Customs, Excise and Gold Tribunal - Delhi
M/S Rajasthan Spg. & Wvg. Mills Ltd. M/S ... vs Cce, Jaipur on 4 April, 2001
Equivalent citations: 2001(76)ECC569, 2001(131)ELT594(TRI-DEL)
ORDER
C.N.B. Nair
1. All these appeals are directed against a common adjudication order i.e. adjudication order No.38/CE/JP-II/99 dated 22.11.1999 passed by the Commissioner of Central Excise, Jaipur-II. Therefore, they were taken up together for hearing and are disposed of by this common order.
2. Appellants M/s Rajasthan Spinning & Wvg. Mills Ltd., (RSWML) M/s Bhilwara Spinners Ltd. (BSL) & M/s Purvi Fabrics & Textures Ltd. (PFTL) are manufacturers of yarn and fabric. The other appellants are Officers of these manufacturing companies.
3. Briefly stated, material facts of the case are that all the manufacturing Cos. are Public Limited Cos. belonging to he same group. In 1994-95 RSWML commissioned a textile processing house at Mordi village for the processing of fabrics. This processing house was commissioned on 29.3.95 and was subsequently leased out w.e.f. 16.6.95 to BSL under an agreement between the two Cos. Consequent upon leasing, RSWML surrendered their Central Excise Registration as a processing house and BSL took out a new Central Excise Registration for carrying out processing in the process house. Thereafter, BSL was paying Central Excise duty in respect all the textile processing carried out from the processing house. later on the lease agreement with BSL was terminated and the processing house was leased out of PFTL. Upon this also, surrender of Central Excise registration and fresh registration were done and PFTL cleared goods on payment of duty from the Mordi process house.
4. The impugned order has held that the "lease agreement was a total sham" and "the process house was being operated under RSWML as its unit". Upon this finding, the impugned order held that duty was payable by RSWML is respect of the fabrics processed for them by BSL/PFTL treating the sale price of RSWML as constituting the assessable value of the fabrics. As a result of the consequential re-assessment of the goods, the impugned order has demanded a differential duty of over Rs. 5.26 crores from RSWML. Penalties have also been imposed on all the contracting Cos. and their officers. The table below indicates the duty demand and penalties against each of the appellants.
Name of the appellant Duty (Rs.) Penalty (Rs.) Rajasthan Spinning & Weaving Mills 5,25,99,871.00 5,27,61,249 Shri Shekhar Agarwal 25,00,000 Shri J.C. Laddha 10,00,000 Shri D.P. Mangal 10,00,000 Bhilwara Spinners Ltd.
50,00,000 Shri R.N. Gupta 10,00,000 Purvi Fabrics & Textures Ltd.
50,00,000 Shri P. Maheshwari 10,00,000 Shri S.K. Aggarwala 10,00,000 Shri B.N. Fitkariwala 10,00,000 Aggrieved by the findings and the actions taken against them, the parties have filed these appeals.
5. The submissions of the appellants are that RSWML, BSL and PFTL are independent public limited Cos. and the leases of the process house among them was a perfectly valid transaction; that there is no basis to the finding that the lease agreement was sham; that BSL/PFTL had paid correct amount of duty payable on all the fabrics processed in the process house and that no short levy of duty had taken place warranting the adjudication proceedings resulting the demand of duty made in the impugned order.
5.1 It is their contention that the investigation into the lease agreement was entirely beyond the jurisdiction of Central Excise Commissioner and that his findings are completely erroneous. They have submitted that, as lessee BSL/PFTL was carrying out processing activities for several parties and that RSWML was only one such party. They have stated that textile processing is basically a job work and the processor carries out processing work on grey fabrics supplied by textile manufacturers/traders. The processor carries out processing work against job charges. They have explained that during the period for which the demand has been raised, the processing work undertaken for RSWML was only about 60% of their total processing work. The remaining processing was done for many other parties. BSL had discharged duty liability on such processed fabrics according to the correct method of valuation as laid down by the Supreme Court in the case of M/s Ujagar Prints Limited reported in 1989 (39) ELT 493 and the method adopted for arriving at the assessable values for processed fabrics was that of adding processing charges to the cost of the grey fabrics. It is their submission that this method of arriving at the assessable value of processed fabrics has been approved in the case of M/s Ujagar Prints Limited by the Apex Court. They have submitted that the impugned order has accepted as correct, duty paid in respect of fabrics processed for all parties other than RSWML and no differential duty has been held to be payable in respect of the fabrics processed for other parties. The duty demand has been made only in respect of the fabrics processed for RSWML. It is the contention of the appellant manufacturers that there is no legal or rational basis for treating the processing work carried out fro RSWML on a different footing from the processing work carried out for other parties with regard to central excise valuation. They have emphasised that this action was grossly illegal in view of the fact that the processing charges levied from RSWML and the other parties were the same or closely comparable.
5.2. It is the contention of the appellants that leasing of plant and machinery is a common practice in the industry and that a lessee who carried out processing activities using leased machinery satisfied the requirement of being manufacturer under Central Excise law. The lease agreement between the two parties in the present case, was perfectly valid and was a commercial arrangement. They have submitted that the lease agreement satisfied the requirements of a valid contract inasmuch as the plant and machinery were leased for a rental consideration of Rs. 2 crores per annum. This amount was fully paid by the lessee to the lessor or was adjusted against the processing charges due from the lessor to the lessee. They have submitted that the adjudication has not brought out any material to show that the processing charges levied by the lessees from the lessor was a favoured rate, causing the assessment of the goods at a lower assessable value. They have submitted that this is clear from the fact that comparable rates charged from other unconnected parties have been accepted as constituting correct processing charge. They have submitted that the entire order is a mis-direction. They have submitted that observations of the Commissioner that the lease amount of Rs. 2 crores per annum was inadequate was entirely unwarranted as the lease rent is to be fixed between the parties to the lease and third parties cannot sit in judgement over the adequacy of the consideration and hold the agreement to be a sham. They have submitted that the Collector ventured into entirely forbidden territory when he took up the examination of the validity of the lease deed. They contend that his findings on various aspects of the lease agreement can only be treated as his personal opinion inasmuch as such an investigation was not within his legal authority. They have submitted that the Commissioner should have in fairness held that once the duty payment in respect of similar fabrics processed on behalf of other parties were found to be correct, there could be no evasion in respect of duty payment on the fabric processing carried out on behalf of RSWML and upon such a finding he should have dropped the proceedings.
5.3. The appellants have also submitted that the Commissioner was wrongly influenced in reaching the adverse finding by factors like the control exercised by RSWML in respect of the process house, the staffing of the process house during the period of lease and monitoring of the performance of the process house by the common promoters of the lessor and the lessee and that payment had not been made by the lessee strictly in accordance with the terms of the agreement. They have submitted that these aspects are not material for determination of assessable value for Central excise duty. Further, these factors do not affect the independence of the parties or the purely commercial character of the transaction. The lessees paid the lessor rent for the period of lease of the equipment and the lessor paid the lessee for the processing work carried out for them. With the assistance of the accounts of the parties for the relevant period, the appellant's Counsel has argued that the transactions were entirely commercial between the parties and that full payment, including interest in respect of delayed payment had been made. They have submitted that quite apart from the fact that the leasing agreement and other commercial transactions were entirely beyond the scrutiny and judgement of tax authorities, the examination of all the relevant facts would show that the transactions were entirely commercial and no favours were given or taken by the lessees and the lessor. Profit and loss of each party is shown in their Balance Sheet for the relevant year. During the argument of the appeals, the learned Counsel for the appellant manufacturers showed with the help of balance sheets that the profit and loss from the operation of the process house was being borne during the lease period by the lessee and there is no iota of evidence for the Central Excise Authorities to hold that the financial responsibility for the process house was borne by the lessor during the period of notice. The lessor in turn was reflecting the lease income from the process house in his balance sheet. The appellants therefore, submitted that the operations were completely transparent and there is no basis to the conclusion that the processing work was infact carried out during the demand period by RSWML.
5.4. The appellants have submitted that the continuation oft he earlier workers and Managers of the process house even during the lease period in no way vitiated the lase arrangement. It is common that workers and managers continue to serve a company even after the transfer of the company to new parties and that this is no factor for holding that the old company was the manufacturer even after the leasing out of the machinery. The appellants have also stressed that control of one company over another company is also no reason for holding that controlling company is the manufacturer. They have relied on the decision of the Supreme Court in the case of Pawan Biscuits Co. Ltd. (2000 (120) ELT 24 (SC) on this point.
6. As against the aforesaid submissions of the appellant, the learned Counsel for Revenue submitted that a make belief lease of the process house has been created through the lease agreement only to reduce Central Excise duty liability. He explained that prior to the transfer through lease of the process house, RSWML were paying duty on the fabrics processed in that unit treating their sale price of the fabric as the assessable value. He submitted that the appellants wanted to reduce their duty liability and in order to achieve this, the lease agreement was signed with BSL another group company. The intention of the parties is clear from the fact that, once the lease agreement was signed, the party has changed the basis for the valuation of assessment of the fabrics processed for RSWML by adopting the cost of grey fabrics plus the process charges. He also pointed out that the working of the companies is being monitored by the group management and the Mordi process house continued to be figuring under RSWML even after its transfer on lease basis to BSL. He also submitted that the transaction between the parties was more a matter of book adjustment than an actual payment. He therefore, submitted that the facts of the case justified treating RSWML as the real manufacture who carried out textile processing from the Mordi process house and the lease agreement as sham.
7. The basic issue for determination in the present appeals is whether RSWML could be treated as manufacturer in respect of the fabrics processed on their behalf in the Mordi process house during the period when the process house was on lease to BSL/PFTL and whether any short levy of Central Excise duty has taken place. The undisputed facts of the case are that the process house was carrying out processing work for several parties during the period. The ratio between fabrics processed for RSWML and other parties was 60:40. A process house is basically a job work facility. Many parties place orders for processing of grey fabrics on a process house. The process house receives processing charge. The grey fabrics belong to other parties. In the instant case, it is seen from records that processing charges were comparable irrespective of whether the processing was done for the process house owner namely RSWML or for other parties. The processing carried out for admittedly independent parties constitute substantial portion (40%) of the processing work carried out by the process house. The Revenue has no case that the processing charge levied from these admittedly independent parties is anyway at a lower favoured rate. Revenue has no case that any short levey took place on account of undervaluation of processed fabrics produced for such unconnected parties. The issue requiring consideration is whether it could be argued that assessable value should be arrived at on a different basis in respect of comparable work carried out for RSWML because they are connected to the processor through a lease agreement. The method of valuation of processed fabrics remains settled by the decision of the Supreme Court in the case of M/s Ujagar Prints. The principle laid down in this decision is that processed fabrics should be assessed to duty treating the cost of the grey fabric and processing charges as their assessable value. In the preset case also, original duty payment took place on this basis. Revenue has no grievance about the duty originally paid in so far as it relates to the valuation and duty payment of fabrics processed for 40% of the parties who are admittedly not connected to the process house. In such a situation, it has to be held that there could be no legitimate grievance about the same principle of valuation being applied in respect of remaining goods also. That one of the parties is the lessor of the processor is of no consequence. Viewed from this angle, it is clear that the present duty demand made in respect of the fabrics processed for the lessor is not legally justified and cannot be upheld. Therefore, there is no evasion of duty required to be recovered. In the absence of evasion of duty penalties can not stand.
8. The duty demand has been made in the impugned order upon a finding that the lease agreement is sham. That finding has been rendered on an examination of the lease agreement, the conduct of the parties, common staff of the process house before and during the lease period, financial relations between the lessee and the lessor and the control of one over the other. Lease agreement were entered into between public limited Cos. There could be no questioning of their competence to contract. The fact of their being Cos. of the same group notwithstanding, the lease agreements were valid in law. The commercial wisdom behind the agreements is not open to questioning by tax authorities. The issue as to whether a transaction is genuine or not is required to be examined from the point of view of whether the transaction really took place and who is the beneficiary of the transaction. In the present case, since the transacting parties were fairly big public limited companies, there could be no doubt about their existence. The books of accounts of the Cos. and their Balance Sheets show clearly that each bore the responsibility for his end of the deal. RSWML continued to be responsible for the capital invested on the process house as its owner, while & BSL and PFTL bore responsibility for paying the lease amount as well as for the running of the processing house. Each Co. paid the other for the assets or services received, including interest for delayed payments. Management control by the Group Hqrs. or common workers and managerial staff for the processing house before and during lease period make no difference to the status of BSL and PFTL as lessee manufacturers.
9. In view of what has been stated above, the findings in the impugned order of adjudication that the lease agreement was sham, that RSWML was the real manufacturer of fabrics at Mordi and that there was short levy of duty cannot be sustained. In the facts of this case, demand could also not be raised for the extended period, invoking Proviso to Section 11 A (1) of the Central Excise Act as the case did not involve fraud, suppression of facts etc. mentioned in the proviso to the Section. No penalty could also be imposed in the present case since no duty evasion had taken place on account of processing of fabrics for RSWML by the BSL and PFTL. Consequently all the appeals are allowed after setting aside the impugned order.
10. The appellants had deposited an amount of Rs.2 crores during the proceedings of the case before the Central Excise Authority. They deposited a further amount of Rs. 75 lakhs in terms of our interim order dated 16.7.2000 on their stay application. In view of the setting aside of the duty demand and the penalties, these amounts shall be returned to the appellant without any delay.
Pronounced today.