Customs, Excise and Gold Tribunal - Delhi
Multi Trade Overseas Corporation And ... vs Collector Of Central Excise on 26 May, 1987
Equivalent citations: 1988(15)ECC31, 1987(12)ECR1112(TRI.-DELHI), 1987(30)ELT980(TRI-DEL)
ORDER V.T. Raghavachari, Member (J)
1. These six appeals were heard together since the issue arising in all the appeals is the same and the facts in the cases are similar.
2. The six appellant firms had obtained the necessary L-4 licences for the manufacture of packaged tea. They filed declarations required under notification No. 198/76-CE dated 16.6.76 and also classification lists claiming benefit under the said notification. On approval of the said classification lists they were removing package tea (manufactured by them) on payment of the concessional rate of duty. Subsequently show cause notice dated 1.9.78 was received by each of them to the effect that they were manufacturing and clearing package tea for and on behalf of others and hence they were not entitled to benefit under notification No. 198/76 and it was therefore proposed to recover from them the differential duty on the removals done earlier on payment of the concessional rate. The appellants sent replies claiming that they were entitled to benefit under the notification. After adjudication the Assistant Collector concerned passed orders upholding the claim made in the show cause notice and confirming the demands raised thereunder, The appeals filed against the said orders were rejected by the Appellate Collector under his consolidated order dated 20.2.82. The appellants approached the High Court of Kerala claiming relief in respect of the said order and later, in terms of the order of the High Court dated 13.6.84, preferred these appeals against the order of the Appellate Collector.
3. We have heard Shri Joseph Vellapally, Advocate for the appellants and Shri K.C. Sachar for the Department.
4. Tariff Item 3(2) CET is with reference to package tea. Therefore tea falling under T.I. 3(1) CET would again become exciseable under T.I. 3(2) CET on being packaged. That is to say, packaging by itself would constitute the manufacturing process with reference to package tea. The case for the appellants is that they were purchasing loose tea and packaging the same and that in addition they were receiving loose tea from others which also they packaged and returned to the suppliers of the loose tea. They had obtained the necessary L-4 licence for manufacture of packaged tea. It is not in dispute that they had filed the necessary declarations under notification No. 198/76-CE dated 16.6.76 and had also filed classification lists seeking approval for payment of concessional duty under the said notification and that on approval of the said lists they were removing the packed tea on payment of concessional rate of duty. The case for the Department, as put forward in the show cause notices issued to the appellants, was that in respect of loose tea received by the appellants for packaging and return to the suppliers of the loose tea the manufacture as well as the clearance of the said packaged tea was on behalf of others i.e. the suppliers of the loose tea and therefore the appellants could not claim the right for payment of concessional rate of duty on the removal thereof. This was evidently on the basis that the suppliers of the loose tea were themselves not entitled to benefit under the notification. The appellants in their replies contended that they were the actual manufacturers of the packaged tea and that the question whether the suppliers of the loose tea would be entitled to benefit under the notification was irrelevant and therefore the demand for differential duty was not sustainable. In appreciating these respective contentions it will have to be remembered, as earlier mentioned, that packaging of the loose tea by itself would constitute the process of manufacture so far as package tea under T.I. 3(2) CET is concerned.
5. Therefore, in effect, the issue for decision in this batch of appeals would be whether the raw material (loose tea) suppliers would be manufacturers of the packaged tea also since the packaging was done of the tea supplied by them and they supplied the packaging material also and the appellants did only the packaging work on receipt of charges therefor. Such a question, though not in relation to the notification now in issue, has been the subject matter of decisions of Courts as well as this Tribunal. These decisions will therefore have to be first considered and the ratio of the said decisions arrived at before the said ratio is applied to the facts of the present case for a proper disposal of the present appeals.
6. An early case that may be relevant in this connection would be Gangadhar Ramchander (1979 ELT 59 Allahabad). That decision resolved on the definition of a manufacturer in Section 2(f) prior to its amendment in 1964 (as may be seen from the fact that the decision was in a writ petition of 1958). The words "if those are intended for sale" (that were in the definition earlier) were omitted by the 1964 amendment. The question in that case was whether a miller who received oil seeds from others and converted the same into oil and returned the oil to the supplier of the oil seeds would be the manufacturer of the oil or the person who supplied the seeds. The Court held that the miller who converted the seeds into oil would be the manufacturer. But the said decision (relating to the pre 1964 section) would not be very relevant to our present case.
7. The Andhra Pradesh High Court had to consider this matter in the case of Andhra Pradesh Re-Rolling Mills (1979 ELT 600). The issue was whether the Andhra Pradesh Rerolling Mills, which received second class rails from others for conversion into M.S. round and effected the said conversion by rerolling on receipt of rerolling charges, was the manufacturer of the MS rounds or the person who supplied the rails. The High Court held that the actual manufacturer of MS round was the Andhra Pradesh Rerolling Mills and not the suppliers of the rails. It is interesting to note that when this matter was taken to the Supreme Court the appellants Andhra Pradesh Rerolling Mills did not even dispute this position but submitted arguments on the other issues only, as is seen from the report in 1986 (25) ELT 3 (SUPREME COURT).
8. In the case of M/s Philips India Ltd. (1980 ELT 263) the Allahabad High Court had to go into the question whether Hind Lamps Ltd. was the actual manufacturer of lamps and bulbs or Philips India Ltd. in view of the fact that the bulbs, lamps etc. were manufactured on the order of, and to the specification of, M/s Philips India whose brand name was also affixed thereto. This case related to the definition in Section 2(f) after its amendments in 1964. The facts of the said case are not similar to the facts of our present case since M/s Philips India admittedly did not supply the raw materials for conversion. But the observations in paragraph 9 and 10 of the judgment would appear to be relevant. It held that to be declared a manufacturer (though the manufacturing process was carried out by another in his own factory) the person who is to be so declared must have the other person working under his specific direction and control and the said other person should be a mere dummy or camourflage. Therefore, ineffect, the Allahabad High Court held that if a person places an order for supply of goods manufactured to his specification he would not for that reason become the manufacturer of the said goods.
9. Another decision which may not also be wholly relevant, but the observations in which would be instructive, is that of the Delhi High Court in the case of Poona Bottling Co. Ltd. (1981 ELT 389). The case dealt with manufacture of aerated drinks by a franchise holder, the question being whether the Company which lends the franchise would be the manufacturer or the franchise holder. Therefore in the said case also the issue was whether the manufacture by the franchise holder was on behalf of the person who grants the franchise. The significane of that judgment in the present appeal is that the High Court pointed out the contradiction in the stand of the Deptt. in claiming that the real manufacturer was the person who granted the franchise but at the same time demanding duty in respect of the said goods from the franchise holder.
10. Another decision which appears to be appropriate to the facts of the present case is that of M/s Modo Plast (P) Ltd. (1985 Vol. 21 ELT 187). In that case also, as in the present case, the Deptt. relied on the decision of the Supreme Court in the Shree Agency case (1987 ELT 168 S.C.) and the judgment of the Bombay High Court in Shri Bajrang Gopilal case (now confirmed bv the Supreme Court as reported in 1986(25) ELT 609 (SC). In the case before the Tribunal the facts were that raw materials were supplied to M/s Modo Plast by M/s Praga Industries (P) Ltd. The actual manufacturing process for converting the raw materials into the exciseable product was by M/s Modo Plast. The Deptt. claimed that M/s Praga Industries were the actual manufacturers and hence M/s Modo Plast's claim for benefit under notification No. 80/80 was not sustainable. The Tribunal held, relying on certain other decisions and distinguishing the judgment in Shree Agency case and the Bajrang Gopilal case, that it was M/s Modo Plast who were the actual manufacturers. The Tribunal pointed out that M/s Modo Plast were not the hired labourers of M/s Praga Industries, nor were they a dummy or fake unit working under the direct control and supervision of M/s Praga Industries but that the transactions between the two were on principal to principal basis and that M/s Modo Plast were independent contractors. Discussing the Shree Agency judgment the Tribunal observed that in that case the excise authorities found that the so called weavers had no interest in the production of the cloth in issue and that it was Shree Agency that was actually engaged in the production of the said cotton fabrics though at different factories and they were therefore the real manufacturers. The Tribunal further took note (in paragraph 14) of the contradiction in the stand of the Deptt. when it held on the one hand that Praga Industries were the real manufacturers but on the other hand demanded duty from M/s Modo Plast.
11. In the above decision the Tribunal had relied on its earlier decision in the case of Lucas Indian Service Ltd. reported in 1984 (16) ELT 415. Lucas Indian Service supplied coid rolled steel strips to Madras Electrical Manufacturing Co. along with diagram and specifications and Madras Electrical Manufacturing Co. fabricated stampings and laminations out of the raw material supplied and delivered the manufactured product to Lucas Indian Service Ltd. on receipt of charges therefor. The Tribunal held that since the transactions between the two firms were on principal to principal basis and one was not a dummy for the other the mere fact that Lucas Indian Services supplied raw materials and the entire product manufactured by the Madras Electrical Manufacturing Co. was being supplied to Lucas Indian Service only, would not make Lucas Indian Service the manufacturer of the \stampings and laminations. In this case also the Shree Agency judgment was considered and held not applicable pointing out that in the said case the alleged actual manufacturers of the fabrics were not the real manufacturers but only the Shree Agencies.
12. This question as to who would be the manufacturer for the purpose of excise duty (whether the raw materials supplier or the person who converted the same) was again considered by the Tribunal in the case of Metal Box India Ltd. reported in 1986 (23) ELT 187. The facts in the said case were that Metal Box India Ltd. supplied base paper to M/s Industrial Packaging who converted the base paper into waxed paper and delivered the same to the Metal Box India Ltd. after charging conversion charges. There also the deptt. relied on the Shree Agencies judgment to contend that Metal Box India Ltd. was the manufacturer. The decision of the Tribunal in M/s Britannia Biscuit Co. Ltd. (Order Nos. 204 to 207 of 84-D dated 19-4-1984) was distinguished on facts.
13. This issue was again considered by the Tribunal in the case of M/s Shakti Udyog (1986 Vol. 25 ELT 423). The issue (arising under Notification No. 176/77-CE) was whether Shakti Udyog which supplied the stainless steel flats was the manufacturer of the stainless steel utensils made out of the said flats or whether four other firms which received the flats and converted them into the utensils on payment of charges therefor were the manufacturers. The Tribunal held that there can be no case of clearance on behalf of another but that the clearance can be by the manufacturer only, though manufacture may be for or on behalf of anothei. It held that since the four units which carried out the conversion were independent units it is they who were the actual manufacturers since they were not a mere dummy for Shakti Udyog. There also the department relied on the Shree Agency judgment but the Tribunal pointed out that the notification which governed the issue in the Shree Agency case read that the exemption related to cotton fabrics manufactured by or on behalf of the same person in one or more factories in which less than 5 powerlooms in all were installed and, therefore, in terms of the said notification the Supreme Court upheld the finding of the excise authorities that the cotton fabrics in issue were manufactured by Shree Agency only though the looms belonged to several others who received weaving charges only.
14. To similar effect is another judgment of this Tribunal in the case of Techma Engineering Enterprises reported in 1987 {27) ELT 460. That judgment related to notification 111 of 1978-CE dated 9-5-1978 and notification No. 71/78-CE dated 1-3-1978. Here also the decision in the Shree Agency case was distinguished on the same lines as in the case cited supra. It was held that the actual manufacturers were not M/s Techma Engineering Enterprises who supplied the raw materials only and that the clearance of the manufactured products was therefore not by or on behalf of M/s Techma but by the actual manufacturer only.
15. In the case of Kalsi Tyres (Chandigarh) Pvt. Ltd. reported in 1986 (26) ELT 631 it was held that the supplier of the raw material would not be the manufacturer but it would only be the person who actually does the conversion of the raw material into the manufactured product, unless that person is proved to be a mere dummy for the raw material supplier.
16. We find that in the case of H. Guru Instrument (P) Ltd. reported in 1987 (27) ELT 269 the Tribunal had taken a different stand. In that judgment the Tribunal held, following the Shree Agencies judgment of the Supreme Court, that the appellants in that case were the actual manufacturers since they supplied the entire raw material to M/s IEC and the instruments manufactured by IEC out of the said material were taken back by the appellants after their brand name was also affixed and instruments were then marketed by them. On these facts the Tribunal held that IEC were not better than hired labour as they received job charges only
17. We find that another judgment which may also throw some light on this issue is that of the Madras High Court in P.M. Abdul Latif and Ors. v. Assistant Collector of Central Excise (1985 (22) ELT 758 (Mad). The notification in issue in the said case was notification No. 176/77-CE. The question was whether benefit of the notification Was available to persons who received raw materials from M/s Bharat Heavy Electricals Ltd. and converted the same into finished products according to the design and specification of Bharat Heavy Electricals Ltd. and received charges for said conversion from Bharat Heavy Electricals Ltd. It was common ground that if the said petitioners were to be held manufacturers they would be entitled to benefit under the notification. The contention for the. Department was that the clearances of the goods were on behalf of BHEL who were the actual manufacturers arid hence the benefit of notification was not available. The' Madras High Court rejected the said contention.
18. It is therefore seen that in almost all the above cited decisions it has been held that the raw material supplier would not for that reason become the manufacturer of the processed product even if the processing may be done to his specification, with a right of rejection also, unless it is established that the processor was a mere dummy for the raw material supplier and the alleged agreement for receipt of conversion charges was a mere make believe, the transaction between the two not having been on principal to principal basis. It has been held that except in cases falling under the exception mentioned above the processor would be the actual manufacturer and not the raw material supplier. It has therefore to be verified whether on the facts established in these appeals the appellants are proved to be a mere dummy for the supplier of the loose tea or whether the appellants are independent legal entities who had entered into a contract with the suppliers of the loose tea for packaging thereof on receipt of the necessary charges therefor, the transaction between the raw material suppliers and the appellants having been on principal to principal basis.
19. The show cause notice proceeded on the basis that these appellants manufactured and cleared package tea on behalf of others (suppliers of loose tea). In his orders the Assistant Collector had concluded that the remuneration received by the appellants (called packers by him) comprised of (1) labour charges (2) cost of raw material such as Hessian, Twine etc. used in the packaging (3) his profit and (4) transportation charges involved. He further pointed out that whenever excise duty was payable by the packer that was also recovered from the supplier of loose tea. On the above conclusions he held that what was involved was only a labour contract for package of tea. It is on the basis of the above conclusions that he had held that the ratio in the Shree Agency judgment applied. In appreciating this conclusion it will be noted that the finding of the Assisiani conector practically proceeded on the basis that there was a contract between the suppliers and the appellants which would in turn be on the basis that they were distinct entities and not that the appellants were dummies for the suppliers. The further finding that the remuneration paid to the appellants included an element of profit also would indicate that the Assistant Collector himself was satisfied that the appellants were distinct legal entities entering into the contract for their own benefit and were not mere dummies. As earlier pointed out, the decision in the Shree Agency case was on the basis of the finding of the lower authorities, which was accepted by the Supreme Court, and was to the effect that the cloth in question was manufactured by Shree Agency only by adopting a device of purported sale of yarn to the weavers and purported purchase of the fabrics from the weavers, the yarn price being inflated and fabric price being deflated leaving only the bare weaving charges to the weavers by way of hire charges. Further, the decision in that case turned on the wording of the notification to which reference has been made in para 13 supra. In view of the clear findings of the Assistant Collector himself (in our cases) as to the components which went to make up the remuneration payable to the appellants (including profit to themselves) there cannot at all be any conclusion that the appellants were mere dummies for the loose tea suppliers.
20. In the later portion of his order the Assistant Collector refers to the fact that the brand name owners were originally licensed to manufacture packaged tea but that they surrendered the said licences and began to employ the appellants, evidently to take advantage of the benefit of notification 198/76 (since the base clearance of the appellants were nil) and therefore the arrangement between the loose tea suppliers and the appellants was only a device. It may be true that if the brand name owners did the packaging themselves they would have been liable to pay full duty but that by having the packaging done by the appellants the duty liability on the packaged tea was lessened in terms of the notification. But the question is whether in thus engaging the services of the appellants the brand name owners were exercising an option open to them in law as would reduce duty liability on the package tea or whether they were using the appellants as a smoke screen only to evade the duty liability. That is to say, whether what the brand owners did was a legitimate tax avoidance measure or was an illicit tax evasion device. In view of the finding of the Assistant Collector himself as to how the remuneration payable to the appellants had been arrived at it would be impossible to conclude that the brand name owners hatched a device for evasion and not a lawful measure for avoidance.
21. So far as the Appellate Collector is concerned, he has referred to the fact that when action was taken against the brand name owners for contravention of the provisions of Rule 174 of the Central Excise Rules they were penalized but that they did not question the same by any appeal therefrom. We are told that the penalties levied were light. Apart from that, the mere fact that no appeal was preferred by the brand name owners would be no ground to raise a conclusion thereon against the appellants when no duty had been demanded from the brand name owners. We may further note that the Appellate Collector has observed that what had been paid to the appellants was by way of labour charges only. This observation of the Appellate Collector is obviously incorrect since the Assistant Collector's finding was that profit as well as labour charges, apart from cost of inputs, formed part of the remuneration paid to the appellants.
22. Yet another circumstances that is pointed out for the appellants to highlight the inconsistency in the stand of the Department is that while under the orders of the lower authorities the brand name owners are said to be the manufacturers and, on that ground, duty is yet demanded not from the brand name owners but from the appellants. The learned counsel for the appellants submits that if the finding of the lower authorities that the appellants were not the manufacturers, and that the brand name owners were the manufacturers, is to be upheld, the Department should not merely not have demanded the differential duty from the appellants but must have taken steps to refund the 75% duty already collected. We have seen that this dichotomy in the stand of the Department had been commented upon by the Delhi High Court in the Poona Bottling Company case and the Madras High Court in the case of P.M. Abdul Latif cited supra. When Shri Sachar made his submissions for the Department he sought to justify the stand of the Department by contending that as the appellants claimed they are the manufacturers, and as they had paid only 75% of the duty as against the full duty payable, they were liable to pay the balance. We are unable to accept this argument.
23. Therefore, on a careful consideration of the facts of the case as well as the legal submissions we hold that it was these appellants that were the manufacturers of the package tea and the duty liability in respect of the said manufactured product was on the appellants and they were therefore entitled to benefit of concessional rate of duty under notification 198/76 as had been earlier rightly granted to them by the Department and hence the subsequent demands for payment of differential duty were not justified. In this view these appeals are allowed and orders of the lower authorities are set aside with consequential relief.