Principal-to-principal subcontracting cannot make an assessee the manufacturer; duty, limitation, interest and penalty fail.

An assessee that has no manufacturing facility and fully subcontracts production to independent contractors on a principal-to-principal basis is not the manufacturer of the goods; the contractors are the actual manufacturers, so duty cannot be fastened on the assessee. Where that position is accepted, the extended period of limitation is unjustified and the consequential duty demand, interest and penalty cannot survive. The record also supported a bona fide belief of non-liability, reinforcing the absence of suppression or mala fide conduct. The impugned order was set aside and relief followed.

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Issues: (i) Whether the appellant could be treated as the manufacturer of the goods when the work was fully subcontracted to independent contractors on a principal-to-principal basis. (ii) Whether the extended period of limitation, duty demand, interest and penalty could be sustained in the facts of the case.

Issue (i): Whether the appellant could be treated as the manufacturer of the goods when the work was fully subcontracted to independent contractors on a principal-to-principal basis.

Analysis: The appellant had no manufacturing facility of its own and had entrusted the entire work to subcontractors who raised bills on the appellant and were paid accordingly. On the record, the subcontractors carried out the actual manufacture of the impugned items, and the relationship was found to be one of principal to principal. The appellant, therefore, was not established to be the real manufacturer for the disputed goods.

Conclusion: The appellant was not the manufacturer; the subcontractors were the actual manufacturers.

Issue (ii): Whether the extended period of limitation, duty demand, interest and penalty could be sustained in the facts of the case.

Analysis: The appellant's conduct indicated a bona fide belief regarding non-liability to duty, and the repeated reduction of the demand in successive adjudications supported that belief. Once the appellant was held not to be the manufacturer, no duty could be demanded from it, and the consequential levy of penalty could not survive. The invocation of the extended period was also not justified.

Conclusion: The extended period, duty demand, interest and penalty were not sustainable.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: Where the assessee merely subcontracts the entire work to independent contractors acting on a principal-to-principal basis and the contractors are found to be the actual manufacturers, duty, penalty and extended limitation cannot be enforced against the assessee.

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