Representatives of a section of Karnataka-based small scale drug units have warned the member firms on the risk of taking job works for big companies in the excise free zones of Himachal Pradesh, Uttaranchal and Jammu and Kashmir.

The representatives said large companies, which are getting their job works done by smaller firms at excise free zones, have been found to be violating essential central excise laws at the expense of the small manufacturers.

In order to claim the excise free exemptions at these zones, a company should have a manufacturing facility here and sell the product manufactured from this zone. But since large companies are not prepared to face problem of setting up new infrastructure and hire people, they adopt loan license option and the principal-to-principal manufacturing arrangement to award job works to smaller firms in the excise free zones. According to the Karnataka representatives, neither of the methods qualifies for the central excise exemption.

Under the loan license system, the small firms manufacture the product but the product label will carry the big company's name only and the SSI's license number. In this case, the companies are flouting the rule by not paying duty because the job is done for a brand owned by another company. Exemption is allowed only if the company makes its own brand in these zones.

The Karnataka representatives have warned SSIs that in case the government detects this malpractice, it is the small firm that will have to pay penalty and duty and not the big firm. Besides this, for the job works SSIs are not paid 1/10th of the efforts.

Now, as many firms have become wary of loan license manufacture and the risk of detection, they have turned to principal-to-principal manufacture. Here the method employed by the company to illegally avail of central excise exemption is the transfer of the drug brand owned by the big firm to the small manufacturer for a limited period. But this is a gross infringement of the MRTP (monopolies and restrictive trade practices) Act, which invalidates such a sale, or transfer of brand names for restricted sales.

When the Karnataka representatives brought the issue to the notice of the central excise officials in the tax-exempt zones, they were unaware of both loan license and Principal-to-Principal manufacture.

The Union Government is flooded with reports of malpractices going on in excise free zones, many of them are under scrutiny and it will be only a matter of time for the government to amend the laws to trap the offenders. The SSIs should not fall prey to the games of large companies and must be able to utilize the tax exemptions for their own products rather than for the benefit of the others at their own risk, cautioned the Karnataka representatives.