1. The 1st petitioner is a Private Limited Company (referred to hereafter as 'the Company') carrying on business of manufacturing diverse electrical appliances and parts thereof. The 2nd petitioner is a Director and Shareholder of the Company. Bajaj Electricals Ltd. carry on business of selling various items including electrical appliances. By its letter dated 19th November, 1971, Bajaj Electricals Ltd. confirmed having accepted the Company's offer to sell to Bajaj Electricals Ltd. 17 items of electrical appliances itemised in that letter with 'Bajaj' brand on certain terms and conditions. Pursuant thereto the appliances were manufactured and sold by the Company to Bajaj Electricals Ltd. On 19th April, 1971, the Company filed its price-list with the Superintendent of Central Excise (namely, the 2nd respondent) in respect of the appliances sold by the Company to Bajaj Electricals Ltd. and declaring as the assessable value the price which the Company was to charge to Bajaj Electricals Ltd. On 25th October, 1971, the 2nd respondent passed his impugned order returning the price-list to the Company stating that -
'... M/s. Bajaj Electricals Ltd. are the exclusive buyers of the goods manufactured by you with 'Bajaj' Name plates. In view of this, M/s. Bajaj Electricals Ltd., become the sold-selling Agent of the goods under reference and accordingly the prices charged by M/s. Bajaj Electricals Ltd. have already been approved as assessable values from time and again (Sic) Your plea to accept the prices charged by you to M/s. Bajaj Electricals Ltd., as assessable value under the circumstances cannot be accepted.'
2. This order resulted in the Company filing an appeal to the Appellate Collector (namely the 3rd respondent) who by his order darted 3rd September, 1973 allowed the Company's appeal on the ground that the transaction between the Company and Bajaj Electricals Ltd. was on principal to principal basis and that the relations between the two were at arms length. The 3rd respondent further held than in view of the judgment of the Supreme Court in Voltas case the Company was entitled to pay duty on the assessable value which should be the selling price of the Company to Bajaj Electricals Ltd. and not the price at which the latter sold the products to the dealers. The 3rd respondent set aside the Superintendent's order dated 25th October, 1971 and ordered that the Company be allowed to pay duty on the assessable values which shall be the price at which the Company sold their products to Bajaj Electricals Ltd. The requisite consequential relief was also granted to the Company.
3. Thereafter on 22nd May, 1974, Government of India (namely the 1st respondent) issued a notice under section 36(2) of the Central Excises and Salt Act, 1944 calling upon the Company to show cause why the order dated 3rd September, 1973 passed by the Appellate Collector should not be set aside on the ground that the facts led to an inference that Bajaj Electricals Ltd. were engaged in the manufacture of the articles through the Company with the result that section 2(f) of the Act was attracted. The Company filed its reply. On 10th June, 1975, the Central Government passed its order setting aside the Appellate Collector's order dated 3rd September, 1973 and restoring the Superintendent's order darted 25th October, 1971 on the ground that -
'....the goods are produced on account of M/s. Bajaj Electricals Ltd., and under special agreement. The goods also bear the brand name of the 'Bajaj which has price (sic) and which has to be included in the assessable value. The goods appear in the market as manufacture of M/s. Bajaj Electricals Ltd. and not the party. M/s. Bajaj Electricals Ltd., are 'engaged' in the manufacture through the Petitioners and the price charged by them would constitute the assessable price.......'
To complete the narration of events, from time to time that Company paid to the Department diverse amounts aggregating to Rs. 1,71,268.60 under protest. It is in these circumstances that the Company has filed the present petition for setting aside the impugned orders dated 25th October, 1971 and 10th June, 1975 passed respectively by the Superintendent and the Central Government and for setting aside the show cause notice dated 22nd May, 1974 and for recovery of the amount of Rs. 1,71,268.60 paid by the Company to the Department under protest.
4. The only point which arises for determination is whether the Company was the manufacturer of the appliances sold to Bajaj Electricals Ltd. as urged by Mr. Bhatt, the learned Counsel appearing on behalf of the Company, or whether the manufacturer can be said to be Bajaj Electricals Ltd., as urged by Mr. Mehta, the learned Counsel appearing on behalf of the respondents. Mr. Bhatt elaborated that the transaction between the Company and Bajaj Electricals Ltd. was a transaction purely of sale and purchase on principal to principal basis at arms length and that Bajaj Electricals Ltd. could not be said to be the manufacturer because the brand name of the purchaser, namely 'Bajaj', was affixed to the goods. The contrary was urged by Mr. Mehta on behalf of the respondents.
5. In order to appreciate these rival contentions it would be pertinent to refer to the terms and conditions contained in the agreement which is in the form of a letter dated 19th November, 1971 from Bajaj Electricals Ltd. to the Company. Both learned Counsels relied upon that letter in support of their respective contentions. This letter opens with the discussions which the Company had with Bajaj Electricals Ltd. and records the confirmation of Bajaj Electricals Ltd. of its accepting the Company's offer to sell to Bajaj Electricals Ltd. the 17 different itemised appliances on the terms and conditions contained in that letter. Clause 1 of these terms and conditions provides that the prices mentioned against each item are subject to variation from time to time depending on market conditions. Clause 2 provides that the Company will manufacture and supply to Bajaj Electricals Ltd. the goods itemised in that letter in 'Bajaj' brand during the period of the agreement. Clauses 3 states that the goods will be despatched for destination to the branches and agencies in India of Bajaj Electricals Ltd. Clause 4 provides -
'There will be a procedure of regular inspection by our inspector and you will send a call 48 hours in advance for such an inspection. It will be optional for our inspector to undertake random inspection or even 100% inspection as may be necessary from lot to lot. This, however, will not absolve you from the guarantee clause of the agreement. The decision of our representative as regards acceptability of quality will be final and binding on you.'
Clause 5 provides -
'You will guarantee satisfactory performance of the items for a period of one year from the date of sale to the ultimate customer and the units developing manufacturing defect within that period will be repaired or replaced by you free of charge'.
I have reproduced clauses 4 and 5 in their entirely as it was on these clauses that particular emphasis was placed by Mr. Mehta (as will appear later in this judgment). Clause 6 provides for the return to the Company of the goods found damaged or broken in transit and the debiting to the Company's account the value of such goods including incidental charges incurred thereon. Clause 7 provides that the Company will allow 45 days credit to Bajaj Electricals Ltd. and that the Company can draw its hundies through the Bank. Clause 8 provides that the Company shall be responsible for any loss, injury or damage suffered by or caused to Bajaj Electricals Ltd. on account of any loss, injury or damage suffered by or caused to any 3rd party on account of using or handling the items supplied by the Company to Bajaj Electricals Ltd. and that the Company shall indemnify Bajaj Electricals Ltd. in this respect and may take out suitable insurance policy for such risk at the expense of the Company. Clause 9 is the usual arbitration clause and clause 10 provides for the termination of the agreement by either party by giving 6 months notice in writing.
6. These terms and conditions unmistakably reveal that the relationship between the Company and Bajaj Electricals Ltd. was that of manufacturer-seller and purchaser and that the dealings between them were on principal to principal basis. It is plainly manifest that in the manufacture of the goods by the Company, no control, direction or supervision was exercised by Bajaj Electricals Ltd. nor did the latter have any financial involvement in the manufacture of the goods. It is also not even the Department's case that Bajaj Electricals Ltd. had any control over the labour employed by the Company for the purpose of manufacturing the goods. Indisputably the raw materials used in the manufacture of the goods were purchased by and belonged to the company as also the machinery with which the goods were manufactured. Admittedly the sales-tax and income-tax were paid by the Company and not by Bajaj Electricals Ltd. Indisputably the goods were produced by a process, mode and method of manufacture entirely of the Company and according to its own schedule and in the Company's factory over which the Bajaj Electricals Ltd. had no control or involvement, financial or otherwise. So also indisputably the Company and Bajaj Electricals Ltd. had no control or financial or other involvement in the working activities and business of each other. Merely because a purchaser requires goods of its own specification would not make him the manufacturer. Once the goods were delivered ny the Company to Bajaj Electricals Ltd., the Company was not concerned what the latter did with the goods or at what price they were sold by Bajaj Electricals Ltd. in the market. For ought the Company was concerned, Bajaj Electricals Ltd. could gift those goods or throw them in the sea. The transaction, as also these two concerns were at arms length, one having no interest in the other. It is abundantly clear that the relationship between the Company and Bajaj Electricals Ltd. was simpliciter that of manufacturer-seller and purchaser and principal to principal. Merely because before delivery of the goods to Bajaj Electricals Ltd., the Company put the label 'Bajaj' on the goods would not make Bajaj Electricals Ltd. the manufacturer, nor could it be said that for that reason the goods were manufactured on behalf of the customer. By reason of the label, the goods did not change their identity. They remained the same. They did not become some new or different goods merely by the affixation of the label 'Bajaj'. As observed by the Division Bench of the Gujarat High Court in Cibatual Ltd., P. O. Atul v. Union of India and others - 1978 E.L.T. J 68, the purpose of the trade mark is merely to indicate the connection in the course of the trade between the goods and the person having a right to use the trade mark. It was held by the Division Bench of the Gujarat High Court in that case that where goods were manufactured according to the customer's specification with his brand name and the customer having the right to reject the goods (as did Bajaj Electricals Ltd. in this case), it could not be said that the goods were manufactured on behalf of the customer. It was further held that where goods are manufactured with customer's brand name and the manufacturer also having the right to sell such goods to outsider but without putting the brand name or trade mark, the goods could not be said to have been manufactured on behalf of the customer. It was held that affixing of the trade mark of the customer on the manufactured good cannot be helpful in determining whether the goods were manufactured by the buyer or on his behalf and that by affixing the brand name any new product comes into existence. It was further held where goods are manufactured with the customer's brand name, the raw materials not supplied by the customer, and where the goods are manufactured in the plant of the manufacturer who pays sales-tax over the goods, it cannot be said that the goods were manufactured on behalf of the customer and accordingly the customer's sale prices cannot form basis for assessment. In Philips India Ltd. and others v. Union of India and others - 1980 E.L.T. 263, it was held by the Division Bench of the Allahabad High Court that where a person simply places an order with a Company for getting certain goods manufactured according to his specifications, details and trade mark, without incurring any financial involvement needed for manufacturing or producing the goods or without having any control or supervision over the manufacturing process, such a person cannot be treated as a manufacturer of those goods because in such cases the transaction is on principal to principal basis in the ordinary course of business. It was further held that in such cases it can be said that the actual manufacturer was engaged in the manufacturing activity 'on his own', as he manufactures goods according to his own schedule, budget, capacity and availability of raw materials. It was further held that if the buyer is also to be treated as manufacturers of the same commodity whereas under the law there cannot be more than one. Mr. Mehta, however, relied on certain observations made in that case, viz. that because of the use of the words 'engages', 'production', 'manufacture' and 'on his own account' in section 2(f), a person though not owning a factory or not himself doing the manufacturing process, can be considered to be a manufacturer if those who own a factory are dummy or camouflage for him or he gets the goods manufactured by them under his direction and control. It is difficult to see how these observations can be of the slightest assistance to the respondents. It is not even the Department's case that any of the criteria stated in these observations relied on by Mr. Mehta exist in the present matter, much less that the Company is merely a dummy or camouflage for Bajaj Electricals Ltd. In Batliboi and Co. Pvt. Ltd. v. Union of India and others - 1980 E.L.T. 1, it was held by a learned singly Judge of this Court that mere affixation of the customer's brand name on a product would not enable the excise authorities to treat the customer as manufacturer of those goods. In Two Star and others v. Union of India and others - 1980 E.L.T. 166, it was held by a learned singly Judge of this Court that the mere fact that the Customer's brand name or trade mark is affixed on the goods and the entire production is sold to him would not make the customer the manufacturer of those goods. In Bata India Ltd. v. The Assistant Collector of Central Excise - 1978 E.L.T. J 211, it was held by the Patna High Court that because the brand name of the Company was affixed to the goods, the same would not make the buyer the manufacturer. The Supreme Court has gone even further. In A. K. Roy and another v. Voltas Ltd. - : 1973ECR60(SC) , it was held that while determining whether the agreement between the manufacturer and the Company is at arms length the mere fact that the supply is exclusively made to the Company and the manufactured goods are supplied with the brand name are not sufficient.
7. These decisions with which I am in respectful agreement are on all fours with the facts of the matter before me and are sufficient to uphold the contentions of Mr. Bhatt and to negate the contentions of Mr. Mehta to the contrary.
8. Great reliance was placed by Mr. Mehta on behalf of the respondents on clauses 4, 5, 6 and 8 of the agreement in an attempt to show that the Bajaj Electricals Ltd. had control and supervision over the manufacture of the goods and hence were the manufacturers within the meaning of section 2(f) of the Act. It may be recalled that clause 4 provides for random inspection or even 100% inspection of the goods by Bajaj Electricals Ltd. Clause 5 provides for satisfactory performance guarantee and clause 6 provides for the return to the Company of goods broken or damaged in transit, and clause 8 provides for the Company's responsibility for loss, injury or damage caused to Bajaj Electricals Ltd. on account of loss, injury or damage suffered or caused to any 3rd party by reason of its using or handling the goods sold by the Company to Bajaj Electricals Ltd. None of these clauses can be of the slightest assistance to the respondents. Merely because the buyer stipulates that the goods which he has agreed to purchase from the manufacturer must be of a particular quality and merely because in order to ensure that the seller does manufacture the goods of the requisite quality and because for that reason the buyer insists on taking inspection (be it 100%) of the goods or insists on a satisfactory performance guarantee and the safe delivery of the goods or takes upon himself the responsibility for providing safe and reliable goods, cannot be considerations which would elevate the purchaser to the status of manufacturer. Such conditions as found in clauses 4, 5, 6 and 8 are normal safeguards is contracts of purchase and sale, meant to ensure to the purchaser that the manufacturer will not foist on the buyer products which are defective or damaged or otherwise not of the standard and quality contracted to be purchased. I do not think this contention of Me. Mehta need detain me any longer than it has already done.
9. It was further urged by Mr. Mehta that because under clause 1, the prices fixed under the agreement were subject to variations depending on the market conditions, Bajaj Electricals Ltd., though not supplying the raw materials, had a voice in the dealings so far as the raw materials were concerned and that instead of actually supplying the raw materials, Bajaj Electricals Ltd. were prepared to indemnify the Company in respect of the variations of the prices of the raw materials. With great respect to learned Counsel this somewhat involved submission is not up to his usual standard of clarity and does not cater to the fact that such a provision is also a normal provision in contracts of sale and purchase without in any manner tending to make the buyer the manufacturer.
10. It was finally urged by Mr. Mehta that if two views are possible, the Court should not interfere in exercise of writ jurisdiction. The fallacy of this contention is that with due modesty, I fail to see what view other than the case taken by me can possibly be taken in the facts and circumstances of this case.
11. On the question of refund of the amount of Rs. 1,71,268.60 Mr. Mehta submitted that no interest thereon should be awarded to the Company. On the aspect of interest Mr. Bhatt submitted to the orders of the Court. I think it would be sufficient if the Department repays to the Company the sum of Rs. 1,71,268.60 without interest within 6 months from today.
12. In the result, the Petition is allowed in terms of prayers (a) and (c) with the exception of the interest prayed for in prayer (c). The Department shall refund to the petitioner-Company the amount of R. 1,71,268.60 within 6 months from today. The respondents shall pay to the petitioners the costs of the petition. Rule is made absolute accordingly.