Loan licensee not treated as manufacturer for excise exemption; September 1986 demand also failed on limitation.

A loan licensee supplying raw materials and exercising quality control was not treated as the manufacturer for central excise purposes because the goods were not shown to be made under its direct supervision or control on a shift basis in the other factory; the SSI exemption under Notification No. 175/86-C.E. was therefore unavailable on that footing. The demand for September 1986 was separately held time barred under Section 11A because the limitation objection was raised and not effectively displaced. The excise liability was thus sustained on the manufacturer issue, but the September 1986 demand was excluded on limitation.

---

---

Issues: (i) Whether a loan licensee who supplies raw materials to another factory and exercises quality control, without taking the factory on shift basis or proving direct supervision and control over manufacture, is to be treated as the manufacturer for central excise purposes and entitled to the small scale exemption under Notification No. 175/86-C.E. dated 01-03-1986; (ii) whether the demand for the month of September 1986 was barred by limitation under Section 11A of the Central Excises and Salt Act, 1944.

Issue (i): Whether a loan licensee who supplies raw materials to another factory and exercises quality control, without taking the factory on shift basis or proving direct supervision and control over manufacture, is to be treated as the manufacturer for central excise purposes and entitled to the small scale exemption under Notification No. 175/86-C.E. dated 01-03-1986.

Analysis: The majority adopted the view that a loan licensee is not automatically the manufacturer for excise purposes merely because it holds a drug licence and supplies raw materials. The decisive feature was whether the goods were manufactured in the other factory under the loan licensee's own supervision or control by hiring shifts. On the facts found, there was no evidence that the factory of the job worker had been taken on shift basis or that manufacture was carried out under such direct supervision and control. The majority therefore followed the view that, in the absence of those features, the job worker in whose factory the goods were actually produced is to be treated as the manufacturer for excise purposes, and the loan licensee cannot claim SSI exemption in its own right on that basis.

Conclusion: The loan licensee was not the manufacturer for central excise purposes and was not entitled to the exemption under Notification No. 175/86-C.E. on that footing.

Issue (ii): Whether the demand for the month of September 1986 was barred by limitation under Section 11A of the Central Excises and Salt Act, 1944.

Analysis: The respondents had specifically questioned the demand for September 1986 as time barred, and the adjudicating order did not effectively rebut that contention. The majority accepted that the limitation plea was made at least in respect of the September 1986 demand and found no adequate discussion to displace it. Accordingly, the demand for that month alone was treated as beyond limitation.

Conclusion: The demand for September 1986 was time barred.

Final Conclusion: The central excise liability was upheld on the manufacturer question, but the September 1986 demand was excluded on limitation, leaving the matter only partly sustained against the assessee.

Ratio Decidendi: A loan licensee is not to be treated as the manufacturer for central excise purposes unless the goods are manufactured in the other factory under its own supervision or control on a shift basis; a limited demand may still fail if it is time barred.

---