Case Law Details

Case Name : Commissioner of Central Excise, Goa Vs M/s. Cosme Farma Laboratories Ltd. (Supreme Court of India)
Appeal Number : Civil Appeal No. 1761 of 2007
Date of Judgement/Order : 07/04/2015
Related Assessment Year :
Courts : Supreme Court of India (998)
CA Urvashi Porwal
Urvashi Porwal

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.

Brief Facts

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.

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