Customs, Excise and Gold Tribunal - Delhi
Steel Treaters (Mysore) Pvt. Ltd. vs Collector Of C. Ex. on 28 April, 1994
Equivalent citations: 1994ECR348(TRI.-DELHI), 2003(160)ELT1105(TRI-DEL)
ORDER S.L. Peeran, Member (J)
1. In all these three matters, a common question of facts and law is involved, hence they are taken up together for disposal as per law. The Collector of Central Excise, Bangalore vide his Order-in-Original dated 30-11-1992 has held by a common order that the clearances of the three units have to be clubbed in view of the fact that M/s. Metal Cutters (Mysore) Pvt. Ltd. and M/s. Steel Treaters have been created and floated by M/s. Vishnu Forge (Mysore) Ltd. for the purpose of wrongly availing the exemption of two small scale units under Notification No. 175/86, dated 1-3-1986 as amended. The learned Collector has held that the goods manufactured and cleared by M/s. Metal Cutters (Mysore) Ltd. during the period from 1-8-1986 to 30-11-1989 and by M/s. Steel Treaters (Mysore) Pvt. Ltd. during the period from June, 1989 to July, 1989 are to be treated as goods actually manufactured and cleared by M/s. Vishnu Forge (Mysore) Pvt. Ltd. The learned Collector has also held that M/s. Vishnu Forge (Mysore) Pvt. Ltd. is ineligible for the duty exemption under Notification No. 175/86-C.E., dated 1-3-1988 as amended, the clearances effected by them through M/s. Metal Cutters (Mysore) Pvt. Ltd. during the period 1-8-1986 to 3-11-1989 through M/s. Steel Treaters during the period from June, 1989 to July, 1989 are chargeable to duty without extending the benefit under the said Notification. Consequently, the learned Collector has confirmed the duty demand of Rs. 24,02,746.73 against M/s. Vishnu Forge (Mysore) Pvt. Ltd. He has imposed penalty of Rs. 2 lakhs on Vishnu Forge (Mysore) Pvt. Ltd. under Rule 173Q(1) of C.E. Rules, 1944 and penalty of Rs. 20,000/- each on Metal Cutters (Mysore) Pvt. Ltd. and M/s. Steel Treaters (Mysore) Pvt. Ltd. under 209A of the Central Excises Rules, 1944. Aggrieved by the said order, the appellants have filed these three appeals which have been heard together for disposal as per law.
2. The allegation made in the common Show Cause Notice dated 16-8-1991 against the three appellants are that M/s. Vishnu Forge (Mysore) Pvt. Ltd. have contravened the provisions of Rules 9(1), 52A, 53, 173F, 173G and 226 of Central Excise Rules, 1944 and committed an offence as specified under Rule 173Q(1) inasmuch as they have manufactured and cleared the excisable goods, viz., Rock rollers, other allied Drill bits, Forging and Forged products, namely, parts of Gears, Automotive parts, Textile Machinery parts, Lathe parts, parts of Earth moving equipments etc. falling under Chapter sub-headings 8202, 8207, 8483, 8708, 8466, 8448, 8431 of Central Excise Tariff Act, 1985 without the payment of Central Excise Duty without following Central Excise procedures. It is further stated that M/s. Metal Cutters (Mysore) (P) Ltd., Mysore and M/s. Steel Treaters (Mysore) (P) Ltd., Mysore are the related person units floated and created by M/s. Vishnu Forge (Mysore), Ltd. for such purpose with an intention to wrongly avail the SSI exemption under notification No. 175/86, dated 1-3-1986 as amended in respect of the said goods manufactured by M/s. Vishnu Forge (Mysore) (P) Ltd. and cleared through the said units and that M/s. Metal Cutters (Mysore) (P) Ltd., Mysore and M/s. Steel Treators (Mysore) (P) Ltd., Mysore are not the actual manufacturers of the said excisable goods. It is further stated that the duty so evaded by M/s. Vishnu Forge (Mysore) (P) Ltd. by wrongly availing the exemption under the said Notification No. 175/86 in respect of the goods cleared through M/s. Metal Cutters (Mysore) (P) Ltd., Mysore during the period 1-3-1986 to 30-11-1989 works out to Rs. 21,25,930.60. The duty evaded by M/s. Vishnu Forge (Mysore) (P) Ltd. by wrongly availing the exemption under the said Notification No. 175/86 in respect of the goods cleared through M/s. Steel Treaters (Mysore) (P) Ltd., Mysore during the period June, 1989 to July, 1989 works out to Rs. 2,76,810.13. It is further alleged that M/s. Metal Cutters (Mysore) (P) Ltd., Mysore and M/s. Steel Treaters (Mysore) (P) Ltd., Mysore are concerned themselves in acquiring, possessing, keeping and selling of non-duty paid excisable goods which they knew, or had reasons to believe are liable for confiscation under the Central Excise Rules, 1944. The basis for the said allegations has been summarised by the learned Collector in Para 2 of his Order as follows :
"2. The scrutiny of records and investigation revealed the following :-
(i) that the 3 units viz., M/s. Vishnu Forge, M/s. Metal Cutters and M/s. Steel Treaters are located in the same premises on the land of about 10 acres which belongs to M/s. Vishnu Forge. There is no lease agreement whatsoever between M/s. Vishnu Forge and other 2 units and no rent is paid for the said land by M/s. Metal Cutters and M/s. Steel Treaters;
(ii) of three units, M/s. Vishnu Forge is a medium scale limited company, while M/s. Metal Cutters and M/s. Steel Treaters are the small scale Private Units registered as such. All the 3 companies are having common Directors, viz., Shri M.S. Ramaiah, Shri M.R.S Ramaiah and Shri M.R. Jayaram, all residing at Gokul House, Bangalore-54. There is one more Director Shri R. Chandra Shekara Shetty residing at 94, 1st Main Road, 10th Cross, West of Chord Road, Rajajinagar, Bangalore. Shri M.S. Ramaiah, Shri M.R.S. Ramaiah and Shri M.R. Jayaram appear to be related persons as father and sons and Shri M.R.S. Ramaiah is the common Managing Director for all the 3 units ;
(iii) the office and Managerial cadre officers are found to be common to all the 3 units;
(iv) the entire common premises is fenced and guarded by security staff of M/s. Gajamukha Security Bureau and of M/s. Vishnu Forge;
(v) M/s. Vishnu Forge has a tool room which has co-turning, die sinking machines etc. The tool room is used commonly for die manufacturing, die modification and repairing tools used in day-to-day manufacturing activity by all the 3 units and no charges are paid by other units to M/s. Vishnu Forge;
(vi) the storing place of raw materials is in the open area adjacent to the cutting section of M/s. Metal Cutters and the raw materials belonging to all the 3 units are stored in this place;
(vii) there is a tempo bearing Regn. No. MEY 4882 in the name of M/s. Metal Cutters and the same is being used for internal movement of the goods commonly by all the 3 units;
(viii) there is a telex facility available in the -- which facility is availed commonly by all 3 units;
(ix) M/s. Metal Cutters (Mysore) (P) Ltd. have to manufacture open forge items. The unit in addition has got cutting machines numbering 22 which are for cutting raw materials. The said unit caters to the need of cutting of raw materials etc. of all the 3 units for availing this facility;
(x) M/s. Steel Treaters are equipped with gas corburrising, hareming, salt bath and tempering etc., all used in the heat treatment processes. No heat treatment facility available at the other units. Thus, M/s. Steel Treaters cater to the heat treatment requirements of all the 3 units. Regarding movement of raw materials, it is seen no procedural formalities are followed among the units; M/s. Steel Treaters have no facility to manufacture any forged products;
(xi) It is seen that M/s. Metal Cutters and M/s. Treaters have accepted the orders for closed die though there existed absolutely no facility in the above units for production of such forgings. For purpose the manpower machinery, dies electric power, technical know-how etc., of M/s. Vishnu Forge have been made use of by the other units.
Further, M/s. Vishnu Forge have themselves issue direction to their customers to place orders with their sister concerns viz., M/s. Metal Cutters and M/s. Steel Treaters;
(xii) Regarding certain job work undertaken from side units, the materials received are cut at M/s. Metal Cutters and later on transferred to Vishnu Forge for final operation. No documents were available in the transfer of goods from M/s. Metal Cutters to M/s. Vishnu Forge."
3. The investigating authorities recorded the statement given by Shri Anand, Accounts Manager, M/s. Vishnu Forge by his statement dated 31-8-1990 (2) Shri R. Subba Rao, Commercial Manager of M/s. Vishnu Forge. His statement was recorded on 31-8-1990 (3) Shri M.R.S. Ramaiah, Managing Director whose statement was recorded on 9-1-1991.
4. M/s. Vishnu Forge filed their reply to the show cause notice and their reply has been summarised in the impugned order which is noted below :
"(i) that the averment made in the show cause notice that M/s. Metal Cutters and M/s. Steel Treaters are related units floated and created by the assessee with an intention to wrongly avail the SSI exemption under notification 175/86-C.E., dated 1-3-1986 was totally incorrect and unfounded; that M/s. Vishnu Forge as well as the other two companies had been incorporated as Pvt. Ltd. Companies by different managements much before the issue of notification 175/86-C.E.; that originally the assessee-company was incorporated on 18-2-1974 as Bangalore Heavy Forgings and Stampings (Pvt.) Ltd. and the name has subsequently changed to M/s. Vishnu Forge (Mysore) Ltd., with effect from 31-7-1976 that M/s. Metal Cutters and M/s. Steel Treaters, were incorporated on 2-7-1977 and 15-3-1977 respectively that all the three companies were taken over by the then management in the year 1985 that therefore it was fully established that the assessee company had not floated the other two companies with an intention of availing the benefit of exemption under Notification 175/86;
(ii) that the allegation in the show cause notice that the assessee had manufactured rock rollers other allied drill bits, forgings and forged products and cleared the same in the name of M/s. Metal Cutters and M/s. Steel Treaters availing the exemption under Notification 175/86 is factually incorrect and unsustainable;
(iii) that the assessee had installed machineries in the factory only to manufacture closed die steel forgings and the industrial licence was granted by the Government of India for the manufacture of closed die forgings of alloy steel and carbon steel, that the assessee also obtained the Central Excise licence for the manufacture of the said goods in March, 1983 i.e. after the steel forgings became excisable, that whereas M/s. Metal Cutters had installed machineries in their factory for manufacturing open hammer forgings, DTH rock rollers and allied drill bits and also for steel cutting and had obtained a SSI Certificate from the Government of Karnataka for the manufacture of those goods that they had also obtained a Central Excise licence on 4-8-1986, that M/s. Steel Treaters had installed machineries in their factory for heat treatment of steel products and to manufacture gears, blanks, the spindles, machine tool and engineering fabrication and had obtained the SSI Certificate from the State Government and the Central Excise licence on 1-6-1989 that further all the 3 units had been maintaining separate RGI registers and other statutory records which were being verified by the departmental officers from time to time;
(iv) that therefore it was clear that the other 2 units were manufacturing the excisable goods independently and clearing the same on their own in accordance with the licence granted to them and hence such clearances cannot be attributed to have been made by M/s. Vishnu Forge;
(v) that besides being registered as separate Pvt. Ltd. Companies all the 3 units were being dealt with separate entities by Government Departments such as Sales Tax, Income-tax, Factories Act, ESI, Provident Fund and Professional Tax Authorities that all the 3 companies had separate electricity connections given by the K.E.B., that in view of those facts the charges in the show cause notice that all the 3 units are not independent entities since there were common Directors related to one another, was not sustainable;
(vi) that as regards the averments made in the show cause notice that the other two units were situated on the same land as that of M/s. Vishnu Forge, absence of lease agreement for such an occupation, non-payment of rent, common security arrangement etc., it was submitted that even though individual job-wise or transaction wise settlement accounts was not being done the amount due for the services rendered, facilities extended and also for the payment made by the one company to the other two companies were debited/credited periodically to the accounts of the respective companies; and
(vii) that the demand is barred by limitation as the extended period under the proviso to Section 22A of the Central Excises and Salt Act, 1944, was not applicable."
5. The reply of M/s. Metal Cutters has been summarised in Para 13 from (i) to (iv) of the impugned order which are noted below :
"(i) that the averment made in the show cause notice that M/s. Metal Cutters had concerned themselves acquiring, possessing, keeping and selling non-duty paid excisable goods which they knew or had reason to believe are liable for confiscation, are incorrect and devoid of any substance, that it was M/s. Metal Cutters who were the actual manufacturers of excisable goods cleared from their factory during the period from 1-8-1986 to 30-11-1989 and not M/s. Vishnu Forge as alleged in the show cause notice;
(ii) that the assessee-company was incorporated in the year 2-7-1977 by a different management and thereafter was taken over the then management in the year 1989; that therefore the charge that M/s. Vishnu Forge had floated the assessee company for the purpose of availing the exemption under Notification 175/86 did not stand to reason in as much as the said notification came into existence subsequent to the incorporation of the assessee company and its subsequent take over by the then management; that the assessee company was being dealt with as a separate entity by the other Government Departments like Sales Tax, Income-tax and the authorities under Factories Act, ESI, Provident Fund and Professional Tax that the assessee company had also obtained a separate electricity connection from the KEB;
(iii) that the assessee had obtained a SSI Certificate from Government of Karnataka with effect from 28-2-1984 for manufacture of steel forgings and for steel cutting job work; that the Central Excise licence was also granted to them on 4-8-1986, for the manufacture of DTH rock roller and allied drill bits and at that point of time M/s. Vishnu Forge was not at all under excise control; that M/s. Vishnu Forge obtained the Central Excise licence only after steel forgings came under excise levy with effect from 1-3-1988, that M/s, Vishnu Forge never had any industrial or Central Excise licence to manufacture DTH rock rollers and allied drill bits;
(iv) that the assessee was manufacturing DTH rock roller and allied drill bits and open hammer forged articles in their factory and was maintaining RGI register and other statutory records and was Submitting RT 12 returns to the department and the same were being assessed, that the statutory records were verified by the officers of the department and the Audit parties during their visit to the factory of the assessee, that even the annual stock taking was being conducted by the departmental officers who noticed no discrepancy in that regard, that therefore it was not open to the department to allege that the excisable goods cleared by the assessee were manufactured by M/s. Vishnu Forge, that consequently they were not liable to a penalty under Rule 209A of the Central Excise Rules, 1944."
6. The reply of M/s. Steel Treaters in Para 15 from (i) to (vi) of the impugned order is summarised which is noted below :
"(i) that the averment made in the show cause notice that M/s. Steel Treaters and M/s. Metal Cutters were the related units floated and created by M/s. Vishnu Forge with an intention to wrongly avail the SSI exemption under Notification No. 175/86-C.E., dated 1-3-1986 was totally incorrect and unfounded, in as much as all the three companies had been incorporated as private limited companies by different managements much before the issue of the Notification No. 175/86;
(ii) that the allegation made in the show cause notice that M/s. Vishnu Forge, had manufactured rock rollers other allied drill bits, forgings and forged products and cleared the same in the name of M/s. Metal Cutters, while M/s. Steel Treaters availing the exemption under Notification No. 175/86 was factually incorrect and unsustainable;
(iii) that M/s. Vishnu Forge had installed machineries in their factory only to manufacture closed die steel forgings of alloy and carbon steel for which the industrial licence has been granted by the Government of India, that they had also obtained a Central Excise licence for the manufacture of the said goods to March, 1988 after steel forgings became excisable that whereas M/s. Metal Cutters, had installed machinery in the factory for manufacturing open hammer forgings, DTH rock rollers, allied drill bits and also for steel cutting for which they had obtained the SSI Certificate from the State Government, as well as the Central Excise licence, that M/s. Steel Treaters had installed machineries for heat treatment of steel products and to manufacture gears, blanks, spindles, machine tools and engg. fabrication and had obtained both the SSI Certificate and the Central excise licence in that regard, that they were maintaining separate RGI register and other statutory records which were being verified by the departmental officers from time to time;
(iv) that M/s. Steel Treaters as well as the other two companies were being dealt with as separate entities by various Government Departments such as Sales Tax, Income-tax, the authorities under ESI, Provident Fund and Profession Tax, that M/s. Steel Treaters and the other two companies were given separate electricity connections by the KEB, that in view of those facts the charge in the show cause notice that M/s. Steel Treaters and the other two companies are not independent entities because there were common directors related to one another was not sustainable;
(v) that to the averment in the show cause notice that there was no lease agreement between the M/s. Steel Treaters and the said two companies that no rent had been paid by M/s. Steel Treaters to M/s. Vishnu Forge, that the office and managerial cadre officers were common; that the tool room belonging to M/s. Vishnu Forge was used by the other two companies without payment of any charges, it was submitted that even though individual job wise or transaction-wise settlement of accounts has not been done, the amount due for the services rendered facilities extended and also for the payments made by one company to the other two companies were debited/credited periodically to the accounts of the respective companies and at the end of the accounting year the same were reflected in the Balance Sheet of the respective companies;
(vi) that since there was no suppression of facts or wilful mis-statement on the part of the assessee the demand was barred by limitation because the extended period under Section 11A of the Central Excises and Salt Act, 1944 was not applicable."
7, The further submissions of M/s. Vishnu Forge before the Collector has been summarised in Para 17 from (i) to (iv) of the impugned order is noted hereunder:
"(i) that the interim reply already submitted please be read as part of the final reply;
(ii) that the certificates of incorporation of all the three companies were enclosed to their letter as Annexures A1, A2 and A3, respectively to counter the allegation made in the show cause notice that M/s.
Metal Cutters and M/s. Steel Treaters were ever floated by M/s.
Vishnu Forge for the purpose of availing the exemption under Notification No. 175/86-C.E. that in the case of G.D. Industrial Engineers v. CCE - 1983 (14) E.L.T. 1994, the CEGAT, New Delhi held that a partner in any of the three firms is distinct from each of the three firms and vice versa, that each of the three firms is separate and distinct from the other two units and also distinct from the individual partners comprising them albeit they were all the identical and if instead of one or two common partners all the partners of three firms were common still all the three firms would be treated as separate and distinct firms, that in the Trade Notice No. 31/92, dated 9-7-1992 of Madurai Central Excise Collectorate, which was parallel to the Trade Notice No. 30/92, dated 9-7-1992 of Indore Collectorate 59/92, dated 14-7-1992 of Vadodara Collectorate and 64/92, dated 20-7-1992 of Ahmedabad Collectorate, the orders of CBEC that "for the purpose of availing exemption under Notification No. 175/86. Limited Companies whether Public or Private is a manufacturer by itself and will be entitled to a separate exemption limit" was communicated, that a copy of the Madurai Collectorate Trade Notice was being enclosed in Annexure 'B', that it was presumed that a similar trade notice had been issued by the Bangalore Central Excise, Collectorate also, that in the case of Philips India Ltd. v. Union of India reported in 1980 (6) E.L.T. 263, the High Court of Allahabad had held that a person being a Director of the companies was not indicative of the fact that one company was dummy of the other but they were distinct legal entities carrying on business on their own account and one could not be held to be controlled by the other, that the ratio of the decisions and the Board Circular referred to, was apply applicable to the facts and circumstances in the present case and therefore M/s. Metal Cutters and M/s. Steel Treaters were distinct and independent companies even though there were common directors for all the three companies;
(iii) that the averments made in the show cause notice as regards the facilities commonly used by all the three factories and the absence of any payment of rentals (in cash) by the other two companies to M/s. Vishnu Forge were admitted;
(iv) that separate Memoranda of Understanding (MOU) were entered into on 13-3-1985 between M/s. Vishnu Forge and M/s. Metal Cutters and between M/s. Vishnu Forge and M/s. Steel Treaters, that in the MOU with M/s. Metal Cutters it was agreed that M/s. Vishnu Forge would let out the factory premises and also would provide administrative services viz., utilisation of office building, telex, telephone facility, the services of managerial cadre officers and security services to the former without any cash payment in return, that as a compensation or consideration M/s. Metal Cutters had agreed to do free of cost the waste of cutting of. steel pre-forging operations for M/s. Vishnu Forge and that for any facility and services over and above those covered by MOU, the cost of services were to be debited to the other company by raising debit bills or notes; that it was agreed that each company should maintain a running account in its ledger in respect of the other company showing the respective debits and credits and that at the end of each accounting year, the same would be reflected in the annual balance sheet of the companies, that a similar MOU was entered into between M/s. Vishnu Forge and M/s. Steel Treaters, whereby the latter was agreed to do the heat treatment work of steel products of the former, that the copies of the MOUs were enclosed to the letter as Annexures C1 and C2, that in pursuance of the MOUs the working of all the three companies was systematized that the extracts of the General Ledger of M/s. Vishnu Forge containing the accounts of M/s. Metal Cutters and M/s. Steel Treaters for the year 1986-87 to 1989-90 were enclosed to the final submission as Annexures D1 to D4, that the balance sheets and the Profit and Loss Account together with the statement of assessable income for the said years had been submitted to the income for authorities and their copies have been produced as Annexures El and E2 to the letter."
8. Further submissions made before the learned Collector by M/s. Vishnu Forge has been summarised which is noted below :
"(i) that the raw materials for all the three companies are steel materials like bars and billets and that mere fact of storing of the raw materials in the open yard near the factory of M/s. Metal Cutters cannot be construed that all the three companies were one entity specially when such raw materials were identifiable and accounted separately by each of the companies;
(ii) that as regards the charge that the tool room of M/s. Vishnu Forge was used by the other two companies also without any payment of charges, it was submitted that the tool room was required in the manufacture of close die forgings and that since M/s. Metal Cutters were manufacturing only open hammer forgings, M/s. Steel Treaters were manufacturing components by turning in lathes, the question of the two companies using the tool room of M/s. Vishnu Forge did not arise;
(iii) that the tempo vehicle belonging to M/s. Metal Cutters was used only occasionally by M/s. Vishnu Forge since the latter had their own trolly and fork lifts for internal movement and that the occasionally use of the vehicle by M/s. Vishnu Forge had no bearing on the distinct and independent character of the three companies;
(iv) that the procedural lapse in the movement of raw materials amongst the three companies by itself neither vitiates the independent and distinct character of the companies nor does it come in the way of availment of separate exemption by M/s. Metal Cutters and M/s. Steel Treaters under Notification No. 175/86;
(v) that M/s. Vishnu Forge was declared as sick company by the BIFR on 22-10-1989 and if the averment that all the three companies are one entity, were to be true, then all the three companies would have been declared sick which is not so in the present case;
(vi) that from the copies of the industrial licence and the Central Excise licence produced along with the letter as Annexures F and G, it could be seen that M/s. Vishnu Forge had no licence for the manufacture of DTH rock roller and allied drill bits and only M/s. Metal Cutters had the licence for the same and therefore the demand for differential duty of Rs. 13,80,386.13 from them on the said goods was unsustainable;
(viii) that in the same manner the demand for duty of Rs. 2,76,810.13 was unsustainable, since it pertained to goods manufactured by M/s. Steel Treaters only;
(ix) that the copy of the extract of page 14 of the RGI register for the period 5-2-1989 to 27-5-1989 and the stock taking report for the year 1988 were being produced as Annexures H1 and H2 to support the contention that the demand for duty was time barred as the departmental officers had visited the factories frequently and that reliance was placed on the decision of the Supreme Court in the case of Collector of Central Excise v. Chemphar Drugs & Liniments."
9. The further submissions of M/s. Metal Cutters made before the Collector has been summarised in Para 20 from (i) to (xiv) of the impugned order which is noted below :
"(i) that in support of the contention that M/s. Metal Cutters was incorporated under the Companies Act, 1956 much before the introduction of the exemption under Notification No. 175/86, the copy of the certificate of incorporation was being enclosed as Annexure 'A';
(ii) that merely because all the three companies had common directors it would not be construed that all the companies were one and the same; that in support of their contention they relied upon the following decisions:
(a) G.D. Industrial Engineers v. Collector of Central Excise
(b) Philips India Ltd. v. Union of India;
(iii) Trade Notice No. 31/92, dated 9-7-92 of Madurai Central Excise Collectorate which is parallel to the Trade Notice No. 30/92, dated 9-7-92, 59/92, dated 14-7-1992 and 64/92, dated 20-7-92 issued by Indore, Vadodara and Ahmedabad Collectorate respectively communicating the orders of the CBEC relating to certain clarifications on Notification No. 175/86-C.E.;
(iv) that M/s. Metal Cutters entered into a Memorandum of Understanding (MOU for short) with M/s. Vishnu Forge under which for utilising common facilities of the latter the former had to carry- out the work of cutting metal belonging to latter free of cost and any additional expenditure was adjusted by raising debit notes on each other and the sum total of such credit/debit were reflected in the balance sheet of the companies for that year; that a copy of the MOU was being enclosed to the letter as Annexure 'C';
(v) that copies of balance sheet and the profit and loss account for the years 1988-89 and 1989-90 were being enclosed to the final reply Annexures D1 and D2 that sample acknowledgement for having submitted the Income-tax returns for the year 1988-89 and 1989-90 were also being enclosed as Annexures E1 and E2;
(vi) that as proof of separate registrations of M/s. Metal Cutters by the Income-tax, Sales Tax, ESI, Provident Fund Authorities and as an SSI unit and as unit under Central Excise and separate billing by KEB for power charges, the certificates, etc., were being enclosed to the final reply as Annexures from 'F' to 'O' respectively;
(vii) that in support of the arguments that M/s. Metal Cutters and M/s. Vishnu Forge were independent entities reliance was placed on the decisions in:
(a) Kanjal Electronics (P) Ltd. v. Collector of Central Excise - 1989 (43) E.L.T. 327
(b) Jagjivandas & Co. v. Collector of Central Excise - 1985 (19) E.L.T. 441
(c) Shree Packaging Corporation v. Collector of Central Excise - 1987 (32) E.L.T. 94
(d) Bhagwandas Kanodia and Ors. v. Collector of Central Excise - 1987 (32) E.L.T. 204
(e) Pimpri Gases v. Collector of Central Excise - 1990 (49) E.L.T. 474;
(viii) that even though the raw materials belonging all the three units Were stored commonly in the open yard near the factory of M/s. Metal Cutters, they were identifiable with batch Nos. and each company maintained separate accounts for the same; that as held in the case of Shree Packaging Corporation it would not be proper to draw a conclusion merely on the ground of storage in a common place that the firms were in reality one;
(ix) that excepting on a few occasions requiring execution of orders for close die forgings, the tool room of M/s. Vishnu Forge was never utilised, by M/s. Metal Cutters, that similarly the tempo of M/s. Metal Cutters was used only on few occasions by M/s. Vishnu Forge when their own trolly or fork lifter were not functioning;
(x) that the mere fact that proper Central Excise procedures were not followed for the movement of raw materials on certain occasions from one factory to another, it neither vitiate the independent and distinct character of M/s. Metal Cutters nor come in the way of availment of separate exemption under Notification No. 175/86 by them;
(xi) that the allegation that M/s. Vishnu Forge had actually manufactured all the goods covered in Annexure I to show cause notice and the same were cleared through M/s. Metal Cutters by availing the exemption under Notification 175/86, was unfounded and contrary to facts;
(xii) that the small scale industries certificate obtained by M/s. Metal Cutters on 28-2-1984 for steel forgings and steel cutting jobs was got amended to manufacture DTH rocks rollers and allied drill bits on 22-7-1986, that latter on obtaining the Central Excise licence the Classification List No. 1/86-87 effective 5-8-1986 was filled and approved and that a copy of the approved classification list and the covering letter are enclosed to the final reply marked Annexures P1 and P2, and that the copies of the classification lists filed and approved subsequently including therein the DTH rocks roller and allied drill bits, were also being enclosed as Annexures Q1 and Q2 and R1 and R2;
(xiii) that the Departmental officers visited the factory of M/s. Metal Cutters regularly, had checked the RGI register and also had conducted stock taking in the factory, that sample copies of extracts of the same were being produced along with the final reply marked as Annexures S1, S2, S3, S4, S5 and T1, T2, T3 and that hence the demand for differential duty of Rs. 13,80,386.13 was not sustainable;
(xiv) that as regards the differential duty of Rs 7,45,550.47 demanded in respect of goods falling under Tariff Heading Nos. 84.83, 84.66 87.08, 84.31 and 84.48, it was submitted that the goods were actually manufactured by M/s. Metal Cutters and that the copies of the RGI extracts and the assessed monthly RT12 returns for April, 1989 were being enclosed as Annexures "U1, U2, U3, U4 and V", respectively, that in respect of only few orders the facilities at M/s. Vishnu Forge were utilised by M/s. Metal Cutters for close die forgings; that the post forging operations were actually carried out in the factory of M/s. Metal Cutters, that in view of the submissions the charge made in the show cause notice against M/s. Metal Cutters for invoking the provision of Rule 209A of the Central Excise Rules, 1944, was not maintainable. The Advocate finally requested for dropping the further proceedings against M/s. Metal Cutters in the interest of justice."
10. The submissions made by M/s. Steel Treaters before the learned Collector has been summarised in Para 21 from (i) to (xvii) which is noted below:
"(i) that the allegation in the show cause notice were not based on facts and records in that the investigation been done thoroughly by the department would have come to know about their existence as separate identity, and the manufacturing facility available with them;
(ii) that the show cause notice was based only on the statements recorded from S/Shri Anand and Subha Rao and Sampangi Ramaiah, that the documentary evidence produced by them would clearly establish their identity as a separate unit with the capacity and infrastructure for the manufacture of goods cleared by them during June and July, 1989;
(iii) that they were issued with Central Excise L4 Licence No. 5/89 on 12-6-1989 a copy of which was being enclosed to their letter as Annexure 'B';
(iv) that they were enclosing a copy of the SS1 certificate as Annexure 'C' and also copies of documents evidencing their independent registration with the following Government Departments/Statutory bodies:
(a) Karnataka Sates Tax department registration - Annexure 'D'
(b) Central Sales Tax registration - Annexure 'E'
(c) Income-tax department - Annexure 'F'
(d) ESI Corporation - Annexure 'G'
(e) Provident Fund Commissionerate - Annexure 'H'
(f) Profession Tax department - Annexure ')'
(g) KEB - Annexure 'K'
(h) Department of Factories and Boilers - Annexure 'L';
(v) that they were enclosing a copy of the letter of the Assistant Director, DIC Mysore; showing the description of the end products, as Annexure 'M'.
(vi) that the transaction between them and M/s. Vishnu Forge was on a principal to principal basis, that there was no financial flow back and that there was a memorandum of understanding a copy of which was being enclosed as Annexure 'N'.
(vii) that they were enclosing the balance sheet for three years as Annexure 'O', that the charges payable by each unit for the work done and for receipt of supplies of fuel and stores was accounted on a daily basis for which debit/credit notes were raised at the end of the month and that they were enclosing copies of the same as Annexure 'P'.
(viii) that they had charged and collected charges for heat treatment of materials of M/s. Vishnu Forge and in support of which they were enclosing a copy of their sundry debtors account as Annexure 'Q' and copy of their sales ledger as Annexure 'R'; that a copy of their general ledger showing the account of M/s. Vishnu Forge for the year 1989-90 was also enclosed as Annexure 'S';
(ix) that copies of the assessed RT12 returns for June and July, 1989 were enclosed as Annexure 'T' that they accept orders for manufacture in their own name and similarly purchase of materials was done directly by them; that they were enclosing copies of the relevant documents as Annexure 'V;
(x) that for their refusal of the allegations made in the show cause notice, they relied on the following decisions :
(a) Smt. Shyam Kumari and Ors. - 1982 (10) E.L.T. 329 (CBE & C);
(b) G.D. Industrial Engineers v. Collector of Customs and Central Excise - 1983 (14) E.L.T. 1994;
(c) Jagjivandas & Co. v. Collector of Central Excise - 1985 (19) E.L.T. 441 (Tribunal)
(d) Shree Packaging Corporation v. Collector of Central Excise -1987 (32) E.L.T. 94 (Tribunal);
(e) Bhagwandas Kanodia and Ors. v. Collector of Central Excise - 1987 (32) E.L.T. 204 (T);
(f) Shakti Engineering Works v. Collector of Central Excise - 1989 (40) E.L.T. 95 (Tribunal);
(g) Pimpri Gases v. Collector of Central Excise - 1990 (49) E.L.T. 474 (Tribunal);
(h) Diamond Engineering & Trading Corporation v. Collector of Central Excise - 1989 (44) E.L.T. 92 (Tribunal);
(xi) that further the CBEC, for ensuring uniformity in the levy of excise duty with regard to Notification No. 175/86-C.E. had laid down the general principal which was communicated in the Madurai Collectorate's Trade Notice No. 31 /92, dated 9-7-1992;
(xii) that the classification issued by the Board and the case laws cited by them when viewed against the facts and circumstances of the case made it clear that the allegations made in the show cause notice are untenable;
(xiii) that the allegation that no payments were made between the units was not tenable as bills were raised and adjusted in the ledgers every month and that the balance in the ledger account were transferred to annual final accounts showing the debtor/creditor position of each company;
(xiv) that M/s. Vishnu Forge vide their letter VFM/Accounts/CED, dated 21-7-1989, informed the Superintendent of Central Excise Range 'C', Mysore, that they were taking up forging labour jobs from them (M/s. Steel Treaters) and that a copy of the said letter was being enclosed as Annexure 'W';
(xv) that the statement of S/Shri Anand and Subba Rao, also do not contain anything to refer that the goods were manufactured by M/s. Vishnu Forge and cleared in the name of M/s, Steel Treaters;
(xvi) that since they had intimated to the department about the process of manufacture vide their letter dated 12-6-1989 and, therefore the extended period under Section 11A of the Central Excises and Salt Act, 1944 was not available to demand duty from them, and in that regard they relied upon the decisions of the Tribunal in the case of Mattel Toys (India) Ltd. v. Collector of Central Excise and Ashwini Vanaspati Industries (P) Ltd. v. Collector of Central Excise;
(xvii) that the department had not given any proof in support of the allegations made in the show cause notice that from their submissions it was clear that the goods had been manufactured and cleared only by them and hence no penalty could be imposed on them under Rule 209A of the Central Excise Rules, 1944."
11. The learned Collector after a careful consideration rejected their contentions and has come to the conclusion that notwithstanding the fact that each one is a registered unit, it is run by one family with mutual benefit with a view to evade the central excise duty. The Collector has noted that all the three companies have common directors and they are related father and sons and Shri M.R.S Ramaiah, is the common Managing Director for all the three units. He has also held that there is no agreement earlier whatsoever with regard to the land which belongs to M/s. Vishnu Forge. Common rent is paid for the said land by the other two units. Learned Collector has held that the agreement entered into by M/s. Vishnu Forge, other two units for adjustment accounts for services rendered towards the rent and other facilities is collected on paper just to avail unintended benefit since the other two unit are totally dependent on M/s. Vishnu Forge as can be gathered from two orders and other documentary evidence. He has also held that transaction emanated from M/s. Vishnu Forge, and it extended all the facilities to these two units as a special case, which is not normally seen in any commercial transaction. He has held that by virtue of their being sisters close family concerns in reality, these two units are being orchestrated by the common Managing Director with vital command from M/s. Vishnu Forge. He has held that commonly used facilities by all the three units such as office, accommodation, transport, telex, telephone storage or raw materials and security, may not be a course for treating three units as one entity but when viewed, in conjunction with the facts discussed then each of those common facilities are mistakable pointer to the camouflage. The learned Collector has applied the rulings rendered in the case of Balamurgan & Balamurli v. Collector of Central Excise, Madras as reported in 1988 (38) E.L.T. 54 (Tribunal) and that of Bhagwandas Kanodia and Ors., Bombay v. Collector of Central Excise, Bombay as reported in 1987 (32) E.L.T. 204 (Tribunal). The learned Collector has held that M/s. Vishnu Forge have sought to accomplish their exercises in duty evasion by creating and flouting the two units by mutual purchase of orders from their customers and exercise total and complete control over the affairs of the said unit flouted under the camouflage of the documents of Memorandum of Understanding through suppression of facts involved in modus operandi from the department and the contravention of the provisions of the Central Excise Act and Rules, in that view of the matter, learned Collector has held that the extended period under Section 11A of the Act can be invoked and thus he has confirmed the duty demand in the show cause notice and imposed penalties as stated.
12. We have heard Shri K. Parameswaran, learned Advocate for appellants and Shri. K.K. Dutta learned JDR for the Revenue. Learned Advocate took us through the order and pointed out to the allegations and the replies filed by the appellants. Learned Advocate's submission is that there is no allegation of financial flow back or common funding in the case that there was no allegation to subterfuge or the units are set up as a facade or that they have been set up as a sham. He pointed out that there is no financial involvement within the three units and that merely because the directors are related persons that by itself cannot be a cause to club the clearances. He pointed out that all the three units are separately incorporated under the Companies Act with separate registration under the various statutes. Thus, they have to be considered as a separate legal entities. Learned Advocate submitted that this has been the settled law in the light of various judgments of the Courts and the Tribunals. He pointed out that it has been well settled that merely because the units utilise common facilities, that by itself is not the ground to club the units, unless it is shown that the two units are dummy units i.e. merely on paper without an existence and that the main unit is controlling the entire financial affairs and that there is flow back of money with the common profit sharing by the main unit. He submitted that on these aspects the department has neither placed any evidence nor any finding has been given by the ld. Collector. In that view of the matter, he argued that all the finding that the three units are one, on the basis of common directors and that they are related on account of some business arrangements, is unsustainable. He submitted that the learned Collector although had not accepted the MOU, but the fact remained that the department had not challenged the document, as a fabricated one. It is his submissions that even if. MOU is not taken into consideration, even then, the various evidence produced on record would clearly disclose that the three units were independent ones. He pointed out to the findings of the learned Collector, wherein, the learned Collector had admitted that the process of each of the units were specific and different. He submitted that in between M/s. Metal Cutters and M/s. Steel Treaters, there was no MOU, and that there was no understanding to share each other's manufacturing process also. He pointed out that all the three units have separate type of work and they were having independent manufacturing process. He pointed out that the quotation referred to by the Collector in his order was not relied in the show cause notice and that these materials which have not been relied upon by department cannot be looked into at all. He also pointed out that some of the materials relied upon by the Collector pertained to the period subsequent to the period in issue and its reliance would vitiate the order. He submitted that the learned Collector had not gone through the entire pleas raised by the appellants nor given any finding on the pleas and the evidence placed before him. He submitted that merely because the purchase orders received by M/s. Vishnu Forge were directed to other two units that by itself is no ground for clubbing the clearances. It is merely a business arrangement and such business arrangement is a common feature in the trade world. He submitted that the non-compliance of rules of Central Excise Rules may only call for penal action but that would not be a ground for clubbing the clearances of three independent and separately incorporated units, in the absence of any evidence of financial flow back. He submitted that common business arrangement and common business managements are different terms than financial flow back and financial management. He submitted that the ruling in Balamurgan and Balamurli was in the control of two units held by husband on behalf of his wife, by virtue of a power-of-attorney. Therefore, the Tribunal had held that the wife's unit was a dummy one. He pointed out that the ruling relied by the Collector was totally inapplicable to the facts and circumstances of the present case. Ld. Advocate pointed out to the various rulings relied by the appellants.
13. The learned JDR reiterated the findings of the Collector. He submitted that although there was a semblance of units being independent one but the manner in which their function was controlled by a common Managing Director showed that it was under a common control. He submitted that MOU is a reliable document. He submitted that financial flow back can be gathered through rent free accommodation and other facilities given by M/s. Vishnu Forge to other unit. He submitted that financial flow back can be gathered from the basis of common utilisation of facilities. He submitted that appellants had not followed the procedure and hence penal action is justified.
14. We have carefully considered the submissions made by both the sides and perused the record, allegations, replies, evidence and findings given by the learned Collector. The learned Collector has proceeded on the ground that the directors being related persons and that there is common Managing Director, that by itself is a ground for clubbing the clearances. He had held that by using common facilities are an unmistakable pointer to the camouflage. The main ground for holding all the units as one is the procurement orders which are passed by M/s. Vishnu Forge to two other units. Learned Collector has, however, held that the manufacturing facilities possessed by each of the three units are process-specific and different. From these findings, we have to infer as to whether the units can be clubbed for the purpose of denying the benefit of the notification in question. The ground on which the clearances can be clubbed is, discussed in the case of M/s. H. Guru Instruments (P) Ltd., Calcutta v. Collector of Central Excise, Calcutta as reported in [1987 (27) E.L.T. 269 (T) = 1987 (10) ECR 333 (CEGAT SB-B1)]. The Tribunal had held that clubbing can be done if manufacturer has a hired labour in the production or manufacture of goods. In the present case, there is no allegation that the other two units are hired labour of M/s. Vishnu Forge. Therefore, the ruling by the Collector in M/s, H. Guru Instruments (P) Ltd. is clearly distinguishable. Further, M/s. H. Guru Instruments (P) Ltd.'s case has not been followed in the case of Prasad Engineering Works and Ors. v. Collector of Central Excise, Hyderabad as reported in [1987 (31) E.L.T. 247 (T) = 1987 (13) ECR 307 (CEGAT SRB)] and Super Printers, Hyderabad v. Collector of Central Excise, Hyderabad as reported in [1987 (30) E.L.T. 745 (T) = 1987 (10) ETR 1]. Undoubtedly, units can be clubbed, if they are dummy ones and have been created as a camouflage of the other. But, in this case, there is no allegation that the three units are dummy units or camouflage of the other. Also there is no allegation in this case that there is a financial flow back or common funding and common sharing of profits. The allegation made is that there are common Director and are related persons, besides utilising of machineries for sharing the technical know-how and diversion of purchase orders. This by itself is not sufficient to club the clearances and deny the units the benefit of notification. In similar cases coming up before this Tribunal, with same charges, the Tribunal has disagreed with the Revenue's contentions and has set aside the orders. In the case of Alpha Toyo Ltd. and Ors. v. Collector of Central Excise, New Delhi by Final Order No. E/166 to 170/94-B1, dated 23-3-1994 [1994 (71) E.L.T. 689 (T) = 1994 (1) RLT 591], the Tribunal has discussed as to what a dummy unit is and the circumstances under which the unit could clubbed to deny the benefit of notification. The finding given in Para 4 of the said order is reproduced herein below:
"We have carefully considered the submissions made by both the sides and have perused the record and the finding and citations relied before us. The Deptt. had proceeded on the basis of the annual report of M/s. Alpha Toyo Ltd. It is noted therefrom about the interest free loans given by them to other four units and have come to the conclusion that they are related persons and that the four units are dummy ones, and as there is a common managerial control, hence the benefit of exemption under notification No. 175/86-C.E., dated 1-3-1986 is denied to them. Therefore the clearances of all the five units have been clubbed. We have considered the grounds and the findings given by the ld. Collector. We are not satisfied with the said findings as managerial control is different from money flow back, management control and profit sharing. A dummy unit is a unit, which is not in existence in reality but it is merely created on paper only. In other words, the physical existence of such a unit is not to be found in terms of investment of capital, machinery and labour. The units which creates such a dummy units, utilise the dummy unit for the purpose of tax evasion. Therefore, the Courts have clearly distinguished on facts each of the cases and have now settled the issue by holding that mere evidence of Directors being common or utilisation of telephone, labour or machinery by itself is not a ground to consider an unit as a dummy unit of the other. It has been held that even if a unit is in existence, but it is not totally controlled in terms of money flow back, profit sharing, management control, and it had been created with a view to evade taxes by a series of acts of omission and commission, by manipulation of accounts and records then in such eventuality, the clearances of a dummy unit can be clubbed. As rightly pointed out by the ld. Senior Advocate there is no definition of the term "dummy unit", but what flows from the judgments cited by him is that a dummy unit is a unit, created by the main unit with a view to evade taxes and that the first main unit totally controls its activity in terms of profit sharing, management control, decision making and acts of such nature. The dummy unit would be a mere facade one and in reality it is one and the same with the main unit. In this particular case, there is no such evidence at all, to. show that such an arrangement is in existence. The mere fact of management control and a few directors being common and also by the fact that interest free loans are being given to the other units by the first unit, these factors, by itself, is no ground for holding them as dummy units and for ordering clubbing of all their clearances and to deny the benefit of the exemption notification. There is no dispute in all these cases that all the four units are independent in existence, with independent transactions, without any profit sharing, management control or money flow back to the main unit. Each unit is having independent bank transactions, loans, sales, purchases and tax registrations. Therefore, on the facts and circumstances of this case, the ground taken by the department is not sustainable. The concept of related persons as envisaged under Section 4 of the Central Excises and Salt Act, 1944 is for the purpose of valuation. This is an independent concept by itself. It has no relationship with the concept of dummy units and units set up as a facade to evade taxes. As pointed out by the ld. Senior Advocate, the ld. Collector has confused this aspect of the matter with the aspect of creation of dummy units. The ground taken by the Revenue in this case is already answered against them in the case of Jagjivan Das & Co., Bhagwan Das Kanodia and Others, Prabhat Dyes & Chemicals, Bapalal & Co. and Prima Control referred before us. The other judgments cited before us also deals on the same aspects of the matter. Applying the ratio of these rulings, we have to hold that the mere fact of management control or of grant of interest free loans is not sufficient to hold the four units as dummy units of M/s. Alpha Toyo Ltd., in the absence of any money flow back, profit sharing and total control on other four units by M/s. Alpha Toyo Ltd. In the result the Appellants succeed in all these appeals. The impugned order is set aside and Appeals allowed."
15. The ratio of the above ruling apply to the facts and circumstances of this case the ruling rendered in the case of Prima Controls (P) Ltd. and Anr. v. Collector of Central Excise, Pune as reported in [1994 (72) E.L.T. 62 (T) = 1994 (50) ECR 188 (Tribunal)] is also applicable to the facts of the present case. The Tribunal in the Prima Controls' case has relied on the ruling rendered in the case of Vivomed Labs. (P) Ltd. v Collector of Central Excise reported in 1991 (53) E.L.T. 152 (Tribunal). The decision rendered by the Tribunal in Vivomed Labs. (P) Ltd's case has been confirmed by the Hon'ble Supreme Court of India. In Prima Controls' case in Para 1, the Tribunal has held -
"A company is an independent juristic person with its own seal and it can sue and be sued. The Directors are mere servants and that the contributors towards the share capital, by their mere contributions do not become proprietors. Mere common hold by individuals does not make both the companies to be one and the same, it is not the case of the Revenue that M/s. Prima is a dummy unit floated on paper for the purpose of defrauding the revenue to take advantage of the exemption notifications. It is only on the basis of common directors and common managing directors and on the concept of related persons, the clearances are being clubbed together. Both these concepts have been negatived in a number of rulings by this Tribunal as cited by the learned Counsel, More recently, the Tribunal has also decided in the case of Fusion Polymers Ltd. v. Collector of Central Excise - 1991 (56) E.L.T. 665, Cheryl Laboratories v. Collector of Central Excise - 1993 (65) E.L.T. 596 and Rathinam Prop. Micheal Match Works v. Collector of Central Excise - 1992 (60) E.L.T. 451."
The Tribunal has also noted in Paras 11 to 17 of the rulings rendered in Meteor Satellite Ltd. and Tele Star Electronics v. Collector of Central Excise, Baroda as reported in [1985 (22) E.L.T. 271 (T) = 1985 (ECR) 1247]. The ratio of Meteor Satellite Ltd. also apply to the present case.
16. In the case of Jagjivan Das Company v. Collector of Central Excise, Bombay-II reported in 1985 (19) E.L.T. 441, the Tribunal has considered the innocuous circumstances such as use of common premises, telephone, telegraphic address, common use of some machinery and commonness of partners etc. and has held that such mutual use are not conclusive circumstances to show that the clearances of the Appellants were "for and on behalf of the others". Therefore, in order to hold that the clearances were "for on behalf of the others" would mean that the clearances of M/s. Steel Treaters and Metal Cutters were "for on behalf of M/s. Vishnu Forge". There is a clear evidence and finding of the Collector that the manufacturing process and goods manufactured by three units were independent. It is also evident that they were independently incorporated with independent transactions except for diversion of purchase orders, common use of certain items. Therefore, the grounds raised by the Revenue have to be negatived in the ratio noted above. There is no evidence of financial flow back or of sharing profit. In that view of the matter, the appellants succeed in this case. The learned JDR had submitted that there had been violation of Central Excise Rules and Counsel fairly submitted that for such violation penalty is imposable. We notice that the penalty imposed on M/s. Vishnu Forge is excessive. There is violation of the Rules in clearing the goods for work to the other units without issue of proper gate pass and this calls for imposing penalty. Ld. Collector has imposed penalty of Rs. 20,000 on M/s. Metal Cutters and M/s. Steel Treaters under Rule 209 of the Central Excise Rules. We hold that this imposition is justified and we do not disturb this portion of the order. As regards the imposition of Rs. 2 lakhs on M/s. Vishnu Forge under Rule 173Q(1) of the Central Excise Rules, we notice that it is too excessive, as there is only violation of certain provisions of law. As such in the ends of justice the penalty is reduced to Rs. 20,000/- (Rupees twenty thousand). The appeals are allowed on the above terms.