33. Whether activity of marketing and distribution of sim card, purchased from the principal who has already paid tax on the full value, is liable to service tax?

Held : No

The assessee dealers were purchasing BSNL postpaid/prepaid cellular sim card on which full tax had been paid by BSNL.

The Service Tax department proceeded against the dealers and the issued show cause notice. The dealers contended that they are only distributor appointed by BSNL, they are not clients and they are not carrying on any activity of service. They further contended that they are buying and selling sim card, which are goods and the difference is treated as profit or loss.

The Tribunal concluded that the dealers were not caring on the activity, liable to the tax under business service. The dealer has not rendered any service but has actually done the activity of purchases and sale of goods on which no service taxes is leviable. Finally they noted that since BSNL had already discharged their tax burden, there cannot be double taxation.

[South East Corporation vs. C.C. Coaching (Tri. - Bang.)] 8 STR

34. Whether credit can be denied to the assessee on account of lapse of time, when the assessee has won the appeal before CIT Appeal for grant of credit and the department has not granted the consequential relief ?

Held : No

The Commissioner (Appeals) granted relief to the assessee and allowed the assessee to claim credit, neither the assessee nor the department went in further appeal. The assessee claimed the credit before the department after a considerable period of time as the department failed to give effect to the order of the Commissioner.

The Tribunal observed that the order of the CIT Appeal was not a subject matter of further appeal and therefore the effect of the CIT order is an enforceable order. The assessee should not suffer for the lapse of the department. The order of the CIT Appeal restoring the right to the assessee gets back to the same date on which the assessee was entitled to the respective credit. Mere plea of lapse of time for no reason attributable to the assessee, the assessee should not suffer.

(CCE vs. SPS Metal Cast and Alloys Ltd. 8 STR 415 (Tri - Kolkata))

35. Whether refund available to the assessee can be appropriated towards another liability of pre deposit under section 35F in another appeal relating to another demand ?

Held : No

The facts of the case are, the assessee are manufacturers of aluminium extrusion. They exported goods to Singapore on payment of duty. Being eligible for exemption they applied for refund. The lower authority accepted the refund application but appropriated the same against demands which were pending before appellant Tribunal.

The Tribunal held that the order was not legal and proper in law. The refund cannot be appropriated against another demand to be pre deposited which was pending for adjudication before appellant authority. They relied on the decision of CCE vs. Girdharilal Sugar Allied Industries Ltd. 168 ELT 350 (TRI - Delhi) wherein in an identical issue the Tribunal set aside the adjustment of refund toward s pre deposit required to be made under section 35 F.

They held that the assessee was entitled to refund and the pre deposit as required under section 35F will be adjudicated by the appellant authority.

Indian Aluminium Company Ltd. vs. CCE 8 STR 433 (Tri – Bangalore)

36. When the owners of license to manufacture drugs gets them manufactured through job worker without hiring his factory, on piece basis and owner of licence checks quality by drawing out samples. Whether loan licensor can be termed as manufacturer as per sec 2(F) of Central Excise Act.

Held – No.

The issue in these appeals related to valuation of medicament under the Central Excise Act being manufactured and cleared in a situation of loan licence arrangement as per Drugs and Cosmetics Act, 1940, wherein raw materials and packaging materials are supplied by one holding the loan licence or a loan licensee under the Drugs and Cosmetics Act, 1940 and the medicaments are manufactured at the premises of another manufacturer (hereinafter referred to for ease of reference as ‘job worker’).

25 Show Cause Notices which were issued against the different notices by the Commissioner of Central Excise, Goa and 7 notices were issued by Directorate General of Central Excise Intelligence, Bangalore Zone Unit and they were disposed by a common order, as it was found that the issues in the notices and the defence replies submitted was similar. The Commissioner, after considering the submissions found:

1. The loan licensees possess a loan license under the Drugs and Cosmetics Act, which authorizes them to manufacture for sale and distribution at other location.

2. The application made for loan license, proposal by the loan licensee to the job worker and consent letters by the job workers indicate that medicaments are to be manufactured by loan licensee with their own raw materials and packaging materials at the factory of the job worker by taking on loan the premises, equipment, staff and testing facilities of the job worker by taking on loan the premises, equipment, staff and testing facilities of the job worker.

3. The job workers, per the agreement and authorization from loan licensee, discharged Central Excise formalities like filling classification and price declaration, statutory returns and records. All the records in respect of the “Said Medicaments” except the Central Excise statutory records were maintained on loan licensee’s account.

4. The Batch Manufacturing Records maintained by the job worker indicate that, all the Raw Materials / Packaging Materials required for manufacture of the “Said Medicaments” are procured from Raw Materials / Packaging Materials stores in the production department under cover of Raw/ Packaging Material Notes issued on account of the loan licensee for manufacture on the loan licensee’s account

5. The job worker did not possess a drug manufacturing licence for said medicaments. Thus the job worker was not permitted to manufacture the “Said Medicaments”, though under the said Drugs & Cosmetics Act and Rules they can make their facilities available to a holder of valid loan licensee.

6. The clause of agreement between loan licensee and job worker were not found true to facts. The factual position was that the job worker did not possess the drug licence for the manufacture of the said medicaments, that the manufacturing licence was held by the loan licensee, that the said medicaments were manufactured on account of loan licensee taking infrastructure of job worker on loan and all the documents were maintained by the job worker on licensee’s account. The loan licensee who were referred to as the “Marketing Company” in the said agreement did not possess any other licence from any “Licensing Authority” to sell or distribute in wholesale the “Said Medicaments” except the loan licence to manufacture for sale or distribute the “Said Medicaments”.

7. All raw materials and packaging materials were supplied by the loan licensee and the job worker did not use any raw material or packaging material of their own. The same was always under the ownership of loan licensee and even hypothecated to the banks and insured by the loan licensee.

8. The packaging and labels of the medicaments clearly show the loan license as the manufacturer at the location of the job workers factory and it does not contain any mention of the name of the job worker.

9. The balance sheets of both job workers and loan licensee reveal that it is not the job worker but the loan licensee, who have shown these medicaments in their accounts as produced and sold by them.

And the definition of manufacture under section 2(f) of the Central Excise Act, 1944 that the loan licensee was to be treated as manufacturer by the licensing authority under the Drugs and Cosmetics Act, 1940 in terms of the definition and the responsibility in respect of quality etc. lies with the loan licensee.

Once the Commissioner (Appeals) held that the loan licensee would be treated as manufacturer, the question of assessable value of the medicament manufactured by the loan licensee on the job workers premises was to be viewed in the light of section 4 of the Central Excise Act, 1944 read with the Valuation Rules and found that in the facts and circumstances of the job worker was not an independent processor. Therefore, the decision in the case of Ujjagar Prints 38 ELT 535 (SC) was not applicable.

In view of his findings, he held that the duty demand on the job worker does not stand and the demand of duty will have to be made on the loan licensee.

The two members of Tribunal deferred on the decision. The technical member felt that job workers only is manufacturer whereas and judicial member felt that loan licensor was manufacturer.

The matter was referred to third member. He observed that great reliance has been placed by Member (Technical) on the decision of the Gujarat High Court in the case of Indica Laboratories Pvt. Ltd and therefore it would be useful to look the ratio of this decision which reads as under:

“It has been held that loan licensees are also manufacturer, within the meaning of the term as envisaged by the said Act and the Rules and specially 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 else also and such premises they might have hired for the time being, shift wise or otherwise”.

This is the key test laid down by the Hon’ble High Court as one of control and supervision. The agreement entered into by the appellants does clearly shows that there is hire of the factory shift-wise or any wise. In view of this, the loan licensee cannot be held to be manufacturer.

It was submitted that above test was recognized and was confirmed by a Larger bench of the Tribunal in Lupin Laboratories vs. Commissioner wherein it was categorically held, inter alia, by the Tribunal that “since there is no evidence on record that the respondents had hired any shift or shifts in the factory of M/s Jay Chem Products for carrying out the manufacture of the disputed goods under their own supervision and control on the ratio of judgment quoted above they cannot be deemed as the manufacturers of the goods in question. Under these circumstances, even though the respondents had supplied the major production of raw materials and packaging material and also exercised some supervision and control over the manufacturing activities, M/s. Jay Chem Products who actually carried out the manufacturing activity in their factory as job worker have to be deemed as the manufacturers of the goods.

They referred to the various clauses of the agreement entered into between job worker and the loan licensee which makes it clear that the job workers were independently, carrying out the manufacture of said medicaments at their premises and were in fact responsible for ensuring that the said medicines confirm to the prescribed quality of standards as also applicable laws. Clause 3 of the agreement states that the manufacturer shall follow technical and scientific data, prescription and advice so given or that may be given hereafter for use of raw material and auxiliary substances, manufacturing, processing and/or finishing the product and shall conform to the same. Clause 7 states that manufacturer shall allow duly authorized representative/ representatives of the Marketing Company to inspect at any time manufacture of the product and the methods of manufacturing, processing and/or finish and shall supply at the request of the representative/ representatives sample of the product. The manufacturer shall be primarily responsible to ensure that the batches of products so manufactured, processed…. are in accordance with the process/processes, specification/specifications… of marketing company, since the control over production is entirely exercised by him. Clause 17 states that manufacturer will be entitled to charge towards processing and/or manufacturing charges which will include cost of production plus his profit for the services as herein provided as the rate/rates as mentioned in Schedule A.

These clauses clearly show that the job worker is not working in the supervision and control of loan licensee and that the loan licensee has not hired the premises of job worker either shift-wise or any wise and that the manufacturer charges per unit manufactured at the rates specified in Schedule A.

I find that the agreement between the loan licensee and the job worker is very clear that the supervision and control will be that of the job worker only and as in every job work, the manufacture has to be carried out as per the price indicated by the raw material supplier and as per the specifications laid down by the raw material supplier and raw material supplier has a right to inspect and draw sample at each stage to ensure that the standards prescribed by him are being followed especially so in the case of drugs where he ultimately has to be held liable for any deficiency in quality where the human lives are involved. No evidence has been brought out to show that the premises had been hired on a shifts basis or otherwise and on the contrary, the agreement clearly shows that the manufacturing charges will be paid at the rate specified in the Schedule on the basis of per unit and there is no reference to payment on the basis of any shift or any particular period.

I am, therefore, of the view that the matter is fully covered by the Larger Bench decision of the Tribunal in the Lupin Laboratories case cited supra and followed in subsequent judgments by the Tribunal. I am therefore in agreement with the views expressed by learned Member (Technical) Shri S.S. Sekhon. The reference is accordingly answered that appeals are to be allowed as held by Member (Technical).

Thus it was held that only job worker can be treated as manufacturer u/s 2(f) of the Central Excise Act.

Cosme Remedies vs. CCE 2003 ELT 567 [Tri-Mum (TM)]