Majmudar, J.
1. In this group of petitions under Article 226 of the Constitution, the petitioners have brought in challenge the action of the authorities functioning under the provisions of the Central Excises & Salt Act, 1944 ('the Act' for short) refusing benefit of the exemption Notification No. 175/86-C.E., dated 1-3-1986 to the concerned petitioners. They have also brought in challenge the show cause notices issued to them under Section 11A of the Act and have further challenged consequential orders confirming the demands contained in the impugned show cause notice. The petitioners have also challenged the vires of paras 2 and 3 of the exemption Notification No. 175/86 dated 1-3-1986 as amended by Notification No. 223/87 dated 22-9-1987.
2. As these petitions involve common questions of law and facts, 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 of 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 petitioners contend that such practice is prevalent on large scale in pharmaceutical industry. That this practice helps those who are small manufacturers and who have no capacity or financial strength to have their own factories for manufacturing their own goods. Such loan licensees are, therefore, permitted to get their PP medicines manufactured at the shift hired at factories owned by persons like the petitioners. Such type of practice is permitted and contemplated under Rules 69A and 74-B of the Drugs and Cosmetics Rules, 1945. The petitioners' case is that when such loan licensees manufacture their own PP medicines at the factory premises of the petitioners by hiring necessary shifts at their factories, the manufactured of the concerned PP medicines are those loan licensees and not the petitioners. In exercise of the powers of exemption under Rule 8 of the Central Excise Rules, the Central Government issued exemption Notification No. 175/86-C.E., dated 1-3-1986 whereunder exemption was granted to first clearance of the specified goods upto value of Rs. 15 lacs and concessional rate of subsequent clearance in case of manufacturers having clearance not exceeding I crore 50 lacs in the preceding year. The petitioners contend that under the scheme of this notification, they were entitled to clear their own manufactured PP medicines from their own factory premises which are SSI units by availing of concession regarding payment of excise duties as contemplated by sub-paras (a) and (b) of para 1 of the exemption notification. That so far as PP medicines manufactured by loan licensees at the petitioner's factories are concerned, according to the petitioners, these loan licensees are also entitled to exemption and payment of concessional rate of excise as per the aforesaid sub-paras of para 1 of the notification. However, according to the petitioners, excise authorities are wrongly denying th benefit of this exemption notification to loan licensees who manufacture their goods as aforesaid at the petitioner's factories and on the contrary, by wrongly applying sub-paras (2) and (3) of the exemption notification, they are clubbing the goods manufactured by the petitioners with the goods manufactured by loan licensees at the petitioner's factories and accordingly slab of cleared goods for the purpose of exemption from payment of excise duty is wrongly inflated and on that wrong 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 provision 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 petitions by filing affidavits in reply of the Assistant Collector of Central Excise and they have been followed by affidavits-in-rejoinder by the concerned petitioners.
7. Before we indicate the points that arise for our consideration, it will be necessary to broadly notice the rival contentions canvassed by the learned Advocates of the respective parties before us.
8. Rival Contentions : The learned Advocates for the petitioners contended that the departmental authorities are patently in error in holding that the loan licensees who get their goods manufactured at the shifts hired at the factories owned by other persons are not manufacturers within the scope and ambit of the exemption Notification No. 175/86 and for that matter, within Section 2(f) of the Act. It was submitted that it is now well settled by catena of decisions of various High Courts including this court and also of the Supreme Court that if a person manufacturer his goods at a facory not belonging to him, he can still be treated as a manufacture within the meaning of Section 2(f) of the Act. It was further submitted that, therefore, even loan licensees who do not own their factories but get their goods manufactured under their own supervision and control by their own labour or hired labour, at the shifts of factories belonging to others, can still be considered to be manufacturers within the meaning of Section 2(f) of the Act and will be governed by the scheme of the aforesaid exemption notification. It was further contended that clause 7 of the exemption notification read with Explanation IV will not come in the way of the petitioners on the one hand and the loan licensees on the other. It was next contended that provision of clubbing of goods manufactured by more than one manufactures at the same factory for the purpose of grant of exemption under the notification in question as per paras 2 and 3 of the notification is ultra vires the scheme of the Act and it is also ultra vires Art. 14 of the Constitution as they seek to treat persons similarly situated in an arbitrary and discriminatory manner. That two classes of small scale manufactures are carved out by the said sub-paras viz. manufactures which are small scale untils and which manufacture their goods in their own factories but who do not allow other manufactures to manufacture their goods in the same factory and other class of manufactures who manufacture their own goods in their own factories and also allow other manufacturers to manufacture the latter's 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, his 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 of the said notification. It was further contended that there is nothing wrong in paras 2 and 3 of the notification as they are part and parcel of the entire composite scheme of exemption. That it is open to the Central Government to issue appropriate exemption notification subject to the conditions laid down therein as per Rule 8 and once that power is exercised, the conditions granting exemption have to be strictly complied with and it cannot be said that they are in any way arbitrary or unreasonable so as to falter on the touch stone of Art. 14 of the Constitution. It was further contended that in view of para 7 and Explanation IV, loan licensees cannot get the benefit of the said exemption notification. It was also contended that in any case, these loan licensees are not having L-IV licences issued to them under the provisions of the Act and this is the additional reason why benefit of exemption Notification No. 175/86 cannot be made available to them and accordingly, the impugned orders are perfectly valid and legal.
10. It must be stated that although the impugned decisions of the respondent No. 3 i.e. the Assistant Collector in all these cases are appealable to the Collector (Appeals), the Court is not inclined to throw out the petitions on that ground for two obvious reasons. These petitions were entertained by this court at show cause notice stage and were admitted to final hearing and under the direction of this court, the petitioners were asked to show cause against the show cause notices and after having done so, the impugned orders have been passed. But apart from that, the main reason why we are inclined to entertain these petitions on merits is that vires of paras 2 and 3 of the exemption notification have been brought in challenge and this question cannot be considered by departmental authorities in the hierarchy of proceedings and that is the main reason why we have thought it fit to decide these petitions instead of relegating the petitioners to departmental remedy by way of filing appeals against the impugned orders of respondent No. 2.
'In view of the rival contentions of the learned Advocates of the parties on merits, the following points arise for our consideration :-
1. Whether the loan licensees governed by the provisions of Drugs and Cosmetics Act, 1940 read with Drugs and Cosmetics Rules, 1945 getting his goods manufactured under 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
11. 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 Cosmetics Act, 1944 read with rules framed thereunder. The Act has been enacted with a view to regulating the import, manufacture, distribution and sale of drugs, and cosmetics. Section 3 of the said Act is definition section. The term 'cosmetic' is defined in clause (aaa) of Section 3. It means any article, intended to be rubbed, poured, sprinkled or sprayed on or introduced into, or otherwise applied to the human body or any part thereof for cleansing beautifying, promoting attractiveness, or altering the appearance; while clause (b) defines the term 'drug' to include all medicines for internal or external use of human beings or animals. The term 'manufacture' is defined under clause (f) to mean in relation to any drug or cosmetic any process or part of a process for making or altering, ornamenting, finishing, packing, labelling, breaking up or otherwise treating or adopting any drug or cosmetic with a view to its sale and distribution. Similarly, 'patent or proprietary medicine' has been defined by clause (b). It includes a drug which is a remedy or prescription presented in a form ready for internal or external administration of human beings or animals. It is not in dispute that the petitioners as well as loan licensees are manufacturing patent and proprietary medicines known as PP medicines, Chapter IV deals with manufacture, sale and distribution of drugs and cosmetics and lays down the standards and qualities of drugs and cosmetics covered by the said Act. Section 18 provides that from such date as may be fixed by the State Government by notification in the Official Gazette in this behalf, no person shall himself or by any other names on his behalf manufacture for sale or for distribution, or sell, or stock or exhibit or offer for sale, or distribute any drug which is not of a standard quality, or is misbranded, adultered or spurious or which are mentioned as prohibited drugs and cosmetics in that section. Section 33 confers power on the Central Government to make rules for the purposes of giving effect to the provision of Chapter IV. Similarly, under Section 33-N, power is conferred on the Central Government to make rules for the purpose of Chapter IV A. When we turn to the rules framed by the Central Government called Drugs and Cosmetics Rules, 1945, we find the genesis of the loan licenses in Rule 69A. The said rule provides that application for 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 rules, system of loan licensing is accepted by the legislature in the filed of manufacture of drugs and cosmetics and PP medicines. These manufacture who do not have their own facilities to manufacture these goods, can get loan licenses entitling them to utilise infrastructures belonging to somebody also whereat they can manufacture their goods.
13. The questions is whether such loan licensees who are entitled to manufacture these goods under the provisions of the aforesaid Act and the rules can be treated to be manufacturers under the Central Excises and Salt Act, 1944 if they get their goods manufactured at the factories of others. So far as this aspect is concerned, reference to relevant provisions of the Excise Act and the rules will be apposite. Section 2(f) of the Excise Act defines the term 'manufacture' to include any process as mentioned in clauses (i) and (ii) of the definition and further recites that the word 'manufacturer shall be constructed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages in their production or manufacture on his own account. The second part of the definition covers all those who engage in production of excisable goods or manufacture on their own account, may be at any place. Place of manufacture is not relevant for deciding as to whether the concerned persons who undertake this activity can be treated to be manufacturers or not. In this connection, reference to Rules 174. 1174-A(b) of the Excise Rules also becomes relevant. Rule 174 occurs in Chapter VIII dealing with licensing. It lays down that every manufacturer, trader or person hereinafter mentioned, shall be required to take out a licence and shall not, conduct his business in regard to such goods otherwise than by the authority, and subject to the terms and conditions of a licence granted by a duly authorised officer in the proper form. When we turn to Rule 174-A it provides that 'not-withstanding anything hereinbefore contained, if the Central Government is satisfied that it is necessary or expedient in the public interest so to do, it may by notification in the Official Gazette, and subject to such conditions or limitations as if may specify in such notification, exempt from the operation of Rule 174...' (b) any class of manufacturers who get their goods manufactured on their account from other purpose or persons' .... 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 licensees 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 fabrics through Ankleshwar Handloom Weavers Co-operative Purchaser Society can be said to be manufacturers within the meaning of Section 2(f) of the Act. Answering this question in affirmative, the Division Bench made the following pertinent observations :-
'Section 2(f)(ii) lays down that a manufacturer shall include 'not only' one who employs hired labour 'but also' one who engages in the production or manufacture etc. The words 'not only' suggest that a person who employs hired labour would be included in the first category. If that was not so, and the legislature wanted to classify persons employing hired labour separately, it would not have used the expression 'not only' but would instead have used a simple conjunctive 'and'. The words 'not only' used in that juxtaposition indicate that the draftsman thought that those who employed hired labour were covered by the first category and then the draftsman proceeded to lay down the inclusive part of the definition by emphasising that 'not only' 'but also' those who engaged in the production etc. would be manufacturers. It is possible for a person who himself does not employ labour but gets goods manufactured through an independent contractor to say that he was not the manufacturer, for he had not brought into existence an article or a product in question either himself or through his servants. To cover such a class of persons the legislature provided the inclusive part of the definition which would include a person who does not himself employ labour but engages himself in the production or manufacture of goods through an independent contractor'.
14. There are various other judgments of different High Courts and the Supreme Court interpreting provisions of Section 2(f) of the Act on the same lines. We do not deem it fit to burden this judgment by referring to them. In view of the aforesaid settled legal position and in the light of the provisions of the Central Excise Act and the Rules, it must be held that the loan licensees are also manufacturers within the meaning of the term as envisaged by the said Act and the Rules, and especially 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 also and which premises they might have hired for the time being shiftwise or otherwise. The first point for determination, 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. 1 accordingly.
15. 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 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. Inspite of the charging section being attracted qua concerned excisable goods, they can be given benefit of partial or full remission of duty by the Central Government. In exercise of that power, the said notification has come to be issued. The preamble of the notification states 'exemption to first clearances of specified goods upto the value of rupees fifteen lakhs and concessional duty on subsequent clearances in the case of manufacturer having clearances not exceeding rupees one and a half crores in the preceding year'. Thus, the exemption laid down under the scheme of the relevant notification attaches to the first clearances of specified goods upto the value of Rs. 15 lakhs and subsequent clearances not exceeding 1.5 crores of rupees by a given factory. Para 1 of the notification makes it clear that the Central Government exempts the excisable goods of the description specified in the annexure to the notification and falling under the Schedule to the Central Excise Tariff Act, 1985, being specified goods and cleared for home consumption on or after the 1.4 in any financial year by a manufacturer from one or more factories to the extent provided in clauses (a) and (b) of the first para. In the case of first clearances of the specified goods upto an aggregate value not exceeding Rs. 30 lakhs, in a case where taxes are not paid on inputs used in the manufacture of the specified goods, whole of duty leviable on specified goods upto aggregate value not exceeding Rs. 30 lacs, is exempted. Sub-clause (b) of the first para provides that in the case of clearance of the specified goods of an aggregate value not exceeding Rs. 60 lakhs, immediately following the said clearances of the value specified in clause (a) concessional rate of duty is prescribed. Proviso to para 1 lays down that the aggregate value of clearances of the specified goods in terms of clauses (a) and (b) of this paragraph taken together shall not exceed Rs. 75 lakhs. Thus benefit of exemption is made available to small factories at which goods are manufactured upto the quantities laid down in para 1 of the exemption notification.
16. Now follow paras 2 and 3 which are impugned by the learned counsel for the petitioners. They provide that the aggregate value of clearances of the specified goods from any factory by one or more manufacturers in any financial year under clauses (a) and (b) of para 1, 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 of 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 shiftwise or otherwise manufactures his own goods under his supervision and control and out of his own raw material and first clearance value of B's manufactured goods exceeds Rs. 30 lakhs, then, but for para 2, both A and B would be entitled, as per para 1, to claim individual exemption on their respective first clearances of goods manufactured by them in the factory to the extent of Rs. 30 lakhs each but because of concept of clubbing brought in by para 2, the goods manufactured from the very same factory, by A and B will be clubbed and their first clearances of the respective goods would amount to Rs. 60 lakhs i.e. Rs. 30 lakhs each. Consequently, exemption from excise duty will be available upto total value of Rs. 30 lakhs only and the rest will attract duty. Similarly clubbing of further clearances of these manufacturers from the same factory would attract ceiling of Rs. 60 lakhs and would not entitle them to have concessional duty on their respective additional clearances upto Rs. 40 lakhs each. Even for the last year, eligibility criterion for the same factory being aggregate value of clearance of the excisable goods for home consumption as the rate of 150 lakhs of rupees would apply conjointly if more than one manufacturers like A and B manufacture from the same factory.
17. It is submitted by the learned Advocate for the petitioners that this is illegal and arbitrary in both ways. Firstly, clauses 2 and 3 cut across clause 1 and hence they are contradictory to one another and therefore, clauses 2 and 3 must make room for operation of parent para 1. Secondly, it was submitted that in any case, artificial classification has been made by the rule making authority between the sole manufacturers who manufacture their goods at the factory which is SSI unit on the one hand and other class of manufacturers who manufacture their own goods in such factory and also permit other manufacturers to manufacture latter's goods in the same factory by utilising their infrastructures. That would include persons like loan licensees. That is the sole manufacturers manufacture their goods in the factory, their first clearances and subsequent clearances as provided by para 1 will get exempted from payment of duty, but only because they permit other manufacturers to utilise their plant and machinery, the rule making authority has evolved the principle of clubbing their manufactured 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) ELT 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.
18. However, we have to see whether the impugned clauses 2 and 3 introducing the system of clubbing the manufactured goods by different manufacturers from the same factory is in any way arbitrary or ultra vires. So far as the first aspect of the matter is concerned, it has to be stated to be rejected. It is true that para 1 lays down general scheme of exemption upto a particular limit of first clearance of specified goods of the same SSI unit and then lays down concessional rate of duty beyond basic clearances upto the ceiling provided therein. But that does not mean that this is an absolute provision. It has to be read conjointly with paras 2 and 3. There is nothing like parent provision, as wrongly assumed by the learned counsel for the petitioners. This is an exemptions notification and exemption can be granted by the Central Government in certain cases subject to conditions which may be laid down in the notification. In the present case, absolute exemption has not been granted by the Central Government but a hedged in concessional scheme of exemption has been promulgated. Thus, paras 2 and 3 have to be read as further conditions of exemption without limiting absolute exemption given in para 1. Therefore, paras 1, 2 and 3 have to be read together in a conjoint manner and once they are so read, there would not be any question of para 1 being cut across by paras 2 and 3 or latter getting ultra vires the so-called parent provision of para 1. Consequently, there is no substance in the first contention of the learned counsel for the petitioners on this aspect.
19. So far as infraction of Art. 14 is concerned, we fail to appreciate how it can be said that wordings of notification in question with paras 2 and 3 lay down any scheme of hostile discrimination against plurality of manufacturers manufacturing their goods from the same SSI unit. The preamble of the notification and the relevant clauses of the notification lay down a clear cut scheme of exemption-cum-concession. All the factories which are SSI units are uniformly covered by the sweep of the said notification and the exemption attaches to the clearances of the specified goods cleared from the factory gate of such factory in a given financial year and the extent of total exemption is upto Rs. 30 lakhs and concessional exemption is beyond 30 lakhs upto Rs. 60 lakhs, with limit of Rs. 75 lakhs in a given financial year. This is the basis or heart of the notification. 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 by 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 infrastructure at some other time during the same financial year will get total benefit for Rs. 30 lakhs by way of first clearance of his own goods. Thus, total exemption limit would stand inflated to Rs. 60 lakhs instead of Rs. 30 lakhs, which is the total limit of full exemption envisaged by the exemption notification, so far as first clearances of concerned goods from the given factory for the financial year go. With a view to avoiding this unexpected and uncontemplated result, the aforesaid system of clubbing envisaged by paras 2 and 3 has been brought in. It works as a safety valve for avoiding such unexpected result and ensures that from the same factory, permissible extent of total goods by way of first clearances as contemplated by notification are allowed to be cleared without payment of duty and, thereafter subsequent total clearances of specified goods from the same factory in the same year would earn concessional rate of duty. Thus, paras 2 and 3 instead of being arbitrary and irrational, are in full consonance with the scheme of exemption envisaged by the notification in question and but for them, the nature of exemption would be rendered arbitrary and lopsided. Under these circumstances, it is not possible to agree with the submission of the learned counsel for the petitioners that impugned paras 2 and 3 of the notification are ultra vires Art. 14 or that they hostilely discriminate against the plurality of manufacturers manufacturing from the same factory. The second point, therefore, fails and stands rejected.
20. Point No. 3 :- Once it is held that the entire notification operates of its own and all the paras have to be given their proper effect, the next question that arises is - as to whether the loan licensees are covered by the sweep of that notification. The authority viz. Assistant Collector has taken the view that though loan licensees are manufacturers as per the provision of Central Excise Act and the Rules, for the purpose of that notification, they cannot be treated to be manufactured because of Explanation IV and para 7 of the said notification which have been inserted in notification No. 175/86 by latter notification No. 223/87. This conclusion of the competent authority is seriously challenged by the learned counsel for the petitioners. We have already seen, while considering point. No. 1 that loan licensees who do not have their own factory are also manufacturers within the scheme of the Excise Act and Rules. Once they 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 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 manufactured or trade. We fail to appreciate how the aforesaid provisions exclude loan licensees from the sweep of the said notification so far as para 7 is concerned it would not apply to a case where a loan licensee labour but under his own supervision and who affixes his own marks of brand name or trade name, for the simple reason that para 7 would apply to a case where on manufacturer affixes on the specified goods manufactured by him with brand name or trade name of somebody else. The case of the petitioners is that loan licensees who manufacture their own goods from their own raw material under their own supervision by hiring shift or shifts in the factory during the financial year are independent manufacturers of their own goods and only the factory premises being common, it cannot be said that owner of the factory is manufacturing these goods. But the loan licensees who have hired the shifts manufacture their own good and affix their own marks. Consequently, it cannot be said that the factory owner is branding the goods manufactured by him with the trade name of somebody else. Thus on the facts alleged by the petitioners, operation of para 7 is ruled out. There is considerable substance in the aforesaid contention of the learned Advocates for the petitioners.
21. On the assumption that what they say is factually correct, we have to decide whether para 7 would apply to such cases. For the purpose of this discussion, we will assume that loan licensees are genuine loan licensees who manufacture their own goods from their own raw material by their own labour or hired labour under their own supervision in SSI factory and for that purpose, they take on lease or hire the shift or shifts therein during the given financial year. Such loan licensees are affixing their own marks on their own goods. Therefore, there is no question of such loan licensees affixing the specified goods with the brand name of somebody else. We must, therefore, hold that if these facts are established as pleaded by the petitioners, then para 7 will be out of picture. We will accordingly consider this para 7 in the light of the assumed facts. Whether these facts are true or not will have to be decided by the competent authority. But if such facts are established, then of course, para 7 will be out of picture, as loan licensees are manufacturers of their specified goods and not 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 manufacture 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, reliances 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 or 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 (b) in a case where a manufacturer who is manufacturing specified goods in a factory other than a factory which is registered under the Industries (Development and Regulation) Act, 1951 with the Director General of Technical Development in the Ministry of Industry has been availing of the exemption under this notification or any of the notifications mentioned therein during the preceding year. Now a mere look at para 4 shows that exemption granted under the notification is confined to these factories which are registered as small scale units with the Director of Industries. It is not in dispute that the petitioners' factories are all SSI units so registered.
22. Thus if a loan licensee manufactures his goods in such factory which is registered with the Director of Industries in the State as SSI unit, he can certainly get benefit of the notification and he will not be left out. So far as provision are concerned, they furnish a scheme of exemption to the provisions of main para 4, meaning thereby, that in case covered by provisions (a) and (b), even though factory at which the goods are manufactured in a given financial year, may not have been registered as SSI unity, exemption benefit of the notification will be available and to that extent, main provision of para 4 will stand whittled down or superseded. It is well settled that provision to any statutory instrument carves out a filed of its own from the operation of the parent provision and to that extent, it is usually treated as exception to the main provision, though in exceptional cases, it may be treated as separate provision of its own. So far as para 4 is concerned, the main thrust thereof is that if the goods are manufactured in a factory which is not registered as SSI unit, scheme of exemption under the notification will not be available to cover these goods, meaning thereby, goods must be cleared from the factory which is a SSI unit. To this provision, there are exceptions as envisaged by provisos (a) and (b). The first exception is, in cases where goods cleared from any factory during the preceding financial year or current financial year do not exceed Rs. 7.5 lakhs, then these goods will be covered by the benefit of exemption notification even thought the factory, where they are manufactured, many not have been registered as SSI unit. Second exception is that if the manufacturer has manufactured his goods 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.
23. 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 notification listed at (i) to (xii) in proviso (b) of para 4, such loan licensees are also entitled to the benefit of the exemption so far as their goods manufactured at such factory are concerned Mr. Dave for the loan licensees submitted that even if a new loan licensee who establishes his business in the current year and hence had not availed of this or earlier exemption notification listed at items (i) to (xii) and proviso (b) to para 4 if he manufactured his goods at a factory during the current year which is SSI unit main sweep of para 4 can cover the goods manufactured by such loan licensee. We find considerable substance in the aforesaid contention of Mr. Dave appearing for loan licensees in special civil application No. 1435 of 1988. It therefore appears clear to us that if a loan licensee manufactures his own goods during the financial year in a factory which is SSI unit, he cannot be told off the gate and cannot be treated as one not eligible for benefit of exemption notification even though he might not have availed of benefit of exemption notification in past. But even apart from that, those loan licensees who might have manufactured their goods in past from the factories which are not registered as medium scale or large scale industry, then, such loan licensees who have availed of benefit of exemption notification listed at item (i) to (xii) of para 4 would also be entitled to the benefit of exemption notification for the current year and they cannot be said to be in eligible for the benefit of exemption notification for the year in question. Under these circumstances therefore, even alternative contention of the learned counsel for the petitioners for non-applicability of para 7 has to be accepted i.e. even though assuming that small scale factory owner has manufactured goods of loan licensees and has affixed the brand name of loan licensees being other person, para 7 will not apply as these other person loan licensees will not be ineligible for grant of exemption under the notification as none of paras preceding para 7 would make them ineligible and para 4 will also not make them ineligible as discussed earlier. For all these reasons, para 7 will not apply to the specified goods manufactured by loan licensees in the factories which are SSI units and which are leased by them on on shift basis or otherwise for the purpose. Reliance placed on Explanation IV 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 manufactured 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 manufacture of such goods.
24. 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 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 manufacturer all these goods and he has affixed trade name of another i.e. loan licensee on these goods, even the, all that Explanation IV does is to raise a negative presumption that only because of that, it cannot be said that loan license is the manufacturer. A mere presumption would arise as per the Explanation which is not an irrebuttable presumption. It can be rebutted on proper evidence led before the authority. Thus Explanation IV merely raises a presumption but it does not lay down any substantive provision excluding operation of the notification qua loan licensees and consequently, even on that ground Explanation IV would not come in the way of genuine loan licensees who are manufacturing goods as SSI factory under their supervision and control for getting benefit of the exemption notification. It must, therefore be held that loan licensees who are referred to in point. No. 1 are entitled to the benefit of general exemption notification No. 175/86 as amended by latter notification No. 223/87. Extent of benefit will of course be subject to the operation of Paras 2 and 3 and subject to clubbing of their manufactured goods with the goods of factory owner during the current year and the loan licensees cannot have best of both the worlds meaning thereby that, they cannot insist that they should get benefit of para 1 but would not be subjected to conditions of paras 2 and 3. Point No. 3 is accordingly answered in the affirmative to the extent indicated above.
25. Before parting with this discussion on point No. 3, we must mention one contention canvassed by Mr. Naik for the respondents. He submitted that before loan licensees can at all get benefit of this exemption, they must be manufacturers having licenses under the Excise Act. That but for these licenses, they would not be entitled to the benefit of this exemption notification. Mr. Naik submitted that these loan licensees are not having such licenses as required under the Excise Act and therefore also, they cannot get benefit of this exemption notification. In order to support this submission, Mr. Naik relied upon a decision of the Rajasthan High Court reported in 1980(6) ELT 21 which has taken the view that manufactured who has not got licence under the Excise Act cannot get benefit of exemption notification. However, learned counsel for the petitioners invited our attention to number to contrary judgments of the High Courts as well as Board of Revenue and Tribunal. They relied upon the following decisions :-
1981(8) ELT 128 (Bom.)
1985(19) ELT ALL. 57
1977 ELT 185-A (being decision of Central Board of Revenue)
1982 ELT 172 (decision of Govt. of India) and
1988(37) ELT 243 (decision of CEGAT)
26. These decision have taken the view that once the scheme of exemption notification operates, the concerned goods get out of the network of taxing provision 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 contention 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 condition or limitation 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 their account from other person or persons. Our attention was invited to annexure B to special civil application No. 1435 of 1988 wherein the Government of India has issued such notification under Rule 174-A so far as manufactured getting their goods manufactured on their own account from other persons are concerned. It is a notification under Rule 174A(b). It provides that such persons will be exempted from operation or Rule 174 subject to the conditions that the manufacturer authorises the person, who actually manufactures or fabrics the said goods to comply with all procedural formalities under the Excise Act and the Rules made thereunder, in respect of the goods manufactured on behalf of the said manufacturer and, in order to enable the determination of value of the said goods under Section 4 of the said Act, to furnish information relating to the price at which the said manufacturer is selling the said goods and the person so authorised agrees to discharge all liabilities under the said Act and the Rules made thereunder. Mr. Naik submitted that no such authorisation has been filed by the concerned loan licensees with the department enabling the factory owners where they manufactured goods to comply with the provisions of the said notification and, therefore, exemption under the said notification may not be available to these concerned loan licenses. In our view, the only condition which is laid down in the notification is that authorisation may be given to the actual manufacturer or fabricator of the goods to comply with the procedural provisions of the Act. The learned counsel for the petitioners made it clear that all of them who are factory owners where the goods are manufactured, undertake to this court to fully comply with the conditions mentioned in the exemption notification at annexure B and if they have not actually complied with the said provision, they are prepared to file written undertaking in this court to allay any fear on the part of the department. In our view, this will fully satisfy the requirements of exemption notification under Section 174A(b). All the petitioners are directed to file such undertakings in this court within one week from today and also file copies of such undertakings before the competent authority. Consequently, it must be held on the facts of the present case, that the concerned loan licensees would be fully covered by the exemption notification No. 175/86 issued under Rule 174-A(b) and the 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 Court and other authorities as stated hereinabove. Point No. 3 therefore, stands answered accordingly.
27. 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 concerned loan licensees. It has also to be kept in view that those loan licensees who can aspire to get benefit of this exemption Notification No. 175/86 read with 223/87 must be SSI units. If they are large scale units or medium scales units, then of course they will be out of purview of the exemption notification as exemption notification is meant for SSI manufacturers only and is meant for giving fillip to their manufacturing activities. If loan licensees fulfil the aforesaid conditions, then subject to paras 2 and 3 of the notification, they can get benefit of the exemption notification to the extent provided therein subject to the condition that petitioners at whose factories they are manufacturing furnish proper authorisation before the competent authority agreeing to abide by the entire procedure of Excise Act and the Rules for the purpose of clearing the goods from their factories even though the goods may be belonging to loan licensees and subject to their keeping relevant records as required by the said Act and the Rules and provided further the petitioners file such written undertakings in this court within one week from today. If these requirements are satisfied, then loan licensees can be said to be entitled to the benefit of the exemption notification subject to the terms and conditions laid down therein and that question has to be examined by the competent authority on merits. We cannot and we don not say anything on the merits of controversy between the parties and it would depend upon the factual data being laid before the competent authority and will have to be examined and scrutinised by the authority in the light of what is stated hereinabove.
28. As the competent authority had no benefit of interpretation of this court on the exemption notification in question and as they have proceeded entirely at tangent, it would be in the fitness of things to set aside the orders passed by the Assistant Collector of Central Excise, respondent No. 3 in these petitions and to direct the competent authority to reconsider the case of the parties in accordance with law in the light of what is decided in this judgment and subject to the terms and conditions which the loan licensees are required to satisfy as indicated hereinabove.
29. As a result of this discussion, impugned orders at
annexure G in Spl. C.A. 1435/88' G 3019/88' G 3020/88' G 3018/88' G 3021/88' J 8113/88' G 3022/88' D 8114/88' G 8511/88' G 8513/88' G 3023/88' I 3025/88Annexure B in Spl. C.A. 1074/89' E 4019/89' 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 re-examine these cases in accordance with law and in the light of what is stated in this judgment. So far as special civil application No. 3017/88 and special civil application No. 3024/89 are concerned, no orders are passed uptil now by the Assistant Collector will be directed in these cases to decide the question afresh in the light of what is stated in this judgment. This disposes of the petitions filed by M/s. Trivedi, Gupta and Dave, Advocates.
30. Mr. S. I. Nanavati filed special civil application No. 2669/88 and 1342/89. In these petitions, impugned orders of the Assistant Collectors are at annexures F and B collectively, in the respective petitions. So far as special civil application No. 8398/88 is concerned, the Assistant/Collector's order is dated 15-3-1989 in the light of show cause notice dated 7-2-1989. All these orders will stand quashed and set aside subject to similar directions to be issued to the concerned Assistant Collector to reconsider their cases. So far as special civil application No. 3283 of 1989 is concerned, Mr. Soparkar has by amendment, brought the order of the Assistant Collector dated 6-1-1989 on record at annexure BB. The same will also stand quashed and set aside with similar directions to the Assistant Collector to redecide the matter. As the matters are hanging fire since long, the concerned Assistant Collector is directed to redecide these matters afresh after hearing the petitioners as well as loan licensees if they want to be heard and the view point of the department, as expeditiously as possible and preferably within four months from the receipt of order of this court in each of these petitions by the concerned authorities. Rules issued in these petitions are accordingly made absolute to the aforesaid extent. In the facts and circumstances of the case, there will be no order as to costs in each one of them.