2015 (11) TMI 1554 - AT - Central Excise

Denial of small scale exemption to both units - clubbing of clearances - mutuality of interest in the business of each other - Held that - there is no ban on the existence of more than one unit in a compound. Likewise commonality of directors with stake in these several units is again not conclusive proof of mutuality of interest. Supply of goods from one to another and even occasional financial accommodation are not unusual features of business activities. Nor can common supervisory system be designated as out of the ordinary. One of the fundamental aspects that appear to have been brushed aside by both lower authorities is the factum of both appellants being limited companies. Such companies may have interest in each other through holding company pattern or group company structure. And such companies may have financial relationship with each other without bearing the stigma of subterfuge for deriving undue advantage of the benefits small scale exemption. This immunity has its origin in the accountability of a company to its shareholders and the status as an artificial person which has neither greed nor the wherwithal to induige in a greedy conduct. Crucial in any proceedings for clubbing is the existence of a principal and a dummy or dummies. The purpose of clubbing is to deny the independent existence of one or more entities on the ground that the subterfuge of physical segregation is intended to avail the benefit of small scale exemption. Consequently only one of the entities proposed to be clubbed is to bear the burden of duties sought to be evaded thus. No evidence to fasten these roles on either of the two appellants has been brought put in the notices. The decision to issue two notices followed by two independent proceedings highlight the lack of any investigation in that direction. Furthermore even after finding reasons to club clearances of the two units duty liability arises on the clubbed value of clearances to the extent that it exceeds the threshold prescribed for small scale exemption. The failure to identify the principal entity has therefore led to denial of this threshold exemption. Therefore the entire proceedings from issue of notice till the impugned order to be tainted by lack of application of mind. - Decided in favour of appellant with consequential relief

Summary

Issues:
1. Unaccounted production of 'ethyl acetate' by M/S Alcochem Organics Pvt Ltd.
2. Allegations of mutual interest and clubbing of clearances between M/S Ghaziabad Organics Ltd and M/S Alcochem Organics Pvt Ltd.
3. Denial of small scale exemption to both units.
4. Examination of relevant precedents and legal provisions.
5. Lack of evidence in duty liability computation and clubbing proceedings.

Issue 1: Unaccounted production of 'ethyl acetate'
The Central Excise authorities initiated proceedings against M/S Alcochem Organics Pvt Ltd for unaccounted production of 'ethyl acetate' for 1998-99 and 1999-2000. The authorities relied on raw material utilization and final goods production to determine a normative yield, finding discrepancies in the yield percentages for specific years.

Issue 2: Allegations of mutual interest and clubbing of clearances
Allegations were made regarding mutual interest between M/S Ghaziabad Organics Ltd and M/S Alcochem Organics Pvt Ltd due to common directors, shared supervisory structure, and financial interdependence. Notices were issued for clubbing clearances and denying exemption benefits, leading to duty demands against both companies. The lower authorities confirmed demands against M/S Ghaziabad Organics Ltd and held M/S Alcochem Organics Pvt Ltd liable for illicit clearance.

Issue 3: Denial of small scale exemption
The lower authorities upheld the denial of small scale exemption to both units based on the totality of circumstances, despite individual factors not being sufficient evidence for clubbing clearances. The judgment emphasized that commonality of directors and occasional financial transactions are common in business activities and do not conclusively prove mutual interest.

Issue 4: Examination of relevant precedents and legal provisions
Various decisions of the Tribunal and the Supreme Court were cited by both parties to support their arguments regarding clubbing of clearances and small scale exemption denial. The judgment highlighted the need to examine each circumstance independently before determining liability for clubbing clearances.

Issue 5: Lack of evidence in duty liability computation
The judgment criticized the lack of clarity in duty liability computation and the notices issued, pointing out the absence of evidence to establish a principal entity in the clubbing proceedings. The failure to identify the principal entity led to the denial of the small scale exemption threshold, indicating a lack of application of mind in the proceedings.

In conclusion, the Tribunal set aside the impugned order due to the lack of evidence, ambiguous notices, and failure to establish the principal entity in the clubbing proceedings, rendering the entire process tainted by a lack of proper assessment.