Job-worker manufacture and Modvat-linked exemption: supplier not treated as manufacturer after discontinuing the framework.

Where master batches were physically manufactured by a job worker using materials supplied by the assessee, the supplier could not be treated as the manufacturer merely because the challans referred to the job-work procedure. The exemption arrangement under Notification No. 214/86-C.E. operated within the Modvat framework and depended on the supplier's undertaking for duty liability on the finished product. Once the assessee discontinued Modvat and informed the department, the earlier declaration ceased to apply for the relevant period. Accordingly, duty demand and penalty were unsustainable, and no liability attached to the supplier as manufacturer.

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Issues: Whether the appellant could be treated as the manufacturer of master batches cleared by the job worker and made liable to duty and penalty under the exemption arrangement.

Analysis: The master batches were physically manufactured by the job worker out of materials supplied by the appellant. The reference in the challans to Rule 57F(2) did not, by itself, make the appellant the manufacturer. The exemption arrangement under Notification No. 214/86-C.E. operated in the context of the Modvat procedure and depended on the supplier's undertaking to bear duty liability on the finished product. Once the appellant discontinued Modvat and informed the department, the earlier declaration ceased to have effect for the relevant period.

Conclusion: The appellant was not the manufacturer and was not liable to duty. The penalty also could not stand.

Final Conclusion: The demand of duty and the penalty were unsustainable, and the appellant obtained complete relief on the substantive dispute.

Ratio Decidendi: Where manufacture is carried out by a job worker, the supplier of inputs cannot be treated as the manufacturer merely because documents refer to the job-work procedure, and liability under the exemption arrangement cannot continue after the supplier has ceased to follow the underlying Modvat framework.

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