Whether clearances of private limited companies be clubbed for determining eligibility for SSI exemption?

Case:-   M/s D S DOORS (I) LTD , SHRI D S SHARMA, M DSHRI DINESH JANGIR, DIRECTOR OF M/s D S WOODTECH LTD Vs COMMISSIONER OF CENTRAL EXCISE, DELHI-IV

Citation: -   2013-TIOL-103-CESTAT-DEL

Brief facts: - The Appellant M/s D S Doors (I) Ltd., 11/7, Mile Stone, Faridabad (hereinafter referred to as DSD) is a private limited company with Shri Dhan Singh Sharma, as its Managing Director and his wife and son - Mrs Kaushalya Jangir and Shri Kunal Jangir respectively, as its directors. It is engaged in the manufacture of various articles of wood such as doors, chowkhats and furniture items etc. chargeable to Central excise duty under Chapter 44 and 94 of the Central Excise Tariff. They avail SSI exemption under Notification No. 8/03-CE. M/s D.S Woodtech Ltd., F-54, Ballabhgarh (hereinafter referred to as DSW) is also a private limited company with Shri Dhan Singh Sharma, and his wife Mrs. Kaushalya Jangir as Directors and his son Shri Dinesh Jangir as Managing Director. This unit is also manufacturing the same items as DSD and is availing SSI exemption under Notification No. 8/03-CE. On receipt of intelligence that both the units are actually controlled and managed by Shri D.S. Sharma and they have been created as separate units only on paper for evading excise duty and that they are wrongly availing the SSI exemption to which they would not be entitled on the basis of their actual clearances, the premises of both the units and the residential premises of Shri D.S. Sharma were searched on 22/3/10 in course of which certain records were recovered which were taken over by the officers. In course of investigation, statements under Section 14 of the Central Excise Act, 1944 were recorded of Shri Joginder Singh Jangir (Foreman DSW on 22/3/10), Shri Satish Pilania, (Manager DSW on 22/3/10), Shri Umesh Yadav, (Manager, DSD on 22/3/10) and, Shri P.B. Sathyaseelan (Foreman, DSD on 22/3/10.) which indicated that :-

(a) Both the units were being run by Shri D.S. Sharma;

(b) No bills/invoices are issued from the factory of DSW and the bills for the goods dispatched from the factory of DSW were being issued from the factory-cum-showroom of DSD, either from the invoice book of DSD or from the invoice book of DSW;

(c) Salary of the persons working in DSW was being drawn from DSD; and

(d) There is no polishing facility at DSW and the same is done either at the factory of DSD or at the customer's premises.

Though Shri D.S. Sharma in his statements dated 22/3/10 and 23/3/10 claimed that DSD and DSW are two separate and independent units, the above-mentioned statements of their employees indicated to the contrary.During investigation, the officers also found that Income tax officers on 7/2/07 had conducted survey and search of the premises of DSD and DSW in course of which huge unaccounted sales had been unearthed. As a result of survey, while DSD in their revised balance sheet for 2005-2006 and 2006-2007 showed 50.57% and 69.07% increase in sales, DSW in the revised balance sheet of the same year showed 52.60% and 45.62% increase, respectively in their sales. The study of assessment order passed by Income tax Department in respect of DSD and DSW for 2005-2006 and 2006-2007 indicated huge under reporting of production and sales. Statement dated 23/4/10 of Shri D.P. Singh, General Manager, DSD indicated that though he was is the employment of DSD, he was handling the book of DSW also. From the above investigation it appeared that DSD is the main company and DSW is a dummy unit, just a part of DSD and if their clearances are clubbed they would not be eligible for SSI exemption under Notification No. 8/03-CE. In view of the above, a show cause notice dated 14/10/2010 was issued for –

(a) Clubbing the clearances of DSD with those of DSW during each year from 2005-2006 to 2009-2010 for determining the eligibility of DSW for SSI exemption and on this basis, recovery of short paid duty of Rs.3,30,81,801/-from DSD for 2005-2006 to 2009-2010 period under proviso to Section 11A (1) of Central Excise Act, 1944, alongwith interest on this duty under Section 11AB ibid;

(b) Imposition of penalty under Section 11AC ibid on DSD and DSW; and

(c) Imposition of penalty under Rule 26 of Central Excise Rules, 2002 on Shri D.S.Sharma and Shri Dinesh Jangir.

The above show cause notice was adjudicated by the Commissioner, Central Excise, Delhi IV vide order-in-original No. 22/DM/Adjn./2011-12 dated 17/10/11 by which –

(a) The duty demand of Rs. 3,30,81,801/- was confirmed against DSD alongwith interest under Section 11AB by clubbing the clearance of DSD with DSW during each year during 2005-2006 to 2009-2010 period and denying the benefit of SSI exemption;

(b) Penalty of Rs. 3,30,81,801/- was imposed on DSD under Section 11AC; and

(c) Penalty of Rs. 70,00,000/- each was imposed on Shri D.S. Sharma and Shri Dinesh Jangir under Rule 26 (1) of the Central Excise Rules, 2002.

Against the above order, these appeals alongwith stay applications have been filed.

Appellant’s Contention: -The learned Counsels for the Appellants, pleaded that DSD and DSW are two separate and independent private limited companies, that just because of some common directors they cannot be treated as one and the same, that in term of board's instructions vide Circular No. 6/92 dated 29/5/92, clearances of private limited companies cannot be clubbed for the purpose of determining eligibility for SSI exemption, that relying on this Circular of the board, Hon'ble Supreme Court in case of ARCAControls Pvt. Ltd. vs. CCE reported in2003 (158) E.L.T. 172 (S.C.) remanded the matter back to the Tribunal for considering the applicability of the Board's Circular No. 6/92-CX dated 29/S/92 according to which a limited company should be treated as a separate entity for the purpose of exemption limit, that as stated by Shri D.S. Sharma in his statement dated 1/4/10, the figures regarding sales given in the original balance sheet of DSD and DSW are the correct figures, as revised balance sheets showing higher sales turnover and higher income had been filed to buy peace from Income Tax Department and the same cannot be made the basis for demanding central excise duty, that appraisal report prepared by income tax department for the purpose of arriving at net taxable income of DSD and DSW cannot, ipso facto, be relied upon by Central excise authorities, that the revised balance sheets of DSD and DSW also included the fake sales which had been shown just to enhance the sale value in the revised balance sheet of DSD and DSW, that cross examination of the person whose statements have been relied upon in support of allegation of duty evasion against DSD, has not been allowed, that in any case, all the facts were known to the department and hence longer limitation period under proviso to Section 11A (1) cannot be invoked, that there is no evidence to show that DSW is a dummy unit or extension of DSD, that the impugned order is not sustainable, that the appellant have a strong prima facie case and pre-deposit of duty demand, interest and penalty would cause undue hardship, that DSD have no financial capacity to pre-deposit the duty demand, interest and penalty and that in view of this the requirement of pre-deposit of duty demand, interest and penalty may be waived for hearing of the appeals and recovery thereof may be stayed till the disposal of the appeals.

Respondent’s Contention:-   Thelearned Senior Departmental Representative, opposed the stay applications and reiterating the findings of the Commissioner in the impugned order. They further pleaded that DSW is only an extension of DSD and it has no independent existence as both the units are being controlled by Shri D.S. Sharma and are being run as one unit, that the goods manufactured in the premises of DSW were being cleared under the invoices of DSD, there was no facility for polishing in DSW and the same in respect of the goods manufactured in the factory of DSW was being either done in the premises of DSD or in the customer's premises. There was common ledger of the two so called independent companies and the payment for the bills issued to one company was being made by the other. The evidence on record indicates that the goods ordered by DSW were being delivered to DSD and quality control was centralised at DSD. All this evidence indicates that DSW was only a colorable device for tax evasion by splitting the manufacturing turnover of DSD into two units, that no justification for cross examination of the witnesses had been given, that in the name of both the units - DSD and DSW a large number of sales of "timber" are shown, which on sample verification were found to be sales of door, chowkhats, etc. The sales claimed to be "fake sales" included in the revised balance sheets of DSD and DSW for 2005-2006 and 2006-2007 are real sales of excisable goods cleared without payment of duty, that the survey report of income tax department clearly shows that during 2005-2006 and 2006-2007 both DSD and DSW had made huge unaccounted sales. In view of this evidence on record the appellant do not have prima facie case in their favour and hence this is not a case for waiver from the requirement of pre-deposit.

Reasoning of Judgment:- The Tribunal held that evidence in support of the above allegations is, in brief, as under –

(1) At the time of visit to the factory premises of DSW at F-54, Ballabhgarh, the officers found that there was no facility for polishing in the unit, there was no bill book/invoice book in the factory and Shri Joginder Singh Jangir, Foreman, in his statement dated 22/3/10 stated that only Shri D.S. Sharma can tell about the bill book/ invoice book and that he reports the status of production only to Shri D.S. Sharma.

(2) Statement dated 22/3/10 of Shri Satish Pilania, Manager, DSW stating that the bills/invoice in respect of the finished goods cleared from DSW are issued from the factory premises of DSD, either from the bill book of DSW or from the bill book of DSD.

(3) Statement dated 22/3/10 of Shri Umesh Yadav, Manager DSD wherein he stated that he does not know as to whether a particular item will be billed from DSD or DSW.

(4) Statement dated 22/3/10 of Shri P.B. Sathyaseelan, Foreman, DSD wherein he stated that he gets his salary from DSW and that he does not know as to whether a particular item cleared from DSD will be billed from DSD or DSW.

(5) Appraisal report of Income Tax Department in respect of DSD and DSW for 2005-2006 and 2006-2007 according to which the sales turnover of DSD and DSW during these years had been grossly under reported. The sale of timber, on inquiry with the buyers we found to be the sale of doors, chowkhats, furniture etc.

(6) Statement dated 23/4/10 of Shri D.P. Singh, GM, DSD wherein he stated that though on paper he is employee of DSD, he is handling the work of DSW also, and that he was maintaining the hand written ledgers for sale proceeds (advance) against orders for both the companies.

(7) There are numerous instances where goods were supplied from DSW but the payments were received by DSD (RUD-20 to the show cause notice). Similarly there are a number of instances when though the deals were finalized with DSD but the supply was made from the bill book of DSW (RUD-21 to show cause notice).

(8) Perusal of ledger account of DSW for 2009-2010, maintained in the books of DSD (RUD-61 to show cause notice) shows several purchases worth Rs. 19,00,000/-having been made by DSD from DSW, but the invoices were found to be fake without any movement of the goods. The payment to DSW appeared to be transfer of funds.

(9) In a letter dated 24/1/09 from DSW signed by Shri D.S. Sharma to M/s Madan Industries for purchase of plywood, the delivery address mentioned was the address of DSD - "11/7, Milestone, Badarpur Border, Faridabad."

The above evidence prima facie shows that both the units were being controlled by Shri D.S. Sharma and were being run by Shri Sharma as one unit and the same, therefore, have to be treated as the factories owned by the same person for the purpose of determining their eligibility for SSI exemption. From the appraised report of Income Tax Department for 2006-2006 and 2006-2007 it is clear that during both these years DSD and DSW had grossly under reported their product and sales. In view of the above discussion, Tribunal are of prima facie view that this is not the case for total waiver. M/s DSD are, therefore, directed to deposit an amount of Rs.2,75,00,000/- (Rupees Two Crore Seventy Five Lakh) within a period of eight weeks from the date of this order. On deposit of this amount within the stipulated period, the requirement of pre-deposit of balance amount of duty demand, interest and penalty by DSD and the requirement of pre-deposit of penalty by Shri D.S.Sharma and Shri Dinesh Jangir shall stand waived and recovery thereof stayed till the disposal of the appeals. The stay applications stand disposed of, as above.

Decision:- Part pre-deposit Ordered.

Comment:- The essence of this case is that even clearances of two private limited companies may be clubbed for the purposes of granting SSI exemption when it is concluded that two companies are formed just to evade excise duty and claim undue benefit and the financial control and flow back of funds is governed by common Managing Director.

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PJ/Case Laws/2012-13/1413

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