BEFORE THE AUTHAORITY FOR
ADVANCE RULINGS
NEW DELHI .
                                                           

P R E S E N T:

RULING
( By R. K. Chakrabarti )

Zodiac Clothing Company Ltd. Worli Mumbai a public company registered under the Companies Act, 1956 is the applicant seeking four rulings from the  Authority.  The applicant has filed an application on 20^th November,2002 under section 23C of the Central Excise Act, 1944.  It proposes to set up a Joint Venture in India with Asia Tangible Investments Pvt. Ltd., Singapore a Private Company registered under the laws of Singapore .  The Joint Venture company will take over the existing units of Zodiac Clothing Company Ltd. And proposes to manufacture readymade garments from two factories in Bangalore and one factory in Gujarat and set up an additional unit primarily for the purpose of export.  To cater to the domestic market, the Joint Venture company proposes to enter into a job work arrangement with Metropolitan Trading Company., Worli Mumbai.  It is a partnership firm registered under the Partnership Act,1932, having its principal place of business in Mumbai and factory at Koramangla in Bangalore .  All goods produced and belonging to the Joint Venture  company will have "Zodiac" and other brand names. "Zodiac" brand name now belongs to Metropolitan Trading Company.

2.   2. As per the draft job work agreement filed along with the application, as and when the joint venture is set up, domestic clearances for the Joint Venture company will be largely got manufactured in the factory premises of Metropolitan Trading Company on job work basis.  The draft job work agreement between the Joint Venture company and Metropolitan Trading Company envisages that the latter will undertake manufacture of readymade garments and clothing accessories on a job work basis, including washing, ironing etc., at the rates and other terms to be mutually agreed upon between them.  The Joint Venture company will supply the raw materials for such manufacture. The services rendered under the proposed agreement will be billed on a regular basis by Metropolitan Trading Company in accordance with a table of rates to be mutually agreed upon with 30 days of receipt.  The agreement will be followed for a period of 10 years from the date of execution.  Under rule 4(3) of the Central Excise Rules,2002 the Joint Venture company will authorize Metropolitan Trading Company to pay central excise duty leviable under central excise law on behalf of the Joint Venture company and in terms of the agreement Metropolitan Trading Company will undertake to discharge all liabilities and comply with all the provisions of the Central Excise Act,1944.  This agreement between the parties would be on a principal to principal basis and all business done under the provisions of the agreement would be on the same basis.

3.  Advance Rulings have been sought by Zodiac Clothing Company Ltd. On the following points:-

(a)   Whether the Joint Venture company would be manufacturer of goods manufactured by the export units only.

(b)   Whether the Joint Venture company would not be a manufacturer of goods manufactured by Metropolitan Trading Company on job work basis for the Joint Venture company and sold by the Joint Venture company.

(c)   Whether the Joint Venture company would be liable to pay duty on goods manufactured by Metropolitan Trading Company and would do so by directing Metropolitan Trading Company to pay duty and would therefore, be end to exemption under notification No.8/2002, dated 1.3.2002.

(d)  And, as a corollary, whether the Joint Venture company can continue to enjoy procedural concessions including exemption from registration and export procedure available under Board's Circular No.212/46/96-CX dated 20.05.1996 read with Notification No.36/2001-CE (NT) dated 26.06.2001.

4.     The applicant, Zodiac Clothing Company Ltd. Has filed adequate documentary evidence to establish the genuineness of the non-resident Co. viz Asia Tangible Investments Pvt. Ltd.  A copy of certificate of incorporation of private company issued by Registrar of Companies and Businesses, Singapore, has been filed.  A copy of the draft MOU which would lead to the Joint Venture agreement has also been filed.  A copy of a letter dated 12.11.02 from Asia Tangible Investments Pvt. Ltd. Addressed to Zodiac Clothing Company Ltd. Stating that Asia Tangible Investments Pvt. Ltd. Was agreeable, in principle, to enter into an MOU with Zodiac Clothing Company Ltd. Has also been filed.  This is a reply to a letter, dated 2.11.02 from Zodiac Clothing Company Ltd. Enclosing a copy of the said draft MOU.

5.   The applicant has submitted that a Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control and that the expression "set up" occurring in the definition of the expression "applicant" under section 23A © of thee Central Excise Act,1944 means "ready to commence". The expression "set up" should be the stage which is anterior to the stage of commencement of business; in the present case, anterior to the stage of establishment of a Joint Venture.  It has been argued that any party engaged in the negotiation for entering into a Joint Venture can be said to be involved in the process of "setting up" the Joint Venture.  Accordingly, they should be eligible to be an applicant to seek an Advance Ruling for the proposed Joint Venture.  In support, they have referred to a decision of the Hon'ble Gujarat High Court in the case of Prem Conductors Pvt. Ltd. Vs. CIT {(1977)(108)ITR 0654)}:-

                           "It was only when the machinery was installed that business could be said to be put into such a shape that it could start functioning as a business or a manufacturing organization.  It was not sufficient that the assessee obtained the eland on lease from the Gujarat Industrial Development Corporation or

                          appointed Dr. Ramanathan as the General Manager or placed orders for purchase of raw materials and stores or ordered out the necessary machinery and equipment.  These were merely operations for the setting up the business and the business could be set up only as a culmination of these operations when all that was necessary for the setting of the business was done and it was only after the machinery was installed and the factory was ready to commence business that it could be said that the new business was set up by the assessee."

6. During the hearing granted to the applicant and the three concerned Commissionerates of Central Excise and viz, Bangalore -I, Bangalore-II and Central Excise and Customs Commissionerate, Valsad on 8.1.2002 the applicant emphasized that since they had already entered into negotiations for setting up the Joint Venture they have gone much beyond the stage of "expressions of interests".  The representatives from the Commissionerates S/Sri Nikhil Chandra and S.N.Prasad did not express any reservation about admissibility of the applicant including with reference to the first proviso to section 23D(2) of the Central Excise Act, 1944.

7. The scheme of issue of Advance Rulings in respect of specified central excise and customs issues for setting up a Joint Venture between a non-resident and a resident (as in this case) is a facilitation measure introduced in the 1999 budget with the specific purpose of lending certainty to the futu5re duty liabilities of a proposed Joint Venture.  Under Chapter III A of the Central Excise Act the expressions "advance ruling" and "applicant" read as under:-

                        "advance ruling" means the determination, by the authority of a question of law or fact specified in the applicant regarding the liability to pay duty in relation to an act6ivity proposed to be undertaken, by the applicant:"

                     "applicant" means a non-resident setting up a joint venture in India in collaboration with a non-resident or resident, or a resident setting up a jo9nt venture in India in collaboration with a non-resident, making application:"

8. It has been laid down in the law exactly what tests should be applied to decide at what stage it can be held that a Joint Venture is being "set up". It is the considered opinion of the Authority that so long there is adequate evidence that there is an active proposal to set up a Joint Venture between a non-resident and a resident and certain negotiations to that end have taken place, it can be said reasonably that the applicant, in this case, Zodiac Clothing Company Ltd. (a resident company) is serious about setting up a Joint Venture with M/s. Asia Tangible Investments Pvt. Ltd.  ( a non-resident company ). While coming to this conclusion the Authority has kept in view the fact that the scheme of issuing Advance Rulings is a facilitation measure as mentioned above.

9.  The Authority also does not consider there is any infirmity in the application with reference to the first proviso to section 23D(2).  However, the Authority considers that whereas there is no difficulty in giving rulings ons the first three issues posed by the applicant, being matters relating to applicability of an exemption notification No.8/2002-CE, dated 1.3.2002 issued under section 5A(1) of the Central Excise Act, the fourth issue is primarily of a procedural nature and prime facie, is not a question on which a ruling can be sought under section 23C of the Act.  The Authority would like to proceed further on this basis.

10. On the question whether the Joint Venture company would be a manufacturer of goods manufactured by their export units only i.e. whether the Joint Venture company would not be a manufacturer of goods manufactured by Metropolitan Trading Company on job work basis for the Joint Venture company and sold by the Joint Venture company it has been submitted, on the basis of judicial decision, that in the given facts of the case, and the draft job work agreement, Metropolitan Trading Company would be the manufacturer of goods produced for the Joint Venture company on job work basis.  Reference has been made to the provisions of section 2(1) of the Central Excise Act,1944 and the following judicial decisions:

(i) Ujagar Prints vs UOI {1988(38)ELT 535 (SC)}

(ii) CCE vs. M.M.Khambhatwala {1996(84)ELT 161(SC)}

(iii) Basant Industries vs. CCE {1995(75)ELT 21 (SC)}

(iv) Britannia Biscuit Co. Ltd. Vs. CCE {1997(89)ELT 22 (SC)}

(v) Apex Electricals Pvt. Ltd. Vs. UOI {1992(61)ELT 413 (Guj.)}

According to the applicant the question as to who is the owner of the goods is not relevant in this case since the relation is that of a principal to principal and the premises, labour, machineries employed are of the job worker, the independent job worker is the manufacturer.  On the same logic, the Joint Venture company would be the manufacturer.  On the same logic, the Joint Venture company would be the manufacturer of goods in their export units.  It is immaterial that the goods may be manufactured in the job worker's premises with the brand name owned by Joint Venture company, according to the applicant.

11.The applicant has made the further following submissions:-

    The Zodiac Clothing Company Ltd. Is engaged in manufacture of readymade garments falling under Chapter 61/62 of CET.  The major part of production of Zodiac Clothing Company Ltd. From three factories are exported and the value of domestic clearances is less than Rs.1 Crore.  Therefore for local clearances Zodiac Clothing Company Ltd. Now  enjoys exemption  of duty under notification No.8/2002-CE, dated 1.3.2002.  The three units of Zodiac Clothing Company Ltd. Are now allowed to operate under the simplified export procedure under Board's Circular No.212/46/96-CX-dated 20.5.96.

     Rule 4 of the Central Excise Rules, 2002 makes an exception in respect of goods falling under Chapter 62 of CET with regard to the question who is the "manufacturer".  The proviso to Rule 4(1), Rule 4(3) and the proposed agreement jointly would mean that due to the special provision under Rule 4 etc. the Joint Venture company would be the manufacturer of goods through a legal fiction.  They can authorize Metropolitan Trading Company to discharge duty liabilities and follow the procedural rules relating to removal and payment of duty.  The Joint Venture company proposes to act under the proviso to Rule 4(3) and as per paragraph 7 of the draft job work agreement Metropolitan Trading Company would pay the duty.  Therefore, the Joint Venture Venture company though being liable to pay the duty will not pay the same and Metropolitan Trading Company though not liable to pay the duty would actually do so.

   Further, the goods manufactured by the Joint Venture company in their units which will be exported will not be included in the value of clearance for determining eligibility for the SSI exemption in terms of the provisions of Clause.2 (v) of the notification No.8/2002-CE, dated 1.3.2002 the total value of goods manufactured by the Joint Venture company in their own factories and cleared for home consumption only has to be included.  The value of goods manufactured by Metropolitan Trading Company is not to be added to the value of clearances while determining the total value of clearances.  The notification allows exemption to a manufacturer whose value of domestic clearance of goods manufactured is below Rs.1 crore.  Since, in terms of the judicial decisions referred above, Metropolitan Trading Company is the manufacturer of the goods manufactured on job work basis for the Joint Venture company, the value of the said goods would be required to be considered for the purpose of determining duty liability under the said notification so far Metropolitan Trading Company is concerned.  Metropolitan Trading Company will not claim benefit of the exemption once their turnover was more than Rs.1 crore.  The job worker viz.Metropolitan Trading Company is the real manufacturer and this is evident from the "deeming fiction" which has been created by use of the expression "as if" in rule 4(3). The Joint Venture company is the manufacturer only to treat the person who gets the goods manufactured on job work basis as a deeming fiction .

 Only for the purpose of rule 4(1) and 4(3), the Joint Venture company is the manufacturer.  It is settled law that deeming fiction created under the Act would be applicable only for the purpose for which is is created and not for any other purpose.  This view has been confirmed in the decision of the Tribunal in the case of Usha Martin Industries Ltd. Vs. CCE(1999)(85 ECR 505):-

"Legal fiction relating to "deemed export" incorporated in the Import Policy 1985-88 has to be applied for the purpose for which it is created and has no application to Central Excise Act.  Therefore, goods supplied to ONGC by a 100% EOU are goods" allowed to be sold in India", and therefore, are not eligible for the benefit of exemption notification 125/84."

   This view was re-iterated in the case relating to Vadilal Embroidery Unit Vs. CCE (2001)(13)ELT-193(Tribunal).  To allow a non-manufacturer to avail of the exemption under notification No.68/2002-CE, dated 1.3.2002 clause 5(1) has been inserted in the notification. The words "should include" expands the scope of the term "manufacturer." This view is confirmed in the decision relating to AC Patel Vs. Vishwanath (AIR) 1954 Bombay 204):-

"Including" is a term of extension.  It imports addition. It adds to the subject matter already comprised in the definition".

     A similar view has been confirmed by the Hon'ble Supreme Court in the case of SGR Tiles Manufacturing Ltd. Vs. State of Gujarat (AIR-1971 SC-90) and Hon'ble Assam High Court in the case of Chandra Mohan Vs. Union of India (AIR-1953 Assam-193).  Therefore, for the purpose of the notification, Metropolitan Trading Company would be treated as the manufacturer of the goods.  Thus, the legislature extended the benefits of the notification to the raw-material supplier by treating them as "manufacturer"

    Since the value of clearance of goods got made on job work basis from Metropolitan Trading Company would not be added to clearance of the Joint Venture Company, as a corollary, they should be exempted from requirement of Central Excise registration.  Decisions of Hon'ble Supreme Court in M.K. Mohd Kunhi {1969(71)ITR 815-para 8} and CIT Vs. Bansi Dhar & Sons {1986 (1) Sec.523} confirm this view.  In view of the

 inherent powers of the Authority and the provisions of notification no.36/2001-C.E.(NT), dated 26.06.2001 extending exemption from registration where the manufacture is exempt under notification No.8/2002-CE, dated 01-03-2002, a ruling to that effect may be issued.

12.     Commissioners of Central Excise Bangalore-I, II and Commissioners of Central Excise & customs valued have contended that in the given facts of the case and the provisions of law, and in particular, special provisions of rule 4 of the Central Excise Rules, 2002 for payment of duty on goods falling under chapter  Nos.61 &62 of CET the aggregate value of clearances of good produced by Metropolitan Trading Company for the joint Venture company. In support of this view lot of emphasis has been put on the fact  that a special insertion in the explanation to notification no.8/2002-CE, dated 1.3.2002 has been made in the form of clause 5(I). Reliance has been placed on Board's Circular No. B_212/46/96 CX.Dated-20.5.96.  The Circular states that the  value of clearance of job workers will be added to the provisions of paragraph 2(v),(vi) &(vii) as well as clause 5(B) of notification No. 8/2000-CE, dated 1.3.2002 support their view and the joint venture company will be required to take out a central excise registration.

13.     The contention of the applicant that in terms of the decision of the  Hon'ble Supreme Court in the case  relating to     Ujagar Prints Vs. UOI     (1988) (38) ELT 535 (SC) Metropolitan Trading Company would be the actual manufacturer in   this case in the normal course is acceptable.  The relation between the Joint Venture company   and Metropolitan Trading Company are on principal to principal basis.  Labour, machineries as well as the premises for manufacture of the goods are also of Metropolitan Trading Company, the job worker. The actual   manufacture  of    the   goods  gets completed in the premises of      Metropolitan Trading Company.  It is really immaterial that the ownership of the raw materials and the final goods is vested with the Joint Venture company.  The decisions in the cases relating to Britannia Biscuit Company Ltd. as well as Apex Electricals (P) Ltd., support the contention of the applicant that in terms of the draft job work agreement Metropolitan Trading Company will be the actual manufacturer.  However, the Authority considers that the issue, who should actually discharge the duty liability can be decided by the Government.  Under section 37(2) (ib) of the Central Excise Act, 1944 the central government can make rules regarding "the manner in which the duties shall be payable".  The special dispensation regarding the manner of payment of duty by a person other than the actual manufacturer of the goods falling under items 61 & 62 CET is an example of the Central Government using this power.

14.     It is clear that facts of this case as compared to the facts in Usha Martin Industries Ltd.(supra) are quite different.  Going by the facts of the Usha Martin's case one finds that a "fiction" was incorporated in the Import-Export Policy issued under the Imports and Exports(Control) Act, 1947.  However, the Tribunal held in the Usha Martin's case (supra) that the fiction created under the Imports and Exports (Control) Act could not be extended to the Central Excise Act.  Import Export Policy and Central Excise Act are different pieces of legislation enacted for different purposes.  Import Export Policy deals with Import/Export trade and the Central Excise Act deals with levy and collection of central excise duty.  In the applicant's case the "deeming fiction" has been introduced under central excise rules treating the Joint Venture company as a manufacturer.  The applicant wants that they be treated as a manufacturer only for the limited purpose of payment of duty.

15.     The fact that a "deeming fiction" need not have a highly restricted connotation has been explained lucidly, based on judicial decisions, in the book 'Principles of Statutory Interpretation' by Justice G.P. Singh (Eighth Edition 2001 page 302 & 303-4)

                 "In interpreting a provision creating a legal fiction, the Court is to ascertain for what purpose the fiction is created, and after ascertaining this, the Court is to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction.  But in so construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of the section which it is created."

Justice G.P. Singh further observes -

             ' After ascertaining the purpose , "full effect must be given to the statutory fiction and it should be carried to its logical conclusion " and to that end " it would be proper and even  necessary to assume all those facts on which alone the fiction can operate".  In an oft-quoted passage, LORD ASQUITH stated : "If you are bidden to treat  any imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequence and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it-.  The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of the state of affairs'.

16.   In the matter of American Home Products Corporation Vs. MAC Laboratories (P) Ltd. and another 1986(I) Supreme Court Cases 465, the issue involved was interpretation of a deeming fiction created under the Trademarks Act, 1940.  The Hon'ble Supreme Court  observed that the purpose for which the fiction had been enacted was set out in section 48(2) and to confine it only to a part of section 46 would be to substantially cut down operation of the legal fiction.

 Hon'ble Supreme Court held :-

          "The purpose for which the said fiction has been enacted are  set out in Section 48(2).  These purposes are the purposes of Section 46   or for any other purpose of which such use in material under the 1958 Act or any other law.  To confine the purpose only to a part of Section 46 would be to substantially cut down the operation of the legal fiction.  The purpose for which the legal fiction is to be resorted to is to deem the permitted use of a trade mark, which means the use of the trade mark by a registered user thereof, to be the use by the proprietor of that trade mark.  Having regard to the purposes for which the fiction in Section 48(2) was created and the persons between whom it is to be resorted to, namely, the proprietor of the trade mark and the registered user thereof, and giving to such fiction its full effect and carrying it to its logical conclusion, no other interpretation can be placed upon the relevant portions of Section 18(1) and of clause (a) of Section 46(1) than the one which we have given."

17.     In view of the above a legal fiction is applicable for the purpose for which it was enacted and for giving full effect to such fiction and also for carrying it to its logical conclusion.  In this case, deeming provision has been made under the Central Excise Rules, 2002 with an objective to treat the merchant manufacturer of garments as manufacturer.  Hence he will be the manufacture for the purpose of the SSI exemption also as the notification stands.

18.   The argument that to allow a non-manufacturer to avail of the small scale exemption, clause 5(I) has been inserted in the notification dated 1.3.2002 is not acceptable for the reason that, the question of extending the SSI exemption to such a person does not arise in case he is not a manufacturer of the goods in question under the said notification and if such a benefit is extended to such a person, the earlier argument of the applicant that such a person has been deemed to be a manufacturer only for purposes of payment of duty (and implicitly, for no other purpose) is unacceptable in as much as the person concerned is being construed as a manufacturer not only for purpose of payment of duty but also for availing the benefit of the SSI exemption notification.

19.   The objective of clause 5(I) to the Explanation in the SSI notification dated 1.3.2002 is, non doubt, to extend the benefit of the said notification to the merchant manufacturer who gets the excisable goods manufactured on job work basis.  Clause 5(I) reads as below:-

            " for the purpose of goods falling under Chapter 61 or 62 of the said First Schedule, the expression "manufacturer" shall include a person who is liable to pay the duty of excise leviable on such goods under sub-rule (3) of the rule 4 of the Central Excise Rules, 2002."

Evidently, since it is a beneficial provision ( in as much as it extends confessional rates of excise duty to SSI units), there is little reason for a merchant manufacturer not to avail of the benefit of the same, much less to deny its applicability to himself.  Once it is accepted that the merchant manufacturer is eligible to avail the benefit of SSI notification (subject, of course, to his fulfilling the other conditions contained in the said notification) it cannot be gainsaid that the person who gets the goods falling under Chapter 61 or 62 of the Central Excise Tariff, 1985 manufactured on his account on job-work  basis, is the manufacturer of such excisable goods.

20. Applicability of the concession under notification No. 8/2002-CE, dated 1/.3.2002 is based on the aggregate value of clearances for home consumption by a manufacturer subject to conditions referred to in paragraph 2 (iii), (iv), (v), (vi) and (vii) of the notification.  Thus the notification and the benefit under it is completely based on the category of the "manufacturer" and the aggregate value of clearance of goods by him from one or more factories.  Since in clause 5(I) of the Explanation to the notification it has been specifically provided that for goods falling under Chapter 62 the expression "manufacturer" would include a person who was liable to pay duty leviable on such goods under sub rule (3) of Rule 4 it cannot be said that the meaning and the scope of the expression "manufacturer" is different is paragraph 2(iii),(iv),(v),(vi) and (vii) from the same in clause 5(I).

21        Thus, in the given facts and circumstances of the matter, after looking into the judicial decisions relating to "deeming fiction" and the provisions of central excise law, in particular, and the provisions and the scheme of notification No. 8/2002 - CE, dated 1.3.2002 (including the same relating to the concept of "manufacturer') the applicant cannot claim to be a manufacturer for some purposes and a non-manufacturer for other purposes.  The argument of the applicant that the introduction of clause 5(I) in the notification No. 8/2002-CE, dated 1.3.2002 is to overcome the difficulty of following a non-manufacturer to claim the benefit of SSI exemption notification (which benefit such a non-manufacturer would not otherwise be able to claim) is fallacious.  The objective of clause 5(I) is only to clarify, beyond doubt, that for the purpose of the SSI notification (and not merely for purposes of payment of duty) the expression  "manufacturer" would include the person made liable for payment of duty in respect of excisable goods falling under Chapter 61 & 62 of CET and manufactured on job work basis.  This is apparent from the fact that even in the absence of clause 5(I), such goods manufactured on job-work basis would be eligible for claiming SSI exemption by the job-worker (since goods specified in Chapter 61 & 62 are included in the Annexure of the SSI exemption notification).  Evidently, since SSI exemption can be claimed by the merchant manufacturer (on excisable goods manufactured on job work basis), he is for all purposes under  central excise law, the manufacturer of the said excisable goods.  In other words, a person cannot be deemed not to be a manufacturer of goods (though liable to pay duty) and yet be a manufacturer (of the same goods) for availing the benefit of SSI exemption.  Any such interpretation would defeat the very objective of the law to make the merchant manufacturer liable on his own account and also on behalf of jobworkers to payment of excise duty on excisable goods falling under Chapter 61 or 62 of CET.

22.     Having considered the submissions made by the Revenue and the Applicant the fourth question i.e. whether the Joint Venture company can continue to enjoy procedural concessions including exemption from registration and export procedure vide Board's Circular No. 212/46/96-CX dated 20.05.1996 read with notification No. 36/2001-CE (NT) dated 26.6.2001 raised in the application is rejected as not an admissible question under section 23C of the Act.  Other references are answered as under:-