CLUBBING OF PROCESSES

[Mr. M. GOVINDARAJAN]

When two units are separately processing goods and neither of them is a dummy of the other, Central Excise Law does not contain any provision for clubbing of the processes carried out in the said two units.   This has been clearly discussed in the case law ‘Bhagylakshmi Processors V. Commissioner of Central Excise, Rajkot’ –2013 (9) TMI 311 - CESTAT AHMEDABAD.  The facts of the case run as follows:

Bhagyalakshmi and Famous are partnership firms having different partners.   They are engaged in processing of grey fabrics on job work basis for M/s Movement Impex Trading Company. Separate bills are raised for job work by both the firms and separate payments are made to the said terms by the trading company.

The process involved in this case is grey fabrics sent by M/s Movement Impex Trading Company are received by Bhagyalakshmi, in whose factory they are subjected to mercerizing and bleaching.  The fabrics in wet condition are manually shifted to the premises of Famous, which are located in the same compound as Bhagyalakshmi. The fabric, in Famous, is subjected to hydro extraction/drying and stentering. The dry fabric is returned to Bhagyalakshmi where it is baled, packed and cleared to M/s Movement Impex Trading Company.

Both the firms have not registered with Central Excise Authority. No duty has been paid for the above process at any stage by both of them.   The dispute in this case relates to the period from October 1996 to December 2002.   During the period the following notifications were issued relevant to this case:

• Notification No.5/98-CE, dated 2.6.1998;
• Notification No. 5/99-CE, dated 28.2.1999;
• Notification No. 6/2000-CE, dated 1.3.2000;
• Notification No. 3/2001-CE, dated 1.3.2001; and
• Notification No. 6/2002-CE, dated 1.3.2002.

The cumulative effects of the above Notifications are as follows:

• Cotton fabrics processed without the aid of power/steam remained exempted throughout. The activity of lifting to overhead tanks was inter alia, deemed to have taken place with the aid of power/steam, even if in actual effect, it involved with the aid of the power for the period after 01.3.2000, but not for the period prior thereto;
• The processes of stentering and hydro extraction remained exempted for the period prior to 01.03.2002, where they were carried out in factories not having facilities for bleaching/dyeing/printing with the aid of power/steam;
• This conditional exemption was withdrawn w.e.f. 1.3.2002, insofar as the process of stentering was concerned.

The Departmental officers visited the premises of both firms. Photographs were taken and a panchnama was drawn up.   Some equipments were found in the premises of both firms by the Officers. They also obtained statements from the partner of both firms and recorded. On the basis of the investigations a show cause notice was issued to both the firms on the ground that Famous was a dummy unit created so as to split up the activities performed in the premises of Bhagyalakshmi and Famous and thereby irregularly avail the benefit of the above mentioned exemption Notifications. It was also alleged that the entire sequence of processes carried out on the grey fabric received at the premises of Bhagyalakshmi and Famous were continuous and concerted and, having been performed with the aid of power, the fabric finally cleared from Bhagyalakshmi was liable to duty. Of these, as the processes of mercerizing, stentering, squeezing and hydro extraction were allegedly carried out with the aid of power the show cause notice alleged that the final fabric as cleared from the premises of Bhagyalakshmi was eligible to duty, not being entitled to any exemption under any of the above mentioned notifications.

The demand was confirmed by the Commissioner. In appeal the Tribunal set aside the order on the ground that the duty demand could not be levied jointly and severally on two units and the entire case was remanded for de nova consideration. In the de nova proceedings demand was confirmed against Bhagyalakshmi with equal penalty.   The demand against Famous has been dropped. Against the said order appeal was filed before the Tribunal.

The Tribunal found that there is a difference between the case of the Revenue as proposed in the show cause notice and as confirmed by the Commissioner in the impugned order.   The show cause notice proceeds on the premise that Famous was only a dummy unit created by Bhagyalakshmi, so as to bifurcate its clearances and wrongly avail the benefit of exemption. As against this, there is no finding in the impugned order.   The clearance of the wet fabrics from Bhagyalakshmi to Famous being admittedly non excisable and no duty have been confirmed on the return, clearances from Famous to Bhagyalakshmi, the prime question to be addressed is whether, as alleged in the show cause notice and as found by the Commissioner, it is permissible to club all the processes carried out at Bhagyalakshmi and Famous and, on that ground, uphold the liability to duty of the final clearances effected from Bhagylakshmi. The Revenue did not advance any substantial arguments on these issues.

The Tribunal analyzed the findings of the Commissioner.   The Commissioner has upheld the allegations of clubbing of the processes carried out in the premises of Bhagyalakshmi and Famous on the ground that-

• no document/challan was prepared at the time of transfer of the wet fabric from Bhagyalakshmi to Famous, as wet fabrics could not be removed as a final product, so that the responsibility and ownership of the goods, even during the time of processing in Famous’s premises remained with Bhagyalakshmi;
• the work relating to procurement of grey fabrics and dispatch thereof were handled by Bhagyalakshmi;
• one partner each in Bhagyalakshmi and Famous was also a partner in the grey fabrics’ supplier firm at Mumbai i.e., Movement; and
• a common account was maintained for mercerizing, bleaching and stentering in Bhagyalakshmi and Famous on a day to day basis.

The above factors, even seen cumulatively, in the opinion of the Tribunal, make out any case for treating the process at both units as one or clubbing the said processes. The Tribunal found that there are four distinct activities carried out at both firms i.e., mercerizing and bleaching at Bhagyalakshmi and stentering and hydro extraction/drying at Famous. It is not as though the fabric after being processed at Bhagyalakshmi, was being transferred in situ, or simultaneously, to Famous by way of conveyor belt or otherwise. There is no allegation of commonality of managerial control, common financing of flow back of finances from Bhagyalakshmi to Famous or vice versa. Both the firms had separate PAN numbers and were separately assessed to Income Tax and Sales Tax. In the wake of these facts, the mere fact that grey fabrics were initially procured and finally dispatched by Bhagyalakshmi, or that common account was maintained for the processes carried out at both firms, in the view of the Tribunal, will not justify clubbing the said processes, or arrogating duty liability on all the said processes, to the final fabrics as cleared. The fact that each firm was also a partner in the grey fabric supplier firm cannot be of any significance. Insofar as the finding that the ownership of the goods remained with Bhagyalakshmi is concerned, it appears to be the mere ipse dixit of the Commissioner, unsupported by any factual material or evidence whatsoever.

The Tribunal further held that no case for clubbing of processes carried out by both firms can be said to have been made out.   They are in view of the evidence on record clearly independent units, independently working for the grey fabric supplier on their own account. The allegation of usage of power in mercerizing and stentering is also on the basis of material on record without substance.   In any event, in view of the fact that-

• the processes carried out at Bhagyalakshmi and Famous have been held to be independent and not liable to be clubbed;
• the fabric cleared by Bhagyalakshmi to Famous is admittedly non marketable;
• there is no demand confirmed against Famous; and
• the processes of bailing and packing cannot be regarded as amounting to ‘manufacture’

no case for enforcing any duty demand against Bhagyalakshmi can be said to exist.