out for a contract manufacturer on job work basis who could manufacture ENO fruit salt. M/s SDP offered to set up a factory for the said purpose and entered into an agreement in September 1998 for manufacture of ENO fruit salt in the manufacturing facility to be set up by SDP. Thereafter, M/s salt. M/s SDP entered into MOU dated 18.3.99 with M/s SBAL for manufacture of ENO fruit salt. M/s SBAL were providing all raw materials and packing materials for manufacture of ENO salt to SDP and in accordance with the formula and technical data provided by M/s SBAL. The MOU clearly provides that entire investment in plant and machinery, labour and other infrastructure facilities would be provided by SDP at their own cost (Clause 1,2,16,17 of the MOU). In terms of the MOU, the factory at Dolaiswaram was set up by SDP with a total investment of Rs. 4.5. crore out of which Rs. 2 crore was invested in the plant and machinery alone. M/s SDP purchased machineries worth Rs. 15 lakh from SBCH and employed about 150 employees for the project. Rs. 3.4. crore was obtained by SDP from their bankers on the strength of the property belonging to Shri Raghavendra Rao. There was no guarantee or collateral security offered by SBAL. ENO fruit salt manufactured by SDP was accounted in the Central excise statutory documents and cleared on payment of duty to the godwon of SBCH who thereafter sold the same in the course of wholesale trade. SDP declared assessable value of ENO fruit salt manufactured by them on the basis of the cost construction method.
5. The Commissioner in the impugned order accepted that after the decision of Apex Court in the case of Pawan Biscuit Company Pvt Ltd. CCE, Patna Reported in 2000 (120) ELT 24 (SC), factors like control on manufacturing activities, strict quality control on goods manufactured, supplier or damaged and the job worker having no right to dispose of the goods rendered defective are no longer relevant to decide whether the job worker can be considered as a controlled manufacturer. But on the very same factor he came to the conclusion that SDP is to be considered as a hired labour of SBAL and that SBAL, a supplier of the raw material is to be considered as the 'legal manufacturer'.
6. The factors on which the adjudicating authority has come to the conclusion that M/s SDP is the hired labour of SBAL are given in Para 34 of the impugned order and the major factors are as follows:-
"(a) The basis for setting out the plant by SDP is the MoU with SBAL
(b) Knowhow and technical assistance to manufacture the product has been provided by SBAL.
(c) Funds have been sanctioned to SDP by the financial institutions on the basis of MoU with SBAL and the underlying support of SBAL.
(d) The entire product is tailor-made to manufacture Eno Fruit salt.
(e) SDP did not own any existing facilities and that all facilities were created pursuant to the MoU."
7. He pleaded that in the MoU between SDP and SBAL, the terms, rights & duties of the respective parties are set out. In the contract for manufacture, technical knowhow is invariably provided by the supplier of raw material. In the contract for manufacturing facility there would be tailor made manufacture of the particular product only. The entire funds were obtained by SDP for purchase of land, plant and machinery and interest on such finances is being given by SDP only. No financial guarantee or security was offered by M/s SBAL. The entire land where the facility has come up belongs to the partner of SDP and machinery has been purchased in the name of SDP out of finance obtained by them. The profit from entire activity is of SDP alone and there is no flowback to SPAL. SBAL only reimbursed the conversion charges and do not provide any other financial charges. The Apex Court in the case of CCE, Baroda Vs. M.M. Khambhatwala reported in 1996 (84) ELT 161 (SC) and the Tribual in the case of Motor industries Company Ltd Vs. CCE, Bangalore reported in 1999 (111) ELT 163 (this decision affirmed by the Supreme Court as reported in 1999 (111) ELT A195), it was held that where the labour has no role to play except to receive his wages, the contract is that of an employer and an employee and with a condition that the hired labourer's services can be terminated at any point of time. Such persons will be considered as hired labourer. Similarly views were taken in the following decision also:-
(a) Britannia Biscuit Company Ltd Vs. CCE, Madras 1997 (89) ELT 22 (SC)
(b) Godrej & Boyce Mfg. Co. Ltd Vs. CCE, Mumbai-II 2003 (156) ELT 88
(c) Surindra Engg. Co. Ltd Vs. CCE, Chandigarh-II 2003 (156) ELT 811
(d) JST Engineering Services Vs. CCE 2001 (133) ELT 350
8. In this case, the contract is not by an employer and an employee but of the principal and job worker. The MOU entered into between SDP and SBAL contemplates execution of definite agreements between the two parties and are to be renewed in writing by mutual consent or superseded by the execution of a definite agreement. All the factors listed out by the Commissioner were examined by the Tribunal in the case of Pawan Biscuit Company (P) Ltd Vs. CCE and after consideration of the agreement, the Tribunal came to a conclusion that Pawan Biscuits was agent of Britannia India Ltd. This order of the Tribunal has been reversed by the Apex Court taking note that the agreement between the two parties specifically indicated that the relationship would be that of a principal and principal and not of principal and agent. If the terms of agreement in the Pawan Biscuits case are compared with the MOU in this case, it would be evident that the terms here are stricter and ensure that the manufacture would take place in facilities owned and created by SDP out of their funds. In the case of Creative Cosmetics Vs. CCE reported in 1993 (63) ELT 348, the Tribunal held that the Hon'ble High Court of Gujarat in the case of India Laboratories Pvt Ltd Vs. Union of India reported in 1990 (50) ELT 210 has not decided as to who is the actual manufacturer. However, in the case of Nickson Pharmaceutical Vs. CCE, Mumbai (1998 (102) ELT 223) and Mayo India Ltd Vs. CCE, Aurangabad (1999 (113) ELT 1036), the Tribunal has held that job worker is the actual manufacturer. In the present case that is from March 2000 to February 2001, the Department itself has been accepting SDP to be the manufacturer and monthly RT-12 returns were filed by M/s SDP indicating clearances and payment of duty on such clearances. The Assistant Commissioner has also passed an order dated 20.08.2003 finalising the assessments of the clearances made by SDP and no show cause notice was issued to SBAL. On the same facts arising out of same MoU, Department cannot take two different stands at two different point of time. It cannot be that SDP would not be considered as manufacturer for the period from March 2000 to February 2001 and would be considered a manufacturer for the period from March 2001 to June 2003. M/s SDP cannot be considered as hired labour of SBAL but ought to be considered a real manufacturer and valuation of the goods manufactured by SDP has to be done in terms of principles laid down by Apex Court in the case of Ujagar Prints Vs. Union of India [1989 (39) ELT 493(SC)] and Pawan Biscuits Co. Pvt. Ltd. Vs. CCE, Patna [2000 (120) ELT 24(SC)].
9. Smt Radha Arun, the Ld. SDR reiterated the reasons given by the Commissioner in the impugned order.
10. We have carefully considered the submissions made by both sides. We find that the Commissioner has come to the conclusion that M/s SBAL were the real manufacturer and M/s SDP were hired labour of M/s SBAL who received the conversion charges for the services rendered while the actual control of production rested with M/s SBAL.
11. From the records it is clear that M/s SBAL has obtained a loan licence for manufacture of ENO fruit salt at the premises of M/s SDP. The Gujarat High Court in case of India Laboratories Pvt Ltd Vs. UOI has held that:-
"the question is whether such loan licensees who are entitled to manufacture these goods under the provisions of the aforesaid Act and the rules can be treated to be manufacturers under the Central Excises and Salt Act, 1944 if they get their goods manufactured at factories of others. So far as this aspect is concerned, reference to relevant provisions of the Excise Act and the rules will be apposite. Section 2(f) of the Excise Act defines the term 'manufacture' to include any process as mentioned in caluses (i) and (ii) of the definition and further recites that the word 'manufacture' shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages in their production or manufacture on his own account. The second part of the definition covers all those who engage in production of excisable goods or manufacture on their own account, may be at any place. Place of manufacture is not relevant for deciding as to whether the concerned persons who undertake this activity can be treated to be manufacturers or not. In this connection, reference to Rules 174. 174-A (b) of the Excise Rules also becomes relevant. Rule 174 occurs in Chapter VIII dealing with licensing. It lays down that every manufacture, trader or person hereinafter mentioned, shall be required to take out a licence and shall not, conduct his business in regard to such goods otherwise than by the authority, and the subject to the terms and conditions of a licence granted by a duly authorized officer in the proper form. When we turn to Rule 174-A it provides that "not withstanding anything hereinbefore contained, if the Central Government is satisfied that it is necessary or expedient in the public interest so to do, it may by notification in the Official Gazette, and subject to such conditions or limitations as it may specify in such notification, exempt from the operation of Rule 174... "(b) any class of manufacturers who get their goods manufactured on their account from other person or persons"... The aforesaid procedure clearly postulates that for the purpose of the Excise Act and the rules, there can be a manufacturer who get his goods manufactured of his own account from other person or persons, meaning thereby, utilizing infrastructures of others. It is, therefore, obvious that such loan licensees who are entitled to manufacture PP medicines and who are having relevant licences under the Drugs and Cosmetics Act read with relevant rules, can Utilize factory premises of other persons where they can get their goods manufactured under their own control and supervision and if they manufacture excisable goods, they would be treated as manufacturers within the meaning of the Excise Act and the Rules. The learned Advocates for the petitioners in this connection invited our attention to a Division Bench Judgment of this court in the case of Jamnadas v. C.L. Nangia, AIR 1965, Gujarat 215. Interpreting the term 'manufacture' as laid down by Section 2(f) of the Act. The Division Bench consisting of J.M. Shelat, C.J. and A.R. Bakshi, J. Was concerned with the question whether the petitioners before them who were manufacturing cotton fabrics through Ankleshwar Handloom Weavers Co-operative Purchaser Society can be said to be manufacturers within the meaning of Section 2(f) of the Act. Answering this question in affirmative, the Division Bench made the following pertinent observations:-
Section 2(f) (ii) lays down that a manufacturer shall include 'not only' one who employs hired labour 'but also' one who engages in the production or manufacture etc. The words 'not only' suggest that a person who employs hired labour would be included in the first category. If that was no so, and the legislature wanted to classify persons employing hired labour separately, it would not have used the expression 'not only' but would instead have used a simple conjunctive 'and'. The words 'not only' used in that juxtaposition indicate that the draftsman thought that those who employed hired labour were covered by the first category and then the draftsman proceeded to lay down the inclusive part of the definition by emphasizing that 'not only' 'but also' those who engaged in the production etc., would be manufacturers. It is possible for a person who himself does not employ labour but gets goods manufactured, for he had not brought into existence an article or a product in question either himself or through his servants. To cover such a class of persons the legislature provided the inclusive part of the definition which would include a person who does not himself employ labour but engages himself in the production or manufacture of goods through an independent contractor."
There are various other judgments of different High Courts and the Supreme Court interpreting provisions of Section 2(f) of the Act. on the same lines. We do not deem it fit to burden this judgment by referring to them. In view of the aforesaid settled legal position and in the light of the provisions of the Central Excise Act and the Rules, it must be held that the loan licensees are also manufacturers within the meaning of the term as envisaged by the said ACt and the Rules, and especially when they get their goods manufactured under their own control or supervision and out of their own raw material at the factory premises belonging to someone also and which premises they might have hired for the time being shiftwise or otherwise."
Thus, it is clear that for the purpose of Central Excise Act and Rules, there can be manufacturer who gets his goods manufactured on his own account from other person or persons thereby utilizing infrastructure of others. It is therefore, obvious that such loan licencees who are entitled to manufacture PP medicines and who are having relevant licences under the Drugs and Cosmetics Act read with relevant rules, can utilize factory premises of other persons where they can get their goods manufactured under their won control and supervision within the meaning of the Excise Act and the rules. It is also possible for a person who himself does not employ labour but gets goods manufactured through an independent contractor hired by him, that is to say that he was not manufacturer for he had not brought into existence an article or a product in question either himself or through his servant. To cover such a class of person, the legislature provided the implicit part of definition which would include a person who does not himself employ labour, but engages himself in the production or manufacture of goods through an independent contractor. In the present case, the Commissioner has held that M/s SDP are the hired labour of M/s SBAL. We find that a hired labour has been examined by the Supreme Court in the case of Britannia Biscuit Company Ltd Vs. CCE, Madras [1997 (98) ELT 22(SC)] and in case of CCE, Baroda Vs. M.M. Khambhatwala [1996 (84) ELT 161(SC)] and by the Tribunal in case of Motor Industries Co. Ltd Vs. CCE, Bangalore [1999 (111) ELT 163 and confirmed by the Supreme Court as reported in 1999 (111) ELT A195. According to these decisions, hired labour is one who has no role to play except to receive his charges with the contract being of an employer and an employee and where his services can be terminated or reinstated at any point of time. A person who is doing the job work and has established the facility with his own finance and has functioned independently with the profit or loss being to his account, he cannot be considered hired labour but only a job worker. In the present case, M/s SDP has erected the plant and machinery by arranging their own finance and on their own land for manufacture of Eno fruit salt. For erection of plant and machinery and the manufacturing unit, they can take help of any technical authority whether it is M/s SBCH or M/s SBAL. As far as M/s SDP are owners of the plant and they are responsible for the profit and loss of the plant. they are independent manufacturer. They have manufactured Eno fruit salt from the raw material supplied by M/s SBAL. They are not under the supervision and control of M/s SBAL for their day to day work. Therefore, the conclusion arrived at by the Commissioner that M/s SDP is hired labour of M/s SBAL is not correct. M/s SDP are the job worker of M/s SBAL. Once they are the job worker of M/s SBAL, then for valuation of the goods, the principle laid down by the Hon'ble Supreme Court in case of Ujagar Prints (1989 (39) ELT 493) and in case of Pawan Biscuits Co. Pvt. Ltd. [2000 (120) ELT 24(SC)] will be applicable.
12. We find that the Assistant Commissioner of Central Excise, Rajahmundry Division, Rajahmundry in his order No. 9/2003 Dated 20.8.2003 has approved the value declared by M/s SDP and finalised the provisional assessments from 5.3.01 to 31.12.02 by taking M/s SDP as manufacturer of Eno fruit salt. Therefore, for the earlier period the Department cannot take a different stand that M/s SDP is a hired labour and not a manufacturer when the position premains the same. We therefore, find no justification in holding M/s SDP as hired labour. They should be considered as the manufacturer and job worker of M/s SBAL. The value of the product manufactured by them should be determined as decided by the Apex Court in use case of Pawan Biscuits Co. Pvt. Ltd. Vs. CCE, Patna (supra).
13. Accordingly, we set aside the order of the Commissioner and allow all the appeals.