Customs, Excise and Gold Tribunal - Delhi
Kinjal Electricals (P) Ltd. vs Collector Of C. Ex. on 16 September, 1987
Equivalent citations: 1989(43)ELT327(TRI-DEL)
ORDER V.T. Raghavachari, Member (J)
1. Notice dated 6-2-84 was issued to the appellants M/s. Kinjal Electricals (P) Ltd. that they had intentionally bifurcated their activities by creating another firm by name M/s. Naveen Enterprises in order to evade payment of Central Excise duty and that the clearances of both units were to be taken together to arrive at eligibility for benefit under Notification No. 83/83 as well as 77/83 and therefore benefit under Notifications No. 309/79 and 179/77 could not be available to the appellants. They were called upon to show cause why action in respect of demand of duty etc. should not be taken accordingly. The appellants replied claiming that they were distinct from M/s. Naveen Enterprises and that there was no common interest between the two firms and therefore the propsed action was not justified. After adjudication the Asstt. Collector of Central Excise, Division-II, Ghaziabad under his order dated 2-12-85 held that Naveen Enterprises was simply a ruse and a device to evade excise duty and that the two units are but one. The appeal against the said order was dismissed by the Collector (Appeals) under his order dated 20-3-86. This appeal is against the said order.
2. We have heard Shri N.C. Sogani, Consultant, for the appellants and Shri Balbir Singh, SDR, for the Department.
3. The appellants had filed an appliation (Misc. No. 189/87-D) for taking on record certain documents. These are 14 documents marked as N series (page Nos. 1 to 23) and 8 documents marked as K series (page Nos. Kl to K-12). At the hearing Shri Sogani conceded that documents 1 to 3 and 13 in the N series would be in the nature of additional evidence and need not be looked into. As regards the other documents he submitted that these are public documents whose authenticity cannot be in issue. Accordingly these documents alone were permitted to be placed on record for consideration.
4. The issue is whether the two firms by name M/s. Kinjal Electricals Pvt. Ltd. and Naveen Enterprises are but a single entity in law. The case for the Deptt. is that though the two purported to be distinct legal entities the firm M/s. Naveen Enterprises has no real existence but was brought into existence on paper only, in order to entitle the appellants M/s. Kinjal Electricals (P) Ltd. to avail of certain benefits in the matter of payment of excise duty. It is this view that has been upheld by the lower authorities. They have held they were entitled to disregard the corporate entity of M/s. Naveen Enterprises on the ground that the same was brought into existence only for purposes of tax evasion. It is this view that is assailed by Shri Sogani.
5. The reasons for which the Assistant Collector came to his conclusion have been set out in the orders of the Assistant Collector [and recaptulated in the order of the Collector (Appeals)] as follows :
(1) that there was only one building with no demarcating walls in between ;
(2) that there is only one office, said to be of M/s. Kinjal Electricals (P) Ltd. but situated in the portion claimed to belong to M/s. Naveen Enterprises ;
(3) two telephones existed in the name of M/s. Kinjal Electricals (P) Ltd. and were fitted in the office premises of M/s. Kinjal Electricals (P) Ltd. and were also used by the other;
(4) main gate of the building is guarded only by the chowkidar employed by M/s. Kinjal Electricals (P) Ltd.;
(5) there are two power meters, but payment is made by only M/s. Kinjal Electricals (P) Ltd.;
(6) there is one generator, as stand by arrangements;
(7) the two Directors of M/s. Kinjal Electricals and the Proprietor of M/s. Naveen Enterprises are close blood relatives;
(8) M/s. Kinjal Electricals had installed two hand operated machines in which power was used for heating the moulding powder on bakelite moulding press, for manufacture of components of switches and plugs for T.I. 68 goods also, but later on shifted these machines to the alleged premises of M/s. Naveen Enterprises, when they came to know that use of power at this stage will deprive them of the benefit of exemption under Notification No. 179/77;
(9) no qualified engineer is employed by M/s. Naveen Enterprises in spite of a large number of costly machines employed by them whereas M/s. Kinjal Electricals (P) Ltd. using hand operated machines had one;
(10) and that the whole of the products of M/s. Naveen Enterprises is passed on to M/s. Kinjal Electricals (P) Ltd. for completion of further processes and only a negligible percentage is shown as transferred to their sister concern at Delhi.
It is roughly these reasons that have been upheld by the Collector though with some modification. While not placing emphasis on certain findings of the Assistant Collector the Collector came to his conclusion for the reasons extracted below:
"However, the facts not in dispute are that the machines requiring use of power and supposed to be put to use only in the premises of M/s. Naveen Enterprises belong to M/s. Kinjal Electricals (P) Ltd. and have been on lease to the former. Further, M/s. Naveen Enterprises working with several machines, requiring use of power, function without an engineer. Even according to the admission of the appellants themselves, the engineer of M/s. Kinjal Electricals (P) Ltd. inspect their machines and equipments installed in the premises, said to belong to M/s. Naveen Enterprises. Though the finished products of M/s Naveen Enterprises are claimed to be sold to others, besides to M/s. Kinjal Electricals (P) Ltd. the appellants have not indicated the extent of the sales to others, and the parties to whom it is sold, to contest the findings of the Assistant Collector in the impugned order, namely that only a very neglibile amount is shown as transferred in the accounts to their sister concern at Delhi. It is also strange that, according to the appellants, a generator is used for lighting, only the presmises belonging to M/s. Kinjal Electricals (P) Ltd. including their office premises situated in the portion said to belong to, and otherwise also house the factory of, M/s. Naveen Enterprises. All these factors appear to confirm the conclusions of the Assistant Collector in the impugned order."
6. From the evidence available before the lower authorities, as also the documents now produced, it is clear that the two firms purported to have separate legal identities and were being dealt with as separate entities by Government Departments such as Sales-tax and Income-tax authorities, Factories Act Authorities, Director of Industries etc. The finding of the lower authorities is that such alleged separate legal existence was a mere sham, created for purposes of tax evasion. The passages extracted (from the orders of the lower authorities and containing the reasons for the said conclusions) show that they relied on certain physical circumstances to arrive at the said conclusion. It appears to us that the conclusion arrived at could not be supported on the said facts since the authorities failed to take into consideration the other relevant considerations. The question whether the two firms were independent would depend much on the question whether they had separate legal identities and functioned independently of each other though they may have transactions between themselves. One of the primary considerations for a resolution of such a dispute would be whether there was any financial flow back from one to the other except in the course of normal commercial transactions. If such a financial flowback or adjustment is established that would furnish strong proof of the two firms being one, though purporting to be different. In the present in stance there has been no attempt to go into this aspect and therefore no attempt to establish any such financial flowback. It is without such evidence that we have to appreciate as to the conclusive nature of the other circumstances relied upon.
7. These circumstances are that the proprietor of one was related to the Director of the other; though costly machinery of one is said to be leased out to the other, the other had no engineer of his own; the office space of one was being utilized by the other, one was sharing the telephone of the other; there was no separate watchman (though both units were situate in the same compound); there was only one generator but its use was said to be only for lighting purposes and, finally, most of the products of M/s. Naveen Enterprises was transferred to the appellants for final manufacture. It appears to us that these circumstances either individually or even comrhulatively would not lead to the only conclusion that the two units are but one. It is explained for the appellants that when the sole proprietor of M/s. Naveen Enterprises became separated from the family he wanted to run his own business and was therefore accommodated in a part of the property originally given on lease to the appellants but in this connection a separate lease deed was executed with the owner of the property and that in respect of machinery leased out to M/s. Naveen Enterprises there is a proper agreement for payment of rent and rent was in fact being paid periodically and properly. The fact of such payment of rent as well as payment of electric charges separately is said to be reflected in the books of account maintained by both firms. As regards the sales of their product by M/s. Naveen Enterprises the lower authorities only go by the fact that most of it was sold to the appellants but failed to attach importance to the fact that at least a part was being sold to outsiders. There is neither allegation nor proof that sale to the third parties was either fictitious or that the proceeds thereof went to the appellants only. As earlier noted, there is no finding that there is any arrangement for financial flowback from one firm to the other. On the other hand each has its own separate accounts as well as separate assessments by other public authorities such as Sales-tax and Income-tax authorities. In the circumstances the mere fact that the proprietor of one is closely related to the Directors of the other would not suffice to arrive at a finding that M/s. Naveen Enterprises was created merely as a ruse and a tax evasion device.
8. It is only for the reason that M/s. Naveen Enterprises has no separate legal existence that the lower authorities have held that the clearances of both are to be considered as clearance of the appellants only. In view of our earlier conclusion in the preceding paragraphs we hold that on the facts as established the lower authorities were not correct in doing so. Accordingly, this appeal is allowed and orders of lower authorities are set aside.