Pradeep Jain - Chartered Accountant

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

We are undertaking the study of a case wherein four units were operating from same premises but were claiming to be separate from each other even when the members of the same family were partners holding the business.

Techno Device v/s Commissioner of Central Excise, Chennai

[2009 (243) ELT 79 (Tri-Chennai)]

Brief Facts of the Case: -

- The Appellant are small scale unit engaged in the manufacture of idlers and parts thereof for another firm M/s Neyveli Lignite Corporation (NLC). The Excise officers visited the Appellants premises and observed that two other units M/s Shri Ranganatha Industries (SRI) and M/s Industrial Engineering Works (IEW) also functioned in the same premises. Another unit M/s Excel Industries (Excel) had also functioned in the same premises till January 1998 and had shifted thereafter to there own premises. Another unit M/s Industrial Fasteners (IF) had functioned in the adjacent premises till 1992 and moved to their own premises thereafter. The said unit was wound up in August 1996.

- The authorities completed their investigation and concluded that members of families of Shri Vasudevan and his brother Shri R. Rajagopal had formed partnerships TD, Excel, IF, and SRI and were engaged in the production of excisable goods from the same factory and availed inadmissible exemption extended to SSI units. The premises had been allotted to the appellant company (TD) by the Tamil Nadu small industries Corporation (TANSIDCO). But the other units were operating without clearance from TANSIDCO. All the units used the power connection allowed to the appellant without separate meters. The appellant company allowed other units to operate in the premises under lease agreements charging nominal rents. Clearance of excisable goods manufactured by SRI and IEW were a camouflage has they had not made clearances to NLC. Clearances under invoices raised by the appellant and Excel, only represented clearances to NLC. It appear that appellant manipulated the records of clearances of excisable goods manufactured by it so as to show that goods were cleared by sister units thereby contravening provisions of Central Excise Rules and evading excise duty due on the clearances made during the period 1994-95, 1995-96, 1996-97 and 1997-98.

- The Commissioner passed the impugned order demanding duty from appellant under section 11A of the Central Excise Act, 1944 along with interest in terms of section 11AB. Penalty was imposed under Section 11AC and also under Rule 173Q of the Central Excise Rules, 1944. Plant and Machinery used for manufacturing the offending goods were confiscated under Rule 173Q and on payment of redemption fine were offered for release. Penalty was also imposed on Shri Vasudevan, Rajagopal and IEW represented by Sanjay under Rule 209A. Against this order, appellants preferred appeal before the Commissioner (Appeal).

- The Commissioner (Appeal) found that four units functioned from the same premises were partnership firms comprising of Shri Vasudevan and Rajagopal and the relatives. Shri R Vasudevan fixed the labour charges for the unit which undertook jobwork for either for the appellant company or for Excel. Only appellant had power connection. Records of all the four units were kept in the same shed and single clerk was maintaining the accounts. All the units functioned from a common shed with the demarcation made by a line painted on the floor. Some machines were attributed to each unit did not mean that all of them functioned separately. The orders were placed only on appellant and Excel and not on others. The job relating to these orders was distributed among these units enabling them to avoid taxes. Single security guard handled the security of all the units. It was evident that all the units pooled the space for their manufacturing activity besides man and machine. All the units took registration on 4-3-1998 as directed by the Assistant Commissioner. The proprietorship of Shri Sanjay was dubious as he drew a very nominal salary from SRI. The premises held by them had not been authorised by the Municipal Authorities. Reliance was placed on the judgement given in Simplex Expeller Works v/s CCE, Chandigarh [2001 (138) ELT 678 (Tri-Del)] to conclude that SSI Exemption was not separately available to the parties involved. Reliance was also placed on the judgment given in Calcutta Chromotype Ltd v/s CCE Calcutta [1998 (99) ELT 202].

- The Commissioner (Appeal) held that the appellant’s case was a classic one to lift the corporate veil where Shri Vasudevan and Rajagopal Brothers had controlled all the business. He found that they were knowingly concerned in the manufacture and sale of excisable goods without payment of duty. Shri Sanjay, de facto proprietor of IEW, had actively participated in the business enabling appellant to evade duty. Therefore the appellant liable to pay duty demanded and the penalties imposed on them. Penalties imposed on the brothers and Shri Sanjay were held to be justified. Appellants have come up before the Tribunal against the impugned order.

Appellants Contentions: -

- The Appellant contended that all the four units were not functioning in one big hall demarcated by painted lines but each factory had four walls and had separate doors. The yellow line was in the open yard where the raw materials of each unit were kept these is obvious from the Mahazar.

- All four units were engaged in manufacturing activity as per Show cause Notice and did not merely exist on paper. The clearances of goods from the units were not clubbed as separate machinery was found along with separate labour. They had leased out the premises to the appellant and had hired the portion on the lease. They owned their own Plant and Machinery. Partners of Excel were different from the partners of Appellant.

- The Excel which had moved to their own premised in August 1996 were having separate machinery and labour and therefore they could not become a dummy for an interim period. This is because Excel had functioned from a portion of the premises leased from appellant.

- The fact that the Assistant Commissioner had directed each unit to take registration certificate and had issued the said certificate to each of them showed that the department was satisfied about each unit having walls on four sides and separate entrances. They cannot be treated as dummies. The firms were separate legal entities for sales tax and income tax purposed. The sales tax returns of Excel showed that SRI, IEW and IF were not mere jobworkers but had sold goods to Excel. A Firm could validly procure goods on purchase from other firms and that could lead to distribution of profits was not a ground to treat all the firms as one as the same. In the absence of common funding and flow back of profit there could be no clubbing. The circumstances of the partners being related and running unit in adjacent premises was not a ground for clubbing.

- The appellant had placed reliance on the judgments passed in the following cases: -

(1) Renu Tandon v/s Union Of India [1993 (66) ELT 375 (Raj)]

(2) Indian Metal Industries v/s CCE [1999 (108) ELT 593 (T)]

(3) Jagjivandas & Co. Thane v/s CCE [1985 (90) ELT 441 (T)]

(4) Nikhildeep Cables Pvt. Ltd v/s CCE [1994 (70) ELT 273 (T)]

(5) Kinjal Electricals Pvt. Ltd v/s CCE [1989 (43) ELT 327 (T)]

(6) CCE v/s Standard Watch Co. [2000 (119) ELT 703 (T)]

(7) Bhagwandas Kanodia v/s CCE [1987 (32) ELT 204 (T)]

(8) Prabhat Dyes & Chemicals v/s CCE [1992 (62) ELT 469 (T)]

(9) Alpha Toyo Ltd v/s CCE [1994 (71) ELT 689 (T)]

(10) CCE v/s National Adhesive and Chemicals [2007 (208) ELT 361]

(11) CCE v/s Sushil Chemicals [2008 (230) ELT 117 (T-Bang)]

(12) Britomatics Engg. Pvt. Ltd v/s CCE [2006 (202) ELT 806 (T)]

(13) CCE v/s Electro Mech Engg. Corp. [2008 (229) ELT 321 (SC)]

(14) Coimbatore Engg. Works v/s CCE [2009 (239) ELT 366 (T)]

- The appellant also relied upon the Board Circular no. 6/92 Dt 29-5-1992.

- The appellant further contended that no incriminating statement was on record showing clubbing of clearances. They were no suppression of clearances. The entire case was built on a statement of Shri R Vasudevan who was partner of Excel during the disputed period and in appellant company during the period 1994-96. Shri Vasudevan was not a partner in appellant company after 1996. The clearances of Excel after August 1996 were excluded in computing the demand.

- The appellant further submitted that the impugned order was passed without ascertaining the account of transactions by all partners before clubbing their clearances. The impugned order had taken into account the goods traded by Excel in determining the duty due. This was against the legal provisions. If the various firms were found to have been manufacturers operating from the same factory, demand should have been raised on each of them. Excel had purchased goods not only from the other units but also from unconnected firms. The demand on traded goods of Excel in 1995-96, and 1996-97 was not sustainable.

Question for Consideration: -

The issue involved in the appeal is as under: -

Whether the appellant and other units were different manufacturers operating in the same premises or the same body of persons was operating as different persons to avail SSI Exemption which would otherwise be inadmissible to them?

Order of the Tribunal: -

v The Tribunal held that the Commissioner had not addressed the claim of the parties that each of them functioned from separate portions in the same premised and they had separate machinery. The Tribunal found that the maintenance of accounts of various units by a single person and at one office is not a ground floor justifying clubbing. If the different firms operated with its own machinery in separate premises leased from as appellant, clubbing their clearances cannot be justified. The Commissioner had found work orders for conveyer equipment placed on appellant or Excel had been distributed among other units. The finding of the Commissioner that ‘the units were owned by partnership formed by relatives and this resulted in distribution of sales and profit among them enabling them to avoid taxes’ was neither correct nor acceptable.

v The Commissioner have placed reliance on a letter dated 4.3.98 issued by M/s Imperial Steel an M/s Rajasthan Steels revealing that the orders were placed by Shri Vasudevan and Rajagopal. But no more details are available in the order. A single security guard was incharge of security of all units in no way contributed to a finding that the clearances of these units could be clubbed. The fact that all the units had taken separate registration certificates indicates that these units were held to be independent and separate manufacturing units by the department although the status of Shri Sanjay as owner of IEW was doubted. There is no discussion by the Commissioner finding him as not the proprietor of IEW.

v It was further held that the Excel was functioning as an independent unit with income tax and sales tax registration and had functioned in separate premises from 1985 onwards. For only short period from 1-4-93 to 9-8-96 they had worked at appellants premises and thereafter returned to their own premises. The Tribunal found that mutuality of interest, financial integrity among various units and unity of control are the sine qua non for clubbing of clearances of the units involved. There are no examinations of transactions of the firms and people comprising them to find if in the name of different partnerships, same entity or Body of persons operated and the partnerships were a facade devised to evade duty. The Adjudicating Authority had relied upon the judgment given in Calcutta Chromotype Ltd case but had left the question unanswered regarding its applicability.

v The Tribunal held that the department had not looked at the aspect of finances/funds operated by each of the units and there was a common fund and sharing of profits among units to decide if these units were dummies of one main units. The units considered to be dummy by the Commissioner had engaged in production and transactions assessed to sales tax and income tax. No justification is forthcoming to reject their finding that the units were independent in their own right.

v The Tribunal considered all the judgments relied upon by the appellant. The Tribunal held that the authorities were uncertain as to whether these units were different manufacturers operating in same premises or same Body of Persons operating as different persons to avail inadmissible SSI Exemption. Both allegations figure in the show cause notice. This ambiguity weakens the finding of one view without adequate substantiation. The Commissioner had not examined the eligibility of various units to SSI Exemption in the light of the Circular no. 6/92 dt. 29-5-1982.

v The Tribunal further found that the factors relied upon by the Commissioner were not sufficient circumstances to hold that all the five firms were as single entity especially since the different partnerships are independent entities and were so recognized by the department by issuing registration certificates to each of them as assessee under Central Excise Laws.

v It was held that the finding of the Commissioner that the appellant and Excel had done an illegal act by procuring purchase orders and distributing the work among different partnerships, is totally erroneous and misconceived. Such practice is common in trade and revenue has not adduced any evidence to conclude that such transactions were not commercial in nature. There is not categorical finding that LEW is not owned by Shri Sanjay, a person outside the families of brothers.

v In the case of Simplex Expeller Works which was relied upon by the Commissioner, one of the units possessed the machinery for the manufacture of goods. Confessional statements were given by the partners. These were important circumstances which led to the Tribunal to hold that the firms involved therein belonging to members of the same family had manipulated their accounts to stay within exemption limit. The firms therein had failed to show the source of funds operated by each of them. The Commissioner had wrongly relied upon this judgment.

v The Tribunal found that it was natural that family members were dominating the business activities of the various firms involved when different partnerships comprised members of the same family. The observation in Sushil Chemicals case that “Law does not prohibit family members from establishing different proprietary and partnership concerns and workings for the common benefit of the group” is relevant to the case. The transactions made by all the units were with in the framework of law. Mutuality of interest among two units or several units of a group of family members cannot be a reason for clubbing of clearances. The partnerships comprised different members of the family and no two partnerships had same set of members of the family as partners.

v The Tribunal held that the Commissioner had failed to appreciate the intend and import of Section 37B order dated 29-5-92 issued by the Board in the context of notification no. 175/86 cited by the appellants. The Commissioner had not reached a finding that by virtue of integrity of finances and unity of control among the firms they were actually one and operated in the guise of separate entities to enjoy undue exemption. There is no examination of transactions of the firms and the people comprising them to find that whether in the name of different partnerships, same entity or body of persons were operating and the partnership was a facade devised to evade excise duty.

v The Tribunal held that in the impugned order the aspect that unless there is mutuality of interest and flow back of finances, clearances of two firms couldn’t be clubbed; was not examined at all. There is no mention of funding of various firms and the source of capital in the impugned order.

v Accordingly, the Tribunal held that impugned order is not sustainable. The firms whose clearances were clubbed with those of appellant and Excel had not been issued show cause notice. This is an important defect which vitiates the proceedings. Also the charge of evasion by the appellant and the partner brothers are not sustainable. Penalty under Rule 209A is set aside as being unsustainable.

Decision of the Tribunal: - Appeals allowed.

Comments & Conclusion: -

The Tribunal rightly held that just because the various firms of a group were owned by the members of the same family which are operating in adjacent premises may have done so with the intent to evade duty. The other factors which point out that the firms might have taken different identity to evade duty, are also required to be established for lifting the corporate veil. In the instant case, there were a lot of factors which were not established like whether there was flow back of finances. Thus, the Tribunal rightly held that appellant and other related firms were operating separately having distinct identity from each other.

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PJ/CASE STUDY/2009-10/020
30 November 2009

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PJ/CASE STUDY/2009-10/020 30 November 2009

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PJ/CASE STUDY/2009-10/020
30 November 2009