Customs, Excise and Gold Tribunal - Delhi
True Chem Pharma (P) Ltd. vs Collector Of Central Ex. on 10 April, 1991
Equivalent citations: 1992(38)ECC22, 1991(56)ELT690(TRI-DEL)
ORDER P.K. Kapoor, Member (T)
1. Briefly stated the facts of the case are that the appellants M/s. True Chem Pharma (P) Ltd. were granted loan licence by the Drugs Controller, Lucknow for the manufacture of patent and proprietary medicines falling under Item 14E of the Central Excise Tariff from M/s. B. Pharma Labs. (P) Ltd., Lucknow, holders of L. 4 licence for the manufacture of patent and proprietary medicines. The appellants were also granted L. 4 licence for the manufacture of patent and proprietary medicines by the Suptd. of the Central Excise. They were getting patent and proprietary medicines manufactured under their (appellants) brand name from M/s. B. Pharma Labs. (P) Ltd. who were also manufacturing patent and proprietary medicines for M/s. Sach Laboratories. On their own account M/s. B. Pharma Labs (P) Ltd. were manufacturing both patent and proprietary medicines and general pharmocopoeial items falling under Item 68 of the Tariff. The Supdt. of Central Excise demanded duty amounting to Rs. 24,745.94 under Rule 9(2) of the Central Excise Rules, 1944 from the appellants on the clearances of patent and proprietary medicines during the months of April and May, 1981 on the ground that the aggregate value of the clearances from the factory of M/s. B. Pharma Labs. (P) Ltd. during the financial year 1980-81 being in excess of Rs. 20 lakhs, the exemption in terms of Notification No. 80/80-C.E., dated 19-6-1980 read with Notification No. 73/81-C.E., dated 25-3-1981 was not admissible. The appeal filed by the appellants against the order of the Asstt. Collector confirming the demand was rejected by the Collector of Central Excise (Appeals).
2. The main point raised by the appellants in their written submissions is that they were not manufacturers of patent and proprietary medicines in terms of Section 2(f) of the Central Excises & Salt Act inasmuch as they had neither employed or hired any labour nor undertaken any process incidental or ancillary to the completion of the manufactured products. In support of the argument that demand could be raised only against the principal manufacturer, namely, M/s. B. Pharma Labs (P) Ltd. reliance has been placed on the Tribunal's decisions in the cases of CCE v. Modoplast (P) Ltd. 1985 (21) ELT 187, Mahavir Metal Inds., Bombay v. CCE 1987 (28) ELT 85 and Lucas India Service Ltd. v. CCE 1984 (16) ELT 415. They have also contended that in case the department's stand is upheld that they have to be deemed as independent manufacturers on account of the Central Excise L. 4 licence held by them, it would not be legal to deny to them the benefit of the exemption in respect of clearances upto the limit of Rs. 20 lakhs in terms of Notification No. 80/80-C.E. as amended. It has been further argued that drugs and pharmaceuticals falling under Tariff Item 68 which were exempt from whole of the duty of excise leviable thereon constituted non-excisable goods, and for this reason they should not have been clubbed with patent and proprietary medicines in computing the aggregate value of clearances under Notification No. 80/80-C.E. (as amended) for determining the limit of Rs. 20 lakhs.
3. We heard Shri Naveen Mullick, the learned counsel for the appellants. He reiterated the points made in the written submissions and submitted that M/s. True Chem Pharma (P) Ltd. cannot be deemed as manufacturer within the meaning of Section 2(f) of the Central Excises and Salt Act inasmuch as they were only supplying raw materials to M/s. B. Pharma Labs (P) Ltd. who were carrying out the manufacturing activity. He argued that the demand raised for payment of duty in respect of clearances from the factory of M/s. B. Pharma Labs (P) Ltd. should, therefore, have been issued to them. He placed reliance on the decision of this Tribunal in the case of JMC Inds. v. CCE, New Delhi Order No. E/171 & 172/90-B1 dated 13-11-1990) wherein on the basis of a number of other decisions of the Tribunal it was held that the duty can be demanded only from the job worker who actually carries out manufacturing activity.
4. Shri Jayaraman, learned SDR appearing on behalf of the department referred to the decision of the Gujarat High Court in the case of Indica Laboratories Pvt. Ltd. v. U.O.I. 1990 (50) ELT 210 (Guj.) and contended that M/s. True Chem Pharma (P) Ltd. being a loan licensee had to be deemed as a manufacturer. For this reason the demand of duty in respect of clearances effected on their behalf from the factory of M/s. B. Pharma Labs (P) Ltd. was rightly issued to them after the exemption limit of Rs. 20 lakhs in terms of Notification No. 80/80-C.E. (as amended) was exceeded.
5. We have heard both the sides and carefully examined the points made by the appellants in their written submissions. The main questions that arise for consideration are the following: -
(i) Whether a loan licensee who gets his - goods manufactured out of his own raw materials in the factory of another manufacturer can - be deemed as a manufacturer within the meaning of Section 2(f) of the Central Excises & Salt Act.
(ii) Whether the appellants as loan licencee were entitled to the "benefit of the exemption in respect of clearances upto the limit of Rs. 15 lakhs in terms of Notification No. 80/80-C.E. (as amended).
(iii) Whether the aggregate value of drugs and pharmaceuticals falling under Central Excise Tariff Item 68 manufactured in the factory of M/s. B. Pharma Labs (P) Ltd. during the year 1980-81 should have been excluded in computing the aggregate value of the clearances for the purpose of determining the eligibility for exemption in terms of Notification No. 80/80-C.E. (as amended) in respect of clearances effected during the year 1981-82.
6. It is seen that the question whether a loan licensee governed by the provisions of Drugs & Cosmetics Act, 1940 read with Drugs & Cosmetics Rules, 1945 who gets goods manufactured under his control, supervision, and direction and out of his raw material can be deemed as a 'manufacturer' within the meaning of Section 2(f) of the Central Excises & Salt Act has been examined in great detail by the Honourable High Court of Gujarat in the case of Indica Laboratories (P) Ltd. and Ors. v. UOI 1991 (32) ECC 15 (Guj.). The relevant extracts are reproduced below: -
"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 clauses (i) and (ii) of the definition and further recites that the word "manufacturer" shall foe 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 manufacturer, 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 subject to the terms and conditions, of a licence granted by a duly authorised officer in the proper form. When we turn to Rule 174-A, it provides that "notwithstanding 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 N(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 gets his goods manufactured on his own account from other person or persons, meaning thereby, utilising infra-structures 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 utilise 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. Manga, 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, CJ, and A.R. Bakshi, J. was concerned with the question whether the petitioners before them who were manufacturing cotton fabrics through Ankleshwar Handloom Weavers Cooperative 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 not so and the legislature wanted to classify persons employing hired labour separately, if 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 emphasising 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 through an independent contractor to say that he was not the manufacturer, 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 terms 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 some one and which premises they might have hired for the time being shiftwise or otherwise. The first point for determination, therefore, has to be answered in the affirmative. We may mention at this stage that the learned standing counsel for the respondents was not in a position to point out any provision in the Central Excise Act and the Rules which contra-indicated the said position. We answer point No. 1 accordingly.
7. On the ratio of this decision of the Honourable High Court of Gujarat only such loan licensees who get their goods manufactured under their own control or supervision and out of their own raw material at the factory belonging to some one else by hiring the premises shiftwise or otherwise can be deemed as manufacturers within the meaning of Section 2(f) of the Central Excises and Salt Act, 1944.
8. For examination of the second question, the changes made in the Notification No. 80/80-C.E., dated 19th June, 1980 by Notification No. 73/81-C.E., dated 25-3-1981 have to be carefully taken note of. It is seen that Notification 73/81-C.E., dated 25-3-1981 introduced certain vital changes in Notification No. 80/80-C.E. as reproduced below: -
"In exercise of the powers conferred by sub-rule (1) of rule 8 of the Central Excise Rules, 1944, the Central Government makes hereby the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 80/80-C.E., dt. 19th June 1980, namely:
In the said notification -
(a) In paragraph 1, for the provisions the following proviso shall be substituted, namely:
Provided that the aggregate value of clearances of the specified goods from any factory by or on behalf of one or more manufacturers -
(i) at nil rate of duty in terms of Clause (a) of this paragraph or (ii) at reduced rate of duty in terms of Clause (b) of this paragraph, shall not in either case exceed rupees seven and a half lakhs in any financial year."
9. These changes were challenged by a number of loan licensees as ulta vires of Article 14 & 19(1)(g) of the Constitution of India and Section 3 of the Central Excises and Salt Act, 1944 in a writ petition before the Honourable High Court of Madras on the ground that as a result of the amendment if there were a number of loan licensees manufacturing the specified goods from one factory and if the aggregate value of the clearances of all the loan licensees put together in the financial year exceeded the prescribed limit, the exemption would not be available to any of the loan licensees. The following extracts from the decision of the Honourable High Court in the case of S. Panna Devi & Co. v. Govt. of India and Ors. 1991 (32) ECC Madras) are relevant: -
"The counsel for the petitioners advances a third argument saying that if the interpretation of the respondents is accepted, then the notification would not violate Article 19(1) (g) of the Constitution of India. Here again, the counter affidavit, in answer to the above contention, says that the petitioners' fundamental rights to carry on business are in no way hampered by the impugned notification. On the other hand, the petitioners are at liberty to do business and discharge their statutory liabilities. While examining the argument of the counsel for the petitioners with reference to Article 19(1)(g) of the Constitution of India, it is necessary to note the purpose of the impugned notification. The counter-affidavit in this respect refers to a genuine small unit for the purpose of allowing exemption. According to the respondents, the exemption is based on the economic policy of the Union of India to give relief only to the genuine small manufacturers. Reference is also invited to Jaipur Mills v. Raj AIR 1971 SC 1330 where the following observations are found: -
'Generally speaking, it is not for the Court to decide whether the policy of exempting certain articles followed by the Government is justified or not. It is for the taxing authorities to take a decision as to which goods should be subjected to taxation and which should be exempted from it.' The counter also proceeds to narrate how certain big manufacturers exploit the exemption notification in the guise of loan licences by floating benami firms/units and getting the goods manufactured in their factory and accounting them separately for the various benami firms for the purpose of claiming exemption. I am satisfied that the impugned notification does not violate the fundamental rights of the petitioners guaranteed under the Constitution."
10. In view of the observations of the Honourable High Court extracted above and on reading the words "provided that the aggregate value of clearances of the specified goods from any factory by or on behalf of one or more manufacturers" introduced in the proviso in paragraph 1 of Notification No. 80/80-CE dated 19th June, 1980 by Notification No. 73/81-C.E., dated 25-3-1981 it follows that the exemption from payment of duty upto the prescribed aggregate value of clearances was in respect of overall clearances from the factory and was not available individually to each manufacturer or loan licensee on whose behalf manufacturing activity was carried out in the factory.
11. For examination of the third question it will be relevant to refer to Explanation V to Notification No. 80/80-C.E., dated 9-6-1980 :
"For the purpose of computing the aggregate value of clearances under this notification, the clearances of any specified goods, which are exempted from whole of the duty of excise leviable thereon by any other notification issued under sub-rule (1) of Rule 8 of Central Excise Rules, 1944 and for the time being in force shall not be taken into account."
On reference to paragraph 1 of the notification it follows that 'specified goods' referred to in Explanation V to the notification are the goods specified in the table annexed to the notification. On reference to the table it is seen that goods falling under Tariff Item 68 have not been specified. Under these circumstances the value of the clearances of drugs and pharmaceuticals covered by Tariff Item 68 manufactured by a unit could not be excluded in computing the aggregate value of the clearances for the purpose of Notification No. 80/80-C.E. (as amended).
12. In the light of above discussion the only issue which remains to be examined is whether the demand for recovery of short levy issued to the appellants was legal and can be sustained. In this regard it is seen that in the case of Associated Chemicals v. CCE 1990 (49) ELT 131 in which the appellants were manufacturing Sodium Silicate on their own account as well as on behalf of M/s. A Pankaj Kumar Patil Bros. out of raw materials supplied by the loan licensee, the Tribunal had held that the clearances of goods by the manufacturer either on his own behalf or on behalf of other units have to be treated as the clearance of the manufacturer only. In the light of this decision and also having regard to the case law cited on behalf of the appellants, M/s. B. Pharma Labs (P) Ltd. who actually carried out the manufacturing activity in their factory on behalf of the appellants and other loan licensees would have to be deemed as manufacturer unless as held by the Honourable High Court of Gujarat in the case of Indica Laboratories (P) Ltd. and Ors. v. UOI (supra) it can be established that the appellants were carrying out manufacturing activity out of their own raw material at the factory of M/s. B. Pharma Labs (P) Ltd., under their own supervision by hiring the factory premises and equipment shiftwise or otherwise. Hence we hold that the demand issued to the appellants would be sustainable only if on the basis of this test it can be established that they were engaged in the manufacturing activity during the relevant period.
13. In view of the above finding the appeal is allowed by remand to the Assistant Collector who shall take a decision on the basis of material on record, and such evidence as may be adduced and permitted to be placed on record.