Clubbing of companies for Valuation under Rule 4A

PJ/Case Laws/2010-11/1004

Case: Parle Bisleri Pvt Ltd v/s Commissioner of Customs & Central Excise, Ahmedabad

Citation: 2010-TIOL-115-SC-CX

Brief Facts:-The appellant manufactures soft drink flavours which are assigned `code names', namely G-44T, L-33A, T-11PC, T-11P, R-66M, K- 55T and L-22L. During the period from years 89-90 to 93-94, the appellant availed of the benefit of Notifications 175/86 & 1/93 as an SSI unit. Appellant is the holding company of M/s. Parle Exports Ltd (PEL). Appellant sells its product to PEL, Parle International Ltd (PIL) and franchise bottlers of M/s PEL.

M/s PEL uses the products sold by the appellant to manufacture Non-alcoholic Beverages Base (NABB). In addition to NABB, M/s PEL also manufactures flavours as the appellant does. During the same period, M/s PEL enjoyed the benefit of Notification No. 175/86 and 1/93 for the year 92-93 and 93-94 (Oct. 93). The flavours named above are researched and developed by PEL, but were allowed to be manufactured by the appellant with the code names given by PEL. The flavours are used in the manufacture of beverages like Gold Spot, Limca, Rimzim etc.

Revenue officers visited to the factory premises and office premises of Parle Group of Companies on the basis of the information that M/s PEL and their Group Companies were indulged in evasion of excise duty, various documents were seized and the statement of key personnel recorded. Consequently, show cause notice was issued.

The Original Authority dropped the demand for differential duty and found no case for imposition of penalty for any of the companies in question.

Revenue filed appeal before the Tribunal. It was alleged that the clearances of the appellant during the period from 1989 to October 1993 must be clubbed with that of M/s PEL and M/s PIL as they are effectively one and the same company, and thus the appellant is not entitled to the benefit of the aforesaid Notifications. It was also alleged that appellant was using the brand name belonging to another person (M/s PEL) who was not entitled to the benefit of the said Notifications. It was also alleged that there was undervaluation of flavours by the appellant which resulted in an inaccurate assessment and hence the differential duty should be demanded from them.

The Tribunal held the Revenue's claim of undervaluation in favour of the appellant primarily on the ground that the Department did not come out with quantifiable data to indicate the extent to which the price was suppressed by the appellant. However, on the issue of misuse of brand name by the appellant, the Tribunal held that M/s PEL did in fact, own the brand name and held that the defence of the appellant that the flavours were marked only by virtue of a code and not identified as a brand did not hold water.

On the primary issue of whether the clearances of the said companies could be clubbed together, and the companies themselves could be treated as one manufacturer, the Tribunal found that the effective financial control and management emanated from a common core, and therefore the companies could well be said to be interdependent and even interrelated.

However, the Tribunal only partly allowed the appeal of the Revenue by holding that the appellant were indeed entitled to SSI exemption between the periods from 88-89 to 92-93 (up to 31.3.93]. Reliance was placed on the judgment given in Commissioner of Central Excise, New Delhi v. Modi Alkalies & Chemicals Ltd. & Ors [2004 (171) E.L.T. 155 (S.C.)] which purportedly took notice of Circular 6/92 issued by the Ministry of Finance, Government of India which stated that the clearance of Limited Companies are not be clubbed together, and held that the Circular was concurrent in operation with that of Notification No. 175/86.However, since this Court, according to the Tribunal, also held that the same Circular was not applicable after the issue of Notification No. 1/93, the appellant could not claim SSI exemption from 1.4.1993 to October, 1993.

Reasoning of the Judgment:- The Apex Court held as under:
Issue I:The first issue was that whether the value of production/clearances of the three Companies, namely the appellant, M/s PEL Ltd and M/s PIL Ltd can be clubbed for the purposes of ascertaining the eligibility to exemption under Notification No. 1/93-CE dated 28.02.93?

With regard to this issue of clubbing the value of production/ clearances, the Apex Court noted that it is now beyond dispute that Circular 6/92 operated concomitantly with Notification No. 175/86. Thus the only point of question is whether the operation of Circular 6/92, and consequently, the benefit of SSI exemption may be halted from the commencement of Notification No 1/93?

The Apex Court observed that the Tribunal had relied solely on an interpretation of the decision in Modi Alkalies & Chemicals Ltd. & Ors. The Apex Court therefore examined the operative part of the decision wherein on facts it was held that the statements of the employees/Directors show that the whole show was controlled, both on financial and management aspects by MACL. If these are not sufficient to show inter-dependence probably nothing better would show the same. The factors which have weighed with Tribunal like registration of three companies under the sales tax and income tax authorities have to be considered in the background of factual position noted above. When the corporate veil is lifted what comes into focus is only the shadow and not any substance about the existence of the three companies independently. The Circular no. 6/92 dated 29.5.1992 has no relevance because it related to Notification No. 175/86-CE dated 1.3.1986 and did not relate to Notification No. 1/93.

Thus, in that decision it was emphasized that Circular 6/92 has no effect upon commencement of Notification No. 1/93, but also the fact that the distinct legal nature of Companies cannot be used as eyewash to portray its independent nature. Where the companies are indeed interdependent and possibly even related through financial control and management, the value of clearances has to be clubbed together in the interests of justice. The operation of Circular 6/92 admittedly protected entities like the appellant prior to the commencement of Notification No. 1/93, but certainly not after the same.

On the facts of the case, it was held that the preponderance of evidence suggest that the companies are related not only in terms of financial control, but also through management personnel. In Modi Alkalies & Chemicals Ltd. & Ors this Court has held that two basic features which prima facie show interdependence are pervasive financial control and management control. The Apex Court applied these two tests to the facts of this case.

It was noted that M/s PEL Ltd advanced an interest-free loan of Rs. 1 crore to the appellant, which was used for purchase of raw material by the latter. Furthermore, the flavours being manufactured by the appellant were developed by M/s PEL at their R & D Lab at Bombay, whose services were at the disposal of the appellant. They were at one point of time were manufactured by M/s. PEL and admittedly owned by them. It was held that all this points to the inescapable conclusion that the three companies in question were intertwined in their operation and management. A careful scrutiny of the records therefore establishes that both the aforesaid two basic features are overwhelmingly present in this case. Therefore it would likely seem that the purported fragmentation of the manufacturing process was but a mere ploy to avail of the SSI exemption. Piercing the corporate veil, when the notions of beneficial ownership and interdependency come into the picture, are no longer res integra. On this count, the Apex Court affirmed the order of the Tribunal which was justified.

Issue II : - The second issue was whether the ‘code names' used to denote soft drink flavours manufactured by the appellant could in fact be termed as `brand names' and if so, whether they belonged to another entity?

The Apex Court held that the yardstick in this regard is Explanation VIII which is pari materia in both Notifications No. 175/86 and No. 1/93. The Apex Court held that the mere difference in nomenclature cannot take away the import of the Explanation from its applicability to present case. The appellants manufactured flavours which fall within the ambit of the ‘code names’ and it is a fact on record that these codes are key to identifying the flavours which are commercially transferable.

Furthermore, it was held that the code names on the flavours indicate a connection in the course of trade between the specified goods and such person using such name or mark. The flavours in question, which were earlier manufactured by M/s PEL Ltd and supplied to the franchise holders, were subsequently allowed to be made by the appellant. The franchise holders were in effect buying the very same flavours from the appellant and were placing orders by referring to the same code name, as is evident from the respective purchase orders. The users of the flavours, i.e. M/s PEL Ltd, M/s PIL Ltd and specified bottlers are all interconnected since the latter group comprises franchisees of PEL and thus there is more than an iota of evidence to prove the connection in the course of trade between the flavours and the entity using the flavours through code names. Furthermore, the ownership of the codenames by M/s PEL Ltd is clearly evidenced from the fact that these flavours were developed, researched and concocted by M/s. PEL Ltd in its research labs. That M/s. PEL Ltd have given the brand names to the flavours and allowed them to be manufactured by the appellant, their holding company cannot hide the fact that M/s PEL Ltd were in fact, the owner of the code/brand names. This conclusion is fortified by the fact that it was M/s PEL Ltd who transferred the right of the codes when they were sold to M/s. Coca Cola Company in November, 1993. Since the appellant was not the owner of the said brand names in question, the Tribunal was justified in holding that the appellant will not be entitled to the benefit of Notification No. 175/86 and 1/93 for the products with code names G-44T, L- 33A, T-IIPC, T-IIP, R-66M and K-55T which belonged to M/s PEL Ltd.

Judgment:- Appeal dismissed.

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PJ/Case Laws/2010-11/1004

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