SSI Exemption - Clubbing of clearances of related & interconnected units

Case: - SPICK-N-SPAN STEEL WOOL PVT.LTD versus COMMISSIONER OF C. EX, NAGPUR

Citation: - 2011 (274) E.L.T. 568 (Tri- Mumbai)

Issue:- Clubbing of clearances of related and interconnected units – whether clearances of private companies and partnership firm can be clubbed together – prima facie case made out and stay granted.

Brief Facts:- There are four units, namely, (i) Spick-N-Span Steel Wools (P) Ltd., (ii) Stewools India (P) Ltd., (iii) Handy Wires Pvt. Ltd., and (iv) Handy Products India. While the first three are private limited companies, the last one is a partnership firm. M/s. Spick-N-Span Steel Wools (P) Ltd and Stewools India Pvt. Ltd are engaged in the manufacture of steelwool falling under Chapter 73, M/s Handy Wires Pvt. Ltd., are engaged in the manufacture of steel wire falling under Chapter 72 and M/s Handy Products India are engaged in the manufacture of corrugated wire nail/steel fibres falling under Chapter 73. The directors of Spick-N-Span Steel Wools (P) Ltd. are Smt. Annahita Shiraz Doongaji, Mr. Jehangir K. Doongaji and Mrs. S.H.Sethna. The directors of Stewools India Ltd. are Mr. Shiraz K. Doongaji, Mr. Jehangir K. Doongaji and Smt. Annahita Shiraz Doongaji.Handy Wires Pvt. Ltd has as its directors Shri Shiraz K. Doongaji, Mr. Jehangir K. Doongaji and Smt. Najoo Khurshedji Doongaji. The partnership firm Handy Products India has as its partners Shri Shira K Doongaji, Jehangir K. Doongaji and Mrs. Najoo K. Doongaji. All the four firms have separate Central Excise registrations and are situated in different premises and have their own independent manufacturing facilities. They have also been separately registered under various laws.

Four show-cause notices were issued to the above four firms demanding differential duty under Section 11A(1) of the Central Excise Act, 1944 as detailed below: (i) Show cause notice dated 8-9-2009 demanding a duty of Rs. 52,68,971/- for the clearances of excisable goods effected during the period from 2004-2005 to 2008-2009 issued to Spick-N-Span Steel Wools (P) Ltd., (ii) Show cause notice dated 20-8-2009 demanding a duty of Rs. 4,83,791/- for the clearances of excisable goods effected during the period from August 2004 to March 2005 issued to Handy Wires Pvt. Ltd.; (iii) Show cause notice dated 23-9-2009 demanding a duty of Rs. 32,01,401/- for the clearances of excisable goods effected during the period from 2004-2005 to 2008-2009 issued to Handy Product India (iv) Show cause notice dated 10-7-2009 demanding a duty of Rs. vi 2,53,946/- for the clearances of excisable goods effected during the period from 2004-2005 issued to Stewools India (P) Ltd. The show-cause notice also proposed to recover interest on the duty short paid under Section 11AB of the Act and to impose penalty on Shri Jehangir K. Doongaji, who is the director of Spick-N-Span Steel Wools (P) Ltd., and partner of Handy Products India and also Shri Shiraz K. Doongaji, who is the partner of Handy Products India under Rule 26 of the Central Excise Rules.

The grounds alleged in the show-cause notice are that all the four companies are interconnected undertakings as per Rule 2(g) of Monopolies and Restrictive Trade Practices Act, 1969 and they are related companies as per Section 40A(2)(B) of Income Tax Act, 1961 as appearing from their Income Tax Audit Report in form 3CD. Therefore, these four companies are appeared to be related persons as per Section 4(3)(b) of Central Excise Act, 1944, having interest directly or indirectly in business of each other. It has, therefore, been alleged that they are not eligible for excise duty exemption available to small scale units under Notification No. 8/2003-C.E., dated 1-3-2003 as amended for the period from 2004-2005 to 2008-2009 severally and value of clearances of all the four companies are required to be clubbed together to determine their eligibility to duty exemption under the said notification.

All the four show-cause notices were adjudicated vide a common order dated 1-4-2010, dated 8-1-2010 by the Commissioner of Central Excise, Nagpur and the Commissioner confirmed the duty demands with interest. The Commissioner further imposed equivalent amount of penalty on all the four companies under Section 11AC of the Central Excise Act and also imposed penalties of Rs. 25,000/- on Spick-N-Span Steel Wools (P) Ltd. Rs. 15,000/- each on Stewools India Ltd., Handy Wires Pvt. Ltd., and Handy Products (India) under the provisions of Rule 25 of Central Excise Rules, 2002. He further imposed a penalty of Rs. 50,000/- on Shri J.K. Doongaji, Director of Spick-N-Span Steel Wools (P) Ltd., under Section 11AC read with Rule 25 of Central Excise Rules, 2002 and a penalty of Rs. 20,000/- under Rule 27 of Central Excise Rules, 2002. He also imposed a penalty of Rs. 50,000/- on Shri Shiraz K. Doongaji, partner of Handy Products under Rule 26 of Central Excise Rules, 2002.

The Appellants are in appeal before the Tribunal against the said order. Application for stay and waiver of pre-deposit is filed.
Appellant’s Contention: - Appellants submit that all the four companies i.e., three private limited companies and one partnership firm are separate manufacturers having independent and separate manufacturing facilities and they are also registered separately with all government and quasi government authorities. Neither in the show-cause notice nor in the order is there any finding that any of the companies is a dummy company for the others. They also submitted that merely because the companies are related persons as per Section 4(3)(b) of Central Excise Act, 1944, the clearances of all four units cannot be clubbed together for the purpose of notification No. 8/2003, dated 1-3-2003 because the concept of related person under Section 4 of Central Excise Act, 1944 is limited to determination of valuation and the same cannot be applied to the definition of manufacturer given under Section 2(f). Hence, clubbing of turn over of four independent and separate manufacturers under Notification No. 8/2003 is not warranted. Appellants submit that Notification No. 8/03 visualizes clubbing of aggregate value of clearance of one manufacturer from one or more factories or from one factory by one or more manufacturers. The said notification does not visualise clubbing of aggregate value of clearances of four separate manufacturers having four separate factories. Appellants also submits that four separate show-cause notices were issued in this case to each of the manufacturers recognizing them as independent and separate entities. Therefore, the benefit of Notification No. 8/2003 cannot be ignored or denied for independent manufacturers.

They have relied on a number of judicial pronouncements in support of their above contentions, namely:
(a) Kiran Biscuits & Foods Ltd. v. C.C.E., Hyderabad - 2005 (179) E.L.T. 566 (Tn. - Bang.)
(b) Sapthagiri Cements Pvt. Ltd. v. C.C.E., Visakhapatnam - 2005 (183) E.L.T. 385 (Tn. - Bang.)
(c) Poly Printers v. C.C.E. - 2002 (139) E.L.T. 295 (Tn. - Del.)
(d) Universal Industries v. C.C.E. - 2005 (188) E.L.T. 200 (Tn. - Bang.)
(e) Studioline Interior Systems Pvt. Ltd. v. C.C.E., Bangalore - 2006 (201) E.L.T. 250 (Tn. - Bang.)
(f) Gajanan Fabrics Distributors v. C.C.E., Pune - 1997 (92) E.L.T. 451 (S.C.)
(g) Rupani Textile Industries v. C.C.E., Mum - 1999 (113) E.L.T. 946 (Tn.)
(h) Universal Industries v. C.C.E. - 2000 (115) E.L.T. 704
(i) Rao Industries v. C.C.E. - 2009 (237) E.L.T. 128 (Tn. - Bang.)
(j) Jindal Steel Fabricators v. C.C.E. - 2005 (180) E.L.T. 238 (T)
(k) Unity Industries v. C.C.E. - 2006 (193) E.L.T. 314 (Tn. - Mum.)
(l) C.C.E. v. Sotex - 2007 (209) E.L.T. 9 (S.C.)
(m) C.C.E. v. Shiva Exim Enterprises - 2005 (185) E.L.T. 169 (Tn.) C.B.E. & C. Circular No. 6/92, dated 29-5-1992
(n) Supreme Washers Pvt. Ltd. v. C.C.E. - 2003 (151) E.L.T. 14
(o) L.D. Industries & Ors. v. C.C.E. - 2003 (157) E.L.T. 459 (Tn. - Del.)
(p) Gufic Pvt. Ltd. v. Collector - 1996 (85) E.L.T. 67
(q) Arihant Arts v. C.C.E. - 2004 (173) E.L.T. 194 (Tn. - Mum.)

In the light of the submissions, the appellants submit that they have a strong case on merits and, therefore, there should be stay of demands of duty and interest confirmed and the penalties sought to be imposed.

Reasoning of Judgment:- The Tribunal noted that in a number of decisions, namely, Kiran Biscuits & Foods Ltd., Poly Printers, Universal Industries, time and again, held that private companies and partnership firms are independent entities and merely because they have mutual interest in the business of each other, their turnover cannot be clubbed for determining their eligibility to small scale exemption. In other words, the criteria adopted in Section 4 of the Act for determining interconnected undertaking cannot be applied for determination of the fact as who is the manufacturer.

The Tribunal perused the Board Circular No. 6/92 dated 29.05.1992 by which an order issued under Section 37B of the Central Excise Act, 1944 was passed clarifying the position in the context of SSI exemption and concluded that the Applicant herein have made out a strong prima facie case in their favour on merits. Therefore they allow the stay application filled by the appellant and order complete waiver of pre-deposit of duty and interest demanded and penalties imposed and stay recovery thereof during the pendency of the appeals.

Decision:- Stay granted.

Comment:- Although it is stay decision but a valued decision on clubbing. Private limited company and firms cannot be clubbed on the ground that they are related person. It has to be proved that they are dummy units or there is financial flow backs. In the absence of the same, the units cannot be clubbed.

This is settled principle but the departmental authorities (popularly known as “field formation”) are reluctant to accept the same and make the cases against the assesee.

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The issue of classification is no more Res-integra and the same has already been settled by the Commissioner (Appeals), Kanpur in the identical matter of Appellant for different period.

Reasoning of Judgment: - The Commissioner (A) noted thatinstant appeal has been filed against demand of duty arising out of classification of Henna Powder under Chapter 33 instead of Chapter 1404 10 19, as claimed by the appellant. Demand of interest and imposition of penalties have also been contested by the appellant. The issue of classification of goods under reference had already been decided by this office vide O-in-A referred by the Appellant.

The Commissioner (A) observed that the Adjudicating Authority has restored to alternate classification of Henna Powder packed and marketed by the Appellant as Goldie Marwari Mehandi under Chapter 33 holding that Henna Powder in unit packing is classifiable under Chapter 33 attracting central excise duty @8% Adv. by virtue of Notfn. No. 4/2006 dated 1-3-2006 (S.N. 66) depending on the end-use of the product. Also reliance is placed on the case of Henna Export Corporation v Collector-1993 (67) E.L.T. 907 (Trib.). On the other hand, the Appellant has categorically pleaded that principle of law laid down by the Apex Court has not been followed that for the purpose of classification specific entry cannot be overridden by a General/residuary entry; that pure Henna Powder is not a preparation for use on the Hair and/or cosmetic preparation as evident from packing material, that it is a settled law that with regard to classification of goods and matter relating to chargeability, the burden is heavily cast upon the Revenue which has to prove its case with positive evidence, which has not been done and that the case of Henna Export Corporation v. CCE - 1993 (67) E.L.T. 907 is distinguishable in as much as in the said case classification of ‘Red Rose Henna for Hair Dye’ was decided which is distinguishable from the present case who were clearing Pure Henna Powder.

The Commissioner (A) found that the Adjudicating Authority has preferred the alternate classification of Henna Powder under Chapter 33 and no sub-heading thereof has been referred to. On perusal of findings it appears that the Adjudicating Authority has decided the classification under chapter sub-heading 3305 relating to preparations for use on the Hair. On perusal of sub-headings of Chapter 3305, the Commissioner (A) found that chapter deals with preparations which are exclusively used on hair and no specific sub-heading provides the entry as Henna, Henna leaves or Henna Powder. On the other hand Vegetable Products not else where specified or included - Henna Powder finds a specific sub-heading as 1404 10 19 and it has been mentioned in the impugned order itself. Further it found force in the Appellant’s contention that facts and circumstances of the case of Henna Export Corporation v. CCE - 1993 (67) E.L.T. 907 (Trib.) are distinguishable from the case under reference. The Commissioner (A) found no indication on the literature of packing material brought to notice of the department since very beginning that the item is projected to be a preparation to be used for hair.

Further The Commissioner (A) found that it is settled law that classification of goods is a matter relating to chargeability and burden of proof is squarely upon revenue - if department intends to classify a goods under a particular heading or sub-heading different from claimed by assessee, department has to adduce proper evidence and discharge burden of proof which has not been adduced to. Also no evidence has been brought on record in respect of end-use of goods under reference as a preparation used for hair. On the other hand-Method of use (Prayog Vidhi) written on the pack clearly and categorically mention of its use in Hand, Feet etc. In the circumstances, there is sufficient material to hold that Henna Powder manufactured by the Appellant merits classification under specific sub-heading 1404 10 19 of the Schedule to CETA 1985 and demand of duty and imposition of penalties are not maintainable. Similar view has been taken in the Order-in-Appeal No. 314-C.E./APPL/KNP/2007 dated 13-9-2007 issued by this office in the appellant’s case itself issued in respect of preceding period.

Decision:- Appeal allowed.

Comment:- This is very detailed and good decision on classification of a product. This decision has clearly underlined the principle that the onus lies on the department to prove that the particular product falls under particular tariff heading if he intends to classify a product in that particular tariff heading.

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PJ/Case Laws/2012-13/1046

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