Collector of Central Excise Vs. LupIn Lab. (P) Ltd. - Court Judgment

Excerpt:
1. this is an appeal by the revenue against the impugned order-in-original passed by the additional collector of central excise, madras. along with the appeal the appellants also filed the captioned stay application for suspending the operation of the impugned order-in-original.it was the case of the revenue that the respondents m/s. lupin laboratories (p) ltd. (in short "llpl") are engaged in the manufacture of pp medicines falling under chapter 30 of get, 1985.3. by obtaining what is known as loan licence under the provisions of drugs and cosmetics rules, 1945 which enables the utilisation of factory premises of other persons where authorised pp medicines can be got manufactured, the respondents m/s. llpl had, during the year 1986-87 (precisely during the period from 1-9-1986 to 31-3-1987), got pp medicine, namely, hepp manufactured at the factory premises of m/s jaychem product (in short m/s "jp") by supplying all the raw materials including packing material and paying job charges thereof to m/s j.p.for this, the respondents m/s. llpl had first filed a declaration dated 19-9-1986 and subsequently obtained central excise licence dated 6-1-1987 when the value of clearances was about to cross rs. 10 lakhs.likewise, m/s. )p had also manufactured pp medicine on their own account from the said factory premises having obtained central excise licence dated 6-1-1987. m/s. jp is a registered ssi unit eligible for the exemption under notification no. 175/86 dated 1-3-1986 as amended.it was further the case of the revenue that during the year 1986-87 the respondents m/s. llpl has cleared pp medicine, namely hepp valued at rs. 17,67,985/- under loan licence from the premises of m/s. jp availing the full exemption from payment of duty upto the value of rs. 15 lakhs and the balance on payment of concessional rate of duty at 5% in terms of notification no. 175/86 dated 1-3-1986. during the same period m/s. jp also cleared the product valued at rs. 65,601.27, manufactured on their own account. it was also their (revenue) case that the respondents had its own factory of manufacture at aurangabad, wherefrom total value of clearances during the year 1985-1986 was rs. 15,11,88,377.78 and that they were also getting pp medicine manufactured from a number of factories situated at several places in india by availing the loan licence facility, like the one being availed at the factory premises of m/s. jp. it was also their (appellants) case that the respondents suppressed all these facts inasmuch as their declaration dated 19-9-1986 and the classification list no. 1/86-87 dated 5-1-1987 filed with the department showed the value of clearances during the year preceding financial year that is to say 1985-86 and the name and address of other factories manufacturing such goods wherein they had got any propriety interest as 'nil'. on these allegations a show cause notice dated 26-9-1991 was issued to the respondents to show cause as to why the duty amounting to rs. 2,48,892.84 for the clearances of hepp made by the respondents from the factory of m/s. jp during the period 1-9-1986 to 31-3-1987 be not demanded and penalty be not imposed. in reply it was inter alia contended by the respondents that the actual manufacturer of the said product, namely, hepp was m/s.jp only and not the respondents, inasmuch as the entire manufacturing activity was carried on by m/s. jp, which is an ssi unit and they were, therefore, eligible for the benefit of exemption under notification no.175/86. allegation of suppression of facts was also denied and contested. it was also contended that the respondents had paid the duty of rs. 2,27,600/- for the clearances made during the period from 1-10-1986 to 31-3-1987 on 9-114991 under protest. the additional collector after usual adjudication proceedings held by his impugned order that m/s. jp are the real manufacturers and not the respondents.on these findings he further proceeded to examine as to whether m/s.jaychem have crossed the exemption by way of actual manufacture and ultimately held that they (m/s. jaychem) had crossed the limit of rs. 15 lakhs and, therefore, had to pay the duty for the goods manufactured beyond rs. 15 lakhs. he further held that the respondents had themselves determined the duty liability and already paid a sum of rs. 2,27,600/- which could be taken only as a payment made on behalf of m/s. jaychem.4. when the case was taken up for hearing shri m.h. patil, ld. counsel for the respondents submitted that while ordering for the issuance of notice of hearing on stay application filed by the revenue to the respondents for today the bench also directed both sides to come prepared to argue the matter on merits in view of the judgment rendered in the case of indica laboratories (p) ltd. v. union of india, 1990 (50) e.l.t. 210 (gujarat) and, therefore, he has come prepared to argue the matter on merits and he would have no objection on the said stay application and the matter be heard. in reply sharad bhansali, ld. sdr submitted that if the matter is heard on merits today itself he would not press the said stay application. accordingly, the matter was heard on merits.5. arguing on behalf of the revenue shri sharad bhansali, ld. sdr submitted that admittedly the respondents m/s. llpl is not an ssi unit and, therefor, they were not eligible for the grant of exemption under notification no. 175/86 as amended in respect of their clearances made from the factory of m/s. jp. the term "manufacture" and "manufacturer" under the provisions of section 2(f) of the central excises and salt act, 1944 cannot be treated as settled in law as observed by the additional collector, particularly when a manufacturing activity is carried on by a drug manufacturer under the provisions of drugs and cosmetic act, 1944 read with drugs and cosmetics rules, 1945 which treats "loan licensee" who gets the drugs manufactured from the other persons as a separate entity/person distinctively different from that of other person in whose factory the process of manufacture is actually done. in view of this, though, the process of manufacture is actually taken place at the factory of m/s. jp the clearances made by the respondents m/s. llpl under the loan licence from the said premises of m/s. j.p. are to be treated as having been done by the respondents and since the respondents had crossed the value of clearances of rs. 200 lakhs from its aurangabad factory during the period under reference, i.e., 1985-1986, they (the respondents m/s. llpl) are not eligible for the benefit of exemption under notification no. 175/86. it was stressed by him that notification no. 175/86 is meant for giving fillip to ssi units and since the respondents admittedly is not an ssi unit, they cannot aspire for the benefit under the said notification and cited the case of indica laboratories (p) ltd. v. union of india, 1990 (50) e.l.t. 210 (gujarat) and also the case of duke pharma v. government of india 1994 (69) e.l.t. 433.6. in reply shri m.h. patil, ld. counsel for the respondents submitted that the respondents are loan licensee and manufacture inter-alia pp medicaments and also got such medicaments manufactured from various independent manufacturers in various parts of the country. in the instant case m/s. jaychem products were the real manufacturers since the relationship between them and the said m/s. jaychem is one of the principal to principal basis and they (m/s. jaychem) have got their own manufacturing full fledged set up. there exists an agreement between the respondents and the said m/s. jaychem for manufacturing the specified medicine under loan licence arrangement and in the said agreement their exists specific clause to the effect that m/s. jp has to ensure that the medicine manufactured by them for the respondents are out of their raw-material conforms to the quality standards. he further submitted that the respondents supply only negligible potion of material to m/s. jaychem and the rest of the material required for the manufacture of the medicine is being procured by m/s. jp. he also submitted that the said m/s. jaychem as well as the respondents company are registered separately and have separate legal entity. in a nutshell he supported the impugned order.7. we have considered the submissions. the additional collector of central excise has noted (at page 3) that "the party replied to the show cause notice, in their letter dated 11-11-1991. they stated that though they have supplied the raw materials to m/s, jaychem products and exercised quality control, the entire manufacturing activities were carried on by m/s. jaychem products, which is an ssi, and as such are entitled for free clearances up to 15 lakhs of the first clearance of p or p medicines manufactured by them. they also stated that they were forced to take out the central excise licence by the department and to observe all the excise formalities. they contended that, as the real manufacturer of the product hepp, was m/s. jaychem products, which was entitled to clear the first 15 lakhs worth of p or p medicines free without any central excise duty, the demand for collecting the duty alleged to be due on p or p medicines valued rs. 17,67,985.07 during 1-9-1986 to 31-3-1987 is not proper and legal as the clearances were made according to the notification no. 175/86 dated 1-3-1986." from the record we find that the statement of shri d. sitaraman, proprietor of m/s. jaychem products was recorded and he answered as follows :- "(1) m/s. lupin laboratories pvt. ltd. have their loan licence in my premises. (2) they supply raw-materials for the manufacture of their goods namely "hepp". i charge labour charges (job charges) for the manufacture of the said product, the finished goods are delivered to the premises as desired by them at their own cost. m/s. jaychem product have no other involvement in their product..........................................i do not know about their activities including their status. i simply undertook the job at their request. the total value of the product "hepp" from my factory from 1-9-1986 to 31-3-1987 was rs. 17,67,985.07. of that amount value of clearances without payment of duty was rs. 14,41,893.28 and the value of the clearance on payment of 5% excise duty was rs. 3,26,091.79." 8. from the reply to the show cause notice and the statement of shri d.sitaraman, proprietor of m/s. jaychem product it is clear that the respondents are supplying the raw-materials to m/s. jaychem product and exercise quality control and in turn m/s. jaychem product are charging labour charges (job charges) for the manufacture of the said product.in the teeth of these self-proved facts the findings of the ld.additional collector (at page 4) that there is no evidence that raw-material is supplied by the respondents is not factually correct.more particularly when he himself has noted at page 3 of his impugned order that the respondents in their reply to the show cause notice have stated that they supply the raw-material to m/s. jaychem product and exercise quality control. for the same reasons the contention of the ld. counsel for the respondents that they supply only negligible portion of raw materials to m/s. jaychem product and rest of the raw-material required for the manufacture medicine is being produced by m/s. jaychem product cannot be expected as correct. in the case of indica laboratories ltd. v. union of india, supra, it was held if the loan licensee who get their pp medicine manufactured at ssi factories belonging to somebody else but under their own supervision or control from their own raw-material and if they affix their trade name and 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 such loan licensee, that is to say who can aspire to get benefits of this notification read with notification no. 223/87 must be ssi units. in the instant case admittedly the respondents is not an ssi unit and, therefore, we have no alternative but to hold that they were not entitled for the benefit of exemption notification no. 175/86 dated 1-3-1986. the case law refer to in the cross objections is not apt to the present controversy as these cases deal with the meaning of the term 'manufacture' appearing in section 2(f) of the central excises and salt act under different situation.9. from the impugned order we find that the additional collector after holding that the said m/s. jaychem product as the manufacturer proceeded to determine their eligibility for the benefit of exemption under notification no. 175/86 and while doing so observed that m/s.jaychem "have to pay duty for the excess quantity cleared over 15 lakhs value and this is rightly demandable. m/s. lupin laboratories have themselves determined the duty liability and also paid the duty amount of rs. 2,27,600/- which can be taken only as a payment made on behalf of m/s. jaychem product. however, this figure has not been confirmed by this department. this require reworking by the concerned officer and duty liability determined and proper demand made after deducting the same amount of rs. 2,27,600/-". in view of our finding that the respondents were the manufacturer, these observations and the findings so recorded also go. it is significant to note that no show cause notice was issued to the said m/s. jaychem nor they are before us and, therefore, we are not called upon to determine the eligibility of m/s.jaychem under notification no. 175/86.10. in the result, the impugned order-in-original is set aside. the concerned additional collector of central excise, madras would now determine the duty liability of the respondents afresh in the light of our findings that the respondents were the real manufacturer and were not entitled for the benefit of exemption notification no. 175/86.11. in the result the appeal is allowed and the case is remanded as aforesaid. the cross objections filed by the respondents also stand disposed of accordingly.12. i have gone through the above order recorded by the ld. member (judicial) but i have not been able to persuade myself to agree with the finding that the respondents were the manufacturers. for this reason i am recording this separate order :- 13. from the findings of the additional collector in the impugned order it is seen that the respondents were only supplying the raw materials to m/s. jaychem products, and exercising quality control but the collector has observed that the entire manufacturing activity was undertaken by m/s. jaychem products. there is no finding that the respondents had got their goods manufactured under their own supervision or control by hiring shift or shifts at the ssi factory of m/s. jaychem products. in the case of indica laboratories pvt. ltd. v.union of india, reported in 1990 (50) e.l.t. 210 the high court of gujarat has observed that 'loan licensees' are persons who hold licences under the provisions of drugs and cosmetic act, 1944 but who do not have their own facilities to manufacture, hire shift or shifts in the factories of other manufacturers for carrying out manufacturing of p.p. medicines under their own control and supervision and out of their own raw materials. in respect of the loan licencees the court has held that if they get their p.p. medicines manufactured at ssi factories belonging to somebody else but under own supervision or control and from their own raw materials 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 who may be merely limbs of factory owners. the court has also held that loan licensees aspiring to get the benefit of the exemption notification no.175/86 read with notification no. 223/87 but be ssi units since large scale units or medium scale units would be out of the purview of the exemption notification which is meant for giving fillip to the manufacturing activities of ssi units. the relevant extracts being relevant from paras 4 and 16 of the judgment are reproduced below :- "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 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 74b 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 manufacturers 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-ce., 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 1 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 exemption notification. that so far as pp medicines manufactured by loan licensees at the petitioners' 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 the benefit of this exemption notification to loan licensees who manufacture their goods are aforesaid at the petitioners-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 petitioners' 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 views of para (2) and (3) of the exemption notification no. 175/86 on the ground that they are ultra vires provisions of the act and they are also ultra vires article 14 of the constitution. 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 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 scale 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 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 do 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." 14. 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 the 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 portion of raw materials and packing 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. hence, i am inclined to agree with the finding of the additional collector that m/s jay chem products as an ssi unit could alone be deemed as the manufacturers of the goods in question. however, in my view the additional collector erred in holding that in respect of clearances of goods of lupin laboratories valued at rs. 17,67,989.07 duty only in respect of clearances of goods in excess of rs. 15 lakhs in value was recoverable. since the additional collector has observed that on the products belonging to lupin laboratories were produced with their brand name it follows that in terms of para 7 of notification no.175/86 exemption under the said notification was not admissible in respect of the entire clearances of the goods belonging to m/s. lupin laboratories who having regard to their overall clearances were not eligible to exemption under ssi exemption under notification no.175/86.15. in view of the foregoing i hold that the entire production of goods by m/s. jay chem products for supply to m/s. lupin laboratories would be chargeable to duty, and such duty was recoverable if otherwise permissible under the law.16. i, therefore, remand the case to the adjudicating authority for de novo consideration of the duty recoverable in accordance with law, having regard to the proceedings in this order.18. since we have differed in our opinion the following question is referred to the hon'ble president in terms of sub-section (1) of section 35d of the central excises and salt act for hearing on it :- (1) whether in the facts and circumstances of the case the respondents m/s. lupin lab. (p) ltd. is to be treated as a manufacturer of the goods in question as held by the member (judicial) or m/s. jay chem products be treated as a manufacturer of the goods in question as held by the member (technical).19. needless to say that since the judicial member has not decided the question as to whether the additional collector erred in holding that in respect of clearances of goods of lupin laboratories valued at rs. 17,67,985.07, duty only in respect of clearances of goods in excess of rs. 15 lakhs in value was recoverable independently, in view of his [member (j)'s] findings, that the respondents were to be treated as the manufacturers of the goods in question, he (member, judicial) would record his own findings, if necessary, on receipt of the opinion of the hon'ble president third member, as the case may be, on the said question. sd/- sd/- (p.k. kapoor) (g.p. agarwal) member (t) (member (j) 20. in the misc. order no. 58/95-c dated 12-12-1994, since the two members, who heard the appeal from the revenue, had a difference of opinion, the matter has been referred to me, for the third member opinion as per the direction of the hon'ble president.21. the only question referred to the third member for opinion is as below : "whether in the facts and circumstances of the case, the respondents m/s. lupin laboratories is to be treated as a manufacturer of the goods in question, as held by member (j) or m/s. jay chem products be treated as a manufacturer of the goods in question, as held by member (t)." 22. for that purpose the facts giving rise to the appeal are recorded below: 22.1 m/s. lupin laboratories (respondents-hereinafter referred to as 'lupin'), holding a loan licence issued under the drugs and cosmetic act, filed a declaration under notification 175/86 and claimed exemption under the said notification, in respect of drugs manufactured on their behalf in the factory of m/s. jay chem products (hereinafter referred to as j.p.) declaring the value of clearances during the preceding financial year 1985-86 as 'nil', as they have started manufacturing from 1-9-1986 only. when the value of clearances in the factory of j.p. exceeded rs. 10.00 lacs, both lupin and jp took out central excise licences and filed classification lists separately on 5-1-1987, claiming concession under notification no. 175/86. during the year 1986-87 (1-9-1986 to 31-3-1987) lupin cleared drugs of a value of rs. 17,67,985/- availing full exemption upto rs. 15.00 lacs and the balance on payment of central excise duty, at the rate of 5% ad valorem. for the next financial year 1987-88, lupin filed a classification list claiming exemption under notification no. 175/86.it is the allegation in the show cause notice that as per intelligence gathered, it was revealed that lupin is having loan licence facility in a number of units in india and they also own a factory in aurangabad manufacturing drugs and the value of clearances in their own unit in aurangabad during 1985-86 was to the tune of rs. 15.11 crores. it was therefore, alleged that lupin is not eligible for availing exemption under notification no. 175/86 for 1986-87. it was also alleged that the fact that lupin had their own factory clearing goods more than rs. 150.00 lacs and were having loan licence production in various other units was suppressed from the department for availing the exemption notification no. 175/86 with an intention to evading payment of duty on the drugs manufactured by them as loan licensee in the factory of j.p.it is also alleged that lupin supplied all raw materials and packing materials for the manufacture of drugs and they were manufactured on payment of job charges to jp. hence lupin are alleged to be the manufacturer of the drugs. hence it was proposed to demand the central excise duty from lupin on the entire value of rs. 17,67,985/-.22.2 in reply to the show cause notice, it was contended by lupin that the show cause notice is based on an erroneous understanding that they have manufactured p or p medicines at the premises of jp, which is not correct. though they have supplied the raw materials to jp and also exercised quality control, the entire manufacturing activity was carried on by jp only, which is an ssi unit registered with the director of industries and hence are entitled for free clearance of drugs upto a value of rs. 15.00 lacs of the first clearances. they bona fidely believed so and they were also told so by the excise authorities initially, when they approached them. they were forced to take out a central excise licence and to maintain all accounts after commencement of production. this does not mean that they are to be construed as manufacturer. even after they took out a licence, many officers visited the factory and hence all their activities were within the knowledge of the officers. there is no justification to invoke the provisions of section 11a of the central excises & salt act, 1944. even the payment of rs. 2,27,600/- towards the demand for 1-10-1986 to 31-3-1987 in respect of clearances of a value exceeding rs. 15.00 lacs, is without prejudice to their contention that jp are the manufacturer and not the respondents.22.3 the additional collector of central excise, madras, under his order-in-original no. 4/92 dated 17-2-1992, however, held that it is only under the cosmetics & drug act, lupin has to be construed as a manufacturer, as they hold a loan licence and permission to manufacture the drugs. but the position under the central excise act is different.it is found that place of manufacture is jp's factory. jp only could be construed to be a manufacturer and not lupin. in fact, under central excises & salt act, there is no such thing as loan licensee.notification no. 175/86 also refers to 'factory' of manufacture only.it is seen that lupin only places orders on the jp, for manufacture according to their (lupin's) specification as approved by the drug control authorities. jp buys raw materials from the market and manufacture the drugs. therefore, for central excise purposes, jp is the manufacturer. he also observed that there is no evidence that raw material is supplied by lupin and even if so, it is not material as seen from the judgment of several courts/tribunal. even in regard to loan licence arrangements of lupin in other places, the factory owners only were treated as manufacturers and accordingly no. 175/86 was extended to clearances from the factory. hence he dropped the allegation to the effect that lupin is the manufacturer in respect of the entire value of rs. 17.67 lacs. he confirmed the demand only in respect of value exceeding rs 15.00 lacs, which jp should have paid then and there, when the value of clearances exceeded rs, 15.00 lacs from their factory.22.4 on appeal from the revenue, against the above order of the additional collector, it was heard by special bench 'c' in delhi and in the misc. order, the difference of opinion on the question as to who is the manufacturer has arisen, which is to be considered by me now.23. after hearing the elaborate arguments from both the sides, i am to discuss the following salient arguments, on facts recorded, from the ld. counsel m.h. patil.23.1 it is not correct to say that all the raw materials were supplied by lupin to jp for manufacture. he refers to the record of personal hearing, which was accepted by the additional collector to plead that they have indicated that only negligible raw material was supplied by lupin to jp. otherwise jp was allowed to buy the raw material, the cost of which was reimbursed by them to jp only exercised quality control to ensure that the drugs conform to the specification laid down under the drugs and cosmetics act. they have not engaged the factory on shift basis nor they have exercised supervision on day to day manufacture.they have not deployed any of their labour or supervisory staff for production. the entire manufacture is done only by jp, who are having the factory registered as ssi unit.23.2 another point on the factual position pleaded by shri m.h. patil, is that member (t) shri kapoor has held that condition no. 7 of notification no. 175/86 would be attracted, because the drugs manufactured in jp were cleared with brand name of lupin. in this case the demand relates to the period 1-9-1986 to 31-3-1987 whereas condition no. 7 was inserted in notification no. 175/86 by amending notification no. 223/86, effective only from 1-10-1987. hence condition no. 7 can not be held against them in the facts and circumstances of the case.23.3 the facts narrated in their reply to show cause notice and the arguments based on those facts for pleading the time bar aspect of the demand have not been considered by any of the two members and no findings are given. if the demand per se is held to be time barred it is futile to consider the academic question raised for the third member's opinion.24.1 on the basis of the above submissions made during the earlier hearing on 22-12-1993, i placed the matter before the president for considering whether the reference can be heard for giving my opinion.the president has ordered that the reference may be decided by me and the third member has powers to deal with facts and law required to answer the question referred.24.2 in the position in which, i am placed, i find only on the facts and law as may be relevant for considering the question referred to me, i can go into them for arriving at my opinion on the question referred.it is not open for me to correct the findings of member (t) shri kapoor holding that condition no. 7 of notification no. 175/86 would be attracted, though on the facts of the case it would appear that condition no. 7 of notification no. 175/86 inserted effective from 1-10-1987 may not be invoked in this case, because demand relates to period 1-9-1986 to 31-3-1987.24.3 likewise, it is not open for me to pronounce my judgment on the question of time bar of demand, because that is not the question referred to me.24.4 it is for the respondents to agitate those issues before the referring bench, before the issue of the final order by that bench, by seeking for a hearing, if they so desire. they cannot agitate these issues before a third member, whose jurisdiction is confined only to the point of difference referred to him.24.5. as regards the contest in regard to factual position [vide argument sum in para 4.1 (23.1) above], i agree that i am to go into this position and determine the factual position and thereafter on that basis determine the point of law.24.6 as regards shri patil's plea that only negligible raw material was supplied and additional collector's finding that there is no evidence regarding supply of raw materials by lupin, i am to take note of their own submission in their reply to the show cause notice, against the specific allegation that they supplied the raw materials and packing materials- in para 2 of their reply to show cause notice, they have stated "though we have supplied the raw material to m/s jay chem products, and also exercised quality control, the entire manufacturing activities were carried on by m/s jay chem products, which is a small scale industry registered as such and are entitled for free clearances upto rs. 15.00 lacs of the first clearances of p or p medicine manufactured by them." from the above, it is found that they did not contest the allegation that they supplied raw materials to jp. hence, no burden is cast on the department to bring in evidence for supply of raw materials by jp. what is not disputed, need not be proved by the department. the additional collector's finding to that effect based on a mere plea that they were supplying only negligible raw material, cannot be acceptable, especially when lupin have not produced any evidence to substantiate their revised stand during personal hearing.when this was pointed out to shri patil, he agreed that the factual position as given out in their reply to show cause notice accepting the supply of raw material and exercising quality control, may be taken as correct and he would advance his argument on that basis, on the question of law.25.1 the main plank of shri patil's argument is that the ratio of decision of gujarat high court in the case of indica laboratories ltd. - 1990 (50) e.l.t. 210 (guj.) would not apply to the facts of this case, so also the decision of madras high court judgment in the case of dukes pharma reported in 1994 (69) e.l.t. 433 (mad). he also referred other case laws in his support, which will be discussed in my findings in this order.25.2 shri v.k. puri, the ld. sdr, on behalf of revenue pleads that once it is not disputed that lupin are holding loan licence under the drugs & cosmetics act, and only under that arrangement, they could manufacture drugs in another factory (not owned by them), they are to be regarded as manufacturer even under the central excise act. the case laws holding that so long as the supplier of raw material and the job worker are independent and the transactions are on principal to principal basis would not apply in the case of p or p medicines, because no drug can be manufactured by any one without holding a licence under the drugs & cosmetics act, loan licensee is held responsible for all the manufacturing activities under the drugs and cosmetics act, even in another factory. hence the legal position is to be viewed in the context of the decision in the case of indica laboratories, where gujarat high court have held that such loan licensee can be regarded as manufacturer even under section 2(f) of the central excise act. merely because, lupin have not taken the factory on shift basis or they have not put their staff in jp's factory, it cannot be held that they are not manufacturer. even if it is taken that they have taken out central excise licence under compulsion, they have not disputed that they filed a declaration for purposes of availing exemption under notification no. 175/86. such a declaration is called for only by the manufacturer intending to avail exemption. in the declaration, they have suppressed vital facts regarding their real status as owning a big factory elsewhere. ssi exemption is not meant for them. this has been observed by the gujarat and madras high courts.26.1 after hearing both the sides, on the legal question, first i would like to have a close look at the judgment of gujarat high court in indica laboratories case. in that case the high court took note of the following factual position. the petitioners were ssi registered units manufacturing p or p medicine. they claimed exemption under notification no. 175/86 as amended by notification 223/87. in their factories, p or p medicines were also being manufactured by those persons who did not have their own facilities for manufacturing the drugs. those persons hire shift or shifts at the factories of ssi units for manufacturing, under their own control and supervision and out of their own raw material, p or p medicines. these persons known as loan licensee, are given such loan licences under the provisions of drugs & cosmetics act, 1944 read with the drug and cosmetics rules, 1945. this practice is prevalent on a large scale in pharmaceutical industry. it was contended by the petitioners that the loan licensees, being small having no capacity or financial strength to have their own factories for manufacturing their own goods, are permitted under the loan licence to get their goods manufactured in another factory, by taking shift or shifts in that factory. hence it was pleaded that both the ssi units owning factory as well as the loan licensees can claim the benefit of exemption contemplated in para 1 of the notification no. 175/86 separately, they also challenged the vires of the provision contained in paras (2) and (3) of the said notification. after hearing the rival contentions, the following points were framed for consideration by the gujarat high court. "1. whether the loan licensee 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 articles 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?" 26.2 shri m.h. patil pleads that in that case, the facts considered by the gujarat high court relate to loan licensees, who take the ssi factory on shift or shifts and manufacture the medicines under their own supervision and control out of their own raw materials. in that factual position, gujarat high court have answered question no. 1 holding that loan licensee is a manufacturer. in the case of the respondents, they only supply raw material and exercise quality control. hence such a loan licensee cannot be said to be covered by this judgment. according to him. lupin, though having their own factory in aurangabad, had to cater to a larger demand beyond the capacity of their own manufacturing units and hence they have taken loan licence for getting the medicines manufactured in the factory of jp, by supplying raw material. jp has carried out the entire manufacturing operation with their own labour and under their own supervision. the factory was not taken on shift/shifts basis by lupin. hence it would be wrong to treat lupin as manufacturer, based on the judgment of indica laboratories.26.3 i have carefully considered this plea, but unable to accept this proposition for the following reason : (1) there is no dispute that lupin could not have supplied raw materials and got the goods manufactured in the factory jp without having the loan licence issued by the drug control authorities. the question considered by the gujarat high court relates to such loan licensees holding licence under the drug and cosmetics act. though in that case it was stated that such loan licensees did not have their own facilities for manufacture but manufacture drugs by supplying raw materials and engaging factories on shift basis for production under their supervision, the emphasis cannot be laid on this position for assuming the distinction and to differentiate the case on that basis. this is evident from a reading of the relevant provision of the drugs and cosmetics act, 1940 and the rules. rule 69a of the said rules framed thereunder deals with loan licensee. explanation reads as below: "(1) for the purpose of this rule, a loan licensee means a licence, which a licensing authority may issue to an applicant, who does not have his own arrangement for manufacturing but who intends to avail himself of the manufacturing facilities owned by licensee in para (2) 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." there is no requirement of taking the manufacturing unit on shift or shifts basis nor is there any requirement that manufacturing activity should be directly under the supervision and control of loan licensee. no doubt, it is stated in explanation (1) that it is issued to a person who does not have his own arrangement for manufacture. in this case lupin is having their own factory in aurangabad for manufacture. but it is stated that they are to cater to a larger demand and hence they have obtained loan licence. from this it appears that even in a case where the applicant has a factory of his own, seeks for loan licence on the ground that his own arrangements for manufacture cannot cater to the demand made on him for such medicine, his application for loan licence can be considered. in this case, the admitted position is that lupin holds such a loan licence. it is not the case of lupin that loan licence was wrongly issued to them. their challenge is only with regard to insistence for taking out central excise licence. in the context of the legal provision governing the issue of loan licence, and taking note of the admitted fact that loan licence has been correctly issued to lupin, i am not persuaded to accept the plea of the ld. counsel that indica laboratory judgment will apply only to such loan licensees engaging an......on shift basis and exercising supervisory control and not to them. (2) it is evident that loan licence is required, where the manufacturer does not have his own arrangements for manufacture (may be, as in the case, for catering to a larger demand) engages himself in manufacture of the quantity of medicines required for catering to a larger demand, in another factory. it may be that before the gujarat high court, the petitioners pleaded that in the case of loan licensees operating in their units, they did not have manufacturing facility and hence had to engage their factory on shift basis, which has been taken note of. on that ground, i cannot hold that gujarat high court seeks to draw a distinction in the category of loan licensees as one having no factory of their own and another having their own factory but not having enough capacity to cater to the larger demand for medicine. all loan licensees are governed by the same drug and cosmetics rules and in the context of such loan licensees, i feel that gujarat high court have given their verdict, after appreciating the legal provision contained in the drugs & cosmetics act as well as section 2(f) of the central excise act, that such loan licensees are manufacturers in their own right. (3) i am fortified in making the above observation on a further reading of the said judgment. the gujarat high court took note of the provision of rule 174a and 174b of the central excise rules and held that such loan licensees can be treated as manufacturer within the meaning of these rules. they also took into account the judgment of the division bench of gujarat high court in the case of jamnadas v. c.l. nangia reported in air 1965 gujarat 215 in the context of section 2(1) of the central excise act to hold that the term 'manufacture' shall include not only a person who employs hired labour but also a person getting goods manufactured through an independent contractor. from this it is evident that indica judgment does not lay emphasis on hired labour by a manufacturer or taking a factory on shift basis or exercising supervision and control over manufacture. they have concluded that loan licensee is a manufacturer in his own right because he hold a loan licence under the drugs and cosmetics rules and he would also fall within the definition of section 2(f) of the central excise act and be governed by provision of rule 174a and 174b of the central excise rules. hence lupin's objection to taking out a central excise licence or filing a declaration for exemption from licensing control does not seem to have any support from the gujarat high court judgment. (4) moreover, in para 16 of the judgment (indica laboratories) discussing the final result, gujarat high court observed thus "it has also to be kept in view that loan licensees, who can aspire to get benefit of the exemption under notification no. 175/86 read with notification no. 233/87 must be ssi units. if they are large scale units or medium scale units, then of course, they will be out of the purview of the exemption notification, as exemption notification is meant for ssi manufacturers only and is meant for giving fillip to their manufacturing activities". from the above observation contained in the judgment of indica laboratories, there can be no scope for doubt that loan licensee of this type having their own manufacturing unit in the large scale sector cannot claim the benefit of ssi as loan licensee. i am not persuaded to accept the contention that loan licensee, who is a small scale manufacturer having no factory of their own, has been held to be a manufacturer by the gujarat high court, and not the others. the above observation in the judgment itself shows that the high court was aware of the large/medium scale units operating under the loan licence arrangement for getting the goods manufactured by supplying raw materials in another factory. the drugs are produced by loan licensees in another factory after satisfying that these factories are having infrastructure, capacity and testing facilities. hence there is no requirement of deploying the staff of loan licensee either for production or for supervision. it would suffice if proper quality control is exercised over the final products to meet the requirement of drug control act. this is admittedly done by the respondents. hence it would appear to me that in the light of the gujarat high court judgment in indica laboratories case, lupin could be treated as manufacturer.26.4 but then, i would not like to hasten by conclusion based on my own reading of the gujarat high court judgment in indica lab. case, because shri patil has cited various case laws before me.26.5 on a perusal of the various case laws cited by shri patil and referred to in the paperbook, i find that most of the judgments are in the context of a customer supplying raw material and getting the goods manufactured by a job worker. in these cases, it has been held that the customer cannot be held to be a manufacturer. but two of the judgments relate to loan licensees operating in another ssi unit. they are decisions by special bench of the tribunal in sol pharmaceutical [1992 (57) e.l.t. 290 (tribunal) = 1991 (37) ecr 638 (t)] and true chem pharma - 1991 (56) e.l.t. 690 (tri.). in the decision of sol pharmaceuticals, the decision of gujarat high court in indica lab. was not specifically considered. however, in the decision of true chem pharma, the judgment of indica lab. is profusely extracted. after considering the judgment of indica lab. the bench consisting 3 members held that unless such loan licensees get their goods manufactured out of the raw materials supplied by them, by exercising supervision and control in another factory by hiring the factory on shift or shifts, they cannot be held to be manufacturer of medicine in the other factory. this view has been taken by three members which is contrary to the view, i have held, on my reading of indica lab. decision, as discussed in the earlier paras.26.6 in such a circumstance, with no option available to a third member for placing the matter before a larger bench (since that is not in the question referred), i am to respectfully follow the decision of the tribunal in true chem pharma reported in 1991 (56) e.l.t. 690 (tri.) in deciding the question posed before me. going by this decision, i am to hold that in the absence of any evidence brought out by the revenue to show that lupin engaged the factory of jp on shift basis and produced the drugs under their own control or supervision, they cannot be held to be manufacturer. jp only could be construed to be manufacturer.26.7 the question referred to has been answered accordingly and the papers may be placed before the referring bench for further action.26.8 before parting with the order, i deem it necessary to invite the attention of the learned members of the referring bench to certain points on factual position raised by the ld. counsel shri m.h. patil recorded in para 1 of my order, two of which could not be considered by me, because of the limited jurisdiction available to third member.these points are open for consideration, if necessary by the referring bench.27. as per office order no. 73/96 dated 3-6-996 the present bench has been constituted by the hon'ble president for pronouncement of order in the present appeal.28. from the record we find that the third member opinion was received in the registry at delhi on 8-4-1996 and no notice regarding pronouncement of order or for any other purpose was ever issued to either party to the present appeal. the ld. third member answering the question referred to him has held that m/s. jay chem products (jp) only could be construed to be manufacturer [see paragraph 7.7(26.6) of his order].29. from paragraph 5.2(24.2), 5.3(26.3) and 5.4(26.4) of the order of the ld. third member dated 8-3-96 it is clear that the opinion of the ld. member shri p.k. kapoor that condition no. 7 of notification no.175/86 would be attracted was challenged before him. to which the ld.third member stated that he cannot go into this question as it is not open for him to correct the said findings of mr. kapoor. despite he could not restrain himself and stated that condition no. 7 of notification 175/86 may not be invoked. likewise, the contention that demand was time barred was also not considered by the ld. third member since he opined that it was not referred to him. after opining so he, in paragraph 5.4(26.4) stated that "it is for the respondents to agitate these issues before the referring bench, before the issue of the final order by that bench, by seeking for a hearing, if they so desire. they cannot agitate these issues before a third member, whose jurisdiction is confined only to the point of difference referred to him." after observing so he also observed in paragraph 7.9(26.8) as follows : "before parting with the order, i deem it necessary to invite the attention of the learned members of the referring bench to certain points on factual position raised by the ld. counsel shri m.h. patil recorded in para 4 of my order, two of which could not be considered by me, because of the limited jurisdiction available to third member. these points are open for consideration, if necessary, by the refering bench." 30. under these circumstances, we feel that the judgment cannot be pronounced in the instant case as the notice has to be issued to the parties concerned in this regard so that they may appear if so desire.a copy of the order shall be sent to both parties along with the notice of hearing to be issued. sd/- sd/-(g.r. sharma) (g.p. agarwal) member (t) member (j) 31. when the file was listed for pronouncement of the order, it was noticed by the bench that the third member had made the following observations in para 4.2(23.2) and 4.3(23.3) of his order : "4.2 another point on the factual position pleaded by shri m.h. patil, is that member (t) shri kapoor has held that condition no. 7 of notification no. 175/86 would be attracted, because the drugs manufactured by jp were cleared with brand name of lupin. in this case, the demand relates to the period 1-9-1986 to 31-3-1987 whereas condition no. 7 was inserted in notification no. 175/86 by amending notification no. 223/87, effective only from 1-10-1987. hence condition no. 7 cannot be held against them in the facts and circumstances of the case. 4.3 the facts narrated in their reply to show cause notice and the arguments based on those facts for pleading the time bar aspect of the demand have not been considered by any of the two members and no findings are given. if the demand per se is held to be time barred, it is futile to consider the academic question raised for the third member's opinion." it was therefore, ordered that a notice should be issued to the parties concerned before pronouncement of the order. accordingly s/shri a.k.madan, sdr appeared for the appellant and shri m.h. patil, advocate represented the respondents.32. we heard the submissions made by both the sides. we find that insofar as the observations of the third member in para 4.2(23.2) are concerned, it is a factual mistake, the same is rectified by amending the last 9 lines starting from "since the additional collector........... under notification no. 175/86." in this case, the demand relates to the period 1-9-1986 to 31-3-1987 whereas condition no. 7 was inserted in notification no. 175/86 by amending notification no. 223/87, effective only from 1-10-1987. hence the condition no. 7 cannot be held against them in the facts and circumstances of the case.para 3(15) of the order of shri p.k. kapoor shall be amended to read as "in view of the foregoing, we hold that condition no. 7 inserted by notification no. 223/87, dated 1-10-1987 will not be applicable in this case." 33. insofar as the question of limitation is concerned, we find that the respondents in their reply to the show cause notice have stated that "the demand of rs. 21,292.85 relating to the month of sept. 1986 being time barred, payment has been restricted to the period from 1-10-1986 to 31-3-1987." the ld. additional collector in his order-in-original has simply commented the contentions of the respondents reading as "it was added that section 11a provision will not apply to them as the factory was visited by the central excise officers periodically and they filed the returns regularly inasmuch as they have taken out the licence, they requested to drop the proceedings." we do not see any discussion or rebuttal of these contentions. we observe that the respondents in their reply to the show cause notice had claimed limitation only in respect of the demand for the month of sept. 1986. though at the time of personal hearing, the appellant extended the scope of their contention however, having regard to the facts of the case and the contentions of the appellant in the show cause notice and having regard to the fact there is no rebuttal we hold that the demand for the month of sept. 1986 alone is time barred.34. the majority order will be that we hold that in the absence of any evidence brought out by the revenue to show that lupin laboratories engaged the factory of m/s. jay chem products on shift basis and produced the drugs under their own control of supervision, they cannot be held to be manufacturer. m/s. jay chem. products only could be construed to be manufacturer. sd/- sd/-(archana wadhwa) (g.r. sharma) member (j) member (t)

Judgment:
1. This is an appeal by the Revenue against the impugned Order-in-Original passed by the Additional Collector of Central Excise, Madras. Along with the appeal the appellants also filed the captioned stay application for suspending the operation of the impugned order-in-original.

It was the case of the Revenue that the respondents M/s. Lupin Laboratories (P) Ltd. (in short "LLPL") are engaged in the manufacture of PP medicines falling under Chapter 30 of GET, 1985.

3. By obtaining what is known as loan licence under the provisions of Drugs and Cosmetics Rules, 1945 which enables the utilisation of factory premises of other persons where authorised PP medicines can be got manufactured, the respondents M/s. LLPL had, during the year 1986-87 (precisely during the period from 1-9-1986 to 31-3-1987), got PP medicine, namely, HEPP manufactured at the factory premises of M/s Jaychem Product (in short M/s "JP") by supplying all the raw materials including packing material and paying job charges thereof to M/s J.P.For this, the respondents M/s. LLPL had first filed a declaration dated 19-9-1986 and subsequently obtained Central Excise Licence dated 6-1-1987 when the value of clearances was about to cross Rs. 10 lakhs.

Likewise, M/s. )P had also manufactured PP medicine on their own account from the said factory premises having obtained Central Excise Licence dated 6-1-1987. M/s. JP is a registered SSI unit eligible for the exemption under Notification No. 175/86 dated 1-3-1986 as amended.

It was further the case of the Revenue that during the year 1986-87 the respondents M/s. LLPL has cleared PP medicine, namely HEPP valued at Rs. 17,67,985/- under loan licence from the premises of M/s. JP availing the full exemption from payment of duty upto the value of Rs. 15 lakhs and the balance on payment of concessional rate of duty at 5% in terms of Notification No. 175/86 dated 1-3-1986. During the same period M/s. JP also cleared the product valued at Rs. 65,601.27, manufactured on their own account. It was also their (Revenue) case that the respondents had its own factory of manufacture at Aurangabad, wherefrom total value of clearances during the year 1985-1986 was Rs. 15,11,88,377.78 and that they were also getting PP medicine manufactured from a number of factories situated at several places in India by availing the loan licence facility, like the one being availed at the factory premises of M/s. JP. It was also their (appellants) case that the respondents suppressed all these facts inasmuch as their declaration dated 19-9-1986 and the classification list No. 1/86-87 dated 5-1-1987 filed with the Department showed the value of clearances during the year preceding financial year that is to say 1985-86 and the name and address of other factories manufacturing such goods wherein they had got any propriety interest as 'NIL'. On these allegations a Show Cause Notice dated 26-9-1991 was issued to the respondents to show cause as to why the duty amounting to Rs. 2,48,892.84 for the clearances of HEPP made by the respondents from the factory of M/s. JP during the period 1-9-1986 to 31-3-1987 be not demanded and penalty be not imposed. In reply it was inter alia contended by the respondents that the actual manufacturer of the said product, namely, HEPP was M/s.

JP only and not the respondents, inasmuch as the entire manufacturing activity was carried on by M/s. JP, which is an SSI Unit and they were, therefore, eligible for the benefit of exemption under Notification No.175/86. Allegation of suppression of facts was also denied and contested. It was also contended that the respondents had paid the duty of Rs. 2,27,600/- for the clearances made during the period from 1-10-1986 to 31-3-1987 on 9-114991 under protest. The Additional Collector after usual adjudication proceedings held by his impugned order that M/s. JP are the real manufacturers and not the respondents.

On these findings he further proceeded to examine as to whether M/s.

Jaychem have crossed the exemption by way of actual manufacture and ultimately held that they (M/s. Jaychem) had crossed the limit of Rs. 15 lakhs and, therefore, had to pay the duty for the goods manufactured beyond Rs. 15 lakhs. He further held that the respondents had themselves determined the duty liability and already paid a sum of Rs. 2,27,600/- which could be taken only as a payment made on behalf of M/s. Jaychem.

4. When the case was taken up for hearing Shri M.H. Patil, ld. counsel for the respondents submitted that while ordering for the issuance of notice of hearing on stay application filed by the Revenue to the respondents for today the Bench also directed both sides to come prepared to argue the matter on merits in view of the judgment rendered in the case of Indica Laboratories (P) Ltd. v. Union of India, 1990 (50) E.L.T. 210 (Gujarat) and, therefore, he has come prepared to argue the matter on merits and he would have no objection on the said stay application and the matter be heard. In reply Sharad Bhansali, ld. SDR submitted that if the matter is heard on merits today itself he would not press the said stay application. Accordingly, the matter was heard on merits.

5. Arguing on behalf of the Revenue Shri Sharad Bhansali, Ld. SDR submitted that admittedly the respondents M/s. LLPL is not an SSI Unit and, therefor, they Were not eligible for the grant of exemption under Notification No. 175/86 as amended in respect of their clearances made from the factory of M/s. JP. The term "manufacture" and "manufacturer" under the provisions of Section 2(f) of the Central Excises and Salt Act, 1944 cannot be treated as settled in law as observed by the Additional Collector, particularly when a manufacturing activity is carried on by a Drug Manufacturer under the provisions of Drugs and Cosmetic Act, 1944 read with Drugs and Cosmetics Rules, 1945 which treats "loan licensee" who gets the drugs manufactured from the other persons as a separate entity/person distinctively different from that of other person in whose factory the process of manufacture is actually done. In view of this, though, the process of manufacture is actually taken place at the factory of M/s. JP the clearances made by the respondents M/s. LLPL under the loan licence from the said premises of M/s. J.P. are to be treated as having been done by the respondents and since the respondents had crossed the value of clearances of Rs. 200 lakhs from its Aurangabad factory during the period under reference, i.e., 1985-1986, they (the respondents M/s. LLPL) are not eligible for the benefit of exemption under Notification No. 175/86. It was stressed by him that Notification No. 175/86 is meant for giving fillip to SSI units and since the respondents admittedly is not an SSI unit, they cannot aspire for the benefit under the said Notification and cited the case of Indica Laboratories (P) Ltd. v. Union of India, 1990 (50) E.L.T. 210 (Gujarat) and also the case of Duke Pharma v. Government of India 1994 (69) E.L.T. 433.

6. In reply Shri M.H. Patil, ld. counsel for the respondents submitted that the respondents are loan licensee and manufacture inter-alia PP medicaments and also got such medicaments manufactured from various independent manufacturers in various parts of the country. In the instant case M/s. Jaychem Products were the real manufacturers since the relationship between them and the said M/s. Jaychem is one of the principal to principal basis and they (M/s. Jaychem) have got their own manufacturing full fledged set up. There exists an agreement between the respondents and the said M/s. Jaychem for manufacturing the specified medicine under loan licence arrangement and in the said agreement their exists specific clause to the effect that M/s. JP has to ensure that the medicine manufactured by them for the respondents are out of their raw-material conforms to the quality standards. He further submitted that the respondents supply only negligible potion of material to M/s. Jaychem and the rest of the material required for the manufacture of the medicine is being procured by M/s. JP. He also submitted that the said M/s. Jaychem as well as the respondents Company are registered separately and have separate legal entity. In a nutshell he supported the impugned order.

7. We have considered the submissions. The Additional Collector of Central Excise has noted (at page 3) that "The party replied to the Show Cause Notice, in their letter dated 11-11-1991. They stated that though they have supplied the raw materials to M/s, Jaychem Products and exercised quality control, the entire manufacturing activities were carried on by M/s. Jaychem Products, which is an SSI, and as such are entitled for free clearances up to 15 lakhs of the first clearance of P or P medicines manufactured by them. They also stated that they were forced to take out the Central Excise Licence by the Department and to observe all the excise formalities. They contended that, as the real manufacturer of the product HEPP, was M/s. Jaychem Products, which was entitled to clear the first 15 lakhs worth of P or P medicines free without any Central Excise Duty, the demand for collecting the duty alleged to be due on P or P medicines valued Rs. 17,67,985.07 during 1-9-1986 to 31-3-1987 is not proper and legal as the clearances were made according to the Notification No. 175/86 dated 1-3-1986." From the record we find that the statement of Shri D. Sitaraman, Proprietor of M/s. Jaychem Products was recorded and he answered as follows :- "(1) M/s. Lupin Laboratories Pvt. Ltd. have their loan licence in my premises.

(2) They supply raw-materials for the manufacture of their goods namely "HEPP". I charge labour charges (job charges) for the manufacture of the said product, The finished goods are delivered to the premises as desired by them at their own cost. M/s. Jaychem Product have no other involvement in their product..........................................I do not know about their activities including their status. I simply undertook the job at their request. The total value of the product "HEPP" from my factory from 1-9-1986 to 31-3-1987 was Rs. 17,67,985.07. Of that amount value of clearances without payment of duty was Rs. 14,41,893.28 and the value of the clearance on payment of 5% Excise duty was Rs. 3,26,091.79." 8. From the reply to the Show Cause Notice and the statement of Shri D.Sitaraman, Proprietor of M/s. Jaychem Product it is clear that the respondents are supplying the raw-materials to M/s. Jaychem Product and exercise quality control and in turn M/s. Jaychem Product are charging labour charges (job charges) for the manufacture of the said product.

In the teeth of these self-proved facts the findings of the Ld.

Additional Collector (at page 4) that there is no evidence that raw-material is supplied by the respondents is not factually correct.

More particularly when he himself has noted at page 3 of his impugned order that the respondents in their reply to the Show Cause Notice have stated that they supply the raw-material to M/s. Jaychem Product and exercise quality control. For the same reasons the contention of the Ld. counsel for the respondents that they supply only negligible portion of raw materials to M/s. Jaychem Product and rest of the raw-material required for the manufacture medicine is being produced by M/s. Jaychem Product cannot be expected as correct. In the case of Indica Laboratories Ltd. v. Union of India, supra, it was held if the loan licensee who get their PP medicine manufactured at SSI factories belonging to somebody else but under their own supervision or control from their own raw-material and if they affix their trade name and 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 such loan licensee, that is to say who can aspire to get benefits of this Notification read with Notification No. 223/87 must be SSI units. In the instant case admittedly the respondents is not an SSI unit and, therefore, we have no alternative but to hold that they were not entitled for the benefit of exemption Notification No. 175/86 dated 1-3-1986. The case law refer to in the cross objections is not apt to the present controversy as these cases deal with the meaning of the term 'manufacture' appearing in Section 2(f) of the Central excises and Salt Act under different situation.

9. From the impugned order we find that the Additional Collector after holding that the said M/s. Jaychem Product as the manufacturer proceeded to determine their eligibility for the benefit of exemption under Notification No. 175/86 and while doing so observed that M/s.

Jaychem "have to pay duty for the excess quantity cleared over 15 lakhs value and this is rightly demandable. M/s. Lupin Laboratories have themselves determined the duty liability and also paid the duty amount of Rs. 2,27,600/- which can be taken only as a payment made on behalf of M/s. Jaychem Product. However, this figure has not been confirmed by this Department. This require reworking by the concerned officer and duty liability determined and proper demand made after deducting the same amount of Rs. 2,27,600/-". In view of our finding that the respondents were the manufacturer, these observations and the findings so recorded also go. It is significant to note that no Show Cause Notice was issued to the said M/s. Jaychem nor they are before us and, therefore, we are not called upon to determine the eligibility of M/s.

Jaychem under Notification No. 175/86.

10. In the result, the impugned order-in-original is set aside. The concerned Additional Collector of Central Excise, Madras would now determine the duty liability of the respondents afresh in the light of our findings that the respondents were the real manufacturer and were not entitled for the benefit of exemption Notification No. 175/86.

11. In the result the appeal is allowed and the case is remanded as aforesaid. The cross objections filed by the respondents also stand disposed of accordingly.

12. I have gone through the above order recorded by the ld. Member (Judicial) but I have not been able to persuade myself to agree with the finding that the respondents were the manufacturers. For this reason I am recording this separate order :- 13. From the findings of the Additional Collector in the impugned order it is seen that the respondents were only supplying the raw materials to M/s. Jaychem Products, and exercising quality control but the Collector has observed that the entire manufacturing activity was undertaken by M/s. Jaychem Products. There is no finding that the respondents had got their goods manufactured under their own supervision or control by hiring shift or shifts at the SSI factory of M/s. Jaychem Products. In the case of Indica Laboratories Pvt. Ltd. v.Union of India, reported in 1990 (50) E.L.T. 210 the High Court of Gujarat has observed that 'loan licensees' are persons who hold licences under the provisions of Drugs and Cosmetic Act, 1944 but who do not have their own facilities to manufacture, hire shift or shifts in the factories of other manufacturers for carrying out manufacturing of P.P. medicines under their own control and supervision and out of their own raw materials. In respect of the loan licencees the Court has held that if they get their P.P. medicines manufactured at SSI factories belonging to somebody else but under own supervision or control and from their own raw materials 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 who may be merely limbs of factory owners. The Court has also held that loan licensees aspiring to get the benefit of the exemption Notification No.175/86 read with Notification No. 223/87 but be SSI units since large scale units or medium scale units would be out of the purview of the exemption notification which is meant for giving fillip to the manufacturing activities of SSI units. The relevant extracts being relevant from paras 4 and 16 of the judgment are reproduced below :- "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 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 74B 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 manufacturers 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-CE., 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 1 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 exemption notification. That so far as PP medicines manufactured by loan licensees at the petitioners' 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 the benefit of this exemption notification to loan licensees who manufacture their goods are aforesaid at the petitioners-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 petitioners' 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 views of para (2) and (3) of the exemption Notification No. 175/86 on the ground that they are ultra vires provisions of the Act and they are also ultra vires Article 14 of the Constitution.

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 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 scale 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 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 do 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." 14. 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 the 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 portion of raw materials and packing 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. Hence, I am inclined to agree with the finding of the Additional Collector that M/s Jay Chem Products as an SSI unit could alone be deemed as the manufacturers of the goods in question. However, in my view the Additional Collector erred in holding that in respect of clearances of goods of Lupin Laboratories valued at Rs. 17,67,989.07 duty only in respect of clearances of goods in excess of Rs. 15 lakhs in value was recoverable. Since the Additional Collector has observed that on the products belonging to Lupin Laboratories were produced with their brand name it follows that in terms of para 7 of Notification No.175/86 exemption under the said notification was not admissible in respect of the entire clearances of the goods belonging to M/s. Lupin Laboratories who having regard to their overall clearances were not eligible to exemption under SSI exemption under Notification No.175/86.

15. In view of the foregoing I hold that the entire production of goods by M/s. Jay Chem Products for supply to M/s. Lupin Laboratories would be chargeable to duty, and such duty was recoverable if otherwise permissible under the law.

16. I, therefore, remand the case to the adjudicating authority for de novo consideration of the duty recoverable in accordance with law, having regard to the proceedings in this order.

18. Since we have differed in our opinion the following question is referred to the Hon'ble President in terms of Sub-section (1) of Section 35D of the Central Excises and Salt Act for hearing on it :- (1) Whether in the facts and circumstances of the case the respondents M/s. Lupin Lab. (P) Ltd. is to be treated as a manufacturer of the goods in question as held by the Member (Judicial) or M/s. Jay Chem Products be treated as a manufacturer of the goods in question as held by the Member (Technical).

19. Needless to say that since the Judicial Member has not decided the question as to whether the Additional Collector erred in holding that in respect of clearances of goods of Lupin Laboratories valued at Rs. 17,67,985.07, duty only in respect of clearances of goods in excess of Rs. 15 lakhs in value was recoverable independently, in view of his [Member (J)'s] findings, that the respondents were to be treated as the manufacturers of the goods in question, he (Member, Judicial) would record his own findings, if necessary, on receipt of the opinion of the Hon'ble President Third Member, as the case may be, on the said question.

Sd/- Sd/- (P.K. Kapoor) (G.P. Agarwal) Member (T) (Member (J) 20. In the Misc. Order No. 58/95-C dated 12-12-1994, since the two Members, who heard the appeal from the revenue, had a difference of opinion, the matter has been referred to me, for the third member opinion as per the direction of the Hon'ble President.

21. The only question referred to the third member for opinion is as below : "Whether in the facts and circumstances of the case, the respondents M/s. Lupin Laboratories is to be treated as a manufacturer of the goods in question, as held by Member (J) or M/s. jay Chem Products be treated as a manufacturer of the goods in question, as held by Member (T)." 22. For that purpose the facts giving rise to the appeal are recorded below: 22.1 M/s. Lupin Laboratories (Respondents-hereinafter referred to as 'Lupin'), holding a loan licence issued under the Drugs and Cosmetic Act, filed a declaration under Notification 175/86 and claimed exemption under the said notification, in respect of drugs manufactured on their behalf in the factory of M/s. Jay Chem Products (hereinafter referred to as J.P.) declaring the value of clearances during the preceding financial year 1985-86 as 'nil', as they have started manufacturing from 1-9-1986 only. When the value of clearances in the factory of J.P. exceeded Rs. 10.00 lacs, both Lupin and JP took out Central Excise licences and filed classification lists separately on 5-1-1987, claiming concession under Notification No. 175/86. During the year 1986-87 (1-9-1986 to 31-3-1987) Lupin cleared drugs of a value of Rs. 17,67,985/- availing full exemption upto Rs. 15.00 lacs and the balance on payment of Central Excise duty, at the rate of 5% ad valorem. For the next financial year 1987-88, Lupin filed a classification list claiming exemption under Notification No. 175/86.

It is the allegation in the show cause notice that as per intelligence gathered, it was revealed that Lupin is having loan licence facility in a number of units in India and they also own a factory in Aurangabad manufacturing drugs and the value of clearances in their own unit in Aurangabad during 1985-86 was to the tune of Rs. 15.11 crores. It was therefore, alleged that Lupin is not eligible for availing exemption under Notification No. 175/86 for 1986-87. It was also alleged that the fact that Lupin had their own factory clearing goods more than Rs. 150.00 lacs and were having loan licence production in various other units was suppressed from the Department for availing the exemption Notification No. 175/86 with an intention to evading payment of duty on the drugs manufactured by them as loan licensee in the factory of J.P.It is also alleged that Lupin supplied all raw materials and packing materials for the manufacture of drugs and they were manufactured on payment of job charges to JP. Hence Lupin are alleged to be the manufacturer of the drugs. Hence it was proposed to demand the Central Excise duty from Lupin on the entire value of Rs. 17,67,985/-.

22.2 In reply to the show cause notice, it was contended by Lupin that the show cause notice is based on an erroneous understanding that they have manufactured P or P medicines at the premises of JP, which is not correct. Though they have supplied the raw materials to JP and also exercised quality control, the entire manufacturing activity was carried on by JP only, which is an SSI unit registered with the Director of Industries and hence are entitled for free clearance of drugs upto a value of Rs. 15.00 lacs of the first clearances. They bona fidely believed so and they were also told so by the excise authorities initially, when they approached them. They were forced to take out a Central Excise licence and to maintain all accounts after commencement of production. This does not mean that they are to be construed as manufacturer. Even after they took out a licence, many officers visited the factory and hence all their activities were within the knowledge of the officers. There is no justification to invoke the provisions of Section 11A of the Central Excises & Salt Act, 1944. Even the payment of Rs. 2,27,600/- towards the demand for 1-10-1986 to 31-3-1987 in respect of clearances of a value exceeding Rs. 15.00 lacs, is without prejudice to their contention that JP are the manufacturer and not the Respondents.

22.3 The Additional Collector of Central Excise, Madras, under his Order-in-Original No. 4/92 dated 17-2-1992, however, held that it is only under the Cosmetics & Drug Act, Lupin has to be construed as a manufacturer, as they hold a loan licence and permission to manufacture the drugs. But the position under the Central Excise Act is different.

It is found that place of manufacture is JP's factory. JP only could be construed to be a manufacturer and not Lupin. In fact, under Central Excises & Salt Act, there is no such thing as loan licensee.

Notification No. 175/86 also refers to 'factory' of manufacture only.

It is seen that Lupin only places orders on the JP, for manufacture according to their (Lupin's) specification as approved by the Drug Control Authorities. JP buys raw materials from the market and manufacture the drugs. Therefore, for Central Excise purposes, JP is the manufacturer. He also observed that there is no evidence that raw material is supplied by Lupin and even if so, it is not material as seen from the judgment of several Courts/Tribunal. Even in regard to loan licence arrangements of Lupin in other places, the factory owners only were treated as manufacturers and accordingly No. 175/86 was extended to clearances from the factory. Hence he dropped the allegation to the effect that Lupin is the manufacturer in respect of the entire value of Rs. 17.67 lacs. He confirmed the demand only in respect of value exceeding Rs 15.00 lacs, which JP should have paid then and there, when the value of clearances exceeded Rs, 15.00 lacs from their factory.

22.4 On appeal from the revenue, against the above order of the Additional Collector, it was heard by Special Bench 'C' in Delhi and in the Misc. Order, the difference of opinion on the question as to who is the manufacturer has arisen, which is to be considered by me now.

23. After hearing the elaborate arguments from both the sides, I am to discuss the following salient arguments, on facts recorded, from the ld. Counsel M.H. Patil.

23.1 It is not correct to say that all the raw materials were supplied by Lupin to JP for manufacture. He refers to the record of personal hearing, which was accepted by the Additional Collector to plead that they have indicated that only negligible raw material was supplied by Lupin to JP. Otherwise JP was allowed to buy the raw material, the cost of which was reimbursed by them to JP only exercised quality control to ensure that the drugs conform to the specification laid down under the Drugs and Cosmetics Act. They have not engaged the factory on shift basis nor they have exercised supervision on day to day manufacture.

They have not deployed any of their labour or supervisory staff for production. The entire manufacture is done only by JP, who are having the factory registered as SSI unit.

23.2 Another point on the factual position pleaded by Shri M.H. Patil, is that Member (T) Shri Kapoor has held that condition No. 7 of Notification No. 175/86 would be attracted, because the drugs manufactured in JP were cleared with brand name of Lupin. In this case the demand relates to the period 1-9-1986 to 31-3-1987 whereas condition No. 7 was inserted in Notification No. 175/86 by amending Notification No. 223/86, effective only from 1-10-1987. Hence condition No. 7 can not be held against them in the facts and circumstances of the case.

23.3 The facts narrated in their reply to show cause notice and the arguments based on those facts for pleading the time bar aspect of the demand have not been considered by any of the two members and no findings are given. If the demand per se is held to be time barred it is futile to consider the academic question raised for the third member's opinion.

24.1 On the basis of the above submissions made during the earlier hearing on 22-12-1993, I placed the matter before the President for considering whether the reference can be heard for giving my opinion.

The President has ordered that the reference may be decided by me and the third member has powers to deal with facts and law required to answer the question referred.

24.2 In the position in which, I am placed, I find only on the facts and law as may be relevant for considering the question referred to me, I can go into them for arriving at my opinion on the question referred.

It is not open for me to correct the findings of Member (T) Shri Kapoor holding that condition No. 7 of Notification No. 175/86 would be attracted, though on the facts of the case it would appear that condition No. 7 of Notification No. 175/86 inserted effective from 1-10-1987 may not be invoked in this case, because demand relates to period 1-9-1986 to 31-3-1987.

24.3 Likewise, it is not open for me to pronounce my judgment on the question of time bar of demand, because that is not the question referred to me.

24.4 It is for the Respondents to agitate those issues before the referring Bench, before the issue of the final order by that Bench, by seeking for a hearing, if they so desire. They cannot agitate these issues before a third member, whose jurisdiction is confined only to the point of difference referred to him.

24.5. As regards the contest in regard to factual position [vide argument sum in para 4.1 (23.1) above], I agree that I am to go into this position and determine the factual position and thereafter on that basis determine the point of law.

24.6 As regards Shri Patil's plea that only negligible raw material was supplied and Additional Collector's finding that there is no evidence regarding supply of raw materials by Lupin, I am to take note of their own submission in their reply to the show cause notice, against the specific allegation that they supplied the raw materials and packing materials- In para 2 of their reply to show cause notice, they have stated "Though we have supplied the raw material to M/s Jay Chem Products, and also exercised quality control, the entire manufacturing activities were carried on by M/s Jay Chem Products, which is a Small Scale Industry registered as such and are entitled for free clearances upto Rs. 15.00 lacs of the first clearances of P or P medicine manufactured by them." From the above, it is found that they did not contest the allegation that they supplied raw materials to JP. Hence, no burden is cast on the Department to bring in evidence for supply of raw materials by JP. What is not disputed, need not be proved by the Department. The Additional Collector's finding to that effect based on a mere plea that they were supplying only negligible raw material, cannot be acceptable, especially when Lupin have not produced any evidence to substantiate their revised stand during personal hearing.

When this was pointed out to Shri Patil, he agreed that the factual position as given out in their reply to show cause notice accepting the supply of raw material and exercising quality control, may be taken as correct and he would advance his argument on that basis, on the question of law.

25.1 The main plank of Shri Patil's argument is that the ratio of decision of Gujarat High Court in the case of Indica Laboratories Ltd. - 1990 (50) E.L.T. 210 (Guj.) would not apply to the facts of this case, so also the decision of Madras High Court Judgment in the case of Dukes Pharma reported in 1994 (69) E.L.T. 433 (Mad). He also referred other case laws in his support, which will be discussed in my findings in this order.

25.2 Shri V.K. Puri, the ld. SDR, on behalf of revenue pleads that once it is not disputed that Lupin are holding loan licence under the Drugs & Cosmetics Act, and only under that arrangement, they could manufacture drugs in another factory (not owned by them), they are to be regarded as manufacturer even under the Central Excise Act. The case laws holding that so long as the supplier of raw material and the job worker are independent and the transactions are on principal to principal basis would not apply in the case of P or P medicines, because no drug can be manufactured by any one without holding a licence under the Drugs & Cosmetics Act, Loan licensee is held responsible for all the manufacturing activities under the Drugs and Cosmetics Act, even in another factory. Hence the legal position is to be viewed in the context of the decision in the case of Indica Laboratories, where Gujarat High Court have held that such loan licensee can be regarded as manufacturer even under Section 2(f) of the Central Excise Act. Merely because, Lupin have not taken the factory on shift basis or they have not put their staff in JP's factory, it cannot be held that they are not manufacturer. Even if it is taken that they have taken out Central Excise licence under compulsion, they have not disputed that they filed a declaration for purposes of availing exemption under Notification No. 175/86. Such a declaration is called for only by the manufacturer intending to avail exemption. In the declaration, they have suppressed vital facts regarding their real status as owning a big factory elsewhere. SSI exemption is not meant for them. This has been observed by the Gujarat and Madras High Courts.

26.1 After hearing both the sides, on the legal question, first I would like to have a close look at the judgment of Gujarat High Court in Indica Laboratories case. In that case the High Court took note of the following factual position. The petitioners were SSI registered units manufacturing P or P medicine. They claimed exemption under Notification No. 175/86 as amended by Notification 223/87. In their factories, P or P medicines were also being manufactured by those persons who did not have their own facilities for manufacturing the drugs. Those persons hire shift or shifts at the factories of SSI units for manufacturing, under their own control and supervision and out of their own raw material, P or P medicines. These persons known as loan licensee, are given such loan licences under the provisions of Drugs & Cosmetics Act, 1944 read with the Drug and Cosmetics Rules, 1945. This practice is prevalent on a large scale in pharmaceutical industry. It was contended by the petitioners that the loan licensees, being small having no capacity or financial strength to have their own factories for manufacturing their own goods, are permitted under the loan licence to get their goods manufactured in another factory, by taking shift or shifts in that factory. Hence it was pleaded that both the SSI units owning factory as well as the loan licensees can claim the benefit of exemption contemplated in para 1 of the Notification No. 175/86 separately, They also challenged the vires of the provision contained in paras (2) and (3) of the said Notification. After hearing the rival contentions, the following points were framed for consideration by the Gujarat High Court.

"1. Whether the loan licensee 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 Articles 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?" 26.2 Shri M.H. Patil pleads that in that case, the facts considered by the Gujarat High Court relate to loan licensees, who take the SSI factory on shift or shifts and manufacture the medicines under their own supervision and control out of their own raw materials. In that factual position, Gujarat High Court have answered question No. 1 holding that loan licensee is a manufacturer. In the case of the respondents, they only supply raw material and exercise quality control. Hence such a loan licensee cannot be said to be covered by this judgment. According to him. Lupin, though having their own factory in Aurangabad, had to cater to a larger demand beyond the capacity of their own manufacturing units and hence they have taken loan licence for getting the medicines manufactured in the factory of JP, by supplying raw material. JP has carried out the entire manufacturing operation with their own labour and under their own supervision. The factory was not taken on shift/shifts basis by Lupin. Hence it would be wrong to treat Lupin as manufacturer, based on the judgment of Indica Laboratories.

26.3 I have carefully considered this plea, but unable to accept this proposition for the following reason : (1) There is no dispute that Lupin could not have supplied raw materials and got the goods manufactured in the factory JP without having the loan licence issued by the Drug Control authorities. The question considered by the Gujarat High Court relates to such loan licensees holding licence under the Drug and Cosmetics Act. Though in that case it was stated that such loan licensees did not have their own facilities for manufacture but manufacture drugs by supplying raw materials and engaging factories on shift basis for production under their supervision, the emphasis cannot be laid on this position for assuming the distinction and to differentiate the case on that basis. This is evident from a reading of the relevant provision of the Drugs and Cosmetics Act, 1940 and the Rules. Rule 69A of the said Rules framed thereunder deals with loan licensee.

Explanation reads as below: "(1) For the purpose of this rule, a loan licensee means a licence, which a licensing authority may issue to an applicant, who does not have his own arrangement for manufacturing but who intends to avail himself of the manufacturing facilities owned by licensee in para (2) 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." There is no requirement of taking the manufacturing unit on shift or shifts basis nor is there any requirement that manufacturing activity should be directly under the supervision and control of loan licensee. No doubt, it is stated in Explanation (1) that it is issued to a person who does not have his own arrangement for manufacture. In this case Lupin is having their own factory in Aurangabad for manufacture. But it is stated that they are to cater to a larger demand and hence they have obtained loan licence. From this it appears that even in a case where the applicant has a factory of his own, seeks for loan licence on the ground that his own arrangements for manufacture cannot cater to the demand made on him for such medicine, his application for loan licence can be considered. In this case, the admitted position is that Lupin holds such a loan licence. It is not the case of Lupin that loan licence was wrongly issued to them. Their challenge is only with regard to insistence for taking out central excise licence. In the context of the legal provision governing the issue of loan licence, and taking note of the admitted fact that loan licence has been correctly issued to Lupin, I am not persuaded to accept the plea of the ld. counsel that Indica Laboratory judgment will apply only to such loan licensees engaging an......on shift basis and exercising supervisory control and not to them.

(2) It is evident that loan licence is required, where the manufacturer does not have his own arrangements for manufacture (may be, as in the case, for catering to a larger demand) engages himself in manufacture of the quantity of medicines required for catering to a larger demand, in another factory. It may be that before the Gujarat High Court, the petitioners pleaded that in the case of loan licensees operating in their units, they did not have manufacturing facility and hence had to engage their factory on shift basis, which has been taken note of. On that ground, I cannot hold that Gujarat High Court seeks to draw a distinction in the category of loan licensees as one having no factory of their own and another having their own factory but not having enough capacity to cater to the larger demand for medicine. All loan licensees are governed by the same Drug and Cosmetics Rules and in the context of such loan licensees, I feel that Gujarat High Court have given their verdict, after appreciating the legal provision contained in the Drugs & Cosmetics Act as well as Section 2(f) of the Central Excise Act, that such loan licensees are manufacturers in their own right.

(3) I am fortified in making the above observation on a further reading of the said judgment. The Gujarat High Court took note of the provision of Rule 174A and 174B of the Central Excise Rules and held that such loan licensees can be treated as manufacturer within the meaning of these rules. They also took into account the judgment of the Division Bench of Gujarat High Court in the case of Jamnadas v. C.L. Nangia reported in AIR 1965 Gujarat 215 in the context of Section 2(1) of the Central Excise Act to hold that the term 'manufacture' shall include not only a person who employs hired labour but also a person getting goods manufactured through an independent contractor. From this it is evident that Indica judgment does not lay emphasis on hired labour by a manufacturer or taking a factory on shift basis or exercising supervision and control over manufacture. They have concluded that loan licensee is a manufacturer in his own right because he hold a loan licence under the Drugs and Cosmetics Rules and he would also fall within the definition of Section 2(f) of the Central Excise Act and be governed by provision of Rule 174A and 174B of the Central Excise Rules.

Hence Lupin's objection to taking out a Central Excise licence or filing a declaration for exemption from licensing control does not seem to have any support from the Gujarat High Court judgment.

(4) Moreover, in para 16 of the judgment (Indica Laboratories) discussing the final result, Gujarat High Court observed thus "It has also to be kept in view that loan licensees, who can aspire to get benefit of the exemption under Notification No. 175/86 read with Notification No. 233/87 must be SSI units. If they are large scale units or medium scale units, then of course, they will be out of the purview of the exemption Notification, as exemption notification is meant for SSI manufacturers only and is meant for giving fillip to their manufacturing activities". From the above observation contained in the judgment of Indica Laboratories, there can be no scope for doubt that loan licensee of this type having their own manufacturing unit in the large scale sector cannot claim the benefit of SSI as loan licensee. I am not persuaded to accept the contention that loan licensee, who is a small scale manufacturer having no factory of their own, has been held to be a manufacturer by the Gujarat High Court, and not the others. The above observation in the judgment itself shows that the High Court was aware of the large/medium scale units operating under the loan licence arrangement for getting the goods manufactured by supplying raw materials in another factory. The drugs are produced by loan licensees in another factory after satisfying that these factories are having infrastructure, capacity and testing facilities. Hence there is no requirement of deploying the staff of loan licensee either for production or for supervision. It would suffice if proper quality control is exercised over the final products to meet the requirement of Drug Control Act. This is admittedly done by the respondents. Hence it would appear to me that in the light of the Gujarat High Court judgment in Indica Laboratories case, Lupin could be treated as manufacturer.

26.4 But then, I would not like to hasten by conclusion based on my own reading of the Gujarat High Court judgment in Indica Lab. case, because Shri Patil has cited various case laws before me.

26.5 On a perusal of the various case laws cited by Shri Patil and referred to in the paperbook, I find that most of the judgments are in the context of a customer supplying raw material and getting the goods manufactured by a job worker. In these cases, it has been held that the customer cannot be held to be a manufacturer. But two of the judgments relate to loan licensees operating in another SSI unit. They are decisions by Special Bench of the Tribunal in SOL Pharmaceutical [1992 (57) E.L.T. 290 (Tribunal) = 1991 (37) ECR 638 (T)] and True Chem Pharma - 1991 (56) E.L.T. 690 (Tri.). In the decision of SOL Pharmaceuticals, the decision of Gujarat High Court in Indica Lab. was not specifically considered. However, in the decision of True Chem Pharma, the Judgment of Indica Lab. is profusely extracted. After considering the judgment of Indica Lab. the Bench consisting 3 members held that unless such loan licensees get their goods manufactured out of the raw materials supplied by them, by exercising supervision and control in another factory by hiring the factory on shift or shifts, they cannot be held to be manufacturer of medicine in the other factory. This view has been taken by three members which is contrary to the view, I have held, on my reading of Indica Lab. decision, as discussed in the earlier paras.

26.6 In such a circumstance, with no option available to a third member for placing the matter before a Larger Bench (since that is not in the question referred), I am to respectfully follow the decision of the Tribunal in True Chem Pharma reported in 1991 (56) E.L.T. 690 (Tri.) in deciding the question posed before me. Going by this decision, I am to hold that in the absence of any evidence brought out by the revenue to show that Lupin engaged the factory of JP on shift basis and produced the drugs under their own control or supervision, they cannot be held to be manufacturer. JP only could be construed to be manufacturer.

26.7 The question referred to has been answered accordingly and the papers may be placed before the referring Bench for further action.

26.8 Before parting with the order, I deem it necessary to invite the attention of the learned members of the referring Bench to certain points on factual position raised by the ld. counsel Shri M.H. Patil recorded in para 1 of my order, two of which could not be considered by me, because of the limited jurisdiction available to third member.

These points are open for consideration, if necessary by the referring Bench.

27. As per Office Order No. 73/96 dated 3-6-996 the present Bench has been constituted by the Hon'ble President for pronouncement of order in the present appeal.

28. From the record we find that the Third Member opinion was received in the Registry at Delhi on 8-4-1996 and no notice regarding pronouncement of order or for any other purpose was ever issued to either party to the present appeal. The ld. Third Member answering the question referred to him has held that M/s. Jay Chem Products (JP) only could be construed to be manufacturer [see paragraph 7.7(26.6) of his order].

29. From paragraph 5.2(24.2), 5.3(26.3) and 5.4(26.4) of the order of the Ld. Third Member dated 8-3-96 it is clear that the opinion of the Ld. Member Shri P.K. Kapoor that condition No. 7 of Notification No.175/86 would be attracted was challenged before him. To which the Ld.

Third Member stated that he cannot go into this question as it is not open for him to correct the said findings of Mr. Kapoor. Despite he could not restrain himself and stated that condition No. 7 of Notification 175/86 may not be invoked. Likewise, the contention that demand was time barred was also not considered by the ld. Third Member since he opined that it was not referred to him. After opining so he, in paragraph 5.4(26.4) stated that "It is for the respondents to agitate these issues before the referring Bench, before the issue of the final order by that Bench, by seeking for a hearing, if they so desire. They cannot agitate these issues before a third member, whose jurisdiction is confined only to the point of difference referred to him." After observing so he also observed in paragraph 7.9(26.8) as follows : "Before parting with the order, I deem it necessary to invite the attention of the learned members of the referring Bench to certain points on factual position raised by the ld. Counsel Shri M.H. Patil recorded in para 4 of my order, two of which could not be considered by me, because of the limited jurisdiction available to third member. These points are open for consideration, if necessary, by the refering Bench." 30. Under these circumstances, we feel that the judgment cannot be pronounced in the instant case as the notice has to be issued to the parties concerned in this regard so that they may appear if so desire.

A copy of the order shall be sent to both parties along with the notice of hearing to be issued.

Sd/- Sd/-(G.R. Sharma) (G.P. Agarwal) Member (T) Member (J) 31. When the file was listed for pronouncement of the order, it was noticed by the Bench that the Third Member had made the following observations in para 4.2(23.2) and 4.3(23.3) of his order : "4.2 Another point on the factual position pleaded by Shri M.H. Patil, is that Member (T) Shri Kapoor has held that condition No. 7 of Notification No. 175/86 would be attracted, because the drugs manufactured by JP were cleared with brand name of Lupin. In this case, the demand relates to the period 1-9-1986 to 31-3-1987 whereas condition No. 7 was inserted in Notification No. 175/86 by amending Notification No. 223/87, effective only from 1-10-1987. Hence Condition No. 7 cannot be held against them in the facts and circumstances of the case.

4.3 The facts narrated in their reply to show cause notice and the arguments based on those facts for pleading the time bar aspect of the demand have not been considered by any of the two Members and no findings are given. If the demand per se is held to be time barred, it is futile to consider the academic question raised for the Third Member's opinion." It was therefore, ordered that a notice should be issued to the parties concerned before pronouncement of the order. Accordingly S/Shri A.K.Madan, SDR appeared for the appellant and Shri M.H. Patil, Advocate represented the respondents.

32. We heard the submissions made by both the sides. We find that insofar as the observations of the Third Member in para 4.2(23.2) are concerned, it is a factual mistake, the same is rectified by amending the last 9 lines starting from "Since the Additional Collector........... under Notification No. 175/86." In this case, the demand relates to the period 1-9-1986 to 31-3-1987 whereas condition No. 7 was inserted in Notification No. 175/86 by amending Notification No. 223/87, effective only from 1-10-1987. Hence the condition No. 7 cannot be held against them in the facts and circumstances of the case.

Para 3(15) of the order of Shri P.K. Kapoor shall be amended to read as "In view of the foregoing, we hold that condition No. 7 inserted by Notification No. 223/87, dated 1-10-1987 will not be applicable in this case." 33. Insofar as the question of limitation is concerned, we find that the respondents in their reply to the show cause notice have stated that "the demand of Rs. 21,292.85 relating to the month of Sept. 1986 being time barred, payment has been restricted to the period from 1-10-1986 to 31-3-1987." The ld. Additional Collector in his order-in-original has simply commented the contentions of the respondents reading as "It was added that Section 11A provision will not apply to them as the factory was visited by the Central Excise Officers periodically and they filed the returns regularly inasmuch as they have taken out the licence, they requested to drop the proceedings." We do not see any discussion or rebuttal of these contentions. We observe that the respondents in their reply to the show cause notice had claimed limitation only in respect of the demand for the month of Sept. 1986. Though at the time of personal hearing, the appellant extended the scope of their contention however, having regard to the facts of the case and the contentions of the appellant in the show cause notice and having regard to the fact there is no rebuttal we hold that the demand for the month of Sept. 1986 alone is time barred.

34. The majority order will be that we hold that in the absence of any evidence brought out by the Revenue to show that Lupin Laboratories engaged the factory of M/s. Jay Chem Products on shift basis and produced the drugs under their own control of supervision, they cannot be held to be manufacturer. M/s. Jay Chem. Products only could be construed to be manufacturer.

Sd/- Sd/-(Archana Wadhwa) (G.R. Sharma) Member (J) Member (T)