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TMI Blog1998 (8) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... 11A of Central Excise Act, 1944 in terms of allegations made in the show cause notice dated 2-3-1995. He has imposed a penalty of Rs. 30 lakhs under Rule 173Q(1) of Central Excise Rules, 1944. Further, he has imposed a penalty of Rs. 1,00,000/ - on each of the other appellants herein. 2. The facts of the case are that all the appellants including MICO Ltd. are independent manufacturers having independent Central Excise Licences and clearing the goods from their premises on payment of duty. However, there were proceedings earlier on the same issue, which has been adjudicated by the judgments of the Karnataka High Court vide Writ Petition No. 36/87 and others in favour of the appellants. The matter was also dealt with by the Tribunal vide Beaver Automotives Pvt. Ltd. v. C.C.E. as reported in 1997 (91) E.L.T. 341. However, despite these rulings, the department again re-issued show cause notice concerned to allege the following allegations of contravention of :- Rules 9, 173F, 174 of the Central Excise Rules, 1944 read with Notification No. 305/77-C.E., dated 5-11-1977 and 27/92-C.E. (N.T.), dated 9-10-1992 for having failed to comply with the provisions prescribed under the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Section 11D of the Central Excises and Salt Act, 1944. The amount so collected during the period September, 1991 to December, 1994 have been worked out to the extent of Rs. 2,49,44,003.94. 4. It was also alleged that the agreements between MICO and the vendors, the machineries lease agreements, the letter of intent are some vital documents which are relied to prove the nature of relationships between M/s. MICO and the vendors. It is alleged that non-disclosure of these documents had been admitted by MICO. Apart from the said documents there are several other documents, correspondences, etc., which are referred to in the Annexure, which disclose that the real manufacturer is only MICO and also regarding the effective management, absolute control, directions that were exercised by MICO on the vendors. From the evidences placed on records, it alleged that MICO have by dubious and colourable methods, suppressed certain vital facts from the knowledge of the department with the sole intention of evading payment of duty, thereby attracting the extended period of limitation of proviso to Section 11A of the Central Excises and Salt Act, 1944. Therefore, it was alleged th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of sale pattern, sales price of inserts, price list submitted by MICO and lastly allegations as to why penal action should not be initiated. 5. Each one of the appellants filed their reply to the show cause notice denying the allegations levelled in the lengthy show cause notice. 6. MICO unit in their detailed reply stated that the transaction between them and the other appellants was on principal to principal basis. They stated that they are manufacturers of various motor vehicle parts including fuel engine pumps, filters and filter inserts, etc. and having been established in 1951 and their manufacture activity commenced in the year 1954. They have stated that in order to encourage small scale entrepreneurs, they had also been developing various sources for manufacture and supply of various items which were hitherto under their line of manufacture. This in the commercial terminology is referred to as `off loading of manufacturing activities . They stated that they have given their business standards specifications, testing procedures, etc. and ordered manufacture and supply of filter inserts from various small scale industries. They had communicated to their respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce ultimately adopted by the buyers. They stated that judicial pronouncements made the subject clear that the goods have to be valued only at the price at which the goods were sold by the SSI manufacturers to the owner of the brand name, i.e. MICO herein. They stated that all these factors and the details including the aspect pertaining to the machineries being rented/leased to vendors by MICO were within the knowledge of the Central Excise department. The department had initiated proceedings as early as in 1986 against the appellants herein namely Karnataka Filters (P) Ltd., Indauto Filters. Beaver Automotive Pvt. Ltd., and Russ Precision Products. Investigations were conducted from time to time by the department on the same issue. Statements were recorded and correspondences exchanged by the department with the vendors and also with MICO. The vendors were showing the manufacture and supply of branded goods in their Classification lists and Price lists filed from time to time. The vendors have been filing the invoice copies raised on MICO periodically. They stated that in the case of Karnataka Filters (P) Ltd., the issue was agitated right upto the Karnataka High Court and the ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises had also paid duty on the notional interest accrued. They gave the figures of all the units. The appellant s above turn over from Jan. 1990 to Dec. 1994, value of material received on loan from MICO, value of machines received from MICO and Advances received from MICO. They stated that the status of each of the vendors (other appellants) is analysed in detail from various aspects to establish that they are independent legal entities and they are independent manufacturers in their own right. MICO in their reply to the show cause notice have elaborately dealt on each of the points raised by the department, and the reply runs to 65 pages. The crux of the reply is that the relationship between MICO and other vendors is on principal to principal basis; the other appellants are not manufacturing on their behalf, but as an independent job workers and in terms of the settled law; the other appellants are required to be considered as manufacturers and hence there is no violation of any provision to notification of Excise law for fastening the duty on the value of the filter inserts sold by MICO. 9. The other appellants have also filed their individual replies holding that they are i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that their action and activities cannot in any way bind MICO. They cannot represent themselves as agents of MICO and it may not stand legal scrutiny and that their relationship with MICO and themselves are not as between the agent and principal but between its principal to principal. They stated that they do not function under the management, direction and control of MICO. They are only manufacturer, supplier and MICO is a buyer. Filter inserts is an engineering item and MICO, the brand owner has standardised the specifications, process, inspection procedures for the product. MICO being the buyer, as is the normal course in the case of engineering products, has to specify its requirement to the seller. This is done by indicating the specification, drawing and other parameters. The communication of requirement in an engineering industry is carried out by way of drawings, specifications including for raw materials, products structure, etc. Since the packing is also standardised, this is also communicated by the buyer. Therefore, there is nothing wrong in MICO clearly spelling out the parameters in respect of the goods which they propose to order/purchase from them. This is do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bdicated, such enterprise ceases to be an independent organisation. He has held that profit-making is the fundamental object of any business enterprises and generating more profit its constant endeavour. He has held that when these ancillary units contend that they are independent that independency should have been demonstrated by their sovereignty in determining their own price. But what he found was that these ancillary units prepare a cost estimate and the purchase (or the buyer) i.e. MICO fixes the prices. He has held that this runs counter to the concept of principal to principal dealing also. The purchaser viz. MICO has held the right to fix the price. He has held that the concept of determination of price by MICO is not an attribute of principal to principal relationship. Therefore, the arrangement of this type cannot be regarded as a case of sale of goods at a price at which they are ordinarily sold in the course of wholesale trade. In this regard he has discussed in various about the statements and from that he draws the conclusion that there is evidence to clearly indicate the state of affairs that is going on in the transaction between the so-called vendors and MICO. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not an oversight, therefore he is unable to accept the unsaid plea that suppression, if any, may not be `wilful . He has held that the way the law has been understood and followed leaves behind in its wake series of infraction. MICO, with the assistance of seemingly real looking but dubious entities, were able to clear the excisable goods on payment of duty much less than normally it would have paid (or have to pay) had those filter inserts were manufactured and cleared from the MICO s own factory. Thus he holds that by resorting to colourable means, MICO have evaded payment of excise duty to the extent of Rs. 3,10,73,971.52 and hence that contravened the provisions of Rules 173F and 174 of Central Excise Rules, 1944 and extended period of limitation could justifiably invoked, and the case calls for imposition of penalty as well. He has proceeded to impose penalty. However, in the order despite noting that Counsel has cited case law, has not attempted to discuss except to say that the case law cited is distinguishable on the ground that the MICO, the buyer, was fixing the price at which the filter inserts were required to be cleared by the ancillaries to MICO and this type of arran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport of their evaluation of the price for consideration by the intended purchaser/buyer. Therefore he states that by no stretch of imagination the aforesaid process results in the tenderers/offerors surrendering their sovereignty of fixing the price to the organisation, as the Commissioner quotes in the order. He pointed out that the entire documents relied in paras 35, 36 and 39 in the order have been grossly is interpreted and has failed to appreciate the said documents in their true and correct perspective and the Commissioner has drawn absurd references in the said documents which are untenable in law. He submits in fact the documents clearly support the plea that all the appellants are independent and have their own managerial control. He cited in this regard the judgment of Tribunal in the case of V. Devaraj and Another v. C.C.E. reported in 1992 (42) ECR 562, where it has been held that two units which in that case were in fact, owned by husband and wife are separate and different, and cannot be clubbed together, when they have to geographical existence and have been periodically filing declarations before the authorities and the authorities also accepting them with separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Karnataka Filters (Pvt.) Ltd. has already been decided by Karnataka High Court in the writ petition cited supra and the same has been confirmed in the writ appeal. Along with the Karnataka Filters (Pvt.) Ltd. there were other units like Metacraft, M/s. Auto Com Engineers and M/s. Lakshmiprasad Enterprises, who had entered an agreement with MICO Industry had challenged the virus of the proceedings. The finding given by Karnataka High Court in the Writ Petition in para 6 to 16 extracted herein below :- 6. The matter was heard for some time on the last occasion and it was adjourned to enable Shri Ashok Haranahally, learned Central Government Standing Counsel to find out whether the Department has taken up the said order of the Collector (Appeals) in further appeal before the Appellate Tribunal. It is submitted by the learned Counsel today that no appeal has been filed by the Department. 7. In these circumstances, the conditions of purchase being identical in all these cases, the view taken by the Collector in case of M/s. Metacraft (W.P. No. 36/87) holds good to all these cases also in which the petitioner is the same, viz., W.P. No. 669/87 and W.P. No. 17313/1986 where the item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in addition to the other materials, on an examination of which, the Court held they were independent manufacturers on their own account and the supply were on principal to principal basis. 15. The Collector, in the petitioners own case, took the correct view that M/s. Metacraft are independent manufacturers on their own account . The Collector s order (Annexure-G) which was passed subsequent to the filing of the writ petition shall apply to these cases also both on facts as well as law. 16. The Department is therefore not able to make out any case to take a different view and deny the benefit of the exemption that is available to the petitioners under Notification No. 77/85. Though in some cases the petitioners have approached this Court after the Assistant Collector held against them and in some cases against the orders of the Appellate Collector, the writ petitions were entertained by this Court." For the reasons stated above, the orders made by the Assistant Collector and/ or by the Appellate Collector, have to be set aside and the petitioners have to succeed in all these cases. The writ petitions are accordingly allowed and the impugned order in each case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sively meant for M/s. MICO. (iii) M/s. BAPL have also agreed vide S. No. 4 of the above said letter that they would seek the concurrence of M/s. MICO before diversifying into manufacturing or marketing other products. This establishes the fact that M/s. MICO have got a strangle hold over manufacturing/diversification of M/s. BAPL in other areas. (iv) M/s. MICO have further provided restrictions regarding the exclusive usage of patent know-how etc. in respect of their goods (vide Sl. No. 3 of the aforementioned letter). (v) Again, as per Sl. No. 5 of the aforesaid letter, M/s. MICO have provided on lease two vital critical machines viz., a calendering machine H.S./MW-1/2, Item No. 6514 - 1 No. for exclusive usage in the manufacture of fuel filter inserts required by them only. The letter dated 19-3-1983 of M/s. MICO mis-states the same as `released on loan . Thus a self controversy is noted between the two letters. The lease/loan payments were also not made periodically and punctually for which there is no reference/remark from M/s. MICO. (vi) On a review of the records of M/s. BAPL and comparison of the price of the goods sold by M/s. MICO (received from M/s. BAPL) reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come into play. (iii) Lease of two machines : He pleaded that the appellants have an outlay of over Rs. 1 crore in their factory and two machines valued at Rs. 80,000/- have been supplied by M/s. MICO as these machines are of certain specific designs and they have procured the same for the manufacture of the goods required by them. There is a lease agreement between the appellants and M/s. MICO under which they are paying a rental of Rs. 1,000/- per month for these machines. He pleaded that the appellants did not have any extra commercial consideration by taking these machines and, in any case, the supply of these two machines does not create any mutuality of interest. In the above view of the matter, he pleaded that unless it could be shown by the authorities that there was a mutuality of interest by reason of the factors as enumerated above, the provisions of Section 4(1)(a)(iii) could not be invoked. He, therefore, prayed for setting aside the order of the learned lower authority. He cited the decision of the Hon ble Supreme Court in the case of U.O.I. v. M/s. Hind Lamp Ltd. reported in 1989 (43) E.L.T. 161 (S.C.). Mutuality of interest has to be shown by reason of other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods. The appellants are paying a rental of Rs. 1000/- in respect of the machines which is valued at Rs. 80,000/-. So far as the value of the machine is concerned, there is no challenge in respect of the same. This amount it would appear to be more rather on the higher side than on the lower side. If that be so, it is not understandable how it can have a bearing on the price of the appellant. The only circumstance which in our view can be taken to have a bearing would be that of supply of know-how. In that event, all that can be urged is that by reason of supply of know-how the appellants may have supplied the goods at slightly lower price than they would have in case the know-how had not been supplied. If it is established by the department that the know-how had a bearing on the price this extra commercial consideration alone can be added for arriving of the value and for that purpose, a reliance will have to be placed to the Valuation Rules. The circumstance of Section 4(1)(a)(iii) cannot be brought in for that reason. No case in our view has been made out for invoking the provisions of Section 4(1)(a)(iii) in the present case. The price sold by M/s. MICO for the goods manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal to principal relationship therefore, the arrangement of this type cannot be regarded as a case of sale of goods at which they are ordinarily sold in the course of wholesale trade. 18. In this regard, he has referred to the statements of Managing Directors, Accountant, Managing partner, Manager, Purchase etc. of individual units to draw this inference. We are totally in disagreement with this finding on the simple ground that the department does not dispute the aspect of the unit being independent and having been independently established by setting up of the units with their own funds and taking their own policy decisions in the matter. The mere fact that the price are negotiated and that the units work out cost as per inputs involved and submit their request for price fixation/revision enclosing their justification does not by itself give room for conclusion or a premise that there is abdication of the right to negotiate the price. All the statements of the persons which are quoted in the Commissioner s order clearly indicate that they submit revised cost estimates, discussions and negotiations and the price consist of net cost of components, added by labour, overhead and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit is when they have been set up as dummy units. Dummy unit being a unit which is not in existence, but being only on paper, as held in the case of Alpha Toyo Ltd. v. C.C.E. as reported in 1994 (71) E.L.T. 689 (Tribunal). It has been held therein in para 4, which is reproduced as under :- We have carefully considered the submissions made by both the sides, and have perused the record, and the findings and citations relied before us. The department had proceeded on the basis of the annual report of M/s. Alpha Toyo Ltd. It is noted therefrom about the interest free loans given by them to other four units and have come to the conclusion that they are related persons and that the four units are dummy ones, and as there is a common managerial control, hence the benefit of exemption under Notification No. 175/86-C.E. dated 1-3-1986 is denied to them. Therefore, the clearances of all the five units have been clubbed. We have considered the grounds and the finding given by the ld. Collector. We are not satisfied with the said findings as Managerial control is different from money flow back, management control and profit sharing. A dummy unit is a unit, which is not in existence in rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f valuation. This is a independent concept by itself. It has no relationship with the concept of dummy units and units set up as a facade to evade taxes. As pointed out by the ld. Senior Advocate, the ld. Collector has confused this aspect of the matter with the aspect of creation of dummy units. The ground taken by the Revenue in this case is already answered against them in the case of Jagjivan Das Co., Bhagwan Das Kanodia and Others, Prabhat Dyes and Chemicals, Bapalal Co. and Prima Control referred before us. The other judgments cited before us also deals on the same aspect of the matter. Applying the ratio of these rulings, we have to hold that the mere fact of management control or of grant of interest free loans is not sufficient to hold the four units as dummy units of M/s. Alpha Toyo Ltd., in the absence of any money flow back, profit sharing and total control on other four units by M/s. Alpha Toyo Ltd. In the result the appellants succeed in all these appeals. The impugned order is set aside and appeals allowed." This matter was further clarified in the case of Binod Kumar Maheswari v. C.C.E. as reported in 1995 (80) E.L.T. 438 (Tribunal), para 5.2, the 3-Member Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the concept of related person". Such considerations could enter into our consideration in determining valuation where concept of related person acquires substantial importance. This is not the case here. The basic question is whether the appellant is a manufacturer in his own right or brings into existence goods through instrumentality of hired labour in form of two other companies. There is no evidence that the profit earned from such goods manufactured by other companies has flown back to him. An individual cannot be equated with family nor can an individual be held to be synonymous with a relative , however close that relation may be." 19. The Commissioner has rejected the independency of the ancillary units on the ground that they have not demonstrated their sovereignty in determining their own price and that they are merely as ancillary units prepare a cost estimate and the purchaser (or buyer) MICO fixes the price. And this runs counter to the concept of principal to principal dealing also. He has further held that the concept of determination of price by MICO is not an attribute of principal to principal relationship and the arrangement of this type cannot be rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again and again by several courts and they laid down what managerial control means and in these cases it has been well laid down that managerial control should be such as to lead to the flow back of the profits to Principal manufacturer. In this particular case, admittedly the ancillaries prepare the cost estimate and that is being negotiated and where there is an escalation of price, the same is also negotiated and re-fixation of price is arrived at. In any contract of this type there is always a price and that price is a negotiated price with offer and acceptance and that there is free will in determining the price. In this case the Commissioner has not demonstrated and shown that there is no free determination of price by negotiation. The data relied by Commissioner itself disclose that there is negotiation and the price is arrived at thereafter. The ancillary units are making profit and it is not as though no profit is made by them. The MICO is determining the market and it is they who are marketing the goods and as the market player, it has to keep its price in terms of the market fluctuations. Therefore, being aware of the market situations, it negotiates the price to maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and the goods sold from the premises of such household ladies, but sale proceeds sent to the respondents. Such household ladies, the Hon ble Supreme Court held, are to be treated as manufacturers of the goods and not as hired labourers . In this regard Hon ble Supreme Court relied on its earlier judgment in the case of Ujagar Prints v. Union of India as reported in 1988 (38) E.L.T. 535 (S.C.) and that of Empire Industries v. Union of India as reported in 1985 (20) E.L.T. 179 (S.C.). In the case of Santha Industrials v. C.C.E. as reported in 1995 (78) E.L.T. 556 (Tribunal), the Tribunal held that owner of the brand name getting the goods manufactured, the ancillary is certainly concerned about its make, quality, standard and market reputation. The Tribunal held that there is no bar in the notification that the brand name holder to get his products manufactured through other independent units on principal to principal basis, on supply of raw materials and by quality control. The Tribunal held that this will not make the other units dummy. 21. This citation refers to large number of judgments of the Tribunal. In the case of Cheryl Laboratories v. C.C.E. as reported in 1993 (65 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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