1993 (1) TMI 164 - AT - Central Excise

Summary

Issues Involved:

1. Whether the factory and the company could be deemed as related persons within the meaning of Section 4(4)(c) of the Central Excises & Salt Act, 1944.
2. Whether the show cause notice issued beyond the period of 6 months was time-barred.

Issue-wise Detailed Analysis:

1. Whether the factory and the company could be deemed as related persons within the meaning of Section 4(4)(c) of the Central Excises & Salt Act, 1944:

The Collector's finding that the factory and the company were related persons under the second part of the definition in Section 4(4)(c) of the Central Excises & Salt Act, 1944 was based on the relationship between the directors and the controlling interests. The Collector concluded that the factory and the company were subsidiaries of the chemical company since the managing director of the company was also a director in the factory, and his wife was the only other director. However, the appellants argued that there was no shareholding between the factory and the company or between the factory and the chemical company, and no power to appoint or remove directors in the respective companies. The Tribunal agreed with the appellants, stating that the Collector's finding was not legally sustainable as there was no shareholding or power to appoint or remove directors, and thus, the companies could not be deemed related persons under the second part of the definition.

The Collector also held that the factory and the company were related persons under the first part of the definition since they had mutual interests in each other's business. This conclusion was based on the fact that the managing director of the company was also involved in the overall management of the factory, and the majority of the goods manufactured by the factory were sold to the company. The appellants countered this by citing various case laws, arguing that common directors or majority sales to one entity do not automatically make them related persons. The Tribunal agreed with the appellants, stating that the transactions were on a principal-to-principal basis and influenced purely by commercial considerations. There was no evidence of sales below normal wholesale prices or any flowback from the buyer to the manufacturer. Therefore, the Tribunal concluded that the factory and the company were not related persons under the first part of the definition either.

2. Whether the show cause notice issued beyond the period of 6 months was time-barred:

The Collector invoked the extended period of five years under the proviso to sub-section (1) of Section 11A of the Central Excises & Salt Act, 1944, alleging that the factory had deliberately suppressed facts to evade duty. The appellants argued that their activities were known to the Department from the inception, as evidenced by the regular filing and finalization of classification lists, price lists, and RT-12 returns. They also pointed out that earlier proceedings on similar grounds were decided in their favor by the Collector (Appeals). The Tribunal agreed with the appellants, stating that there was no conscious or deliberate withholding of information, and the Department had full knowledge of the facts. Citing the Supreme Court's decision in CCE v. Chemphar Drugs & Liniments, the Tribunal held that the demand was limited to six months as there was no fraud, collusion, or wilful misstatement. Therefore, the show cause notice issued beyond six months was deemed time-barred.

Conclusion:

The Tribunal set aside the impugned order and allowed the appeal, concluding that the factory and the company were not related persons within the meaning of Section 4(4)(c) of the Central Excises & Salt Act, 1944, and the show cause notice issued beyond the period of six months was time-barred.