Who will be the manufacturer?

PJ/Case Laws/2011-12/1373

Case: CCE, Mumbai v/s Vikram Ispat

Citation: 2011 (271) ELT 587 (Tri. – Mumbai)

Issue:- Supplier of plant, equipment and personnel also selling the finished goods at higher prices can be termed as main manufacturer?

Brief Facts:- Praxair entered into an agreement with Respondent to manufacture pure/refined carbon dioxide out of the impure carbon dioxide arising in the manufacture of sponge iron by the latter. To enable Respondent to purify carbon dioxide in their factory, Praxair supplied plant and equipment on lease basis and also supplied personnel at the premises of Respondent. Respondent sold the entire carbon dioxide to Praxair at a contract price of Rs. 4.31 per kg. whereas M/s. Praxair sold the goods subsequently at a higher price.

Department alleged that Praxair are the real manufacturers of the pure carbon dioxide and hence they were liable to pay duty at the price at which they have sold the goods and accordingly two show-cause notices were issued, one demanding differential duty of Rs. 43,35,687/- for the period from May to December 2000 and another demanding a differential duty of Rs. 50,26,540/- for the period from January 2001 to June 2001. Penalty under Rule 173Q, 209 and 226 of the Central Excise Rules, 1944 read with Section 11AC of the Central Excise Act, 1944 was also proposed to be imposed. There was also proposal to confiscate the excisable goods produced and also plant and machinery used in the manufacture thereof under provisions of said Rule 173Q.

The Commissioner observed that the factory in which gas is produced were registered in the name of Respondent both under the Factories Act as also under Rule 173(U) of the Central Excise Rules, 1944. The entire electrical power required for the whole applications including in the carbon dioxide plant was generated by Respondent and the raw material, namely, impure carbon dioxide was also manufactured by Respondent. Praxair is only a buyer of the purified carbon dioxide and they are engaged in the trading of the said goods purchased from Respondent and they hold a dealer's registration issued by the department for the said period. As regards the equipment supplied by Praxair to Respondent it was given on lease basis. The Commissioner concluded that in the light of these facts, Respondent has to be treated as the manufacturer and not Praxair. The Commissioner also observed that from the agreement it can only be concluded that there is mutuality of interest between the two units. Therefore, if at all the department wants to demand duty on the value at which Praxair sold the goods, then the department has to establish financial flowback between the two and issue show-cause notice accordingly and they cannot treat Praxair as a manufacturer under Section 2(f). Accordingly, the Commisioner dropped the proceedings initiated under the show-cause notices.

Department is in appeal against the said order before the Tribunal.

Appellant’s Contention:- Revenue contended that even though the Commissioner observed mutuality of interest between Praxair and Respondent, he failed to hold M/s. Praxair as the manufacturer in view of the fact that Praxair has other units manufacturing carbon dioxide and the entire machinery used for the manufacture of carbon dioxide and employees required therefore were supplied by Praxair.

Respondent’s Contention:- Respondent submitted that though the facility for liquefier and purifier of carbon dioxide has been set up by Praxair, the same facility has been leased out to them who are paying lease rental charges. Further, even though Praxair maintains the facility and operates the same, Respondent pays charges towards operation and maintenance in accordance with the agreement entered into between the two parties. The personnel provided by Praxair is only for operational and maintenance work for which Respondent pays charges. In view of this position, Praxair who is merely a lesser of the equipment and undertakes maintenance operation activity cannot be deemed to be manufacturer and Respondent has to be held as the manufacturer. In view of the above, they submit that the appeal filed by the department has no merits.

Reasoning of Judgment:- The Tribunal perused the agreement for establishment of carbon dioxide purification and liquification facility and products purchase dated 6-12-1999 entered into between the two parties. It was noted that Para 1.4 of the said agreement provided that –

"The facility equipment shall be got fabricated, purchased, imported or otherwise procured by Praxair at its own cost and shall be leased to Respondent for the term of this Agreement. Respondent shall pay to Praxair, as hereinafter provided, lease rent for the facility equipment, commencing from the date of first sale of carbon dioxide by Respondent to Praxair from the facility."

It is therefore very clear that the leasing of the facility and its operation and maintenance is not done free of any charges but Respondent has to bear the cost by way of rental charges and operational and maintenance charges. Therefore, the transactions between the two are on a principal to principal basis.

It was noted that the entire show-cause notice proceeds on the assumption that since the equipment has been leased out by Praxair and they operate and maintain the facility they have to be deemed as 'manufacturers'. However, this proposition has no legal basis whatsoever, in the Mahico Seeds [2005 (182) E.L.T. 163] the Bombay High Court held that raw materials supplier could not be treated as manufacturer under Section 2(f) of the Central Excise Act. Similarly, in the case of M.M. Khambhatzonla [1996 (84) E.L.T. 161], the Apex Court held that "goods produced by household ladies in their own premises out of the raw materials supplied by the respondent who paid wages on the basis of number of pieces manufactured - in such cases, the household ladies have to be treated as manufacturer of the goods and the goods cannot be said to have been manufactured on behalf of the respondent.

The Tribunal held that in the instant case, the raw material namely impure carbon dioxide has been manufactured by Respondent and the cost of manufacturing has been borne by them. That being so, there is no way it can be held that they are not manufacturers. Accordingly, it was held that the transaction between Respondent and Praxair are between principal to principal basis and the price at which Respondent has sold the goods to Praxair is the price at which duty liability has to be discharged, in the absence of any evidence indicating that the transactions were not at arms length and there were additional considerations flowing from Praxair to Respondent.

Decision:- Appeal rejected.

Comment:- This decision clearly says that when the agreement between the parties is on principal to principal basis then the purchaser of goods cannot be termed as deemed manufacture. But if the position is reverse then he can be said as manufacturer liable for payment of Excise duty.

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PJ/Case Laws/2011-12/1373

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