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TMI Blog1989 (5) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... they were heard together and are being disposed of by this common judgment. 3. Introductory facts: Before highlighting the nature of controversy posed for our consideration in this group of petitions, it is necessary to note a few relevant facts. All these petitioners are engaged in manufacturing patent and proprietary medicines falling under Chapter 13 of the First Schedule to the Central Excise Tariff Act, 1985. All of them have got necessary small scale industry registration numbers and licenses in Form L-IV under the Act for the purpose of manufacturing patent and proprietary medicines ("PP medicines" for short). 4. It is the case of the petitioners that in their factories, PP medicines are also being manufactured by those persons who do not have their own facilities to manufacture the same. They therefore hire shift or shifts at the petitioners' factories for manufacturing under their own control and supervision and out of their own raw material, PP medicines. Those persons who hire such shift or shifts, are known as 'loan licensees' who are given these licences under the provisions of Drugs and Cosmetics Act, 1944 read with Drugs and Cosmetics Rules, 1945. The petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong basis, the impugned show cause notices are issued to the petitioners which are liable to be quashed. The petitioners also challenge the vires of paras (2) and (3) of the exemption Notification 175/86 on the ground that they are ultra vires provisions of the Act and they are also ultra vires Art. 14 of the Constitution. 5. All these petitions were admitted to final hearing by the division Bench of this court. But by way of interim orders, it was directed that the petitioners may show cause against the impugned show cause notices in the meantime so that the authorities can have an opportunity to look into the grievances of the petitioners. Accordingly, the petitioners have shown cause to the impugned show cause notices and after hearing them, the competent authorities viz., the Assistant Collector of Central Excise, respondent No. 3 has rejected the contentions of the petitioners and has confirmed the demands contained in the show cause notices. These orders of the competent authority are brought in challenge by way of amendment to the petitions and they are challenged on the same grounds on which show cause notices are challenged. 6. The respondents have opposed these petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturers who manufacture their own goods in their own factories and also allow other manufacturers to manufacture the latters' goods in the same factory. That such type of classification has no rational basis and has no nexus to the objects sought to be achieved by the exemption notification viz. to grant exemption to SSI units from payment of full excise duty as per the scheme of the notification. It is contended that in any case, respondent No. 3 has gravely erred in totally rejecting the claim for exemption to loan licensees who get their goods manufactured at the factories of the petitioners which are admittedly SSI units. It is further contended that the very basis of the impugned decision that loan licensees cannot be treated to be manufacturers in view of para 7 read with Explanation IV to the exemption Notification No. 175/86 is patently erroneous and hence, this decision is liable to be quashed. 9. The learned standing counsel for the respondents on the other hand contended that exemption notification is for SSI units, meaning thereby small scale industries having factories. That loan licensees are not having their own factories and hence, they are outside the scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r his control, supervision and direction and out of his 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 question In the light of our answers to the aforesaid points for determination, we will have to pass appropriate final orders in connection with the impugned orders passed by the third respondent in these cases. We have heard the learned Advocates for the petitioners as well as the Standing Counsel for the respondents on all these points. We may now proceed to deal with these points seriatim. 12. Point No. 1: - In order to appreciate the nature of activities of loan licensees, it would be profitable to turn to the provisions of Drugs and C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grant or renewal of loan licences for the manufacture or sale or for distribution of drugs other than those specified in Schedules C, C(1) and XI shall be made in form 24-A to licensing authority and shall be accompanied by a fee of Rs. 200/-. Explanation (1) to the said Rule provides that for the purpose of this rule, a loan license means a licence which a licensing authority may issue to an applicant who does not have his own arrangement for manufacture but who intends to avail himself of the manufacturing facilities owned by licensee in form 25. Explanation (2) lays down that the licensing authority shall, before the grant of a loan licence, satisfy himself that the manufacturing unit has adequate equipment, staff, capacity for manufacture and facilities for testing, to undertake the manufacture on behalf of the applicant for a loan licence. Rule 70-A provides that loan licences for manufacture for sale or distribution of drugs other than those specified in Schedules C, C(1) and XI shall be issued in form 25-A. Rules 73 and 73-A provide for certificate of renewal and certificate of a renewal of loan licence. It is, therefore, obvious that as per the aforesaid Act and the ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their account from other person or per-sons"....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, utilising 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 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. 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 fab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 contraindicated the said position. We answer point No.l accordingly; 13. Point No. 2 : - In order to appreciate the nature of the grievance centering round the impugned para of the notification, it is necessary to keep in view the background in which this notification came to be issued. The said notification is at annexure C to special civil application No.1435 of 1988 and it is also annexed to other petitions. This notification is issued by the Central Government in exercise of the power under Rule 8(1) of the Central Excise Rules. Under the said rule, the Central Government is empowered to, from time to time, by notification in the Official Gazette, exempt, subject to such conditions as may be specified in the notification any excisable goods from the whole or any part of duty leviable on such goods. It is obvious that under charging Section 3, once excisable goods are manufactured by a manufacturer, they attract duty as prescribed in the Schedules. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , shall not exceed Rs. 30 lakhs and Rs. 60 lakhs respectively. There is a proviso to para 2 which lays down that the aggregate value of clearances of the specified goods from any factory by one or more manufacturers in any financial year, in terms of clause (a) and clause (b) of para 1, taken together, shall not exceed Rs. 75 lakhs. Para 3 provides that nothing contained in this notification shall apply if the aggregate value of clearances of all excisable goods for home consumption, (a) by a manufacturer, from one or more factories, or (b) from any factory, by one or more manufacturers, had exceeded Rs. 150 lakhs in the preceding year. Thus, paras 2 and 3 bring about the concept of clubbing of manufactured goods for the purpose of earning exemption qua their clearances from a given factory. To illustrate working of these two paras read with para 1, we may take example of a manufacturer. A owning factory whose first clearance from that factory amounts to Rs. 30 lakhs. Then as per para 1 (a) (ii) he will get total exemption of excise duty qua these specified goods cleared upto limit of Rs. 30 lakhs. But if in the very same factory, some other manufacturer B on hiring factory shiftwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and, therefore, the extent of exemption available to individual manufacturer gets whittled down or curtailed. There is no rational basis underlying such differential treatment to plurality of manufacturers utilising the same factory in given financial year for manufacturing their goods and, therefore, such classification evolved by clauses 2 and 3 is arbitrary and ultra vires Art. 14 of the Constitution. Reliance was placed by the learned counsel for the petitioners on the Supreme Court decision in the case of Govt. of India v. Dhanlaxmi Paper Mill -1989 (39) E.L.T. 171. Exemption notification issued in that case under Rule 8(1) was brought in challenge on the ground that clause (a) of third proviso thereof providing for an earlier date as cut off date for restricting benefit of exemption was without any basis, arbitrary and ultra vires. Considering the scheme of that notification, the Supreme Court held that choice of date as cut off date for restricting benefit of exemption was arbitrary and ultra vires if such date has no rational relation to the object of notification. There cannot be any dispute on this well settled position. However, we have to see whether the impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification. If one manufacturer manufactures specified goods in one financial year alone from that factory and gets the said goods cleared, he gets full exemption and concession to the extent provided by para 1. But if more than one manufacturer utilise the said factory and infrastructures during the financial year and get their goods cleared through the factory gate in the same year, then, their goods will be clubbed for the purpose of deciding the question of total exemption upto the limit prescribed and concessional exemption upto further limit prescribed. The common thread which runs through all the paras of the notification is the scheme of exemption and concessional duty in connection with total quantity of first clearances and subsequently clearance of specified goods, ex-factory gate during the financial year. Once this common thread is kept in view, then paras 2 and 3 will fall in line with para 1. If paras 2 and 3 are not countenanced, unexpected and unwarranted result would follow. From the same factory gate, goods manufactured by manufacturer A in a financial year will get total exemption upto Rs. 30 lakhs as per para 1 and manufacturer B who also utilised the same infr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir own factory are also manufacturers within the scheme of the Excise Act and the Rules. Once they are held to be manufacturers, there is no reason why for the purpose of exemption notification issued under Rule 8, they would get excluded ipso facto from its sweep and become non-manufacturers, as assumed by the competent authority. Now, so far as para 7 is concerned, all that it provides is that the exemption contained in this notification shall not apply to the specified goods where a manufacturer affixes the specified goods with a brand name or trade name (registered or not) of another person who is not eligible for the grant of exemption under this notification. We are not concerned with the proviso to para 7, so far as Explanation IV to the notification is concerned, all that it says is that for the purpose of this notification, where the specified goods manufactured by a manufacturer, are affixed with a brand name or trade name (registered or not) of another manufacturer or trade, such specified goods shall, not merely by reason of that fact, be deemed to have been manufactured by such other manufacturer or trade. We fail to appreciate how the aforesaid provisions exclude lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the factory owner. But even in the alternative, it is contended by the petitioners that even assuming that factory owner can be said to be manufacturer of goods of loan licensees and that he is branding the goods with the trade name of loan licensees, even then, para 7 will not hit as another person viz. loan licensee cannot be said to be ineligible for exemption under the said notification. For that purpose, reliance is placed on para 4 of the notification by the learned Advocate for the petitioners. When we turn to para 4 of the notification, we find an extra condition that the notification shall be applicable only to a factory which is an undertaking registered with the Director of Industries in any State or the Development Commissioner (Small Scale Industries) as a small scale industry under the provisions of the Industries (Development and Regulations) Act, 1951. However, there are two provisos (a) and (b) which say that nothing contained in this paragraph shall be applicable (a) in a case where the value of clearances from a factory during the preceding financial year or in the current financial year did not exceed or is not likely to exceed rupees seven and a half lakhs or ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in a factory which is other than factory which is registered as medium scale factory under the Industries (Development and Regulations) Act, 1951 with the Directorate General of Technical Development in the Ministry of Industry and has availed of benefit of the present notification or earlier notifications of exemption during the preceding financial year, then such manufacturer will also get benefit of the present notification in the current year. We fail to appreciate how this para 4 would disentitle loan licensees from the benefit of exemption notification. There is lot of substance in the contention of the learned counsel for the petitioners that if loan licensees manufactures his goods in a factory which is registered as SSI unit, because of the main provision of para 4 read with para 1 exemption will be available to the goods manufactured by such loan licensee from such factory, subject to the concept of clubbing envisaged by paras 2 and 3. But even if such loan licensees in past have manufactured goods from a factory which was not medium scale or large scale factory and had availed of benefit of the present notification or earlier exemption notifications listed at (i) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the competent authority to deny benefit of this exemption notification to loan licensees is also uncalled for as all that Explanation IV says is that where a manufacturer who manufactured specified goods and affixed them either brand name or trade name of other manufacturers or traders, merely because of such branding, it cannot be said that a person to whom this trade name or brand name belongs, will be deemed to be manufacturer of such goods. This Explanation postulates that manufacturing must have been done by the factory owner and he might have affixed the manufactured goods with the trade name of another. As we have seen above, on the facts as pleaded by the petitioners and on the assumption that they are true, the factory owners are not manufacturing the goods of loan licensees nor are they affixing trade name or brand name of loan licensees and hence, Explanation IV, main part will not apply to such cases. Even that apart, even on the assumption that the factory owner has manufactured all these goods and he has affixed trade name of another i.e. loan licensee on these goods, even then, all that Explanation IV does is to raise a negative presumption that only because of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng decision of Central Board of Revenue) 1982 E.L.T. 172 (decision of Govt. of India) and 1988 (37) E.L.T. 243 (decision of CEGAT). These decisions have taken the view that once the scheme of exemption notification operates, the concerned goods get out of the network of taxing provisions either wholly or partly and in cases of total exemption, there would remain no need for manufacturer of such commodity to get a licence under the Excise Act before he can be treated to be entitled to the benefit of the exemption notification qua the concerned goods. We would have been required to closely consider these rival contentions but for the fact that in the present case a notification is already issued by the Central Government under Rule 174-A. Rule 174-A of the Excise Rules does provide for exemption from the scheme of licensing contemplated by Rule 174 read with Section 6, provided that the Central Government is satisfied that it is necessary or expedient in the public interest so to do, and subject to such conditions or limitations as it may specify in such notification, it can exempt from the operation of Rule 174, any class of manufacturers who get their goods manufactured on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overed by the exemption notification No.175/86 issued under Rule 174-A(b) and hence they will not be required to take manufacturing licence under Rule 174 read with Section 6 of the Act. It is, therefore, not necessary for us to resolve the wider controversy which was posed for our consideration by the learned advocates of both the sides, based on relevant judgments of the High Courts and other authorities as stated hereinabove. Point No. 3 therefore, stands answered accordingly. 16. Final result: In the light of the aforesaid discussion, the following picture emerges. If the loan licensees who get their PP medicine manufactured at SSI factories belonging to somebody else but under their own supervision or control and from their own raw material and if they affix their trade name or brand name on these manufactured goods, they will be entitled to the benefit of exemption notification No. 175/86 read with notification No. 223/87 but they must be genuine loan licensees and not bogus parties who may be merely limbs of the factory owners. That question will have to be examined by appropriate authorities before making available the benefit of this exemption notification to the concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5; G " 3020/88 G " 3018/88 G " 3021/88 G " 8113/88 J " 3022/88 G " 8114/88 D " 8511/88 G " 8513/88 G " 3023/88 G " 3025/88 I " Annexure B in Spl. C.A. 1074/89 4019/89 E " III " 8492/88 all filed by M/s. Trivedi, Gupta and Dave, advocates for the petitioners, will stand quashed and set aside and matters will have to be remanded to the competent authority to reexamine these cases in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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