Whether clubbing of clearances is possible only on the basis that same family members were partners, directors?

Case:- M/s KICH INDUSTRIES, SHRI NITESH CHIMANBHAI HAPANI, SHRI DINESH CHIMANBHAI HAPANI, SHRI VITHALBHAI N PANELIA, SHRI CHIMANBHAI NANJIBHAI HAPANI & SHRI BHARATBHAI CHIMANBHAI HAPANI Vs. C.C.E., RAJKOT

Citation:- 2013-TIOL-908-CESTAT-AHM

Brief Facts:-The Commissioner (Appeals) in order total demand for differential duty of Rs.8,50,48,810/- has been confirmed against M/s. Kich Industries (KI) with interest as applicable and penalty equal to the duty demanded has also been imposed. Further penalties have been imposed on members of Hapani family and one Shri Vithalbhai N. Panelia under Rule 26. The period involved is August 2004 to February 2010 and the impugned order is culmination of proceedings initiated by four show cause notices. There are seven business entities involved in this case and admittedly all the seven entities are owned by the family members as mentioned above or limited companies where family members are the directors. The details of family members are as under:

HAPANI FAMILY MEMBERS

Name	Relation
Shri Chimanbhai Hapani	Father (Founder & Chairman)	CH
Shri Bharatbhai C. Hapani	Son of CH	BH
Shri Nilesh C. Hapani	Son of CH	NH
Shri Dinesh C. Hapani	Son of CH	DH
Ms. Sonalben B. Hapani	Daughter-in-law of CH (wife of BH)	SH
Shri Vithalbhai N. Panelia	Bro/in-law of CH & Uncle of BH/DH/NH	VNP

The family members had several SSI units. The names and their constitution and name of directors/partners/proprietors are as under:

SSI UNITS & ITS CONSTITUTION

Name	Constitution	Name of Directors/ Partners /Proprietors
M/s. Kich Industries	Partnership	CH + SH
M/s. Kich Marketing Pvt. Ltd.	Pvt. Ltd. Co.	CH + BH + NH
M/s. Kich Manufacturers	Proprietary	DH
M/s. Jay Bajrang Industries	Proprietary	CH
M/s. Fitwell Technologies Pvt. Ltd.	Pvt. Ltd. Co.	CH + BH + NH
M/s. Chaitanya Industries	Proprietary	NH
M/s. Kich Overseas	Proprietary	BH + NH Closed since 2004

There is no dispute about the fact that all the above named business entities have the five persons of Hapani family members mentioned above and they controlled these units. After considering the evidences gathered during investigation and records and documents, the Commissioner has come to the conclusion that KI was the main unit having the required infrastructure for manufacturing and maintenance of accounts and all the other firms/companies were created for the purpose of showing them as independent manufacturing units which they were not to derive maximum benefit from SSI exemption notification.

Reasoning of Judgment:-The Tribunal heard both the sides in great detail. The appellants made his submissions on the basis of evidences/issues discussed by the Commissioner and his conclusions thereon. We find it appropriate to proceed on the same basis. The conclusions of the Commissioner and the basis thereon and the counter submissions on behalf of the appellants and submissions of respondent are also considered issue-vise.

The respondent submits that entire purchase of raw materials, consumables etc. for all units was done at the insistence of Shri Nitesh Chimanbhai Hapani and all payments are made under his signatures. Thus all expenses are controlled by Shri Nitesh Chimanbhai Hapani who is the son of Shri Chimanbhai Hapani. The appellant submitted that Shri Nitesh Chimanbhai Hapani was the director of M/s. Kich Marketing Pvt. Ltd. (KMPL). This company looked after the marketing of all the products manufactured by all the group companies. The raw materials, consumables etc. were purchased by KMPL and supplied to the units who manufactured finished goods and supplied to KMPL. The KMPL gets the goods manufactured on conversion basis and naturally it is not surprising that Shri Nitesh Chimanbhai Hapani signed the bills for purchase of materials and it is not the case of the department nor there is any evidence to show that purchase of any material by each unit was controlled by Shri Nitesh Chimanbhai Hapani but it is a case of controlling purchase of major raw materials meant for goods manufactured on job work basis.

The Tribunal finds that it is not the department's case that KMPL was to be treated as the manufacturer and duty demand is to be from them. While the case has been made out against KI, the supply of raw materials, consumables etc. is controlled by KMPL and KMPL is a Pvt. Ltd. Co. consisting of two members of the family and is a purely marketing company. It was also submitted during the hearing that after the amendment of valuation rules, appellants have been paying the duty at the price at which KMPL is selling the goods. It is not even the case of the department that KMPL is a related person. Under these circumstances, these findings are not of much help to the Revenue.

The respondent submits that the receipt of raw materials for all the units were looked after by Shri Virghese Philips, clerk of KI. In this regard appellant submit that in his first statement Shri Virghese Philips had admitted that he received the goods for all units in the premises of KI. However, during cross examination he stated that he was going to respective units to receive the materials. Bills and invoices of suppliers show the address of respective units and also show that the goods have been delivered at respective units. Since all the units were owned by family members only, Shri Virghese Philips was helping all the units at the instance of Shri Chimanbhai Nanjibhai Hapani. The Tribunal finds that even though searches have been conducted in all the units, excess/shortage of raw materials have not been found and there is no clear finding by panchas that the concerned units did not have machinery for production of the goods which they claim to have produced. While the Commissioner has relied upon the statement of the clerk, the appellants have relied upon the submissions during cross examination and documentary evidence which show that delivery book place in the individual units. While it is the claim of the Revenue that all the units had a common head office, there is no allegation nor finding that other units were non existent or were located in the same premises. Therefore the claim that all the raw materials were received in the premises of KI does not emerge from the facts.

The Respondent further submit that costing job work charges were determined by Shri Bharatbhai Chimanbhai Hapani. In this regard the appellant submit that KMPL is getting goods manufactured from various units on job work basis out of raw materials supplied by KMPL as per their specifications. Therefore it is natural that he does costing of each product and determines the job work cost. Up to 31.3.07 each unit was paying duty on the basis of value arrived at as per the decision of the Hon'ble Supreme Court in the case of Ujagar Prints Ltd. After introduction of valuation rule 10A, the appellants started paying duty on the basis of sale price of KMPL, even though appellants do not agree with the view taken by the Revenue that they were liable to pay duty at the price of KMPL since branding and packaging was done by KMPL and goods sent by job workers were not sold as such. Once again Tribunal finds that department is relying upon the statement of Shri Bharatbhai Chimanbhai Hapani that he did not know whether other units had the facility or not. On that basis as well as based on the fact that he determines the job work charges, conclusion against KI is proposed to be established. We do not find any relationship between the two. If KI was supposed to be treated as the manufacturer and clubbing was to be done, department had to show that other units did not have the facility and were controlled by two partners of KI i.e. Shri Chimanbhai Nanjibhai Hapani and Ms. Sonalben B. Hapani. Neither of the two partners are shown to be involved in determination of job work charges or in control of supply of raw materials.

The next allegation of revenue is accounting methods for all the units was determined and controlled by KI. In this regard the appellant pleaded that there is no finding or conclusion that accounts are not maintained separately for each unit. There is not even an allegation that there was combined accounting. Each unit has been identified as separate, separate registration certificates have been issued by the department. The Tribunal finds that just because accounting policy is determined and methods followed are same by all the units, clubbing cannot take place.

The next observation is that stock of raw materials and finished goods of all units lying at a particular time is controlled by KI and KMPL. The observation was countered by the appellant by submitting that no common stock of raw materials or finished goods was controlled by KI. Further each unit is situated at a different place and they are not even adjacent to each other and each has its own accounting of raw material and finished goods and during the visit of officers or during the search operations, no discrepancy was found. KMPL gets the goods manufactured from other units as per their specification and out of their raw materials and no evidence has been shown that other units were doing it for KI. It is natural for KMPL to maintain account of raw material supplied to each unit and finished goods manufactured by each unit. No evidence has been put forth either documentary or by way of findings by panchas that materials were received in KI.

The Respondent submit that quality of goods manufactured by all units is controlled by Shri Manoj Kacha, in this regard appellant submit that Shri Manoj Kacha is an employee of KMPL and therefore quality control by him is natural and is in the fitness of things.

The respondent also submit that the same PF code number was being used by KI and KMPL, in this regard appellant submit that Assistant Provident Fund Commissioner's letter has been relied upon for this and this cannot be a conclusive evidence. However, he submitted that they have written to the Provident Fund Commissioner pointing out that this was a mistake.

The respondent submit that office work of all units was done from the premises of KI, The appellant submits that it is a settled law that this cannot be a ground for clubbing value of clearances. Further, all the units were registered with central and state authorities like Central Excise, Income Tax, Sales Tax, Municipal Authorities etc. Moreover, the goods were being manufactured for KMPL and not for KI. No evidence has been put forth that KMPL and KI were one and the same.

The respondent further alleged that certain officials on the role of KI and KMPL were nominated as authorised signatories to execute work of other units. In fact the respondent submitted that Shri Bharatbhai Chimanbhai Hapani signed as director marketing of other units also. The appellant submit that in view of the fact that other units were job workers of KMPL, certain items of work were authorised to be done by KMPL officials and they were paid by both KMPL and KI. Neither of the partners of KI executed any work in any of the other units. The Tribunal finds therefore that this is not of much help to the Revenue.

The respondent’s allegation regarding storage of raw materials of KMPL in other units, The appellant submit in this regard that the raw materials of KMPL was directly sent to other units since others were job workers. KMPL had their own premises/godown where they receive finished goods from each of the other units and carry out branding and packaging. In the absence of any law requiring the principal getting the goods manufactured on job work basis to have a storage and manufacturing facilities, this cannot be a ground for clubbing according to the appellant. The Tribunal agreed with this submission.

The appellant also explained that the payment of Rs.1,00,000/- to KI on 14.03.05 by KMPL was because KI did not have sufficient balance to pay M/s. Speciality Heaters and this was out of payment due from KMPL to KI and a natural transaction during the course of business. He also submitted the brand name/logo was assigned to KMPL by KI on payment of compensation of Rs.25,000/- and therefore KMPL was the brand owner on the basis of records and this cannot be a ground. As regards one case of transfer of machinery to Fitwell Technology, the Appellant submits that the documentary evidence shows that it is an actually a sale. The fact that Kich Overseas paid their insurance premiums as well as insurance premiums of KMPL would not be of any help to the Revenue since Kich Overseas did not undertake any manufacture.

It was submitted by the Respondent that an amount of Rs.4.3 lakhs was paid to Vijayaben and Shilpaben. This was countered by the appellant that stating that these amount were due to the individuals and were paid and there is no evidence to show that this was a flow back or transfer of money from one unit to the other. He also submitted that for every inter unit transfer of fund, appellants were made only out of outstanding of one unit to the other and proper accounts have been maintained and reflected in the books of account. We find that it is not the case of the department that these financial transfers were not reflected in the books of account.

The Respondent also submitted that appellants had claimed all the units as one unit for getting SSI award. However, the appellant submitted that it was clearly mentioned that it was Kich Group and no award was claimed on the basis of a single unit. Further, he submits that the claim was correct since all the units in Kich Group were SSI units during the relevant time.

The discussion of various grounds relied upon by the Commissioner in the order and the counter points submitted by the appellant would show that Revenue has not been able to make out a case by showing that KI was in reality the manufacturer; other than completing some finishing work, KI did not undertake manufacture of all the goods claimed to have been manufactured by others; even though the same family members were partners, directors etc. in the firms and companies, for all legal purposes, each unit was treated separately and no evidence has been put forth to show that such is not the case; even though units were searched and visited, the panchanama does not reveal that the units did not have facilities for manufacture; raw materials were received by each unit separately, accounted separately and finished goods were sent to KMPL and not to KI. From the facts and records of the case what emerges is that it was KMPL for whom goods were manufactured by all the units and KMPL did control the supply of raw materials, quality of raw materials, payment for raw materials and job charges and receipt of finished goods from them and sale thereof whereas no records/evidences have been put forth to show that it was KI in such a position.

The discussion above would show that Revenue has not been able to make out a case that KI has to be treated as the manufacturer and the clearances of other units have to be clubbed and KI has to be held as liable to pay duty on all the goods manufactured by all the concerned units. Accordingly the demand for duty from KI in respect of goods manufactured by all the units cannot be sustained and accordingly is set aside. Since we have held that on merits Revenue has not case, the penalties imposed on various appellants cannot be sustained and accordingly penalties are set aside. In the result all the appeals are allowed with consequential relief to the appellants, if any.

Decision:- Appeal allowed.

Comments:- The crux of this case is that clubbing of clearances of all the separate SSI units is not possible if the Revenue is not able to make out a case based on proper evidences that there has been financial flow back between such SSI units; even though the same family members were partners, directors etc. in such units.

Comments

PJ/Case law/2013-14/1642

Post a Comment

Query