2024 (9) TMI 914 - AT - Central Excise

Denial of SSI exemption under N/N. 08/2003CE dt.01.3.2003 - clearance value of sealing machines manufactured by each of the Units (called as mother units) - dummy Units created and controlled by Sepack - Confiscation - penalty - HELD THAT - The undisputed facts are that the appellant(M/s. Sepack) during the relevant period engaged in trading, inter alia, of sealing machines. These sealing machines were manufactured by various independent units (DMUs) and supplied to Sepack at the price mutually agreed. The appellant after affixing their brand name and packing the sealing machines cleared to the end consumer at a price higher than the price at which the same were purchased from different units. Each of the DMUs engaged in the manufacture of sealing machines was registered with the respective village panchayats, but not registered with the Central Excise Department claiming SSI exemption under Notification No.08/2003-CE dated 01.3.2003 up to the aggregate value of clearances in the respective financial years being less than Rs. 150 lakhs. The allegation of the Revenue is that the individual units which are described as Decentralized Mother Units (DMUs) are dummy units being created and controlled by Sepack only for the purpose of claiming SSI exemption benefit under N/N. 8/2003-CE dated 01.03.2003 on the turnover of each of the said Units. Secondly, it is also alleged by the Revenue that the product sealing machines at the premises of the DMUs were not fully finished and attained the character of a marketable commodity; the sealing machines became complete and emerge only after the quality checking, and other processes in the premises of Sepack including the processes of branding, labelling, warranty agreement which enriches its value as well as make the sealing machines marketable. Thus, manufacturing of sealing machines becomes complete only after these incidental and ancillary processes undertaken by the appellant at their premises. Hence, Sepack is the manufacturer of the sealing machines. The learned Commissioner has observed that there is a financial flow-back from the appellant to DMUs inasmuch as the Sepack identify the supplier of raw materials who would supply the inputs at the least possible price to the DMUs; the reduction in the production cost by various methods including procurement of raw materials at a cheaper price and through other mutual efforts benefitting both Sepack and the DMUs; the benefit that accrues to Sepack by such means would definitely be considered as a financial flow-back to Sepack - The mother units started placing purchase orders of base and rocker arms with the diecasting units and could able to achieve better efficiency, uniformity and cost reduction and they could able recoup the investment on moulds within one year and returned the advances made by the mother units. Later the diecasting units were investing in the moulds themselves and recovering the cost through amortisation. The said statement of Shri Biju Philipose has been verified by the Department from the ledger account submitted and no discrepancy was noticed as recorded in the show-cause notice. Thus, the finding of the Commissioner that there is a financial flow back by way of investment in moulds cannot be sustained as it is within the normal practice of the trade. It is to be borne in mind that the entire allegation of the Revenue rests on the premises that all these individual DMUs were dummy units of Sepack, impliedly, these units do not have separate physical existence in practice and their existence was on paper only. On the contrary, from the various statements, it could easily be discerned that there has been commercial and healthy negotiations between Sepack and all DMUs by exchanging ideas and sharing of cost data and suggesting to arrive at the optimum cost of production so as to maximise the profit in the interest of both parties. Thus, it cannot be interpreted that the individual DMUs have no existence and all the units belong to Sepack and fully controlled by Sepack. In the event, the DMUs were in existence only on paper, then there was no need to conduct periodical monthly meetings and deliberate on the issues of reduction in cost and contributing to the efficiency in production. The second alternate allegation of the Revenue is that the sealing machines cleared by the DMUs to the Sepack were incomplete, since the processes of branding, packing and placing warranty cards have been undertaken by the Sepack in their premises. It is the Revenue s contention that these processes are ancillary and incidental; therefore, resulted into manufacture of sealing machines - it is found from the record that the Sepack initially carry out the process of inspection before delivery of sealing machines at their premises and accepts the same when it is found complete and also carry out a second time inspection before selling the goods to the consumers, which itself indicate that when they receive the sealing machines, the same was complete and ready to be used condition. Thereafter, Sepack affixes its brand name, placing the warranty card and packing the sealing machine, clears the same to their customers. Hence, it is incorrect to say that incomplete / unfinished sealing machines were received by Sepack from the DMUs. Thus, it could not be established by the Revenue that Sepack are required to pay duty by clubbing the turnover of the individual DMUs, denying each of the units the benefit of N/N.8/2003-CE dated 01.03.2003 and also considering Sepack as manufacturer of sealing machine during the period 2009 to 2014, on the price of sealing machines cleared by them. In the result, on merit, the impugned order cannot be sustained. The confiscation of seized goods, imposition of penalty on Sepack, penalty on other appellants under Rule 26 of Central Excise Rules, 2002 become academic and hence not deliberated - the impugned order is set aside and the appeals are allowed.

Summary

Issues Involved:
1. Denial of SSI exemption under Notification No. 08/2003-CE due to alleged dummy units.
2. Liability of confiscation and penalty on seized goods.
3. Justification for imposition of penalty under Rule 26 of CER 2002 on other appellants.

Issue-wise Detailed Analysis:

1. Denial of SSI Exemption:

The core issue was whether the decentralized mother units (DMUs) were dummy units created and controlled by Sepack India Pvt. Ltd. to claim SSI exemption under Notification No. 08/2003-CE. The Revenue alleged that the DMUs were dummy units, effectively controlled by Sepack, and thus the clearances should be clubbed, denying the SSI exemption. The appellant argued that each DMU was independent, had its own infrastructure, and was managed separately.

The Tribunal analyzed the principles of law on clubbing of clearances, referencing several judgments, including CCE, New Delhi Vs. Modi Alkalis & Chemicals Ltd. and CCE, Pune-II Vs. Ravi Batteries, which emphasized that financial and managerial control are key indicators of interdependence. The Tribunal found that Sepack's involvement in negotiating raw material prices and advising on cost reduction did not amount to pervasive financial control. It was noted that the DMUs were independently registered, managed their own finances, and there was no evidence of financial flow-back or shared profits between Sepack and the DMUs.

The Tribunal concluded that the DMUs were not dummy units and were eligible for SSI exemption. The decision was supported by the fact that some DMUs existed before Sepack was incorporated, and the mutual benefits from cost reduction efforts were part of normal commercial practices, not indicative of control.

2. Liability of Confiscation and Penalty on Seized Goods:

The second issue was whether the goods seized at Sepack, Global Pack Industries, and Speed Pack were liable for confiscation and if penalties were justified. The Revenue argued that the goods were incomplete and became marketable only after further processes by Sepack, thus making Sepack the manufacturer.

The Tribunal found that the sealing machines were complete and marketable when received by Sepack, and the additional processes like branding and packaging did not constitute manufacture. The Tribunal referenced the judgment in CCE Vs. Rafique Malik, which held that affixing a brand name and packaging do not amount to manufacture if the goods are already marketable.

Since the Tribunal concluded that the goods were complete and marketable when received, the confiscation and penalties imposed on the seized goods were not justified.

3. Justification for Imposition of Penalty under Rule 26 of CER 2002:

The third issue was whether penalties imposed on the various proprietors under Rule 26 of CER 2002 were justified. The Revenue argued that the proprietors were involved in evasion of duty by being part of the dummy units.

The Tribunal noted that since the DMUs were found to be independent and eligible for SSI exemption, the basis for imposing penalties under Rule 26 did not hold. The penalties were based on the premise that the DMUs were dummy units, which was not established. Therefore, the penalties imposed on the proprietors were set aside.

Conclusion:

The Tribunal set aside the impugned order, allowing the appeals with consequential relief. It was concluded that the DMUs were independent units eligible for SSI exemption, the seized goods were not liable for confiscation, and the penalties imposed under Rule 26 were not justified.