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M/s. Food & Health Care Specialities, M/s. Heinz India Private Ltd. Versus CCE, Delhi-IV

2015 (7) TMI 432 - CESTAT NEW DELHI

Valuation of Glucon-D - Job work - whether job worker can be treated as related person and Job work charges are not at arm's length price - Clearance of Glucon-D on the basis of cost of raw-material received plus job charges plus the profit margin - revenue sought the duty on sales price of the goods - Held that:- A job worker and the principal manufacturer can be treated as related persons only when the terms of the job work are such that the job worker is not free to charge the job charges as .....

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y the assessable value of the goods manufactured by FHS would have to be determined in accordance with the Apex Courtís Judgment in the case of Ujagar Prints and Ors. vs UOI [1989 (1) TMI 124 - SUPREME COURT OF INDIA] i.e. aggregate the cost of the raw material, job charges and job worker s profit and not the price at which the goods were being sold by Heinz form their depots and as such the judgments in the case of S. Kumars vs CCE [2005 (11) TMI 71 - SUPREME COURT OF INDIA] would not be applic .....

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iling of these appeals are, in brief, as under:- 1.1 M/s.Food Health Care Specialities, Plot No.135, Sector-24, Faridabad (hereinafter referred to as FHS) are engaged in blending and packing of various food products including Glucon D and Complan. The period of dispute in the present case is from 01.10.2000 to 28.02.2002. During this period FHS in terms of their agreement with M/s. Heinz India Pvt. Ltd., Aligarh (hereinafter referred to as Heinz) were blending and packing Glucon D and Complan on .....

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of the products of Heinz strictly confidential. (c) The product shall be delivered after packing to Heinz or at the destination directed by Heinz for which FHS would receive a mutually agreed upon charges. (d) FHS were blending and packing the products for Heinz out of raw-material and packing material supplied by Heinz and FHS were to ensure that the manufacturing and handling loss does not exceed 1.5% and FHS shall disclose all the necessary information, data, workings, cost and other expenses .....

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any time enter upon and inspect FHS factory premises to examine and supervise the process or method of blending and packing of the product and Heinz may also get the products quality tested in its quality control Department. (i) FHS is to comply with the entire requirement under Food laws, taxation laws, labour and safety laws pertaining to its business and FHS shall indemnify Heinz if any liability under this statute is incurred by Heinz on account of these by FHS. (j) The agreement between FHS .....

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ere clearing the blended and packed Glucon D to Heinz on payment of duty on the value determined in terms of the Apex Court judgment in the case of Ujagar Prints and others vs. Union of India reported in 1989 (39) ELT 493 (SC), that is, on the basis of cost of raw-material received plus job charges plus the profit margin of FHS. 1.3 Sometime in October, 2000, the Department initiated enquiry and also analyzed the terms of the agreement between FHS and Heinz to ascertain as to whether the same ar .....

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, FHS had started paying duty on the value determined in accordance with the Apex Court s judgment in the case of Ujagar Prints (supra). The Department after enquiry and on going through the terms of the agreement was of the view that the transactions between FHS and Heinz are not on principal to principal basis. It is on this basis that the department was of the view that the assessable value of the glucon-D cleared by FHS to Heinz would be the sale price of the product by Heinz from their depo .....

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value-ing their finished product 3 CE-20/R-VI/F&HCS/SCN/2002/3264 dated 17.07.2002 4,02,95,824/- 1.7.2001 to 28.02.2002 Evasion of duty by undervalue-ing their finished product 1.4. The above three show cause notices were adjudicated by the Commissioner by a common Order-in-Original No. 26, 27 & 28/RH/Adj/2004 dated 31.08.2004 by which the Commissioner held that the transactions between FHS and Heinz are not on principal to principal basis, as FHS in terms of their agreement with Heinz w .....

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s 1944/Rule 25 (1) of Central Excise Rules, 2001 and also penalty of same amount on Heinz under Rule 173 Q (1) of Central Excise Rules 1944 read with Rule 25 (1) of Central Excise Rules, 2001 and also another penalty of ₹ 2.00 Crores on the under Rule 209 A of the Central Excise Rules, 1844/ Rule 26 of the Central Excise Rules 2001. 1.5. Against this order of the Commissioner these appeals have been filed. 1.6. The above appeals were earlier decided by the Tribunal vide order dated 12.01.2 .....

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incipal manufacturer are not at arm s length and the two are related person, the formula prescribed in the Apex Court s judgment in the case of Ujagar Prints (supra) would not apply and that in such a case, the Apex Courts judgement in case of Commissioner vs. S.Kumars reported in 2005 (190) ELT 145 (SC) would apply and the price at which the goods were sold by Heinz would be the assessable value-, that the Tribunal did not address this aspect of the matter, as it did not consider whether the as .....

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s viz., the processor and the merchant- manufacturers/traders, in the former. In short, S. Kumars holds that if the processor-assessee is not at arm s length with the merchant-manufacturer and is a related person, the formula prescribed in Ujagar Prints (III) would not apply and assessable value for the purpose of levy of excise duty will have to be determined in terms of the ratio of S. Kumar i.e. in accordance with the procedure contemplated in Section 4(1)(b) of the Act read with the relevant .....

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for the Tribunal to examine in depth the agreement between the Assessee and Heinz as also any other additional material, the parties may like to adduce and determine the question whether or not both of them are related persons. 13. Resultantly, the appeals are allowed and the matter is remanded back to the Tribunal for the purpose of determining the nature of relationship between the Assessee and Heinz. If it is found that they are not related persons, then the present decision of the Tribunal .....

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that the transactions between them cannot to be at to be end arm s length and FHS and Heinz are related persons; and (b) If the Tribunal finds that FHS and Heinz are related persons, it shall remit the matter to the adjudicating authority for fresh determination of the assessable value of the goods in question in accordance with law. 2. Accordingly, the matter was heard on 08.05.2015, 11.05.2015, 12.05.2015 & 13.05.2015. 3. Shri B.L. Narasimhan, Advocate, the ld. Counsel for the appellant, .....

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ated; that merely providing of production schedule by Heinz to FHS does not vitiate the independence of FHS, that clause 7 and 12 of the agreement providing that FHS shall limit the manufacturing / handling loss to 1.5% and the finished product which are not found as per the specifications of Heinz shall be rejected and the expenses shall be debited against the amount payable to FHS are not at all interlinked and each has its own commercial relevance in an arm s length transaction; that providin .....

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rs to believe that they are an agent of Heinz, that this clause of the agreement itself is a proof that the transactions between FHS and Heinz on principal to principal basis and FHS cannot be treated as an agent or hired labour of Heinz, that from the very first clause of the agreement, it is clear that the factory of FHS was set up by them with their own investment in land, plant and machinery, that FHS apart from the job charges, do not receive any other monetary benefit, directly or indirect .....

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se of Smithcline Beecham Asia Ltd. Vs.CCE, Vishakhapatnam reported in 2004 (168) ELT 40 (Tri. Bang.) has held that when the job worker has set up his factory with his own finance and functions independently, the job worker and the principal manufacturer cannot be treated as related persons and the value of the goods manufactured by the job worker shall be determined in accordance with Apex Court s judgment in the case of Ujagar Paints Ltd. (Supra) and this judgment of the Tribunal has been affir .....

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-worker had been hired by the principal manufacturer shift-wise or otherwise, the staff had been completely lent by the job-worker to the principal manufacturer / raw-material supplier and their salaries were paid by the principal manufacturer/raw-material supplier and the staff were accountable to him only and not to the job worker; that none of these features are present in the present case; and that the Apex Court in para 21 of its judgment in the case of Cosme Remedies Ltd. Vs. CCE reported .....

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on principal to principal basis. Shri Narasimhan also cited the judgment of Tribunal in the case of Makson Health Care Pvt. Ltd. Vs. CCE, Bhopal reported in 2007 (218) ELT 286 (Tri. Del.) wherein the Tribunal held that when the appellant (job-worker) were manufacturing goods for the raw-material supplier (PGIL) using their own machinery, capital investment, labour, licence and other facilities out of the raw-material/ packing material and manufacturing technology required for manufacture supplie .....

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ary or otherwise, between the parties. Shri Narasimhan pleaded that the ratio of this judgment of the Tribunal is also squarely applicable to the facts of this case, as in the present case also, there is a specific clause 22 in the agreement between the FHS and Heinz according to which the agreement shall not be one of the agency, that the FHS and Heinz deal on principal to principal basis and FHS shall not do any act even to induce others to believe that it is an agent of Heinz Shri Narasimhan .....

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other. He emphasized that there is nothing in the agreement between FHS and Heinz from which it can be concluded that there was mutuality of interest in each others business. Beside this, he also pointed out that there is no cross-holding of shares, that is, shareholding of FHS in Heinz and share- holding of Heinz in FHS. He, therefore, pleaded that even on the basis of the definition related person as given in section 4(3) (b) of Central Excise Act 1944 , the FHS & Heinz cannot be termed as .....

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HS and Heinz effective from the same date for blending and packing of Glucon - D for Heinz, Heinz was to supply raw-material, packing material and technical know-how to FSH for blending and packing of the product. In accordance with the terms of the agreement, during the period from 01.03.2000 to 30th September, 2000, FHS paid excise duty on the basis of the wholesale price of the product when sold at depot of Heinz. This clearly demonstrates that FHS was the agent of Heinz and relationship betw .....

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acking of said product by them for Heinz in accordance with this agreement. It is in accordance with this clause in the agreement that during the period from 01.03.2000 to 30.09.2000 FHS were paying duty on the goods cleared by them to Heinz on the sale price of Heinz from their depot. There was no justification for them to start paying duty w.e.f. 01.10.2000 on the aggregate of the cost of raw-material, packing material and job charges when the above clause in the agreement indicates their rela .....

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ctory premises of FHS and the records being maintained by them alongwith a right to inspect them and make copy thereof are highly restrictive clauses which substantially curtail the independence of FHS. (3). The agreement also uses the terms like examination, inspection, testing, advice, recommendation, communication of standards all of which are general in nature and do not restrict the independence of the manufacture (FHS) who is doing the job work for Heinz However, the conditions regarding i .....

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t as may be intimated to it by Heinz from time to time and for the purpose, has agreed to disclose and communicate to FHS the know-how necessary for blending and packing of the same as per the terms and conditions in the agreement. Accordingly, Heinz has provided the necessary know-how to FHS for which FHS has not paid any charges. This is a financial benefit for FHS. This shows that the transaction between them are not on principal to principal basis, as no amount has been charged by Heinz from .....

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enses of such nonconforming product. These conditions imposed on FHS given unfair advantage to Heinz and, therefore, the transactions between them cannot be said to be on principal to principal basis. (6) Shri.Dixit pleaded that in terms clause 8 of the agreement Heinz will from time to time provide a schedule for blending and packing of the said product for such quantities as it may require at the agreed rate and for the delivery of the packed stock within the time specified. In terms of clause .....

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nted out to clause 13 and 15 of the agreement. According to clause 13, FHS shall pack the said products in packages and containers bearing the trade-mark Heinz and in accordance with the directions and specifications in that behalf given or prescribed by Heinz from time to time. In terms of clause 15, during the continuance of the agreement, the authorized agent or representative of Heinz shall be entitled to enter into the factory of FHS for inspection and examine and supervise the process and .....

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f the agreement also considerably reduce the freedom of operation of the FHS. Shri Dixit citing the Apex Court s judgment in the case Union of India & Others Vs. Atic Industries Ltd reported in 1984 (17) ELT 323 (SC) pleaded that interest between two persons in the business of each other can be direct or indirect and pleaded that various clauses of the agreement between FHS & Heinz, as discussed above point to direct as well as indirect interest between FHS and Heinz in the business of e .....

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s and the agreement between the Pilky Footwear Co. Pvt. Ltd. and principal manufacturer (Bata Shoe Co.) provided for not only the advice, assistance and technical know-how and supervision of its unit by the principal manufacturer but also provided for necessary working capital by the way of interest free advances for operation of the plant and other working expenses being provided by Bata Shoe Co. to M/s. Pilky Footwear with the stipulations to sell the whole stock to Bata Shoe Co. with the bran .....

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einz and FHS were to manufacture blend and pack Glucon D by using the technical knowhow provided by Heinz and as per their instructions, advice and assistance and also under their supervision. (9) Shri. Dixit also cited the judgments of the Apex Court in the case of CCE, New Delhi vs. Modi Alkalies and Chemcials Ltd. reported in 2004 (171) ELT 155 (SC), Supreme Washers (P) Ltd. vs. CCE, Pune reported in 2003 (151) ELT 14 (SC) and Calcutta Chromotype Ltd. vs. CCE, Calcutta reported in 1998 (99) E .....

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llant in rejoinder, made the following submissions:- (1). With regard to the judgment of the Apex Court in the case of Pilky Footwear Co. Pvt. Ltd. vs. Union of India (supra) cited by the ld. D.R., Shri Narasimhan pleaded that in that case in terms of the job work agreement between Pilky Footwear Co. Pvt. Ltd. and Bata Shoe Co. the working capital by the way of interest from advances for operation of the plant and other working expenses of M/s. Pilky Footwear was to be provided by Bata Shoe Co. .....

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ons between Pilky Footwear Co. Pvt. Ltd. and Bata Shoe Co. are not on principal to principal basis and it is this judgment which has been affirmed by the Apex Court. Sh. Narasimhan pleaded that in the present case apart from the job charges, no other monetory consideration, direct or indirect, in the form of any interest free advances etc. has been received by FHS from Heinz. He, therefore, pleaded that the Apex Court s judgment in the case of Pilky Footwear Co. Pvt. Ltd. is not applicable to th .....

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einz provides for providing of technical knowhow by Heinz to FHS, no such knowhow has been received by FHS from Heinz. Though this plea has been specifically made before the Commissioner but absolutely no finding has been given by him on this aspect. 6. We have considered the submissions from both the sides and perused the records. FHS in terms of their job work agreement with Heinz, blend and pack, the Glucon D & Complan received in bulk from Heinz, on job work basis as per the specificatio .....

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blending and packing of the product of Heinz if any, provided by Heinz to FHS shall be kept by FHS strictly confidential. * FHS shall deliver the product after blending and packing to Heinz at the destination directed by Heinz for which FHS would receive mutually agreed upon charges. The manufacture/ handling loss of only 1.5% would be allowed to FHS. * Heinz can reject the product not confirming to its quality standards, specifications and instructions and, destroy the said products and recover .....

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trol in their own quality control department. * The agreement between FHS & Heinz shall not be one of agency FHS and Heinz deal on principal to principal basis and FHS shall not do any act or even induce others to believe that it is an agency of Heinz. * FHS shall store on behalf of Heinz in the manner prescribed, sufficient quantities of materials to be blended and packing material as may be necessary and it would be the responsibility of FHS that there is no damage to the goods stored in t .....

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reement for Heinz. The period of dispute is from October 2000 to February 2002. During the period prior to October 2000 i.e. from March 2000 to September 2000, FHS had paid duty in respect of the goods cleared to Heinz on the sale price of Heinz from their depots. However, w.e.f. 1.10.2000 FHS started paying duty on the value determined in accordance with the Apex Court s judgment in the case of Ujagar Prints & Ors. Vs UOI (supra) i.e. aggregate of the cost of raw material and packing materi .....

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, the only question which is to be examined is as to whether the relationship between FHS and Heinz is on principal to principal basis or otherwise, or in other words whether the two are to be treated as related persons . If the FHS and Heinz are to be treated as related persons within the meaning of this term as defined in section 4(3)(b) of the Central Excise Act, 1944, the assessable value of the goods manufactured and cleared by FHS to Heinz would be the sale price at which the same were sol .....

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ve inasmuch as there had very limited freedom of action and hence, FHS have to be treated as an extension of Heinz or hired labour of Heinz. 7. In terms of section 4(3)(b) an assessee and its customer shall be deemed to be related for the purpose of this section if * They are interconnected undertakings; * They are relatives * Among them the buyer is a relative and distributor of the assessee or a sub distributor of such distributor or; * They are so associated that they have interest directly o .....

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tive and distributor of the Assessee or sub-distributor of such distributor . The case of the Department is that FHS and Heinz are so associated that they have interest directly or indirectly in the business of each other and that the terms of the agreement between FHS and Heinz clearly indicate to the existence of direct as well as indirect interest in each other s business. 8. In our view, the expression. interest directly or indirectly used in clause (iv) of section 4(3)(b) would refer to the .....

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both A and B are controlled financially and managerially by the same person or same group of persons and the benefit is flowing to that person or group of persons. In another situation, when on lifting the corporate veil of some entities say A,B,C and D, which may be partnership firms, proprietorship firms, private limited companies or public limited companies, it is found that the same have been artificially created by a person to avoid tax and it is that person who has all pervasive financial .....

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decided from the above criteria. 8.1 Though, the terms of the agreement, Heinz would provide technical knowhow to FHS for blending and packing of the products, the plea of the appellant is that no such technical knowhow has been provided. The Department s contention is that providing of technical knowhow has benefitted the FHS and reduced the cost of manufacture for them. However, the appellant s plea is that they have not received any technical knowhow from Heinz and as such there is no findin .....

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by Heinz to manufacture the goods on their own account and for their other customers. But there is neither any such allegation, no any evidence. 8.2 The other conditions of the agreement that - FHS will do the blending and packing of Glucon D and Complan for Heinz as per their specifications and quality standards, and that manufacturing schedule of FHS shall be as per the instructions of Heinz or that Heinz shall have access to the factory of FHS to inspect their operations, cannot be said to b .....

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the agreement also cannot be said to be the conditions which curtail the financial freedom of FHS to transact with Heinz and make then a pure hired labour and extension of FHS. 8.3 In the present case FHS had invested in their own plant and machinery and were manufacturing food products for other persons also. There is no allegation that Heinz had made any investment in plant and machinery of FHS for manufacture of their products. In the case of M/s Pilky Footwear Company (P) Ltd. vs UOI (surpa) .....

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ation of their plant and other working expenses with the stipulation that M/s Pilky shall sell the whole stock with the brand name of Bata Shoe Company and it is in these circumstances that Hon ble Bombay High Court held that Pilky Footwear Company and Bata Shoe Company would have to be treated as related persons and it is this judgment which was subsequently upheld by the Apex Court. In the present case no interest free advance has been received by FHS from Heinz and other than the job charges .....

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td., Shri Chamunda Gas & Chemicals (P) Ltd. & Nipon Gas & Chemicals (P) Ltd. for the purpose of determining their eligibility for SSI exemption and the Apex Court held that since Modi Alkalies & Chemicals Ltd. had all pervasive managerial and financial control over the other three units, their clearances would have to be clubbed. In the present case there is neither any allegation nor any evidence to prove that Heinz had all pervasive financial and managerial control over FHS and .....

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t in the case of Calcutta Chromotype Ltd. vs. CCE, Calcutta Cited by Ld. DR, the Apex Court in that case held that the merely because the transaction in between two or more companies, it does not lead to an inescapable conclusion that both are unrelated and the court can always lift the corporate veil of the companies to see whether or not any colourable device has been deployed to get evade the tax. In other words, the principle laid down in this judgment is that the court can lift the corporat .....

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necessary information, data working cost and other expenses and the costing necessary for determination of the job charges to be mutually agreed upon. In our view, this clause cannot be interpreted to infer that it gave Heinz an all pervasive, managerial and financial control over FHS, more so when, the costing data and information provided by FHS to Heinz was to be used for determination of the job charges by mutual agreement and thus, this is not the case where the job charges of FHS were to .....

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S as a principal manufacturer getting his goods manufactured through a job worker out of raw material, packing etc., supplies him can always insist on minimum wastage of his raw material and the goods being as per his quality standards. 8.7 To sum up, the conditions in the job work agreement which require the job-worker to,- (a) Manufacture the goods out of the raw material and packing material and technology, if any, supplied/ provided by the principal manufacturer (owner of the goods manufactu .....

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if waste exceeds certain specified limit; (d) Providing access to principal manufacture to his factory and his records including records of expenses incurred in job-work to enable determination of job charges by mutual agreement are not the conditions while curtail the financial independence of the job worker but are the condition which are necessary for the principal manufacturer to ensure that the goods got manufactured by the job worker are as per his quality standards and specifications and .....

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Cx has held that the loan licensee who has been issued the necessary license by the drug controller to manufacture certain medicaments but does not have the factory and the other infrastructure to manufacture the same and for this reason, he gets the medicaments manufactured through another manufacturer out of raw material supplied by him and as per his specification and under his supervision and control, would not be treated as the manufacturer and it is the job worker in whose premises the goo .....

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FHS & Heinz shall not be one of agency FHS and Heinz deal on principal to principal basis and FHS shall not do any act or even induce other to belief that they are an agent of Heinz. In our view this clause in the agreement is also a clear evidence showing that the transactions between FHS and Heinz were on principal to principal basis and FHS could not be treated as an agent of Heinz. We find that in the above mentioned case of CCE Goa vs Cosme Pharma Laboratories (supra), in the agreement .....

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Excise Act, 1944. In our view the ratio of this judgment of the Apex Court is squarely applicable to the facts of this case. 10. Tribunal in the case of M/s Smith Kline BeeChem Asia Ltd. vs CCE Vishakhapatnam reported in 2004 (168) ELT 40 Tri Bang. examined the question as to when the job worker can be treated as hired labour of the principal manufacturer. The Tribunal in this case in para 11 of the judgment, relying upon the Apex Court s judgment in the case of Britania Buiscuit Company vs CCE .....

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facility with his own finance and functions independently with the profit and loss being to his account, he cannot be considered as a hired labour but has to be treated only as an independent job worker. In the present case, FHS had set up their factory with their own finance and they employed their own labour and they were manufacturing products not only for Heinz, but were manufacturing different food products for other persons also and as such were functioning independently with the profit o .....

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ndia Ltd and Cadbury & Nestle India Ltd. In this case also the Tribunal held that just because goods were being manufactured by M/s Max & Health Care (P) Ltd. of using the technical knowhow provided by their customers, they cannot be treated as a hired labour of their customers. 12. The Tribunal in the case of Glenmark Pharmaceuticals Ltd. Vs CCE Nasik reported in 2008 (224) ELT 267 on the question as to whether the loan licensee who has been issued licence by the drug controller to manu .....

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