ORDER
S.V. Maruthi, Member (J)
1. The appellants a partnership firm manufacture coloured pencils. The raw materials required for manufacture of coloured pencils i.e. wooden slate, synthetic colours etc., packing material (all duty paid) were supplied by M/s. Lions Pencils Pvt. Ltd., Bombay free of charge. Originally, a contract was entered into vide letter dated LPL/10/1825/75 dated 5th October, 1975, under which the appellants were to be paid Rs. 3.50 for gross as labour charges. The contract is subject to renewal. After the manufacture, the colour pencils were sent back to M/s. Lions Pencils (P) Ltd., Bombay. While so a Show Cause Notice dated 26th Aug., 1980 was issued on 5th September, 1980 proposing to recover duty on the pencils manufactured by them for the period 18th June, 1977 to 28th Feb., 1978; 1st March 1978 to 28th Feb., 1979; 1st March 1979 to 31st March 1980; 1st April 1980 to 15th April 1980 on various grounds inter alia that they are manufacturing pencils on behalf of M/s. Lions Pencils (P) Ltd. On receipt of reply the Collector confirmed the demand. The appeal to the Board was rejected. The appellants against the order of the Board preferred a revision to the Central Government which was transferred to this Tribunal on its constitution.
2. The appellants raised the following contentions :-
That they are independent manufacturers and their transactions with M/s. Lions Pencils Pvt. Ltd. is Principal to principal basis; That the price for labour charges which includes their profit was subject to revision from time to time consistent with rise in prices. The appellants it is submitted, are real manufacturers equipped with a factory and know-how to manufacture pencils. M/s. Lions Pencils Pvt. Ltd. are trading in pencils albeit manufacturing pencils elsewhere on their own account. The appellants and M/s. Lions are two independent legal entities as M/s. Lions Pvt. Ltd. is a limited company; whereas they are a partnership concern. M/s. Lions Pvt. Ltd., have not supervised the manufacturing; they accept the goods after testing the quality and whenever the goods of a particular lot did not meet their standard; they have either rejected lots or paid for the same at lower rates. It is also submitted that the appellants have their own industrial licence, factory licence, registration, maintain their own records, for sales tax, income tax. Therefore, they are independent manufacturers and the manufacture of pencils by the appellants cannot be treated as manufacture on behalf of the M/s. Lions Pvt. Ltd., and it cannot be clubbed with the production of M/s. Lions Pvt. Ltd. In support of their contentions that they are independent manufacturers they relied on Ujagar Prints, etc. v. Union of India – 1988 (38) ELT P 535 (SC); Hindustan Everest Tools Ltd. v. Collector of Central Excise – 1989 (39) ELT P 662 (T); C.C.E., Madras v. Modoplast Pvt. Ltd., Coimbatore – 1985 (21) ELT 187 (T), Metal Box India Ltd. v. C C.E., Calcutta 1986 (23) ELT P 187(T).
3. The second contention raised by the appellants is that the Show Cause Notice is barred by limitation. It is submitted that pencils fall under T.I.68. Excise duty was first levied under T.I. 68 in the year 1975. Under Notification No. 54/75 dated 1st March 1975 and 10th May 1976 the pencils are exempt from payment of duty as they employed less than 49 to 50 workers. From 18th June 1977 to 13th March 1979 small scale units where capital investment as plant and machinery did not exceed ten lakhs, were exempt from duty up to thirty lakhs in a full financial year; upto 24 lakhs for the period 18th June 1977 to 31st March 1978. Since the capital investment of their plant and machinery is 3 lakhs and their clearance in each financial year 1977-78, 1978-79 less than thirty lakhs they were exempt from payment of duty. The period between 1st April 1979 and 18th June 1980 the exemption is by Notification No. 89/79, dated 1st March, 1979. It is also submitted that the Central Excise officers were visiting the factory from time to time; and they were posted with the knowledge of the removal of the goods and there was no clandestine removal of goods. On 18th January, 1980 one Balayya visited the factory and after inspecting the same advised the appellants to take out a licence. By a letter dated 22nd Jan., 1980 the appellants sought clarification from the jurisdictional Supt. Again on 3rd Feb., 1980 they wrote another letter where they pointed out the visit of Asstt. Collector, and also brought to the notice the observations of the Asstt. Collector and Superintendent that their factory does not come under Excise purview as long as their job work charges do not reach to the range of 15 lakhs. On 4th March 1980 Shri Balayya again visited and insisted that the appellants should obtain a Central Excise licence. However, the appellants submitted that they have ignored this letter as the other officers opined differently. Therefore, it is submitted that there is no suppression of facts, fraud, collusion etc. and the Show Cause Notice is barred by limitation. At any rate it is submitted that the notice is barred for the period 18th June 1977 to 15th April 1980.
4. In reply Shri Arora submitted that the appellants are manufacturing on behalf of the manufacturer, the value should be clubbed with the value of the supplier of the raw material. His further submission is that even if the department is posted with the knowledge of the manufacture of the pencils by the appellants it is the responsibility of the appellants to correctly calculate the duty and pay. In support of their contentions he relied on the judgment of the Supreme Court in Jayshree Chemicals….
5. Taking up the first contention that the appellant is an independent manufacturer and therefore his production and clearance of pencils cannot be clubbed with the production and clearance of M/s. Lions Pencile Pvt. Ltd., there is no dispute that M/s. Lions Pvt. Ltd. supply only raw material and the appellant by utilising the raw materials bring into existence pencils that is a new product. Therefore, the fact that the appellant manufacture pencils is not a disputed fact. But the question is whether their production is liable to be subjected to duty independently or clubbed with the production of M/s. Lions Pencils Pvt. Ltd.
6. Admittedly, it is not the case of the department that the appellants are a dummy and a faked unit and were working under the direct control or supervision of the supplier of raw material and the transactions were not on principal to principal basis. Both the appellants and M/s. Lions Pencils Pvt. Ltd. are independent units having distinct and separate identity having different management, and having no control and supervision over the other. The appellants own their factory and have an industrial licence in their own name and manufacture goods as an independent contractor with the raw material supplied by M/s. Lions Pencils Pvt. Ltd. [C.C.E., Madras v. Modoplast (P) Ltd. – 1985 (21) ELT P 187]. It is also not the case of the respondents that the appellant is an agent of M/s. Lions Pencils Pvt. Ltd. [Metal Box India Ltd. v. C.C.E. -1986 (23) ELT P 187]. Therefore, we are of the view that the appellants are independent manufacturers and they are liable to pay duty on the pencils manufactured by them.
7. In Ujagar Prints etc. v. Union of India [1988 (38) ELT P 535] it was held that Excise Duty is imposed on production or manufacture of goods. This is quite independent of the ownership of goods. Therefore, the value and goods produced on job work basis, for the assessment under Section 4 of the Excise Act will not be the processing charge alone but the intrinsic value of processed fabrics which is the price at which the fabrics are sold for the first time in the wholesale market. In other words, the assessable value would, therefore, include the value of the material supplied to the processor plus the value of job work done plus manufacturing profits and manufacturing expenses whatever would be included in the price at the factory gate.
8. Therefore, since the appellants manufacture pencils out of the raw material supplied by M/s. Lions Pencils Pvt. Ltd. they are liable to pay duty on the pencils manufactured by them and the said duty is payable on the assessable value which includes the value of the raw material supplied to them by M/s. Lions Pencils Pvt. Ltd., thus the value of job work done, plus manufacturing profits and manufacturing expenses that was included in the price at the factory gate.
9. It is true that this Tribunal in H. Guru Instruments v. Collector – 1986 (27) ELT 269 held, that where the appellants (in that case) supplied raw materials to M/s. I.E.C. and the latter manufactured scientific and industrial instruments therefrom as per specifications of the appellants, the instruments so manufactured bore the brand name and ISI mark of the appellants, and they were also marketed by the appellants just like similar instruments in their own factory, the status of M/s. I.E.C. was only that of hired labour. However, in the order there is no reference to the judgment of the Supreme Court in Ujagar Prints. Secondly, there is also no reference to the earlier cases of 3 member bench in Modo Plast and Metal Box India Ltd. Therefore, the order in H.S. Guru Instruments Ltd. is not relevant.
10. We, therefore, are of the view that the appellants are independent manufacturers and the duty is payable on the assessable value to be determined in accordance with principle laid down in Ujagar Prints case (supra).
11. The next question to be determined is whether the Show Cause Notice is barred by limitation.
12. The Show Cause Notice dated 26th Aug. 1980 issued on 5th Sep., 1980. The contention of the appellant is that from 1st March 1975 to 10th May 1976, the pencils are exempt from payment of duty as they employed less than 49 to 50 workers. Therefore, the remaining period is from 18th June to 15th April 1980. The liability to pay duty depends on whether production of appellants exceed the maximum limit prescribed in the relevant notification. The department can recover the duty provided the Show Cause Notice is within the period of limitation.
13. The allegations in the Show Cause Notice are that “raw materials are supplied by M/s. Lions Pencils Pvt. Ltd. free of charge, the ownership of raw materials vested in M/s. Lions Pencils Ltd., and it could not be said that ownership have passed on to appellants in the absence of any payments for these raw materials. The pencils are manufactured as per the directions and specification of M/s. Lions Pencils Ltd. The finished goods were sent to the customers for sale by the customer. Even packing materials are supplied by M/s. Lions Pencils. Hence, it would amount to manufacture of pencils for and on behalf of M/s. Lions Pencils.”
14. In other words, the allegations in the Show Cause Notice are that inference from the circumstances indicate that the manufacture by appellants is on behalf of M/s. Lions Pencils Pvt. Ltd. However, according to the Supreme Court in Ujagar Prints (supra) the circumstances indicate that the appellants are independent manufacturer. In other words, according to the department, the legal inference that is to be drawn from the above fact is that it is a manufacture on behalf of the supplier of raw material whereas the Supreme Court took a different view of the matter. Where the liability to pay duty depends on the legal inference to be drawn from the facts, and there is a possibility of taking two views, it is difficult to hold that the department is entitled to invoke larger period of limitations. Declaration by the appellants as manufacturer does not amount to mis-declaration in view of the Supreme Court judgment in Ujagar Prints. Therefore, the department cannot invoke the larger period of limitation.
15. We, therefore, direct the Asstt. Collector to work out the aggregate value of the clearances for the period which falls within a period of six months prior to the issue of Show Cause Notice in accordance with the principle laid down by the Supreme Court in Ujagar Prints (supra). The appeal is, disposed of accordingly.