Customs, Excise and Gold Tribunal - Mumbai
Statfield Equipment Pvt. Ltd. vs Commissioner Of Central Excise on 30 August, 2000
Equivalent citations: 2000(72)ECC165, 2001(137)ELT929(TRI-MUMBAI)
ORDER G.N. Srinivasan, Member (J)
1. These group of 9 Appeals have been filed against the decision of the Collector of Central Excise, Pune, made in Order No. 46/CEX/1990 dated 20th November, 1990 confirming the Show Cause Notice issued on 16th January, 1989 whereby he had confirmed.
(A) The duty demand of Rs. 13,47,043.40 under annexures 'C-I' to 'C-III' of the Show Cause Notice i.e. Rs. 13 Lakhs consists of the following:
Annexure C-I Parts I & II
(a) Inclusion, non-inclusion of raw material costs in the assessable value of Statfield Systems (Coating) Pvt. Ltd. (Appeal No. 5244 of 1991)--Turnover of Rs. 4,48,600 excluded of raw material.
Duty is Rs. 67,290
(b) Non-inclusion of design engineering charges Rs. 74,86,950 Duty is Rs. 10,33,817 Annexure C-II Demand of under-valuation by Statfield Equipments (Appeal No. 5240 of 1991) by way of separate recovery of design and engineering charges through related persons i.e. Intelligent Conveyors & Stackers Pvt. Ltd. (Appeals No. 5241 of 1991) for the period 1986-87,1987-88 up to 1st March 1988, amount involved for year:
1986-87 Rs. 5.84,140 Duty Rs. 87,621 1987-88 Rs. 5,64,500 Duty Rs. 84,675 Total Duty on this count Rs. 1,72,296 Annexure C-III
The demand showing under-valuation by Minilec Control Pvt. Ltd. (Appeals No. 5243 of 1991) by routing their Sales through related person Minilec Protective Relays Pvt. Ltd. (Appeal No. 5245 of 1991):
Differential assessable value to be fixed at Rs. 5,79,860.00 Duty Rs. 73,640.47 (B) The demand for Central Excise Duty of Rs. 88,50,884.56 raised under Annexure 'D-I' to 'D-V of the Show Cause Notice consists of the following:
Annexure D-I Differential duty demand on account of fragmentation of Minilec Controls Pvt. Ltd. (Appeal No. 5243 of 1991) for the years 1983-84 to 1987-88, The duty amount involved is Rs. 24,31,384.90 Annexure D-II Demand on account of fragmentation in respect of Statfield Equipments Pvt. Ltd. (Appeal No. 5240 of 1991) for the period 1.8.83 to 31.7.88 The duty amount involved is Rs. 23,41,941.10 Annexure D-III Fragmentation in respect of Statfield Systems (Coating) Pvt. Ltd. (Appeal No. 5244 of 1991) for the period 1.8.83 to 31.7.88 The duty amount involved is Rs. 20,95,117.10 Annexure D-IV Fragmentation in respect of Minilec Protective Relays Pvt. Ltd. (Appeal No. 5245 of 1991) for the year 1985-86 up to 31.7.88 The duty amount involved is Rs. 14,07,066.30 Annexure D-V On account of Fragmentation in respect of Intelligent Conveyors & Stackers Pvt. Ltd.
(Appeal No. 5241 of 1991)
for the period 1986-87 to 31.7.1988
The duty amount involved is
Rs. 5,75,374.50
The total duty demand confirmed as per A & B above Rs. 1,01,97,927.96
By the said order the Collector also imposed penalties under Rules 173Q in the following manner:
(i) M/s. Minilec Controls Pvt. Ltd.
(Appeal No. 5243 of 1991) Rs. 2,50,000
(ii) M/s. Statfield Equipments Pvt. Ltd.
(Appeal No. 5240 of 1991) Rs. 2,50,000
(iii) M/s. Statfield Systems (Coatings) Pvt. Ltd.
(Appeal No. 5244 of 1991) Rs. 2,20,000
(iv) M/s. Minilec Protective Relays Pvt. Ltd.
(Appeal No. 5245 of 1991) Rs. 1,40,000
(v) M/s. Intelligent Conveyors & Stackers Pvt. Ltd.
(Appeal No. 5241 of 1991) Rs. 60,000
(vi) M/s. Surcoat Consultants Pvt. Ltd.
(Appeal No. 5242 of 1991) Rs. 1,50,000
(vii) Shri Y.G. Ghaisas
(Appeal No. 763 of 1991) Rs. 80,000
(viii) Shri S.R. Apte
(Appeal No. 762 of 1991) Rs. 80,000
(ix) Shri M.R. Apte
(Appeal No. 5246 of 1991) Rs. 40,000
By the said order the adjudicating Authority also confiscated land, building, plant, machinery of the 5 manufacturing units and fixed redemption fine of Rs. 1 Lakh each.
2. This group of Appellants started their business activities in various years. Historically and factually it will be useful to mention that a firm called M/s. Suyash Sankalp started in 1979. Shri Y.G. Ghaisas (Appellant in Appeal No. 763 of 1991) & Shri S.R. Apte (Appellant in Appeal No. 762 of 1991) started the business of manufacturing Current Sensing Unit and Microprocessor Based Annunciation system and other electrical and electronic control equipments, High Voltage sensing products and electronic panel and relays, Spary Painting Plant, Spray Booth and Ovens, Manual and Automatic Power Coating and Liquidating equipments and their spare parts, vertical carousal storage systems and various conveyors and stackers etc. There was some intelligence gathered by the department that the Appellants were violating various provisions of the Central Excise Act & Rules. The manner of violations will be described in the later part of the order. The Show Cause Notice dated 16th January 1989 charged the Appellants with violating various provisions of the Central Excise Act and Rules. Detailed replies were filed by each of the Appellant. The Collector after hearing parties and after taking note of various evidences of both oral and documentary came to the conclusion that there has been clearances of firms which were required to be clubbed together and the Appellants were not entitled to benefit of Small Scale Industries Exemption Notification No. 175/86 or other earlier notifications. He confirmed the demand stated above and imposed penalties as mentioned above. We shall deal with each Appeal seriatim.
(i) APPEAL NO. 5240/1991: STATFIELD EQUIPMENTS PVT. LTD.
The Appellants started their business on 3rd October 1973. They were engaged in manufacture of Manual and Automatic Powder Coating and Liquidating Equipments and their Spare Parts falling under Chapter Heading 84.24,84.28 and 84.31 mentioned in Schedule of CETA, 1985. They also manufacture painting equipment in collaboration of German Company M/s. Mullers. They also have Japanese Collaborators by name Iwato in respect of painting equipment. They supply to other spray painting small painting contractors and companies like Bajaj Auto Ltd. Escorts Ltd., Godrej & Boyce Ltd., TISCO etc. The Appellants state that they sell their equipments on principal to principal basis to other Appellants viz Statfield Systems (Coating) Pvt. Ltd. (Appeal No. 5244 of 1991), Intelligent Conveyors & Stackers Pvt. Ltd. (Appeal No. 5241 of 1991). But it is stated by the Appellants that sales to such companies represent only 15% of their total sales. The manufacturing activity for the programmable conveyors was for their main products viz. painting equipment and was causing difficulties for manufacture. Therefore they sold out the technical know-how to Intelligent Conveyors & Stackers Pvt. Ltd. (Appeal No. 5241 of 1991). The Show Cause Notice dated 16th January 1989 was issued by the Adjudicating Authority charging them that there was violation in respect of their product. In the Show Cause Notice it was alleged that the Appellants being constituent manufacturing unit of Suyash Sankalp Group, they wrongly claimed Excise exemption under Notification Nos. 77/83, 77/85 and 175/86 for period 1983-84, 1984-85, 1985-86, 1986-87 and 1987-88 in that they have not declared true relationship of other related manufacturing/ non-manufacturing units owned, directed and controlled by the said group of persons. The demand raised against the Appellants at Annexure C-II is Rs. 1,72,296 and at Annexure D-l is Rs. 23,41,941. A reply dated 24th April 1989 was filed explaining as to how the Appellants cannot be charged with under-valuation. The Adjudicating Authority by his order dated 20th November 1990 confirmed the demand of above excise duty and imposed penalty of Rs. 2,50,000. Hence, the present Appeal.
(ii) APPEAL NO. 5241 OF 1991: INTELLIGENT CONVEYORS & STACKERS PVT. LTD.
The Appellants are Small Scale Unit engaged in the manufacturing and selling of conveyor, parts of conveyors, vertical carousal systems and stackers. The Appellants unit is situated at Pirangoot in Pune Dist. As stated in the previous paras, the Appellants purchased in 1985, the dies and tools and the necessary technical know-how for the manufacture of conveyors, paint shop and for material engaging other than paint shop from the Appellants in Appeal No. 5240 of 1991 i.e. Statfield Equipments Pvt. Ltd. They have various customers like L&T, Bharat Earth Movers Ltd., Premier Auto Ltd. etc. Out of the 10 customers mentioned in Appeal only three are engaged in paint shop activity. The Appellants by the Show Cause Notice dated 16th January 1989 were charged with evasion of duty and specifically the Appellants were charged for violation of taking exemptions wrongly under Notification Nos. 77/ 83, 77/85 and 175/86. They were also charged with failure to determine the correct excise duty under TI 68 of the then Excise Tariff and Chapters 84, 85 & 91 of the CETA of 1985. The Appellants were charged for suppressing the fact deliberately to the extent of true relationship of the inter-related manufacturing, non-manufacturing units owned, controlled by the said group of persons. The Appellants filed a reply on 24th April 1989. The impugned order was passed by the adjudicating authority confirming the demand of Rs. 5,75,375.00 (clubbing) under Annexure D-II in the Show Cause Notice and a penalty of Rs. 60,000 was imposed. The main charge of violation is fragmentation of the production, which according to Appellants is contrary to law. Hence, the present Appeal.
(iii) APPEAL NO. 5243 OF 1991: MINILEC CONTROLS PVT. LTD.
The Appellants was registered under the Companies Act, 1956 on 24th July 1982. They entered into partnership with Miniature Electricals Ltd. The partnership was engaged since 1984 in the business of Electrical and Electronics Control Equipments, Current Sensing unit and Microprocessor Based Annunciation system. The Appellants also supplied microprocessors to appellants in Appeal No. 5241 of 1991 viz. Intelligent Conveyors & Stackers Pvt. Ltd. They sell only less than 5% of their production to the Appellants in Appeal No. 5241 of 1991. The goods manufactured by them are covered under Chapter Nos. 84, 90, 91. The charge against them was that they wrongly claimed exemptions under Notification Nos. 77/83, 77/85 and 175/86. They were further charged that Suyash Sankalp Group suppressed the facts deliberately and they did not declare to the Central Excise Department the extent of relationship of other related manufacturing/non-manufacturing units owned/directed/controlled by the said group of persons with a view to fraudulently claim benefit under the above-mentioned notification. The demand on account of fragmentation charge has been quantified in Annexure D-I at Rs. 24,31,385 and undervaluation as per Annexure C-III at Rs. 73,640. The Appellants filed their reply on 25th April 1989. They stated that no Show Cause Notice was issued to Suyash Sankalp Group nor its whereabouts was brought out in the Show Cause Notice. After hearing the Appellants, the impugned order dated 20th November 1990 was passed confirming the duty demand of Rs. 24,31,384.90 (clubbing) and Rs. 73,640 (undervaluation). A penalty of Rs. 2,50,000 was imposed on the Appellants. Hence the present Appeal.
(iv) APPEAL NO. 5245 OF 1991: MINILEC PROTECTIVE RELAYS P. LTD.
The appellants was registered as a Company on 20th May 1985. They manufacture high voltage sensing products and electronic panel and relays. Like other Appellants, they were also charged for wrongly claiming exemption under Notification Nos. 77/ 83,77/85 and 175/86 and they were also charged for under-valuation of their products under Item 68 of the Schedule to the Central Excise Tariff and thereafter Chapters 84,90,91 of CETA, 1985. A duty demand of Rs, 14,07,086.30 was claimed (clubbing). A reply dated 24th April, 1989 was filed by the Appellants denying the liability claiming on the ground that no Show Cause Notice was issued to the so-called Suyash Sankalp Group nor are its whereabouts brought out in the Show Cause Notice. It was further contended by Appellants that since no Show Cause Notice was issued to the so-called Suyash Sankalp Group they are not liable to pay any duty. By the impugned order dated 20th November 1990, the Adjudicating Authority confirmed the duty amount of Rs. 14,07,086.30 from the Appellants and imposed a penalty of Rs. 1,40,000 confiscation of land building, machinery etc. Hence, the present Appeal.
(v) APPEAL NO. 5244 OF 1991: STATFIELD SYSTEMS (COATING) P. LTD.
The Appellants in this case started its business in 31st July 1979 in the manufacturing of Spray Phosphating Plant, Spray Booth and Ovens. They are contractors of complete industrial paint-shops by undertaking to supply and erecting and commissioning complete paint-shops which includes both liquid as well as powder coating systems, baking oven, material transport system. They purchased bought out items like power motors, pump sets, boilers etc. They carried out complete, industrial paint-shop for electronic industrial company, Godrej and Boyce Ltd. Bombay, Bajaj Group of Companies, Escorts, Siemens, etc. They are also engaged in erection and installation of industrial paint-shops. As mentioned above, the Show Cause Notice dated 16th January 1989 was issued to them charging that they wrongly claimed exemptions under Notification Nos. 77/83,77/85 and 175/86. They have been charged for undervaluation, recovery of designing and consultancy charges through related person viz. Surcoat Consultants Pvt. Ltd. (Appellants in Appeal No. 5242 of 1991) to the tune of Rs. 11,01,107 and for differential duty on account of benefit of Small-Scale Unit exemption to the tune of Rs. 20,95,117 (clubbing). By their letter dated 3rd April 1989, they denied the charges. However, by the impugned order dated 20th November 1990, the Adjudicating Authority confirmed the demand of Rs. 11,01,107 on the ground of under-valuation on the allegation that design and engineering charges were not included. The adjudicating Authority confirmed the demand of Rs. 20,96,117 (clubbing). He imposed a penalty of Rs. 2,20,000 under Rule 173Q. Hence the present Appeal.
(vi) APPEAL NO. 5242 OF 1991: SURCOAT CONSULTANT PVT LTD.
The Appellants started business by registering itself as a company from 19th June 1992. They provide drawing, design and consultancy on technical know-how for turnkey projects. They have done the job for certain clients of Appellants in Appeal No. 5244 of 1991. They have also done jobs for certain other independent clients. The Appellants were charged for violation of Rule 173B in not mentioning the true relationship of manufacturing/non-manufacturing units. Reply dated 21st April 1989 was filed starting inter alia that the Appellants are not a manufacturing unit. They stated that the activity of drawing, design and consultancy was for technical know-how for turnkey project and not for designing manufacturing units. The adjudicating Authority by the impugned order rejected the claim of the Appellants and imposed a penalty of Rs. 1,50,000. Hence, the present Appeal.
(vii) APPEAL NO. 5246 OF 1991: M.R. APTE The Appellant is a Partner of Suyash Sankalp Pune. He is also a Director in Statfield Systems (Coating) Pvt. Ltd. (Appeal No. 5244 of 1991), Statfield Equipment Pvt. Ltd. (Appeal No. 5240 of 1991), which was constituted on 16th December 1981 with an objective to provide labour market survey, to provide research and development facilities etc. The Show Cause Notice dated 16th January 1989 was issued to him charging for violation of Central Excise Act & Rules. The Appellant filed reply dated 4th April 1989 denying the charges made. However, by the impugned order dated 20th November 1990, the Adjudicating Authority imposed a penalty of Rs. 40,000. Hence, the present Appeal.
It is reported that the Appellant died on 19.8.97 and hence the Appeal aborts.
(viii) APPEAL NO. 762 OF 1991: MR. S.R. APTE.
The Appellant is a partner of Suyash Sankalp firm which was constituted on 16th December 1981 with an objective to provide labour market survey, to provide research and development facilities etc. Besides, the present Appellant, Late Mr. M.R. Apte (Appellant in Appeal No. 5246 of 1991) & Mr. Y.G. Ghaisas (Appellant in Appeal No. 763 of 1991) were Partners in the said firm. The present Appellant is not related to Mr. M.R. Apte. The Show Cause Notice dated 16th January 1989 was issued. It may be noted that the Appellant was not a manufacturing unit and yet the Show Cause Notice charged him for claiming wrongly exemption under Notification Nos. 77/83, 77/85 and 175/86. a reply dated 4th April 1989 was filed denying the charges. However, the impugned order was passed imposing penalty of Rs. 80,000 on the Appellant. Hence, the present Appeal.
(ix) APPEAL NO. 763 OF 1991: MR. Y.G. GHAISAS The Appellant was a partner of Suyash Sankalp Firm, which was constituted on 16th December 1981 with an objective to provide labour market survey, to provide research and development facilities etc. Besides, the present Appellant, Late Mr. M.R. Apte (Appellant in Appeal No. 5246 of 1991) and Mr. S.R. Apte (Appellant in Appeal No. 762 of 1991) were Partners. The Show Cause Notice dated 16th January 1989 was issued. It may be noted that the Appellants was not a manufacturing unit and yet the Show Cause Notice charged him for claiming wrongly exemption under Notification Nos. 77/83, 77/85 and 175/86. A reply dated 4th April 1989 was filed denying the charges. However, impugned order was passed imposing penalty of Rs. 80,000 on the Appellant. Hence, the present Appeal.
3. All the group of Appellants as per the respective Appeal memorandum and the Synopsis of the case filed reply to Show Cause Notice stating that right from 1978 certain technically qualified Appellants like Mr. Y.G. Ghaisas, Mr. S.R. Apte and Mr. M.R. Apte started a Partnership firm. Thereafter, floated independent companies for manufacturing activities such as paint equipment, automatic powder coating and liquidating equipment, carousal systems etc. and non-manufacturing activities of engineering paint items including consultancy services etc. The Show Cause Notice proceeds on the basis that they have been wrongly claiming exemption of duty under Small Scale Industries Notification Nos. 77/83, 77/85 and 175/86. Issues involved in the present set of Appeals is whether:
(a) The demand raised against each of the 5 manufacturing units contained in the Annexure D-l to D-V on the grounds that each of the 5 units are not entitled to the benefit of SSI Notification on account of clubbing of the value of the clearance are sustainable?
(b) The demands on account of under-valuation contained in Annexure C-I to C-III are sustainable?
The allegation in the Show Cause Notice is that there exists common mutuality of interest in Suyash Sankalp Group of Companies (SS). These allegations are based on a two-fold approach:
(i) The Show Cause Notice first seeks to show that there is common mutuality of interest in 3 pairs of two companies each. These are:
(a) Statfield Systems (Coating) Pvt. Ltd. [SS(C)L] and Surcoat Consultants (P) Ltd. (SCPL).
(b) Minilec Controls P. Ltd. (MCPL) and Minilec Protective Relays Pvt. Ltd. (MPRPL) (C) Statfield Equipments Pvt. Ltd. (SEPL) and Intelligent Conveyors & Stackers P. Ltd (ICSPL).
(ii) The second basis on which the Show Cause Notice proceed is to show that SS has common and mutuality of interest with other companies which come under "Suyash Sankalp Group". The notice therefore relies on documents and instances to show the association of SS with each of the other 6 companies.
4. Shri Vikram S. Nankani, Advocate along with Shri A.G. Kulkarni Chartered Accountant appeared for the Appellants. Shri Deepak Kumar DR Appeared for the Department.
5. Shri Nankani stated that at conceptual level what is known as clubbing in the Central Excise Law is combination of existence of certain pattern in the clearances of the excisable goods manufactured by two or more manufacturers. These are as follows:
--common control of production and sales,
--day-to-day management control and financial control/relationship,
--financial flow back from one unit to the other.
He stated that some of the Appellants like Appellant in Appeal No. 5242 of 1991, Appellant in Appeal No. 782 of 1991, and Appellant in Appeal No. 763, there cannot be any charge of wrongful claiming of exemption because they are not the manufacturers. There can be a clubbing only if there is existence of dummy unit. Shri Nankani strenuously stressed the point that once it is an accepted fact that there is an existence of independent individualistic persons there cannot be any clubbing. He stated that by the decision of the Supreme Court in Gajanan Fabrics Distributors v. Commissioner of Central Excise, Pune the issue stands settled in favour of assessee. The Supreme Court has held as follows:
We find after having heard learned Counsel, that it is necessary to remand the matters to the Collector to consider the entire case afresh. The principal factor that leads us to this conclusion is the finding of the Collector, upheld by the Tribunal, that the seven units which are the appellants before us "are only a corporate facade although registered with the various authorities with a view to camouflage their actual identity and thereby avail of the exemption which, otherwise, would be inadmissible to them. The Tribunal failed to give due attention to the fact that the Collector had confirmed, in the sum of Rs. 11,84,708.51 the demand made in the Show Cause Notices upon all seven units. And their partners or directors. Having regard to his conclusion that all units other than Gajanan Weaving Mills were fictitious units, the sequitur, one would have assumed could only be that it was a Gajanan Weaving Mills which was the assessee and liable to satisfy the demand. By confirming the demand upon the seven units the Collector appears, however, to have treated them all as assessees and, implicitly recognized their independent existence.
From the above, he stated that there are independent industrial companies. Therefore the question of clubbing cannot be made in this case. He further stressed that independent licenses have been given to each of the Appellants. The situations of the factories of these Appellants are not adjacent to each other. By this argument, he states the demand mentioned in D-I to D-V in the Show Cause Notice will go away. As far as the valuation is concerned, Shri Nankani stressed the point that there was no sale between the Appellant in Appeal No. 5244 and 5 manufacturing units enumerated at SI. No. 1 to 5 in the Show Cause Notice. He also stated that sales between one or two units cannot be called as a sale to a related person as since there was no finding that one is not the holding company of any subsidiary company. He therefore pointed out in terms of the provisions of the Central Excise Law there cannot be the concept of the related persons. Commenting on the Appellant in Appeal No. 5244 of 1991, he stated that Paras III-I to III-22 of the Show Cause Notice point out certain stray instances of the common activities. He stated that the turnkey project in the very nature of things cannot be achieved without discussions and mutual consultations. He further stressed that the undertaking of the turnkey project involve coordination and execution in a planned manner so that the object is achieved. He further emphasized the fact that the approach of the department in coming to the conclusion that there is under-valuation is wrong in law inasmuch as the adjudicating authority has confused the issue of mutuality. The mutuality is used in this case wrongly in an interchangeable manner in respect of both valuation and clubbing. He also stated that there cannot be a case of mutuality where financial flow-back is concerned. For example one firm may pay money on behalf of some other firm and may in turn it has taken a reimbursement. When such is a position, there cannot be an instance of financial flow back for the conclusion of clubbing. He also stated that only when there is a depreciation of the price because of certain extra commercial considerations the valuation provisions of the product for the purposes of assessment of Excise Duty may be invoked. Looking into the valuation, he stated that one has to prove existence of related persons concept for proving the charge of under-valuation especially in respect of limited companies registered under the Companies Act, one has to prove in line that definition mentioned in Section 4(4)(C). He stated that the Show Cause Notice does not refer to the clause in the said Section nor does the Show Cause Notice mention the existence of the concept of the holding company, subsidiary company or relative under the Companies Act, 1956. The charge of under valuation, therefore, according to Shri Nankani, cannot be sustained.
The Learned DR adopts the reasoning.
6. We have heard the submissions.
6.1 As far as the clubbing is concerned, it has been held in the case of Gajanan Fabrics Distributors (supra) by the Supreme Court that once there is a confirmation of demand upon all the units independently, implicitly, they have been treated as recognizing their independent existence. It is therefore incomprehensible for us to conclude the combined existence of all the said units. It cannot be treated as a facade, make believe, cloak or dummy only to claim the exemption of the notification because the sites and business of each of the Appellants are not contiguous. It is not a case of the Appellants that they are adjacent to each other. One is located at Pirangoot, one is located at Pimpri and one is at Hadapsar. The fact that they are not adjacent would itself go to show that they are independent units. It is a stronger case here than the Gajanan Fabrics Distributors case.
6.2 Another important ingredient of the law of clubbing is the financial flow-back. It is not demonstrated here before us either in the Show Cause Notice or by means of any evidence from the balance sheets of various companies that there has been a financial flow back. No evidence has been set out by the statement of various employees, by the department that there is a financial flow-back. The Show Cause Notice does not provide for existence of any documentary evidence to that effect. In the absence of financial flow back and the existence of independent legal individuality amongst the Appellants clearly goes to show that the charge of wrongful claiming of exemption under the Notification Nos. 77/83, 77/85 & 175/86 are not established in the group of companies.
6.3. Even the board has issued a Circular Order under Section 37-B of the Central Excise Act, the gist of which has been reflected in the Madurai Collectorate Trade Notice reported on Page No T41 of Volume 60 ELT where, in the first para, it has been specifically stated that "Limited companies whether Public or Private is a manufacturer by itself and will be entitled to a separate exemption limit," In this case all are separate private limited registered companies under the Companies Act, 1956. Those could not be treated as one company or one firm. The department is bound by the trade notices issued in terms of the Board Circulars issued under Section 37B.
6.4 It is true that the Show Cause Notice proceeds on the basis of certain decisions taken by the group of companies in their meetings held regarding execution and compliance of certain turnkey projects. We shall refer to circumstances contained in the Show Cause Notice when we are dealing with the under-valuation, but the fact remains that when a turn-key project is taken, it is rightly contended by Mr. Nankani that such an activity involves mutual consultations, meetings, conferences between a man who has undertaken to execute the turn-key project and its constitutent without mutual consultation cannot be achieved. The synchronized action should be done in such a way that there should not be any clash of unplanned activity so that there cannot be derailment of the turnkey project. The co-operation of participation of turnkey project in the very nature of things involves joint planning for all the participating Individual constituents and careful and coordinated action in a planned way. We are therefore of the view that the charge of clubbing can never be sustained in this case.
7. The valuation provision is dealt with in Section 4 of the Central Excise Act, relevant portion of which reads as under:
Section 4. Valuation of Excisable goods for purposes of charging of duty of excise--
(1) Where under the act, the duty of excise is chargeable on any excisable goods with reference to value, such value, shall, subject to the other provisions of this section, be deemed to be--
(a) The normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal, where the buyer is not a related person and the price is the sold (sic) [sole] consideration for the sale:
Provided that --
(i) where, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being related persons) each such price shall, subject to the existence of the other circumstances specified in Clause (a), be deemed to be the normal price of such goods in relation to each such class of buyers;
(ia) where the price at which such goods are ordinarily sold by the assessee is different for different places of removal, each such price shall, subject to the existence of other circumstances specified in Clause (a), be deemed to be the normal price of such goods in relation to each such place of removal;
(ii) where such goods are sold by the assessee in the course of wholesale trade for delivery at the time and place of removal at a price fixed under any law for the time being in force or at a price, being the maximum, fixed under any such law, then, notwithstanding anything contained in Clause (iii) of the proviso, the price or the maximum price, as the case may be, so fixed, shall, in relation to the goods so sold, be deemed to be the normal price thereof;
(iii) 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.
(b) Where the normal price of such goods is not ascertainable for the reason, that such goods are not sold or for any other reason, the nearest ascertainable equivalent thereof determined in such manner as may be prescribed.
(2) ...
(3) ...
(4) For the purposes of this section--
(a) "assessee" means the person who is liable to pay the duty of excise under this Act and includes his agent;
(b) ...
(ba) ...
(c) "Related person" means a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor.
Explanation--In this clause "holding company", "subsidiary company" and "relative" have the same meanings as in the Companies Act, 1956 (1 of 1956),
8. In the said Section 4, Sub-section (1)(a) provides for the valuation of excisable goods in normal wholesale trade transaction. Where there is an absence of normal wholesale transaction, only then value should be determined as provided under Valuation Rules--in terms of Section 4(1)(b). Another concept where the price charged on the basis of special relationship between the buyer and seller is, the fact that one is a holding company and other is a subsidiary company or a relative as mentioned in the Companies Act, 1956, then the aspect of ascertaining correct value for excisability of excise duty is involved. In this connection we feel it is necessary to extract what is contained in the Show Cause Notice.
The allegation in Para III Sub-Paras 1 to 22 of the Show Cause Notice is reproduced below:
III. M/s. SCPL has been floated with specific intention to avoid payment of Excise duty on design and drawing charges. M/s. SCPL is nothing but a design department and project division of M/s. SS(C)PL.
III-1. It may be seen from the letter written by Shri S.R. Apte, Managing Director of M/s. SS(C) PL to S.B.I., Pune listed vide S. No. 182 of the Annexure B to the Show Cause Notice that there is inter-locking of funds with the following business associate concerns viz. (1) M/s. Suyash Sankalp Exports Pvt. Ltd. (2) M/s. Surcoat Consultants Pvt. Ltd. under the heading SCPL a Paragraph in that letter reads us under:
For ail practical purposes, this nothing but our design department. In our earlier letter we have made it clear that there are some definite advantages for the consulting organisation and hence the separate company is floated. This company is also banking with yours and you have not given any limits to this company except bank guarantee and hence there will be always substantial amount receivable from this company. The reason for this is also, the same, which we have explained in case of SSEPL". In the same letter a comparative statement of amount payable/receivable of their business associates is also available as enclosure to letter.
III-2. In another letter written from M/s. SS(C)PL to Gujarat Communication and Electronics Ltd. Baroda vide S. No. 103 of Annexure 'B' to the Show Cause Notice the first para of the letter reads as under:
The above tender documents have been forwarded to us by our sister concern M/s. Surcoat Consultants Pvt. Ltd., Pune. We are manufacturers of the tendered equipment and Surcoat Consultants is our sister concern and Project Division. We are taking liberty to forward our offer against the tendered documents received from M/s. Surcoat Consultants Pvt. Ltd.
III-3. M/s. SS(C)PL authorizes M/s. SCPL to bid, negotiate and conclude the contract on their behalf. An example of such authorisation communicated to customers may be seen in a letter written from SS(C)PL to the "Central Organization for modernization of work shop" vide S. No. 184 of Annexure 'B' to the Show Cause Notice.
III-4. The Project report of M/s. SCPL listed at S. No. 185 of the Annexure 'B' to the Show Cause Notice reveals the activity potential, organisation, experience, know how machinery and projected balance sheet of M/s. SCPL. Under the heading 'Activity' one of the para reads as under: "The activity of this company is planned to provide following services as consultants for industrial paint shops.
(a) To decide the process of Painting.
(b) To design and estimate the painting plant including layout.
(c) To draw specifications of individual plant equipment.
(d) To co-ordinate the procurement of plant equipment.
(e) To inspect the equipment for quality
(f) To erect such plants
(g) To commission and hand over the plant after satisfactory production run.
Under the heading organization experience and know how it reads as under.
This company is being established to co-ordinate the supply of 3 group companies and to provide single source responsibility. These group companies are:
1. SS(C)PL Pune manufacturing ovens, booths, pretreatment plants under technical know how from West Germany.
2.Mechen Engineering Pvt. Ltd., Bombay (Ambarnath manufacturing conveyors for Paint shops.
3.SEPL Pune (Pimpri) manufacturing Electrostatic spraying equipments under West German Collaboration.
Thus the company has the expertise, know-how and experience derived from those group companies. The technical staff has mainly been absorbed from group companies.
The Joint Managing Directors are:
(a) Mr. Y.G. Ghaisas Also Managing Director of Associate Company
(b) Mr. S.R. Apte Also Managing Director of Associate Company.
III-5. The employee from SCPL and SS(C)PL work in both the Units as per the directions received by them. This fact is evident in the evidences listed at S. Nos. 186, 187, 188, 189 and 190 of Annexure 'B' of Show Cause Notice. Inter Office Memo from SCPL to SSCPL listed at S. No. 186 reads as under:
As per the recent circular dated 20.12.1985 Mr. Duppalivar will perform his duties full day at Head Office till further instructions.
(Here H.O. and SCPL are one and the same).
Another Inter Office Memo from SCPL to all concerned listed at S. No. 187 reads as under.
From today onwards Mr. S.V. Duppaliwar will be looking after the Co-ordination and costing of Surcoat Consultants Pvt. Ltd. as well as Statfield Systems (Coating) Pvt. Ltd. He will be in Head Office during morning hours and in the afternoon at SSCPL. All are requested to give the necessary co-operation.
III-6. In a circular listed at S. No. 138 while deciding about the best communication system for productive results at item 5 it is mentioned that "Designation for all the staff members will be the same on SCPL and SSCPL.
III-7. The Circular listed at S. No. 189 and signed by Shri S.R. Apte mentioned about functions of Project execution group appears to further substantiate that employees of the unit are asked to work for other unit of the group and project execution group is entrusted to co-ordinate with design, purchase production, sales, accounts and also finalize erection contracts.
III-8. In the minutes of meeting held on 5.6.86 listed at S. No. 190 attended by key persons under SCPL and SSCPL decided amongst various other things the following at Item 6. "The viability of the projects should be checked by arranging common sittings of project execution, project sales, design and production".
III-9. The file note dated 24.10.86 regarding execution of a particular order listed at S. No. 191 of the Annexure B' of the Show Cause Notice would appear to rule out any possibility of treating SCPL and SS(C)PL as separate entities inasmuch as the following step by step execution of a particular order appear to be perfectly homogeneous viz.
--Project sales department will give the format for the feed back from the project execution department for the status of running projects. Project execution will give the feed back to project/sales department every 15 days in the prescribed format.
--Design department will only start the drawings after putting complete data from project execution in the format given by Design Department.
--Design department will check the article movement of raise and fall and bends etc. before finalization of any hanger/J.G. design.
- Design department will give tentative material list immediate after getting the required data from project execution department. Further design department will send two sets of drawings to P.E. (i.e. one set for Erection and one for P.E.) with material requirement for individual drawings which will be mentioned in the drawings. And P.E. department will consolidate the material requirement and send the part list to SS(C)PL.
--Production/Commercial department will contact or follow up directly with design department for any material requirement or drawing/design problem. Accordingly design department will give the solution/feed back to SS(C)PL with the copy to project execution.
--Project execution will hand the money collection from the clients. But any order will be executed only after getting the 100% specified advance against that order and this will be the total responsibility of project sales department. After all the final decision will be given by the Management to execute the order without advance from clients.
--Erection Engineer if deputed to particular project will physically check all the material before despatch if he is available in Pune. Otherwise immediately before starting the erection at site. And he will send the list of material shortages to Head Office immediately before starting of erection.
--Also erection engineer should plan his activity and erection schedule before leaving the Head Office to start the particular site, this had been observed that our erection contractors are not carrying out all the tools, tackles required for erection. This delays the project. This is necessary to take decision. Whether we can provide our tools and tackle for all sites or any special machine, drill bit, special consumables like S.S. Rods etc. to avoid the delay at sites.
--Our Accounts department will start to update the project wise costing immediately with necessary help from project execution.
III-10. The intentional avoidance of payment of Excise Duty on design and consultancy by the assessee would appear established from the documentary evidences listed at S. Nos. 225, 223, 224, 222, 221, 220, 219, 218, 217, 216, 227, 228, 229, 230, 231, 232, 233, 238, 250, 251, 252, 253, 255, 256, 257, 258, & 259 of Annexure 'B' to the Show Cause Notice which clearly show their systematic approach to under-invoice the goods by splitting order value.
For example: In the documents mentioned at S. No. 225 M/s. SS(C)PL in its offer of painting plant to Steelage Industries Ltd. intimate the total project cost in the following manner.
Total Ex-Works cost Rs. 12,65,000 including design, drawing, consultancy, manufacturing, supply, erection, commissioning.
This total cost can be subdivided in following different orders in order to work-out minimum taxes (Excise & Sales Tax)
(i) Order on M/s. SCPL Towards drawing design, engineering charges for Painting Plant Rs. 3,25,000
(ii) Order on M/s. SS(C)PL Towards manual and supply of plant Rs. 9,40,000 Rs. 9,40,000 can further be splited as below:
Rs. 50,000 towards erection of the Plant & Rs. 8.90,000 towards material supply value Now Rs. 8,90,000 shall only attract all taxes which are as below:
Rs. 8,90,000
Add 55,000 Approx, Excise duty
__________
Rs. 9,45,000
Add 94,500 10% Sales Tax
__________
Rs. 10,39,500
Add 41,580 4% Octroi
__________
Rs. 10,81,080
Add 12,000 Transport insurance charges
__________
Rs. 10,93,080
Add 50,000 Towards erection charges
__________
Rs. 11,43,080
__________
Now Add 3,25,000 Design and consultancy Charges
__________
Rs. 14,68,080
__________
Thus total project cost excluding civil work cost is Rs. 14,68,080. In the same letter it is also further confirmed vide Page 225.4 that the order split up has been done only to reduce the taxes of the total project value.
In an offer made by SCPL to M/s. Voltas Ltd. at S. No. 221 the following Note appears and is relevant.
Note--To reduce the incidence of tax and excise, we suggest that the order be split as below:
(i) on SCPL
--towards planning, engineering, designing and
consultancy Rs. 4,40,000
--towards erection and commissioning Rs. 2,20,000
(A) Sub total Rs. 6,60,000
(ii) on SEPL
--towards supply of
(a) Electrostatic Powder coating applicators Rs. 80,000
(b) Overhead conveyor Rs. 1,45,000
--Towards packing charges Rs. 20,000
(B) Sub Total Rs. 2,45,000
(iii) on SS(C)PL
-- Towards supply of
(a) Spray phospating plant Rs. 8,30,000
(b) Water drying oven Rs. 2,40,000
(c) Powder Coating booth Rs. 1,20,000
(d) Powder curing oven Rs. 3,20,000
(e) Towards packing charges Rs. 46,000
_________________
(C) Rs. 15,56,000
_________________
Grand Total inclusive of packing charges,
Erection and commissioning charges Rs. 24,61,000
Wore: Excise and Sales Tax will not be applicable as per the present regulation on Sub Total 'A' i.e. on 6,60,000. In the documents listed at S. No. 226 and 227 originated from M/s. SS(C)PL Note given at the end of each reads as under.
Note: "Being these companies are in private sector and to save taxation we have advised to raise separate order for drawing, designing and consultancy and erection and commissioning to our associate M/s. Surcoat Consultants Pvt. Ltd. which is fully owned by a parent company".
III-11. In the documents relied upon vide S. No. 219 and 220 to Annexure B of the Show Cause Notice it is pertinent to note that M/s. SS(C)PL have raised separate proforma invoices, one in, the account M/s. SS(C)PL for supply of the Plant and the other one in the account of M/s. SCPL for design, engineering and consultancy charges pertaining to plant supplied by SS(C)L mentioning within separate charge for erection and commissioning. It is also very interesting to note that both the said invoices in the letter head of M/s. SCPL and M/s. SS(C)PL are signed, by one and the same person Mr. S.V. Duppalivar Executive P.E. from M/s. SS(C)PL.
III-12. From the document listed at S. No. 218 in Annexure 'B' it comes to the light that M/s. SSCPL is engaged in under-valuation to avoid Excise duty in the guise of raising separate invoice for design, drawing and consultancy in the name of M/s. SCPL to the extent of more than 50% of the supply value.
The project cost of Automatic Painting Plant pertaining to contract with Haryana Equipments Ltd. has been split in the following fashion.
(i) Order value of SS(C)PL (supply of Plant) Rs. 17,47,000
(ii) Order value of SCPL
(design, drawing & Consultancy) Rs. 9,83,000
(iii) % of order value of SS(C)PL to SCPL 56.27%
III-13. An inter office Memo from sales to SS(C)PL listed at S. No. 229 of Annexure 'B' speaks how the assessees regularize the impact of separation of design and engineering charges from the basic value on collection of packing and forwarding charges. The relevant para in the said letter reads as under:
As we have separated design and engineering charges and erection and commissioning charges from the basic value the packing forwarding charges now will be derived on a smaller base and hence the same is charged on 5% on item I and 3 on item II.
III-14. In a novel modus operandi to avoid Central Excise duty payment on design and consultancy by raising separated invoice for the same, M/s. SS(C)PL have gone to the extent of asking their customers to amend the original purchase order after receipt of advance payment by them as per the terms of the said original purchase order so as to split the order value and to accommodate advance received under the heading, drawing, design and consultancy charges. This aspect is clear in the letter from SS(C)PL to M/s. Cycle Corporation of India Ltd. at S. No. 23 of Annexure B to the Show Cause Notice. The second para of the said letter reads as under:
Please find enclosed our bill No. 44 & 45 dated 27.1.85 for drawing, design and consultancy charges. You are requested to cover the advance received by us into these charges. Draft of the same is enclosed for your reference". In one of the said draft amending order the original value is split in the following manner.
(i) Design, drawing and Consultancy charges Rs. 1,44,000
(ii) Supply of material inclusive of powder coating booth
applicators and control panel etc. Rs. 5,76,000
Rs. 7,20,000
In the other said draft-amending order the original order value is split in the following manner.
(i) Drawing, design and consultancy charges Rs. 3,80,000
(ii) Supply of material value inclusive of spray painting
booth, oven, flash off zone and conveyor Rs. 13,75,000
(iii) Erection and commissioning of the
total plant and handing over charges Rs. 1,95,000
Total Rs. 19,50,000
III-15. As regards standardization of a product of M/s. SS(C)PL on instance of decision taken by common meeting of key persons from the group of Industry may be seen from the minutes of meeting listed at S. No. 231 of Annexure 'B'.
III-16. A letter from Surcoat Consultants Pvt. Ltd. to S.B.I. Pune listed at S. No. 236 of the Annexure 'B' establishes the financial relations between SCPL and SS(C)PL inasmuch as advance received by M/s. SCPL towards design and consultancy has been transferred to M/s. SS(C)PL to start manufacturing activity. The gist of the said letter reads as under.
Please find enclosed cheque Nos. CHT/GB 245820 & CHT/GB 245821 dated 14.8. of Rs. 8,00,000 drawn on us by Godrej and Boyce Mfg. Co. Pvt. Ltd. Bombay 85 towards 50% advance against order No. KRT/P2/85/753 dated 5.7.85 against consultancy charges. The manufacturing activities will be carried out by M/s. SS(C)PL. The order placed on them is under IDBI Scheme to start the manufacturing activity for the delivery of the plant in scheduled time. We have to transfer this amount to SS(C)PL. Therefore we request you to discount the above-mentioned cheques and credit the proceeds of the same to our account with you.
III-17. M/s. SCPL is part and parcel of M/s. SS(C)PL inasmuch as SCPL itself in its letter to their customer advertise SS(C)PL activities as its own activities it can be seen in document replied upon at S. No. 242 of Annexure B. The second paragraph of the letter reads as under:
We introduce ourselves as consultants in the field of Industrial Surface Coating. We are primarily engaged in the manufacture of total paint shop system. Our present range of manufacture includes spray and dephosphating systems, spray booths, ovens, conveyors, Electrostatic manual/automatic appliators etc. We have supplied a number of liquid paint powder coating plants and total surface coating systems to several organisations and abroad.
III-18. Though the separate orders are managed on SCPL and SS(C)PL for design and consultancy and supply respectively from the customers, the detailed manufacturing drawings prepared by SCPL or design department is directly going to production or SS(C)PL as it is evident from some sample documents listed at S. No. 245, 246, 247 & 260 of Annexure 'B'.
III-19. For getting the order value split and to obtain separate orders on sister concerns quotations are submitted from SCPL's office on behalf of sister concerns and signed by one and the same person Mr. Anil K. Karve but signed in different language as is evident from the quotations relied upon vide S. No. 250, 251 & 252 of Annexure B to Show Cause Notice. The details are as follows:
Qtn. No. & date Amount
SCPL 825025/G&B/1738 Dated 20.8.86 Rs. 4,25,000
SS(C)PL 78025/G&B/H-1737 Dated 20.8.86 Rs. 5,74,000
ICSPLICSPL/H-1739 Dated 20.8.86 Rs. 1,25,000
Total Rs. 11,24,400
It may be seen that outward nos. are serially arranged with identical date which shows despatch from one and the same office. In one of the agreements signed between SCPL and Godrej & Boyce for consultancy contract relied upon vide S. No. 254 of the Annexure 'B' at item 3 Para reads as under:
The consultants for and in consideration of the payment by the company as provided hereinafter in this agreement shall undertake to supply technical know-how and technical services, which shall be in the form of:
(a) Design and drawings
(b) Technical specifications
(c) Supervision during installation and commissioning of plant and undertake to help in achieving optimum results.
(d) Inspection, quality assurance of the equipment being supplied by the concerned manufacturer.
"Technical know-how shall mean and include details of process practices and service concerning designs and drawings".
III-20. When erection and commissioning charges are separated the remaining consultancy charges are pertaining to design and drawing charges which is a manufacturing activity in the light of nature of consultancy provided as above and the relationship as established between SCPL and SS(C)PL in the earlier paras.
III-21. Certain sample debit notes raised by M/s. SS(C)PL on M/s SCPL are relied upon vide S. Nos. 196 to 215 of Annexure 'B' to S.C.N, which shows that SS(C)PL have incurred expenditure on behalf of SCPL in respect of the following viz. Expenses incurred on travelling and erection payments made to employees payments made to other sister concerns, purchases of material at site, telephone bills, electricity bills, provident funds, sales tours and raised debit notes on SCPL for the same which amounts to more than five lakhs in a span of one year. This shows the financial adjustments between the two companies.
III-22. As per the documents relied upon at S. Nos. 192, 193, 194, 195, it may be seen that activities of the SCPL is absorbed in Statfield Systems Coating Pvt. Ltd. along with all the staff members w.e.f. 1.4.88 however, separate entity of SCPL has been kept unchanged. While explaining the reason for merger Shri S.R. Apte, Managing Director explained to S.B.I. Pune that it was mainly because of outstanding balance of SCPL with the Bank and to stop further expenditure on them.
9. From the reading of the above paragraphs would only show that the approach of the department was wrong inasmuch as the charge of clubbing has been wrongly confused with the idea of the under-valuation. This is a specific ground taken in the appeals of Statfield Systems (Coating) Pvt. Ltd. Appeal No. 5244 of 1991) and Surcoat Consultants Pvt. Ltd. (Appeal No. 5242 of 1991). In our view it is a correct argument. The concept of clubbing is entirely different viz. Benefit of exemption notification issued under Section 5A of the Central Excise Act. Valuation is under Section 4 of the Central Excise Act. The case of the department as stated above is confusing. For example in para III-14, it says about the activity potential, organisation, experience, know-how machinery and projected balance sheet. The projected activities are enumerated under the said para. What does it reveal? It reveals the planning. The object undertaken viz. a man who undertakes to execute the project and its co-ordinate constituents, which are in this case companies had to co-ordinate with each other to achieve the objective of another project. We are sorry, we have to repeatedly use this phrase in a repetitive manner to emphasize that the turn-key project cannot be individual. The principal co-ordinator along with the help of the designated constituent has to do it in a systematic planned way to achieve the objective. Moreover, nowhere the idea of related person or holding company or subsidiary company as mentioned in Clause (c) of Sub-section (4) of Section 4 referred to in the Show Cause Notice or in the finding in the impugned order. The said clause specifically provides for meaning a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other and including the holding company, subsidiary company, a relative, a distributor of the assessee and any sub-distributor of such distributor. The Show Cause Notice does not refer to the existence of any fact, which comes within the ingredient of this sub-section viz. 4(4)(c) of the Central Excise Act, 1944. In the absence of the same, we are afraid we cannot agree to the contentions raised by the department in the Show Cause Notice that there has been any under-valuation. We are therefore of the view that the entire proceedings initiated by the department as reflected in the Show Cause Notice and the impugned order are not sustainable in law. Hence, the impugned order is set aside including imposition of penalties. The Appeals are allowed with the consequential reliefs, if any, according to law.