2018 (8) TMI 686 - AT - Central Excise

SSI Exemption - clubbing of Clearances - common Directors - it has been argued that the appellant M/s Pharma Chem Services and M/s Sanj Pharma Engineering Pvt. Ltd are both separate legal entity and they cannot be treated as a one person for the purpose of SSI exemption - Difference of opinion. Held that - There is difference of opinion on the matter Whether the appeals are to be rejected as held by Learned Member (Technical) or the same are to be allowed as held by Learned Member (Judicial)?

Issues Involved:
1. Clubbing of clearances for SSI exemption.
2. Determination of whether two entities are separate or a single entity for tax purposes.
3. Legitimacy of loan transactions between the entities.
4. Applicability of the doctrine of lifting the corporate veil.
5. Relevance of common ownership and control in determining the independence of entities.
6. Interpretation of judicial precedents in similar cases.

Detailed Analysis of the Judgment:

1. Clubbing of Clearances for SSI Exemption:
The main issue revolves around whether the clearances of M/s Pharma Chem Services and M/s Sanj Pharma Engineering Pvt. Ltd. should be clubbed for the purpose of Small Scale Industry (SSI) exemption. The Commissioner (Appeals) upheld the decision of the Assistant Commissioner of Central Excise, which confirmed the demand of duty and imposed penalties by clubbing the clearances of the appellant.

2. Determination of Separate or Single Entity:
The appellants argued that M/s Pharma Chem Services and M/s Sanj Pharma Engineering Pvt. Ltd. are separate legal entities, each with its own factory, workers, and registrations (Service Tax, Sales Tax, etc.). They contended that the two entities should not be treated as one for the purpose of SSI exemption.

3. Legitimacy of Loan Transactions:
The appellants also argued that the loan provided by M/s Sanj Pharma Engineering Pvt. Ltd. to M/s Pharma Chem Services for the development and construction of factory premises, which was repaid, should not be a basis for clubbing the clearances. They cited the decision in Studioline Interior Systems Pvt. Ltd. to support their argument.

4. Applicability of the Doctrine of Lifting the Corporate Veil:
The Revenue relied on the decision of the Hon'ble Apex Court in Calcutta Chromotype Ltd., which allows for lifting the corporate veil to determine the true nature of the relationship between entities. The Tribunal noted that while a company is generally considered a separate legal entity, there are exceptions where the veil can be lifted, particularly in cases of tax avoidance or improper conduct.

5. Relevance of Common Ownership and Control:
The Revenue argued that the common ownership and control (Mrs. Reema Madhavan holding 99% shares in M/s Sanj Pharma Engineering Pvt. Ltd. and being the sole proprietor of M/s Pharma Chem Services) indicated that the two entities were essentially the same. The Tribunal considered whether the existence of common directors and financial transactions between the entities justified treating them as a single entity.

6. Interpretation of Judicial Precedents:
The Tribunal examined various judicial precedents, including the decisions in Servo Packaging (P) Ltd., Switching Electronics, and Ghaziabad Organics, which generally held that clearances should not be clubbed if the units are independent and capable of manufacturing the final product on their own. The Tribunal also referred to the decision in Calcutta Chromotype Ltd., which emphasized that tax planning within the framework of law is legitimate, but colorable devices to avoid taxes are not.

Separate Judgments Delivered by the Judges:

Judgment by Member (Technical):
The Member (Technical) concluded that the two entities were artificially created to avail SSI exemption and upheld the clubbing of clearances. The decision emphasized that the entire funding of the new unit was done by the old unit, and the common ownership and control indicated that the entities were not independent. The appeals were dismissed.

Judgment by Member (Judicial):
The Member (Judicial) disagreed, arguing that the two entities were located at different places, had separate registrations, and were capable of manufacturing independently. The judgment emphasized that the loan transaction alone was not sufficient to treat the two units as dummies of each other. The Member (Judicial) allowed the appeals and set aside the impugned orders.

Conclusion:
The Tribunal delivered a split decision on whether the appeals should be rejected or allowed, leading to a difference of opinion between the Members. The Member (Technical) upheld the clubbing of clearances, while the Member (Judicial) allowed the appeals, emphasizing the independence of the two entities.

← Previous Next →