Customs, Excise and Gold Tribunal - Mumbai
Barron International vs Commissioner Of C. Ex. And Cus. on 27 March, 2003
Equivalent citations: 2003(161)ELT540(TRI-MUMBAI)
ORDER J.H. Joglekar, Member (T)
1. M/s. Barren Intl. Ltd., (BIL) entered into a contract to manufacture "AKAI" brand colour TV sets in India. These sets were got manufactured by them on job work basis from a number of manufacturers including from M/s. J.R. Electronics (JRE). A study was conducted of the value at which such TVs were sold by JRE to BIL and the prices at which these in turn were sold by BIL in the market. The study showed that there was a very significant difference between these prices. JRE was a proprietary unit owned by Shri Jaffer Rizvi. Inquiries were conducted into the significant difference. Shri Chabra, authorized signatory of JRE deposed that the raw materials were imported from M/s. Dynasty Enterprises, Hong Kong, that some material was given by BIL to them, that the CTVs manufactured by them were sold exclusively to BIL and that BIL exercised quality control checks for such CTVs. The costing data revealed that the job worker was getting Rs. 190/- to Rs. 250/- as conversion charges and profit. It also appeared that the imports made by BIL were under valued to keep the overall cost low. The premises of JRE and BIL were searched. Statements of the employees and persons in charge of both the units were recorded. The action plan prepared by M/s. BIL for establishing their credentials with M/s. Akai was also examined. The imports were of CTVs in SKD form. All raw materials except packing material which was locally procured, were sourced from Akai with M/s. Dynasty operating as C & F agent.
2. Shri Jafer Rizvi was a manufacturer/exporter of embroidery work. He later on started an electronic factory named as M/s. J.R. Electronics at Vasai but was about to close it because he was making a loss.
3. He was supplying embroidery to Mrs. Mulchandani one of the Directors of BIL. She requested him to start a unit for manufacture of electronics at Noida. Shri S.C. Gupta, Director, BIL was given the power-of-Attorney and the unit was started and commissioned by Shri Gupta in exercise of the power-of-attorney from Shri Rizvi. Shri Cooper, Shri B.S. Bhat and a number of others who were employees of BIL were involved in the setting up and later running of the factory at Noida. Shri Rizvi did not participate in any manner either in the setting up of the unit or in the operation thereof. The bank accounts in the name of M/s. JRE were opened on the introduction of M/s. BIL. Shri Rizvi used to sign blank cheques and disbursements were made to the appropriate persons from the bank account of M/s. JRE. JRE did not have any commencement funds. All the funds were deposited by M/s. BIL in the account of JRE from where they were disbursed. The payment to importers was also identically made. The entire staff for working in JRE was selected by senior officers of BIL. Some senior officers while in the employ of BIL were exclusively working for JRE. Shri Rizvi accepted this in a statement dated 7-12-95 and claimed that this was in terms of the instructions given by Shri Kabir Mulchandani, M.D. BIL and Shri S.C. Gupta, Director. The production was continuously monitored by Shri Bhat who was initially the employee of BIL and who later became the employee of JRE. In both capacities, the staff continued to report to Shri S.C. Gupta. No reference was made to Shri Rizvi on technical matters. All financial requirements of GRE was controlled, managed, and provided for by BIL. The show cause notice shows that even the household expenditure on telephones, petrol and Eid sweets were defrayed by BIL using the cheques signed by Shri Rizvi. Both the Vasai factory and Noida factory were exclusively supported financially by BIL.
4. Apart from erecting and commissioning the factory and funding the import of components and parts, all expenses relating to the post manufacturing activities of the CTV were also managed and paid for by M/s. BIL. Custom duty, clearing charges, outward and inward freight, octroi duties, sales tax and other expenses were paid by M/s. BIL in connection with the clearance of CTVs from JRE. As the activities at JRE picked up, the flow of funds to them from BIL also increased.
5. The clearances of imported parts was done by the same CHA. The same container used to hold the goods imported in the name of both units, although ultimately all the parts went to JRE only. The import licences were also shared by both the units.
6. The investigating authorities probed the nature of relationship between the two units. Vinod Chabra, who was the power-of-attorney holder of JRE supplied to the investigating officers a letter dated 19-10-94 from BIL to JRE. Vide this letter, JRE were permitted to affix the Akai brand name on the CTVs manufactured by them provided that they were supplied exclusively to BIL. Yet another agreement dated 24-6-94 was also supplied which on investigation was found to be not authentic. The agreement appeared to be an improvement upon that initially tendered on 19-10-94. The officeis were of the impression that the agreement was a made up document to camouflage the fact that JRE was merely a dummy of BIL.
7. Before the investigating officers, it was claimed that there existed a provision for payment of 18 per cent interest on all the loans and advances made to JRE by BIL. The investigating officers found that for the financial year 1994-95 the accrual of such interest had not been shown in the books of BIL.
8. On the basis of these facts, the show cause notice was issued. The allegation made was that JRE was not an independent job worker but was a dummy of BIL, that the dummy was created and nurtured with the single motive that the cost of manufacture be reduced by bifurcation where the cost for sale promotion, advertisements, after sales services etc. were incurred by BIL. These charges which are normally incurred by a manufacturer are to be added to the assessable value and so as to reduce the price a device was created to arbitrarily separate these costs. The show cause notice summarized the investigations in the following manner :
(i) BIL was appointed distributor of AKAI products in India. (ii) BIL was allowed to fabricate the products of AKAI identified from and supplied by AKAI and its OEMs. (iii) BIL negotiated/communicated with AKAI and its OEMs with regard to price fixation, import of raw material, manner of import, packing for import. (iv) JRE Vasai factory was managed by Shri S.M. Cooper reporting to J.R. Mulchandani, C.M.D., BIL and later on Chief Executive, BIL. The working capital was provided by BIL. (v) JRE's Bombay Bank accounts namely those with HSBC, ANZ Grindlays, UCO bank were operated by BIL in the manner discussed in the show cause notice and as admitted by the concerned employees and Shri Z.H. Rizvi. (vi) JRE had no infrastructure, experience. The affairs of JRE were run by BIL. Infrastructure was provided by BIL in form of its offices located all over India.
(vii) As per directions of MD-BIL, the employees of BIL were undertaking day to day work of JRE.
(viii) Accounts of JRE factories were maintained by BIL (at Delhi and Bombay).
(ix) JRE was not free to use the funds provided by BIL at its own discretion.
(x) No funds were provided by JRE towards erection of Noida factory.
(xi) The funds for fixed assets of JRE's Noida factory as also towards working capital of JRE were provided in totality by NIL before commencement of production.
(xii) Key persons appointed by BIL such as S/Shri D.S. Bhatt, Production Manager (CTV), Nestor Rangel, Production Manager (Audio) and Vinod Chhabra, Manager (Admn) by change of their employment from BIL to JRE. After changeover they continue to report to management of BIL.
(xiii) Technical problems, problems related to spares, instruments etc. were taken care of by BIL.
(xiv) The role of Shri Zaffer Hussain Rizvi, (Proprietor-JRE) was limited to a mere signatory of Bank cheque books (blank) and statutory documents. The cheque books were used by BIL in the manner as discussed in the show cause notice by way of deposit of money into account of JRE.
(xv) Raw material indenting, shipping, clearances at customs, payment of customs duty, clearing charge, license procurement were done by BIL in respect of JRE.
(xvi) Raw material was provided on credit by BIL by way of routing the supply through M/s Dynasty Enterprise. The balance items supplementary to the product were imported by BIL in their own name.
(xvii) Supply of raw material to JRE imported by BIL in its name was done on credit without JRE incurring any expenditure towards it.
(xviii) JRE, in addition to financially being dependent on BIL, was under control of BIL as without PCBs and Remote controls provided by BIL on credit to JRE, JRE was not in a position to complete the manufacture.
(xix) Payments were being made by BIL (directly/by way of credit into accounts operated in the name of JRE) on behalf of JRE in respect of transport, custom duty, clearance charges, sales tax, supplies of the raw material on regular basis.
(xx) Sales tax accounting and its payment done by BIL. (xxi) Directors namely Shri Kabir Mulchandani (MD) and Shri S.C. Gupta (Whole-time Director) acted in tandem with one another. While MD controlled the affairs of JRE at Bombay, the whole-time Director controlled the affairs of JRS's factories and BIL's Delhi marketing. The operation of Bombay accounts was undertaken by BIL's staff at Delhi. The balance sheet was prepared by BIL and accounts at Noida and Bombay were maintained by BIL. Under Company Law, MD and Whole-time Director of a company enjoin the same status and their position is different from other Directors. (xxii) Payment of outward freight by BIL.
(xxii) The purpose of running a factoiy in the name and style of JRE in terms of intent highlighted in the project report relating to Gurgaon (as discussed in para 2.16 of this Notice) was to evade Central Excise duty and other taxes and to bring the goods in contravention of Export Import regulations.
(xxv) Selection of personnel and installation and erection of factory of JRE at Noida were undertaken by BIL.
(xxvi) Assessable value and ex-factory price were determined by BIL.
(xxvii) JRE got conversion charges fixed by BIL in such a way to take care of expenses towards the factory and only a meager profit accruing to JRE.
(xxviii) The transaction between JRE and BIL are mere paper transactions as ultimately the funds originating from BIL reached them in form of finished goods and in return for providing a meagre profit to JRE, BIL enjoys financial benefits on account of evasion of Excise duty and other taxes being resorted to in this manner.
(xxix) The authorized signatory in respect of factory at Noida was the Whole-time Director of BIL. He himself obtained the Central Excise Licence in respect of CTV factory and likewise the Sales Tax registration was obtained by him. He was holding General Power-of-Attorney and acting as agent of the principal i.e. JRE.
(xxx) The Sales Tax and Excise registration were obtained in the name of JRE by BIL for the purpose of evasion of Central Excise duty and other taxes.
(xxxi) The instruments, Jigs, Fixtures were identified by BIL. The instruments were arranged by BIL from overseas and the ownership remained with BIL.
(xxxii) JRE was manufacturing division of BIL created by way of funding J.R.E. which is to be treated as loan/advance in name of J.R.E. The use of loan/advance remained in the hands of BIL.
9. The Notice proceeded to allege that in view of foregoing, JR Electronics could not be considered an independent manufacturer. BIL was running a factory of JRE in the manner discussed in the show cause notice out of the funds provided by BIL without investment of funds by J.R.E. The factory of JRE was not only erected and managed by BIL but also the billing of AKAI Brand Products was for BIL. JRE was nothing but a captive manufacturer devised by BIL for the purpose of tax evasion. JRE was used by BIL as a colourable device for evasion of tax by way of subterfuge. The contention that the support was done on principal to principal basis holds no water in light of the evidence discussed in the show cause notice. More important than the agreements and the constitution of the unit was the examination of the fact how the transactions between JRE and BIL were taking place. The dealings between BIL and J.R.E. were not that of a principal with another principal but were in the nature of a principal and agent. The dealings between them were not at arms length. There was mutuality of interest between J.R.E. and BIL. The design and the intent of M/s. BIL to cut the costs of the CTV (as highlighted in their project report), the financial support of JRE, financial control along with conglomeration of other circumstances as discussed in this S.C.N. pointed to J.R.E. being a dummy/camouflage/facade/colourable device/ front company in the hands of BIL for the purpose of evasion of taxes.
10. The sales tax separate registration, excise registration, and the (STC) were for the purpose of evasion of taxes only as per the intent of BIL highlighted in the project report relating to Gurgaon project. When JRE were getting a fixed margin, it could only be called a job worker of BIL. But the job worker in this case was not an independent one since all the activities were controlled by BIL. The funds for all the activities right from setting of the factory, supply of Jigs, fixtures, testing instruments was done by BIL. The list of instruments available at the factory was prepared under panchnama dated 10-11-95 which prima facie revealed that the ownership rested with BIL. In this case, the job worker was financially and from the point of infrastructure totally dependent on BIL. The funds of BIL provided to J.R.E. remained in the hands of BIL. JRE therefore could not be called as an independent job worker. It was nothing but a dummy and camouflage devised by BIL.
11. The proprietary unit of JRE was converted into a limited company named as JR Consumer Electronics Pvt. Ltd. (JRCE) on 1-4-1996 with Jaffer Rizvi and Jaideep Anand as their directors. The show cause notice claimed that all the circumstances establishing JRE as a dummy of BIL remained the same. What changed was "Colour of the colourable devise". The relationship between JRE and BIL was not on principal to principal basis and similarly the relations between the BIL and JRCE were also on the basis of principal and agent. Therefore, the prices for CTVs could not be taken as the price at which JRCE cleared the same, but should be taken at the selling price of BIL in the market. The notice then proceeded to arrive at the assessable value based on the selling price of BIL. Admissible deductions were given. Special scheme deductions were not accepted. Differential excise duty was computed at 27, 58, 18, 413.14. The show cause notice demanded this duty jointly and severally from both BIL and JRC and alleged that both the units and the various persons named therein were liable to penalties.
12. Three more show cause notices were issued for subsequent periods where the allegations were the same. Further duty allegedly short levied and demanded in these SCNs amounted to Rs. 25,96,56,276/-.
13. The noticees filed replies. All the noticees were heard by the Commissioner. The Commissioner thereafter passed the order. The Commissioner opined that at the time when the project report was prepared by M/s. BIL, the CTVs attracted specific rate of duty and therefore the aim of the project report namely of reduction of the manufacturing cost could not be called a device to reduce the burden of duty. He mentioned the market realities that the consumer products required a very substantial outlay on the advertisement of the product which induces a buyer to buy a product manufactured by a particular manufacturer, in preference to a similar product manufactured by another manufacturer, where both the products may be identical and equally good. A small sector manufacturer working on job contract basis clearing his goods without affixing the brand name is not concerned about marketing and therefore does not incur any cost except those of manufacture. The Commissioner observed that there was nothing wrong where brand name owner could get the goods manufactured and incur substantial expenditure on advertising the product after its clearance from the job workers factory. He called this method as tax planning and not as tax evasion. He observed that the prices at which the job worker sold goods need not be compared with the prices at which these goods were later sold, but that the correct comparison would be of the prices charged by other manufacturers similarly placed for identical goods. He observed that in the cases of Cornerstone Brands case, the prices of CTVs as noticed and approved by the Tribunal were lower than those charged by JRE. He further observed that BIL were getting identical goods manufactured from M/s. Dixon at prices almost equivalent or less than those of JRE and that the agreement between BIL and Dixon had been accepted by the department. He also observed that a quotation for such products made by M/s. Uptron which was a public sector undertaking were also on par with the prices quoted by JRE. He further observed that Uptron being a large sector unit would normally have higher cost of production and even then the prices quoted by Uptron were on par with those quoted by JRE.
14. He thereafter went on to examine the allegation that JRE was a "dummy" of BIL. He cited Tribunal's judgment in the case of Alpha Toyo Ltd. v. Collector [1994 (71) E.L.T. 689] in which the term "dummy" was defined as a person not in existence in reality but existing on paper only; or in the alternative, a unit totally controlled by another in profit sharing, management control, decision making etc.
15. He held that the unit actually existed. He observed that the unit was earning substantial profits even in the face of small margin of profit since the volume was high. He held that there was no financial control exercised by BIL on JRE in as much as JRE had repaid the loans given and had also paid 18% interest. He observed that the show cause notice itself did not allege that profits were shared or that there were any flowback of profits from JRE to BIL. He held that taking the tribunal judgment in the case of Alpha Joyo Ltd., as the basis, the noticees before him were on a much sounder footing.
16. He held that the job worker had a physical identity, that they had machinery and personnel. Since the goods were physically manufactured in Noida factory, JRE were the manufacturers in terms of Section 2(f) of the Central Excise Act, 1944. They were not the "hired labourer" of BIL and therefore BIL could not be called to the manufacturer.
17. On the aspect of payment of interest by JRE to BIL, he took notice of the statements made by a number of employees of both the units to the effect that BIL had provided interest free loan to JRE. He held that the C.A. certificate and the balance sheet showed that whatever advances were received were paid back in all cases with interest. The documentary evidence thus superceded the spoken word.
18. He then examined the various aspects on which the show cause notice alleged that JRE was a dummy of BIL. On the aspect of total financial control, he observed that every item of expenditure was funded by BIL on the basis of need based revolving loan. Meticulous accounting was made and the expenditure so incurred was cyclically repaid by JRE. He observed that the books of account of both units showed all the financial transactions and also witnessed that each loan along with the interest thereupon was returned. He compared the situation with that covered by the Supreme Court in the case of Metal Box v. Collector [1995 (75) E.L.T. 449 (S.C.)]. In that case, the entire funding was made by M/s. Metal Box and even then the Supreme Court held that the transactions between these two units was on principal to principal basis. He compared the present position with that involved in the tribunal judgment in the case of M/s. Cornerstone Brands Ltd. v. Collector [1996 (86) E.L.T. 257] and observed that the Tribunal in identical circumstances had held that the job worker was an independent manufacturer. Quoting Tribunal's judgment in the case of M/s. Alpha Toyo Ltd., he distinguished financial management or assistance from financial control.
19. As regards to the loan of manpower from BIL to JRE, he held that M/s. S.M. Cooper, S.C. Gupta, V.K. Yadav and B.S. Bhat were on temporary secondment from BIL. Later total staff was recruited some of them from the ranks of BIL employees. Any disbursement made by BIL for the staff was repaid by JRE as a commercial transaction. The compensation for the services of Gupta and Cooper was quantified at Rs. 2,77,000/- and was paid for by JRE to BIL. It was claimed that over 250 skilled workers were in the employment of JRE. That would show their independent status.
20. As regards sharing of the premises also, he held that adequate compensation was made to BIL.
21. He observed that both BIL and JRE had maintained accounts of their mutual exchanges. It was necessary for BIL to maintain accounts because they had to monitor the return of the capital as well as the interest receivable.
22. As regards the receipt of raw materials, he observed that all the goods necessarily had to be obtained from M/s. Dynasty. Dynasty had deposited the large initial amount required by the AKAI and had also given 80 days credit both to JRE and BIL. AKAI did not recognize JRE and therefore there was nothing unusual in the raw materials being routed in this manner. He maintained that for all the raw materials received payments had been made by BIL for their own sake as well as for the imports made by JRE from the revolving funds made available by BIL. He cited case law to the effect that even when all the raw materials were supplied by the principal manufacturer, the job worker was still the manufacturer under the Central Excise Law. He relied upon the Supreme Court's decision in the case of M.M. Khambatwala v. Collector [1996 (84) E.L.T. 161]. As regards clearance of imported parts of the same licences, he observed that a specific license could not be used by two entities and SIL being transferable licence, could have been used by JRE on payment of appropriate fees.
23. As regards allegation that the assessable value was fixed by M/s. BIL, the Commissioner held that there was nothing unusual in this. The principal manufacturer would always ensure that he got a good bargain by keeping the value of a job worker limited to job work charges. This did not establish the status of the job worker as a dummy.
24. The Commissioner referred to the statements of some officers to the effect that the loans were free of interest. He stated that the statement was obviously wrong because the fact of interest being paid was duly documented.
25. The Commissioner then examined the various judgments cited before him by the revenue wherein it was held that one unit was the dummy of the other unit. He distinguished the judgments on facts from the issues before him.
26. In the absence of relationship between JRE and BIL, he held that JRE was an independent entity and not a dummy of BIL. He however observed that there was, a serious doubt created in his mind about the status of JRE as an independent person. When he had established that there was no managerial control in the earlier part of his order, in the later part he held that there was managerial control and in turn held that JRE was not a totally independent person. Therefore, he held that the values at which BIL sold the goods should be held as the assessable value.
27. Covering this possibility, Counsel for the assessees had worked out the duty payable for the relevant period December, 1994 to March, 1996 at Rs. 5,48,92,612/-. The figures and their working were shown by the adjudicating authority to the departmental officers. In his order, he reproduced the method of computation as follows :
"Total sales of Baron Including sales of old TVs but excluding Sales of PCB and remote controls 145,88,06,463 Less :
(a) Sales tax, freight octroi paid by JRE 6,18,55,211
(b) Discounts given under various schemes 15,31,67,695
(c) Interest cost on delayed payments 2,44,81,174
(d) Freight paid by Baron 21,96,564
(e) Sales tax paid by Baron 2,55,46,828
(f) Advertisement 18,88,48,983
Total 45,60,96,455
Net realisation of Baron 100,27,10,008
Taking Rs. 100,27,10,008 as Cum-duty price cal- Rs. 16,71,18,335
culate Excise duty @ 20%
Excise duty of Rs. 11,22,25,723/- has been paid by JRE during the same
period.
Therefore, differential duty payable is Rs. 5,48,92,612 (Rs. 16,71,18,335/-
Rs. 11,22,25,723/-)".
28. The Commissioner held that the deductions claimed at (a) above were admissible. Since the factory gate had moved from the premises of JRE to BIL, he allowed the deduction as under (d). He examined the various discounts claimed under (b). He allowed the deduction on account of cash discounts. Where a TV was supplied free on account of purchase of high number of TVs by a customer, he held the discount to be admissible. He then examined the deductions claimed on account of supply of boughtout items as gifts along with the CTVs which gift items were not manufactured by JRE. After examining the relevant judgments, the Commissioner allowed this discount. As regards advertisement expenses, he recalled the Supreme Court's judgment in the Bombay Tyre Intl. case wherein it was held that such expenses could not be claimed at abatement. He, however, referred to the Phillips India judgment of the Supreme Court [1997 (91) E.L.T. 540] where the contest was an account of trade discount specifically given so that the dealer could bear a part of the cost of advertising. In the face of the Bombay Tyre judgment also, the Supreme Court had allowed such deduction as trade discount for calculating the assessable value. Since the dealers name were also prominently brought out on the advertisements, he allowed 50% of the advertisement expenses as deduction. The sum of Rs. 2,44,81,174/- claimed at (c) above was allowed deduction following the MRF judgment Holding that JRE was not an independent manufacturer, he directed that the differential duty of Rs. 5,48,92,612/- be recovered from BIL.
29. The second part of the demand related to the later period commencing from 1-4-1996 when the proprietary unit of JRCE was taken over by JRC, a private limited company. He held that the show cause notice had not disclosed any evidence to suggest that there was any relationship between the two companies. They were not interested in each others business. The situation having been radically altered, it could not be said that the private limited company was a dummy of BIL.
30. Referring to the three show cause notices later issued, he held that they related to the period when the proprietary unit had been converted into a company and therefore in the absence of establishment of any mutual relationship, the demand for the later periods also would not sustain.
31. Earlier in his discussions, the Commissioner had held that the assessments were provisional and that the order passed by him was in the nature of finalisation of the assessment. In this belief, he confirmed recovery of differential duty of Rs. 5,48,92,612/-. The remaining quantum of demand was dropped. Since the proceedings were in the nature of finalisation of assessment he did not impose penalty on any of the noticees.
32. Against this order, M/s. Baron Intl. Ltd. have filed an appeal challenging the confirmation of duty to the extent shown above. The Revenue have filed appeals challenging the act of the Commissioner of reducing the quantum of demand, of dropping of a substantial portion of the demand and of not imposing any penalty on any of the respondents to the show cause notice.
33. In the memorandum of appeal by the revenue where the respondent was JRE, the various grounds on which JRE was alleged to be a dummy of M/s. BIL were reiterated. In addition, the memorandum claims that M/s. Dynasty at Hong Kong from whom the parts in SKD conditions were imported was also a front company created by BIL, that the company was under invoicing the imported parts and that the scrutiny of the document showed that the value of the components used in the costing of the product were different from the value shown in the import documents. It was claimed that although JRE were working on a fixed margin, they could not be called as job workers since they had no independent existence and that all their activities were controlled by BIL.
34. As regards the deductions given on the assumption that the price charged by BIL to their dealers was the basis for assessment, it was claimed that the discounts allowed for various special schemes could not qualify for deduction. For want of detailed working, the correct deductable amount on account of freight could not have been quantified. The appeal memorandum challenged the admission of all the claimed amount on account of freight.
35. The appeal memorandum challenged the belief of the Commissioner that no evidence has been brought on record to show that JRC was the dummy of BIL. It is claimed that the entire game plan of BIL included the conversion of JRE into JRCE. It was claimed that all the factors remaining the same, the mere change in the name did not alter the "dummy"' position of JRCE also. It was claimed that the Commissioner had glossed over pertinent facts disclosed in para 25 of the show cause notice. The case law on which reliance was placed by the Commissioner was claimed to be not relevant to the facts of this case. On this ground, the ratio thereof was urged as not admissible. It was claimed that in appreciating the evidence, wrong interpretation and application of several judgments was made. The judgment in the case of Alpha Toyo was correctly applicable but it had not been understood and appreciated by the Commissioner. It was claimed that financial control and management control were the two essential features establishing the identity of a master and a dummy. The show cause notice having brought out these two aspects fully, the law should apply without distinction. It was claimed that the Commissioner had failed to recognize the calculated facade put up to conceal the true nature of transactions between JRE and BIL.
36. It was claimed that during the entire period, the assessments were not provisional but that they were made provisional w.e.f. October, 1995 only when the investigations commenced. It is claimed that in terms of Duncans Agro judgment of the Delhi High Court, [1989 (39) E.L.T. 511] penalty was leviable even when the assessments were provisional, especially where the criminality of the assessee had been established.
37. The memorandum agitated the discounts held admissible by the Commissioner while confirming the demand of Rs. 5.59 crores. It was urged that Glaxo India [1995 (76) E.L.T. 451 (T)] negated the ratio of Kothari Detergents v. Collector [1998 (104) E.L.T. 513 (T)]. It was claimed that when the duty was meticulously calculated by the department, such deductions could not be considered. The act of the Commissioner of granting deductions on account of advertisement charges was challenged on distinguishing the Phillips India judgment, (supra).
38. It was urged that the Commissioner was wrong in accepting the costing of the product as shown by JRE which was based on Dynasty's supply prices when the show cause notice had hinted at the possible under invoicing of the SKD parts sent by M/s. Dynasty. The memorandum goes to show how dynasty was a front company indirectly held by K.J. Mulchandani of BIL.
39. It was again claimed that the judgment in the case of Tyaga-raja Engg. Enterprises v. CCE - 1996 (88) E.L.T. 312 (S.C.) = 1997 (68) ECR-41 was correctly applicable to the present case.
40. In the appeal filed by M/s. BIL, the following submissions were made:
1. The show cause notice demands duty jointly and severally from BIL as well as JRE and as such, the notice is liable to be discharged. This was raised as a preliminary objection which had not been dealt with by the Commissioner.
2. The show cause notice seek to recover duty Under Section 11A of the CSA 1944 without identifying and pin pointing the person charged with the responsibility of payment of duty. On this ground also, the notice was invalid and demand made in pursuance thereon was not sustainable.
3. The Commissioner accepted that JRE and JRCE were not fictitious units but were commercial entities. He accepted that there was no flow back of funds from the job workers to the BIL. He discussed each aspect of evidence disclosed in the show cause notice and arrived at a conclusion that the transaction between the two units were on a principal to principal basis and that JRE was not a dummy of BIL. In spite of this clear distinctions made, the action of the Commissioner in confirming the demand although in part, is without basis and should be set aside.
4. The fact that Shri Gupta had power-of-attorney did not establish the existence of managerial control being exercised by BIL over JRE. The Commissioner having accepted this fact could not have held that BIL were exercising managerial control over JRE. Power-of-attorney was to enable Shri Gupta to ensure that the unit was set up early. For the time spent by him on the job policy, JRE had compensated BIL. Therefore, the mere fact of Gupta holding the power-of-attorney did not constitute managerial control.
Even otherwise, in the absence of financial control, mere managerial supervision did not do away with the independence of the job workers.
5. The quantum of duty confirmed by the Commissioner was challenged. It was claimed that the entire amount spent on advertisement should have been permitted deduction. However, no elaboration was made to sustain this ground.
41. The case for JRE/JRC, BIL, and their officers was argued by Shri Laxmikumaran, Advocate assisted by T. Vishwanathan. Revenue was represented by Shri M. Chandrasekharan, Senior Advocate assisted by C. Harishankar, advocate.
42. Shri Laxmikumaran on two occasions challenged the Commissioner's order on grounds of jurisdiction. His objections were overruled by the Bench in two interim orders. He then proceeded to argue the appeals and to reply to the arguments of Shri Chandrasekharan. The two interim orders are made as enclosures to the present order.
43. Shri Chandrasekharan reiterated the arguments made in the appeal memorandum. Quoting extensively from the show cause notice, he brought out that the agreements were made up documents and were created only as a defence when the investigations commenced. Shri Laxmikumaran contested this and stated that in spite of the seeming deficiencies in the agreements, the fact remains that the interest at the rate of 18% prescribed in the agreements was in fact paid by JRE to BIL. Shri Chandrasekharan stated that the balance sheet of M/s. BIL for the first year after the production was started by JRE did not show the receipt of or accrual of interest. Shri Laxmikumaran submitted that it might have been an error but that did not disprove the fact that for the entire period the interest was paid by JRE to BIL.
44. Shri Chandrasekharan maintained that the show cause notice had disclosed very substantial evidence in support of the charges made therein. The Commissioner had dealt with them superficially and had glossed over a number of disclosures which were material to the charge that JRE was a dummy. He stated that right from the inception, JRE was and continued to be a shadow entity without its own finances, staff, expertise etc. Shri Laxmikumaran claimed that not only the agreements but also the subsequent behaviour of the parties showed that in the initial period JRE was helped by BIL but that later JRE took off on their own. He emphasized that BIL was merely a trader whereas JRE was a manufacturing unit with over 250 people who were technically qualified at the working level. He claimed that even though initially the money was advanced by BIL and even through from time to time finances/loans were made, the accounts and the C.A. certificates would show that everything was paid back to BIL.
45. Shri Chandrasekharan claimed that JRCE was as much a dummy unit of BIL as was JRE. The mere fact that its constitution was changed, did not alter the ground realities in any mariner. Along with the assets and liabilities the status of a dummy also stood transferred to JRCE. Shri Laxmikumaran submitted that there could be no comparison between an individual enterprise and a limited company. At the time when it came into existence, it had his own accommodation, machinery and the loan out of which these goods had been acquired had already been paid back with interest. Apart from Shri Rizvi, there was another Director namely Shri Anand. Thus there was no similarity between the proprietary unit and the limited company.
46. The duty confirmed in the contested proceedings were calculated after allowing certain deductions. Both sides advanced arguments on the methodology and quantification of such deductions. Shri Chandrasekharan claimed that under the guise of trade discount inadmissible deductions were granted. He stated that where free gifts were given there was no cause for deduction of value of such free gifts from the price charged. The customer would go to the market to purchase the TV and would be prepared to pay the price as was levied in the open market. If he got a free gift, he would not be unhappy but the fact that he got a free gift does not enable the manufacturer to claim a deduction. As regards the advertisement, it was the claim of Shri Chandrasekharan that the cited law did not apply in the present case and therefore no deduction at all was warranted. He stated that wherever the deductions were warranted, the department had taken these into account and had thereafter only quantified the payable quantum.
47. Shri Laxmikumaran claimed that the prices charged by JRE from BIL were on par with the prices charged from BIL by other manufacturers also. He submitted that when the full discount is given even the assessable value calculated on the basis of BIL's prices to their dealers would be almost at par, with what was charged by JRE to BIL.
48. We have carefully considered the submissions made by both the sides and seen the citations made.
49. Considerable case law cited relates to the need for "Clubbing" together the output of two units.
50. In order to promote the interests of units in the small sector, certain notifications were issued providing duty fee clearance of goods up to a particular value limit. Some unscrupulous persons proceeded to duplicate their manufacturing facility so as to gain multiple benefits for the split units from the notification. Thus a person inside a single shade may establish three units all under his control where all the facilities, machinery and labour would be pooled together. Each unit would be registered separately under the excise law and would also obtain separate registration under Sales tax, Income-tax, Octroi and the Shop Establishment Act etc. Invoices for sale would be issued unit wise. A number of offence cases were booked by the department alleging unity of such units. Several cases were held as not established by the Tribunal as also by the Courts. It was held that commonality or persons in charge was not an element to establish unity, nor did the pooled raw materials etc. indicate commonality. In a number of cases, unity was established, the clearances were clubbed together and the duty short levied was ordered to be payable by the "principal" unit, Later, the judgments were coalesced into giving certain parameters on which the facts were to be tested. Considerable case law has been established in this area where certain guidelines have emerged. The law evolved, in simple terms is that where one unit has total financial and/or managerial control over the other unit, the two units are actually one and their clearances are required to be clubbed.
51. It should be understood that the issue involved in cases of clubbing do not relate to valuation as governed under Section 4 of the Central Excise Act, 1944 but that they relate to the calculation of total value of permissible clearances. The determination of assessable value is not a question involved in these case. Therefore this batch of cases does not give any ratio where valuation is disputed.
52. The thrust of the show cause notice in these proceeding is that JRE was a dummy of BIL, that they were more of a hired labour of BIL than an independent manufacturer, that in the circumstances BIL should be held to be the actual manufacturer and therefore the prices at which BIL sold the goods to their dealers should be taken to be the basis for calculation of the assessable value.
53. Section 4(1)(a) [Proviso (iii)] of the Central Excise Act, 1944 at the material time read as follows :
"where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related persons) or where such goods are not sold to such dealers, to dealers (being related persons), who sell such goods in retail --".
54. The definition of a manufacturer under Section 2(f) of the Act at the material time included any person who engaged in the production or manufacture of excisable goods and also one who hired labour in the production or manufacture of such goods.
55. The charge in the show cause notice does not claim relationship in terms of Section 4 of the Act, between JRE and BIL but makes out BIL as the manufacturer denying the independent existence of JRE by calling them a dummy.
56. As against the charge in the show cause notice and pleading by Shri Chandrasekhar, the claim made by Shri Laxmikumaran was that JRE were an entirely independent operator, operating as a job worker for M/s. BIL.
57. For a number of years a job worker was considered to be hired labour of the principal manufacturer. It is in this belief that the Central Excise authorities required a licence to be obtained by the principal manufacturer even where the actual production was done by the job worker. Notifications such as 305/77-C.E. exempted the traders who sent grey fabrics for processing to a process house from licensing control provided they gave a declaration as to the valuation of a grey fabric and also undertook to pay the duty if not paid or short paid by the processors. This was in the belief that the processors were "hired labour" of the traders. This concept was ultimately negated by the Supreme Court in the judgment in the case of Ujagar Printing Works and Ors. v. U.O.I [1988 (38) E.L.T. 535 and 1989 (39) E.L.T. 493] where the job worker was held to be the manufacturer in terms of Section 2(f) of the Act and the basis of assessment of the goods cleared by him to the principal manufacturer was determined as the sum total of cost of raw materials, cost of conversion and a reasonable margin of profit. By a later clarificatory order, the Supreme Court ruled that although these goods would be ultimately sold by the trader in the market at a price higher than determined by the formula given, the margin received by the trader was not addable to the assessable value and for computation of duty when the job worker cleared the goods to the trader or the principal manufacturer. At this stage, it is recalled that Shri Laxmikumaran had maintained that BIL were trader and not a manufacturer.
58. The Tribunal in their judgment reported in 2001 (135) E.L.T. 751 (Ekbote Interiors Pvt. Ltd. v. CCE, Pune), observed as under:
"Although the definition of 'manufacture' has undergone a change, the definition of "Manufacturer" has remained the same. It would appear that the definition evolved in a period where goods were manufactured by individuals who occasionally also employed "hired labour" in the manufacturing process. Thus, if the physical manufacture was done by a labourer, the liability to pay duty remained with the person who had hired the labour. As the industry evolved, the independent job workers emerged. For quite some time, there was a conflict of opinion as to whether the principal manufacturer was the 'manufacturer' for the purposes of Centra) Excise or whether it was the Job worker. In establishing the identity of the manufacturer, during those early years the emphasis was placed on the ownership of the goods. Thus in a landmark judgment of the Supreme Court in the case of Shree Agencies C. S.K. Bhattacharjee [1977 (1) E.L.T. (J 168)], the Supreme Court was examining the entitlement of the Appellant to a notification which exempted the products of a number of powerlooms grouped together. The yarn was given to the powerloom operators for weaving into cloth. On record it was shown that the yarn was purchased by the powerloom owners but in reality the ownership continued to vest with' the master weaver. Although only the job charges were paid to the weavers, the Supreme Court held that interest in the yarn remained with the master-weaver. Although only the job charges were paid to the weavers, the Supreme Court held that interest in the yarn remained with the master-weaver throughout and also observed that the billing and transport charges were paid by him. In this situation the master weaver was held to be the real manufacturer although the physical manufacturer was done by other persons. The same line of reasoning was followed by Supreme Court in their judgment in the case of Bajrang Gopilal Gajabi reported in [1986 (25) E.L.T. 609].
But with the increase in scale and also the increase in the complexities of the manufacturer, it was not possible to get the work done by utilizing hired labour. The work of the manufacturer came to be entrusted to the job worker who had a separate legal identity. Some were firms and some were Ltd. Companies. These job workers obviously were not "Hired labour" and therefore, had to be held as independent manufacturers. The Gujarat High Court in their judgment in the case of Apex Electricals Pvt. Ltd., 1992 (61) E.L.T. 413 held that ownership of the raw materials was not a relevant factor in determining the identity of the manufacturer. The confusion as to the identity of the manufacturer when the physical manufacturer was done by an entirely independent from the one who gave out the job continued for quite sometime. A view was held for a very long time that the supplier of the raw material continued to be the manufacturer.
This was most prominent in the case of grey fabrics supplied lo the independent processors of fabrics. Such traders were required, to file an application for exemption from licensing control and had to undertake that they would pay the duty payable in case of default by the processors. This was embodied in Notification 305/77-C.E. initially and later in Notification No. 27/92. The second area in which job working prevailed was the manufacture of medicaments. It was common for a Company to obtain registration from the Food & Drug Administration without having any manufacturing facility and to get the pharmaceuticals manufactured from another person having a factory.
However, at the same time the Courts as well as the Tribunals were aware that the person who (corporate of individual) undertook the physical manufacture could not continue to be classified as " Hired labour". Therefore, the law evolved that the manufacturer in terms of the said section was not the customer or the primary manufacture but that it was the job worker. One of the earlier judgments to this effect was of the Andhra Pradesh High Court judgment in the case of Andhra Re-Rolling Works, 1979 (4) E.L.T. (J600) (A.P.). The Supreme Court judgment in the case of Ujagar Prints Ltd., settled the issue finally [1988 (38) E.L.T. 535 and 1989 (39) E.L.T. 493]. In the judgment the Supreme Court held that the job worker who processed the fabrics was the "manufacturer" and not the trader who entrusted the grey fabrics to him."
59. In the judgment of Pawan Biscuit Company Pvt. Ltd. [1991 (53) E.L.T. 595 (T) M/s. Pawan was manufacturing biscuits on behalf of M/s. Britannia Industries Ltd. The dispute arose whether duty was chargeable on the price charged by the job worker to the Principal manufacturer or on the value that was charged by the Principal manufacturer in the market. The Tribunal examined the agreement between the parties. They observed that BIL had exercised complete control, direction and supervision of the work of M/s. Pawan. Experts of Britannia were posted in the factory of Pawan. If the job worker produced defective goods, there was a provision for cutting the conversion charges. Thus financial control to great extent was exercised by BIL over Pawan. The biscuits could not be sold to anybody else except to Britannia. On perusal of these clauses the Tribunal held that the agreement was as between a Principal and its agent. It was also held that the transfer of goods did not amount to sale. It was held that the assessable value could not be the combination of cost of raw material plus conversion charges but that it had to be the price charged by BIL in the market. The Judgment in the case of Ujagar Prints (supra) was cited before the Tribunal. But the Tribunal following the wording of Section 4 of the Central Excise Act 1944 denied the ratio of the Ujagar Prints altogether. It was held that the concept of "open market" did not exist where the job worker had given the goods to the principal manufacturer. The Supreme Court reversed this judgment [2000 (120) E.L.T. 24]. The Court applied the ratio of Ujagar Prints Judgment holding that the job worker's factory gate was the "deemed factory gate" as envisaged under Section 4.
60. The ratio of this judgment was followed by the Tribunal in the case of Ultra Lubricants (India) Pvt. Ltd. v. Commissioner [2002 (150) E.L.T. 580]. The judgment however does not give the underlying facts, which come out in the latter judgment in the case of Kwality Ice Cream Co. v. Commissioner [2002 (145) E.L.T. 584 (T)]. In this case Brooke Bond Lipton India Ltd. had entered into an agreement with Kwality Ice Cream Co., where the later were to manufacture Ice Cream for the former. The point of dispute is highlighted in para 4 of the Tribunal Order as follows :-
"The Assistant Commissioner while confirming the above finding placed reliance on certain other points also. Commissioner (Appeals) took the view that the terms and conditions of the agreement between the appellant and BBLIL/HLL do not leave any scope to indicate that the appellant has any independence to run their unit. Starting from the procurement/purchase of raw material to the manufacture of the final product, all the activities of the appellant are fully controlled by BBLIL/HLL. The nature and type of machinery to be put into use is as per the directions of BBLIL/HLL. The manufacturer does not have any liberty to market its goods. The price of goods is determined by BBLIL/HLL and any cost found extra is pruned/cut down by BBLIL/HLL. Even the margin of profit is determined by BBLIL/HLL. There is a mutuality of interest between the appellant and the buyer inasmuch as the buyer has given an interest free deposit of Rs. 50 lakhs to the appellant besides payment of non-competition fee of Rs. 7.50 crores. Therefore, transactions between the appellant and the buyer are not on principal to principal basis. Interest accrued on the interest free deposit with the appellant read with other terms and conditions of the agreement is clearly an extra commercial consideration. The above finding is challenged in this appeal on different grounds."
61. After examining the facts the Tribunal found that the price was fixed on the basis of a mutually agreed formula. As regards the sourcing of raw materials, the Tribunal found that no undue advantage was available to the principal manufacturer. The Tribunal did not accept the contention that the job worker was under the total control of the principal manufacturer. The Tribunal held that in insisting upon total quality control there was no unreasonable restriction. The Tribunal noted that the investments, where the job worker has paid an amount of Rs. 50 lacs, the Principal manufacturer has given an interest free advance of Rs. 2.75 crores. The Tribunal observed that payment from the principal manufacturer was made on receipt of the goods. The Tribunal referred to their earlier judgment in the case of LVT Products Ltd, v. CCE [1997 (93) E.L.T. 134] which involved sale of biscuits by a job worker on the ground identical to that involved in the Britannia Industries Ltd.'s case (supra). The Tribunal held that the job worker was the real manufacturer placing reliance on the Judgment of the Supreme Court in the case of Union of India v. Playworld Electronics Pvt. Ltd. - 1989 (41) E.L.T. 368 to the effect that in identical circumstances and even where the brand name of the principal manufacturer was affixed on the goods and even when the entire production was required to be purchased by the principal manufacturer, there was no existence of relationship. Thus in the cited case of Kwality Ice Cream the Tribunal held that the job worker and the principal manufacturer were not related persons, the transaction between them was one of principal to principal basis and that the price being the sole consideration, the assessable value should not be based upon the sale price of the buyer.
62. The Tribunal judgment in the case of Dixon Utilities and Exports Ltd. v. Commissioner - [2000 (121) E.L.T. 780 (T) = 2000 (41) RLT 130] is most akin. Dixon were manufacturing CTVs assembled with the material supplied by a number of brand holders. The Tribunal following the Ujagar Prints Judgment held that the prices were to be taken at which the goods were sold by the job worker.
63. With this background it is necessary to examine the various grounds raised in the proceedings to establish the relationship between JRE & BIL.
64. We have listed earlier the allegations made in the Show Cause Notice. These can be condensed and set out as below :-
(a) That Shri Z.H. Rizvi had no experience of manufacture of CTVs and that he was a puppet or dummy in the hands of BIL;
(b) That the facilities such as premises, godowns and personnel owned and employed by BIL were shown as either belonging to JRE or were shared by them;
(c) That JRE had no funds of their own and that all the funds were given by BIL but were shown to be those possessed by JRE;
(d) That all the raw materials were given free without any expenditure including their importation post importation and attendant expenditure;
(e) That the entire project report made by BIL was with the intention to implement a scheme as set out above; with the intent to evade duty;
(f) That conversion of JRE into JRC was another colourable devise which did not change the underlying reality.
65. The revenue has placed a significant reliance on the project report submitted by BIL to Akai. It is attempted to be shown that the proposal to cut costs by way of employing job workers was the beginning of a scheme to create a facade with the intent to reduce the burden of duty. But as Shri Lakshmikumaran has pointed out at the time of preparation of the project report the rate of duty on CTVs was specific and not ad valoram and therefore this conclusion is entirely wrong. This submission is valid. We have to hold that the project report is not the seed in the scheme to defraud the revenue.
66. The main contention of the Revenue during the arguments was that the entire funding was of BIL and not of JRE. The counter argument of the party was that these two units were independent and that whenever money was needed by JRE they were availing of loans which were returned by the job worker from time to time as was evidenced by the accounts. It was submitted that these arrangements were evidenced by the agreements which were on record. The counter offensive of the revenue is that these agreements were not in existence but were later fabricated to prove their independence. It was also claimed that there was nothing shown as an accrual of profits in the accounts of BIL although in the books of JRE such expenditure was shown. The counter was made by Shri Lakshmikumaran that such transaction in each period were covered by a Chartered Accountant's certificate and that even if some persons had made statements that loans were free of interest, the statements needed to be pleaded at a lower footings in the face of proof of return of loans with payment of interest,
67. The point of compensation attracted the maximum discussion. The claim of the Revenue is that the agreements were a subterfuge and that the statements of certain persons showed that the advances made were without interest and therefore it is suggestive of the unity between JRE and BIL. The very legality of the agreements produced was questioned. But Shri Lakshmikumaran stated that the proof of repayment of the advances along-with interest is reflected in the accounts and that these are certified by the Chartered Accountants and are reflected in the books of accounts. We have seen the documents. There are two certificates on record, one by Shri Deepak Agarwal, Chartered Accountant certifying the payment of interest by JRE and the second by Shri P.R. Shah, Chartered Accountant, who had examined the accounts of BIL witnessing the receipt of the same by BIL same from the books of accounts. There are several such certificates all evidencing payments by JRE to BIL on account of rents to BIL, services rendered by BIL's staff and other Misc. expenses. These specifically refer to Gupta, Bhatt and others.
68. With regard to these certificates and accounts a very interesting suggestion was made during the hearing. It was claimed by Shri Chandrasekaran that these were a cover up operation and the original statements of the persons to the effect that there was no interest stipulated would show the cover up. It was also claimed that there was doubt as to the validity of the agreements. We are unable to find substance in these submissions. The C.A. who certifies a state of finances would normally do so only on full examination of the accounts kept by the client. He is aware that wrong certification would lead to loss of his licence to practice. We further observe that till the issue of the show cause notice the investigations were current and if this was a subterfuge, the experienced officers of the DRI could very well have exposed the cover up operation by examining the Chartered Accountants.
69. On the basis of the evidence disclosed we accept the contention that JRE had accepted the loans from time to time and returned the loans with interest to the manufacturer. Therefore the transaction must be accepted as on principal to principal basis and not that of principal and agent or of master and hired labour or dummy. In coming to the conclusion we have taken in to account that for all the costs, and services shown as rendered by BIL to JRE, the former were adequately compensated.
70. The very considerable quantum of deposit made by BIL to Akai has no relevance to the issues involved. We further find that in the grounds of appeal it has been brought out that this amount was paid by M/s. Dynasty in Hong Kong which is a wholly owned firm of Shri Mulchandani. This allegation come for the first time only in the appeal memorandom and therefore we do not take serious notice of this new allegation.
71. The sourcing of material is also made a big issue of in the Show Cause Notice. In the case of Ujagar Prints (supra) the basic raw material was always given by the traders. In a number of cases it has been held that the entire raw material being supplied by the principal manufacturer, did not change the position of the job worker as the manufacturer. We do not see any illegality in such importation by BIL and supply to JRE. In fact in a large number of cases especially in the Modvat area under the Central Excise law it has been held that a principal manufacturer would source and direct the source to supply the material directly to the job worker, and even where the material would not reach or be routed through the place of principal manufacturer, the principal manufacturer could take Modvat credit.
72. At a couple of places the show cause notice make the allegation that there was an element of undervaluation in the case of goods supplied by Dynasty. The same allegation is made in the present appeal filed by the Revenue also. However, at neither place was any specific instance cited to support this claim. For lack of any substantiation we need not pay any attention to such vague allegations.
73. It is not that Shri Rizvi is a man of straw. The Show Cause Notice in para 5.3 shows that he was a manufacturer of machine made embroideries and that he was running a factory for over 10 year. It has come up in the said para that in the same unit Shri Rizvi was running a factory making audio equipments also. The Show Cause Notice itself admits that Rizvi is a manufacturer who had good knowledge of operating the business as well as factory. It also shows that he owned a residence in the medium end location in Mumbai.
74. Much has been made in the show cause notice about the participation of officers of BIL viz. Gupta, Bhatt and Cooper who had assisted in the setting up of the factory. What is claimed on his behalf is that Shri Rizvi could not be available at all times at the site and that somebody had to set up the unit. It was time and again claimed that such assistance was a perfectly acceptable commercial transaction especially when compensations were being made by JRE on the expenditure quantified by the salaries and wages of these people.
75. In the notice and in the arguments it was brought out that even the household expenses of Shri Rizvi were being paid by BIL. Since JRE was a proprietary unit, such expenses would also be covered by the later compensation. A printed reference was made to Eid sweets. Shri Laxmikumaran clarified that these were distributed to the workers of JRE and were in fact a corporate expenditure.
76. Much space is also devoted to managerial control and supervision of production by BIL employees. As we have observed above, these employees were appropriately compensated. For effective implementation they were required to have power-of-attorney vested in them. The measures taken for smooth implementation cannot be suggestive of total control over the job worker.
77. It is not unusual for a principal manufacturer to exercise some control over the manufacture/quality of production of the job worker. This by itself does not convert the agreement between them from principal to principal to agency agreement.
78. Thus we conclude that on the basis of the evidence disclosed it has to be held that the relationship between JRE and BIL was that of one principal with another principal. Therefore JRE was a manufacturer in terms of Section 2(f) of the Central Excise Act. Therefore the price which was charged by the job worker to the principal manufacturer was the value for assessment and that the traders' margin when the goods were finally sold in the market would not enter the calculation for quantifying of assessable value.
79. We now come to the later period when JRE (a proprietary unit) was converted into JRCE a Private Limited Company, The show cause notice makes light of this change and says that the ground reality had not changed and that the relationship continued to be of hired labourer as was in the case when the unit was a proprietorship. Shri Chandrasekaran claimed that in effect nothing was changed except that the mask was of a different colour. He attacked the belief of the Commissioner that no 'independent evidence had been led to show that the relationship between the two corporate persons was not as between two principals. He claimed that it was not necessary to show afresh in the evidence when nothing had changed except the name of the unit.
80. We have seen the contents of para 26 of the Show Cause Notice. This para reiterates the earlier claim that JRE was a dummy. It brings out the friendship between Rizvi and Anand, who were the Directors of the private limited company and J.R. Mulchandani and Kabir Mulchandani. It shows that the assets and the liabilities of the proprietary unit stood transferred to the limited company. It says that all that happened was that the unit was thereafter run "not by BIL but a confidant of BIL". It shows precious little as to how the change does not alter the legal status or realities. It is alleged that this step was merely to perpetuate a fraud already existing. If this was the confirmed belief in the minds of the revenue they could have recorded statements of the concerned persons to show the futility of this exercise. But it was not done by the investigative agency. In this regard our comments earlier on the fact of payment of interest would bear repetition here.
81. There is a world of difference between a proprietary firm and a private limited company. The liability of the proprietor to the third parties is limitless where as in a company it is limited. A proprietorship unit is not subject to the dictates of the Companies Act. In fact it is a simplistic statement to claim that when a proprietorship firm converts into a private limited company nothing changes. In the remaining paras on this area the various allegations made in the earlier portion are merely reiterated. The reference to photographs of some persons concerned including Mulchandani and Rizvi given in para 25.2 neither gives any insight in the allegation that "colours of colourable device were changed".
82. We need not go into the issue whether the sins of the proprietary unit would attach themselves to the limited company which had taken over the assets and liability. This is because we have already held that the relationship between the earlier proprietary unit and BIL was on principal to principal basis.
83. Once we have held that price at which the goods were normally supplied to the principal manufacturer was the value for the purpose of assessment following the judgment in the case of Ujagar Prints (supra), there is no need for us to go into the issue whether the deductions claimed were available to the manufacturer.
84. When examining an allegation as to evasion of duty by way of artificial depression of assessable value, the price at which goods of like kind and quality are sold in the market at the time of clearance of the goods is a very material aspect. In the present case the allegation is of depression of assessable value by the job worker. It was claimed by Shri Lakshmikumaran that at all stages of the proceedings it has been brought to the notice of the department that the values were comparable. In para 64 of the Commissioner's Order, now impugned, it has been shown that Dixon's price was on par with the JRE price. This point was made during the hearing before us also but was not contested. In para 64 of the said order the Commissioner has also recorded the submissions that M/s. UPTRON, a public sector unit had also made an offer to supply CTVs at the price comparable to those charged by JRE. This point was also not challenged or contested by the Revenue. The parity display of this price charged by other units for identical goods would go to show that the price charged by JRE was not artificially deflated.
85. On the basis of these discussions we allow the Appeal filed by, BIL, and dismiss the seven appeals filed by the Revenue.