Whether clearances of 100% subsidiary company shall be clubbed with clearances of holding company for SSI exemption?

PJ/CASE LAW/2015-16/2676

Case:- COMMR. OF C. EX. & CUS., BANGALORE-II VERSUS ASCHEM AGROTECH (P) LTD.

Citation:- 2015 (315) E.L.T. 618 (Tri. - Bang.)

Brief facts:- The respondent holds 100% shares of M/s. Healthline Pvt. Ltd. (HLPL). Therefore, HLPL is a subsidiary for the respondent and therefore, the respondent has full management control over HLPL. There is no dispute on this fact. Entertaining a view that the clearances of HLPL have to be taken into account for deciding eligibility of benefit of SSI exemption notification in respect of the respondent, proceedings were initiated. Both the lower authorities took the view that the value of clearances of subsidiary namely HLPL cannot be clubbed with the respondent herein. Aggrieved by the decision, the revenue filed this appeal.

Appellant’s contention:- The appellant contented that the holding and subsidiary companies were separate units as such and therefore, for claiming benefit of the SSI Exemption notification, both companies should be treated as different.

Respondent’s contention:- Learned AR submitted that the case could be distinguished by the fact that there was evidence of flow of funds from holding company to subsidiary company and hence, both should be treated as same for claiming benefit of SSI Exemption.

Reasoning of judgement:-It was found that the issue as to whether a subsidiary company and holding company should be treated as different for the purpose of SSI benefit or not was considered by the Tribunal in the case of CCE, Cochin v. Modern Food Industries Ltd. reported in2006 (198)E.L.T.95 (Tri.-Bang.) = 2008 (9)S.T.R.329 (Tri. - Bang.). This fact alone did not make a difference. For all purposes the holding company would be having more than 50% of the shares of the subsidiary company and in this case admittedly 100% of the shares were held by the holding company. When 100% of the shares were held, interest is paid on the loan or not did not really make a difference for the transaction between the two. Because in any case the holding company would have to bear the entire amount or profit or loss, whatever be the result of the activity of the subsidiary.

It was also noticed that the original adjudicating authority while dropping the show cause notice had made the following observations:
(a)        The two companies were located at different places and were independent legal entities,
(b)        M/s. HLPL did not sell any of the goods manufactured by them to the assessee company.
(c)        The products manufactured by M/s. HLPL and the assessee were different.
(d)        There were no commercial transactions between the two companies.
(e)        The profit or loss was assessed separately and there was no interference between two companies in administrative control, exercised by either company.
(f)         The ratio of Supreme Court judgment in the case of CCE, Bangalore v. M/s. Gammon Far    Chems limited reported in 2003 (152)E.L.T.28 (S.C.) is not applicable to the case of M/s. HLPL as the department had not established that they (M/s. HLPL) had produced goods on behalf of the holding company i.e., the assessee.
(g)        The clarification given by the Board in Circular No. 6/92, dated 29-5-1992 supported the case of M/s. HLPL.
(h)        As per the rulings of the Hon’ble Tribunal in the case of M/s. Precision Gears Private Limited v. CCE, Bombay/Indore reported in 1998 (100)E.L.T.535 (Tri.-Del.) the mere fact of holding shares would not make other company an unit of the other when both of them existed as independent entities.

Hence, it was observed that the decision of the original adjudicating authority was logical and correct and had been rightly upheld.

Decision:- Appeal rejected.

Comment:- Holding and subsidiary companies are to be treated as separate units for calculating threshold limit for SSI Exemption, when there is no flow of funds from holding company to subsidiary company or vice versa. If the holding company does not exercises any administrative control over the subsidiary company, then the holding and subsidiary are to be treated as separate units for the purpose of claiming the benefit of small scale exemption. Hence the value of clearances of subsidiary will not be clubbed with the value of clearances of holding company if it is established with evidences that the two units are operated independently and there is no financial flow back of funds.

Prepared by- Sharad Bang

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PJ/CASE LAW/2015-16/2676

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