1989 (5) TMI 72 - HC - Central Excise

S.S.I. Exemption - Exemption to first clearances of specified goods - Loan licensees - Value of clearances

Issues Involved:

1. Whether the loan licensees governed by the provisions of Drugs and Cosmetics Act, 1940 read with Drugs and Cosmetics Rules, 1945 getting their goods manufactured under their control, supervision and direction and out of their own raw material, is manufacturer within the meaning of Section 2(f) of the Central Excises and Salt Act?
2. Whether paras (2) and (3) of the general exemption Notification No. 175/86 dated 1-3-1986 read with latter Notification No. 223/87 dated 22-9-1987 are ultra vires the Central Excises and Salt Act, 1944 and also ultra vires Article 14 of the Constitution?
3. Whether the loan licensees referred to in point No. 1 are entitled to the benefit of general exemption Notification No. 175/86 dated 1-3-1986 as amended by Notification No. 223/87 dated 22-9-1987 and if yes, to what extent?

Detailed Analysis:

Point No. 1: Manufacturer Status of Loan Licensees

The court examined the provisions of the Drugs and Cosmetics Act, 1940, and the Central Excises and Salt Act, 1944, to determine if loan licensees are considered manufacturers. The term "manufacture" under Section 2(f) of the Excise Act includes processes carried out by persons who do not own the factory but engage in production under their own control. The court referenced Rule 174-A(b) of the Excise Rules, which exempts certain manufacturers from the licensing requirement if they get their goods manufactured by others. The court concluded that loan licensees, who manufacture their goods under their own supervision and control in another's factory, qualify as manufacturers under the Excise Act. This interpretation aligns with previous judgments, including Jamnadas v. C.L. Nangia, where the court held that engaging in production through an independent contractor still qualifies one as a manufacturer. Therefore, the court affirmed that loan licensees are manufacturers within the meaning of Section 2(f) of the Act.

Point No. 2: Vires of Paras (2) and (3) of the Notification

The court analyzed the exemption Notification No. 175/86 and its subsequent amendment by Notification No. 223/87, focusing on the provisions for clubbing clearances from the same factory by different manufacturers. The petitioners argued that paras 2 and 3 are arbitrary and violate Article 14 of the Constitution by treating similarly situated persons differently. However, the court found that the notification's scheme aims to limit the total exemption from excise duty to a specific value of clearances from a single factory, regardless of the number of manufacturers. This ensures that the exemption benefits are not unduly inflated by multiple manufacturers using the same factory. The court held that paras 2 and 3 are not arbitrary or discriminatory but are necessary to maintain the integrity of the exemption scheme. Thus, the court rejected the challenge to the vires of these paragraphs, affirming their validity under the Act and the Constitution.

Point No. 3: Entitlement to Exemption Benefit

The court considered whether loan licensees are entitled to the benefits of the exemption notification. It examined para 7 and Explanation IV of the notification, which restrict exemptions if goods are branded with the name of another person who is not eligible for the exemption. The court concluded that if loan licensees manufacture their goods under their own supervision and affix their own brand names, para 7 would not apply. Additionally, the court found that para 4 of the notification, which requires factories to be registered as small-scale industries, does not exclude loan licensees from the exemption if they meet the registration criteria. The court emphasized that genuine loan licensees who comply with the procedural requirements and provide necessary authorizations can benefit from the exemption, subject to the clubbing provisions of paras 2 and 3. Therefore, the court affirmed that loan licensees are entitled to the exemption benefits, provided they meet the specified conditions.

Final Orders:

The court set aside the impugned orders of the Assistant Collector of Central Excise and remanded the cases for reconsideration in light of the court's interpretation. The competent authority was directed to reexamine the cases, ensuring that loan licensees who meet the conditions are granted the exemption benefits. The court also directed the petitioners to file written undertakings to comply with procedural requirements within one week. The Assistant Collector was instructed to decide the matters afresh within four months, considering the court's guidelines.

Conclusion:

The judgment clarified that loan licensees are manufacturers under the Central Excises and Salt Act, 1944, and are entitled to exemption benefits under Notification No. 175/86, subject to compliance with specified conditions. The court upheld the validity of paras 2 and 3 of the notification, ensuring that the exemption scheme is not exploited through inflated clearances from the same factory. The court's decision ensures a fair and consistent application of the exemption benefits while maintaining the integrity of the excise duty framework.

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