Brief of the Case
In the case of Commissioner of Central Excise, Goa V/s. M/s Cosme Farma Laboratories Ltd., it has been held by the Hon’ble Supreme Court of India that in case of job work arrangement, the job worker should be considered as manufacturer on the basis of the arrangement between the parties and the assessable value be a sum total of cost of raw material, labour charges and profit of the job worker as stated by the law prevailed during the relevant period.
The respondent is a manufacturer of medicaments having license under the provisions of the Drugs and Cosmetics Act, 1940. The respondent not only manufactures certain medicaments but also gets certain medicaments manufactured through other job workers so the respondent is a loan licensee – who is also permitted to get drugs manufactured at different places under the provisions of the Drugs and Cosmetics Act, 1940 and Rules made thereunder. Under the agreement entered into between the respondent on one hand and the job workers on the other hand, raw material as well as packing material is supplied to the job workers and as per the instructions of the respondent loan licensee, the job workers manufacture the medicaments under the supervision of the loan licensee, i.e. the respondent so as to see that the quality of the medicaments manufactured by the job workers is as prescribed by the loan licensee.
Several notices had been given to the respondent as well as to the job workers by the Commissioner of Customs and Central Excise calling upon them to show cause as to why the respondent, the loan licensee should not be treated as a manufacturer as per the provisions of the Central Excise and Salt Act, 1944 in respect of the medicaments manufactured by the job workers and on that basis the respondent was also called upon to make payment of certain duty and the job workers were also called upon to show cause as to why they should not be directed to pay penalty etc.
After hearing the concerned parties, the Commissioner came to the conclusion that the respondent was a manufacturer of the medicaments manufactured at the premises of its job workers within the meaning of the provisions of the Central Excise and Salt Act, 1944 and the Rules made thereunder.
The above order has been challenged by respondent before CESTAT and got order in its favour. Against the said order passed by the CESTAT, the appellant has filed the present appeals before Hon’ble Supreme Court.
Contentions of the Revenue
The Revenue contented that the respondent should have been treated as a manufacturer in view of the fact that the raw material as well as the packing material for manufacturing the medicaments had been supplied by the respondent to the job workers and the respondent was having supervision over the manufacturing activity though the said activity was being carried out at different places, where the job workers were working. The Revenue further contended that though the job workers were doing the work in their own premises, the raw material as well as packing material was being supplied to them by the respondent and they were working under strict supervision of the respondent loan licensee and therefore, in fact the respondent loan licensee was the manufacturer. The loan licensee was the manufacturer of medicaments under its own brand name, the price at which the goods, i.e. the medicaments were being sold was the assessable value in respect of the medicaments in question. The Revenue relied upon the judgments delivered in the case of M/s. Ujagar Prints and others v. Union of India and others (1989 (3) SCC 488) and Pawan Biscuits Co. Pvt. Ltd. v. Collector of Central Excise, Patna (2000 (6) SCC 489) to substantiate his case to the effect that the price at which the goods were sold for the first time in the market would be the assessable value of the goods in question.
Contentions of the Assessee
The assessee contended that the job workers were the manufacturers for the reason that the entire activity with regard to manufacturing was carried out in their premises. Supply of raw material as well as packing material to them by the respondent was not relevant. It was duty of the job workers to manufacture medicaments as per the quality prescribed by the respondent and, in fact, the manufacturing activity was done by the job workers. As regards to the assessable value of the goods manufactured by the job workers, such goods were sent by the job workers to the respondent. The job workers were not selling the goods in the market and therefore, the value at which the goods were transferred to the respondent by the job workers would become assessable value and for determining the said value, the principles laid down by Hon’ble Supreme Court in the case of Pawan Biscuits (supra) are to be followed.
Held by the Hon’ble Supreme Court
The Hon’ble Supreme Court stated that the manufacturing activity was done only by the job workers in their premises and with the help of their labour force and machinery. The Hon’ble further stated that simply because the job workers had to adhere to the quality control or the specification with regard to the quality prescribed by the respondent, it would not mean that the respondent is the manufacturer.
The Hon’ble court further clarified that the term ‘manufacturer’ or the loan licensee used under the provisions of the Drugs and Cosmetics Act, 1940 has nothing to do with the manufacturing activity or term ‘manufacture’ under the provisions of the Central Excise Act, 1944. Both the Acts referred to hereinabove have been enacted for different purposes. The provisions of the Drugs and Cosmetics Act, 1940 pertain to manufacture of drugs and quality of the drugs etc. The manufacturer of the drugs has to see that the quality of the drugs manufactured by him is as per certain standards and if there is any defect in the drugs manufactured by him or someone working under him, he becomes responsible or liable under the said Act. There is also a provision in the said Act with regard to getting the drugs manufactured by someone else. So a manufacturer, who is having a license to manufacture, can get the drugs/medicaments manufactured by another person under his supervision and he would be liable if the drugs manufactured by someone else are not as per the prescribed quality. Though the drugs/medicaments might not have been manufactured by the one who is a licensee and the actual manufacturer is guilty of manufacturing substandard drugs, the licensee becomes responsible and liable under the provisions in the said Act.
On the other hand, the provisions of the Central Excise Act, 1944 are for the purpose of imposing duty on the goods manufactured. The manufacturer becomes liable to pay certain duty as per the provisions of the said Act.
The Hon’ble stated that the term ‘loan licensee’ used by the appellant is not much relevant as the Court is not concerned with the quality or standard of the drugs/medicaments manufactured by the loan licensee or anybody else manufacturing medicaments for him.
The Hon’ble court further stated that the agreement between the parties shows that the relationship between the parties is that of the principal and the principal and not that of the principal and the agent. Thus, it is clear that the job workers were not manufacturing the drugs as agents of the respondent or on behalf of the respondent, but they were carrying out the manufacturing activity independently and therefore, they were manufacturers of the drugs as per the provisions of the Central Excise Act, 1944.
As regards to the assessable value, the Hon’ble court stated that once it has been determined that the job workers are the manufacturers, the assessable value of the goods would be a sum total of cost of raw material, labour charges and profit of the job workers, as per circular No.619/10/2002-CX dated 19th February, 2002 and the law laid down by this Court in the case of Pawan Biscuits (supra) and other cases. In such a case, the price at which the respondent brand owner sells its goods would not be the assessable value because the duty is to be paid at the stage at which the goods are manufactured and not at the stage when the goods are sold.
In view of the above the appeal has been dismissed.