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TMI Blog2024 (9) TMI 914X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 premis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Us 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Gigi Kurian - Rs. 50,000/- 4 E/20520/2016 Ms. Ani Paul, Proprietor - Rs. 50,000/- 5 E/20521/2016 Mr. K.K.Eldo, Proprietor - Rs. 50,000/- 6 E/20522/2016 M/s. Speedpack - Rs. 25,000/- 7 E/20523/2016 Poulose K.U., Proprietor - Rs. 50,000/- 8 E/20524/2016 K.P.Ulahannan Proprietor - Rs. 50,000/- 9 E/20525/2016 Ms. Biji Philipose, Proprietor - Rs. 50,000/- 10 E/20526/2016 Mr. Shibu, Proprietor - Rs. 50,000/- 11 E/20527/201 6 M/s. Santha Ignatius, Proprietor - Rs. 50,000/- 12 E/20528/2016 Biju K.P., Proprietor - Rs. 50,000/- 13 E/20529/2016 Mr. Binoy Joseph, Proprietor - Rs. 50,000/- 14 E/20530/2016 Mr. Paulson.P, Proprietor - Rs. 50,000/- 15 E/20531/2016 Mr. Pradeep A, Proprietor - Rs. 50,000/- 16 E/20532/2016 M/s. Lilly Rajan, Proprietor - Rs. 50,000/- 17 E/20533/2016 M/s. Global Pack Industries - Rs. 25,000/- 18 E/20534/2016 Mr. Geevar Paul, Proprietor - Rs. 50,000/- 19 E/20535/2016 M/s. Elizabeth, Proprietor - Rs. 50,000/- 20 E/20536/2016 Eldho Varghese, Proprietor - Rs. 50,000/- 21 E/20537/2016 M/s. Solly, Proprietor - Rs. 50,000/- 22 E/20538/2016 M/s. Bini Aji, Proprietor - Rs. 50,000/- 2. Brief facts of the case are that the appellant M/s. Sepack India Pvt. Ltd. (formerly known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Speed Pack along with interest. Penalty of Rs. 1.00 lakh was imposed on the appellant and penalty of Rs. 25,000/- was imposed on each of M/s. Global Pack Industries and M/s. Speed Pack under Rule 25 of Central Excise Rules, 2002. Similarly on adjudication of the show-cause notice dated 06.01.2015, the demand of Rs. 5,18,69,926/- confirmed with interest with penalty of equal amount; penalty of Rs. 5.00 lakhs was imposed on the Managing Director of the appellant; penalty of Rs. 50,000/- was imposed on Proprietors / Managing Partners of other appellants under Rule 26 of Central Excise Rules, 2002. Hence, the present appeals. 3. At the outset, the learned advocate for the appellants assailing the impugned Order that the DMUs are merely dummy units of Sepack and have no independent existence that Sepack exercises effective control over the DMUs and all products manufactured by them are sold to Sepack, submitted as below: ➢ The DMUs have been deciding their own product line and acquired the technology on their own accord; ➢ there is no arrangement that the DMUs should sell their products only to the Appellant or manufacture only sealing machines; in fact, almost all DMUs w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monstrate any concrete evidence of any financial flow back. ➢ With regards to the allegation regarding financial flow back by providing assistance for die casting moulds, it is submitted that the department has incorrectly appreciated the factual position. The true facts are that 50% of the cost of the die casting moulds was borne by Sepack while the rest were adjusted against the bills of the DMUs. The DMUs were required to pay a certain amount as advance to Sepack which was in turn settled against future bills. This was purely a business arrangement arrived at with the consent of all parties involved. ➢ As regards mutuality of interest, it is relevant to state that Sepack is a corporate entity with 29 shareholders with the Managing Director possessing less than 25% of the equity. On the other hand, all the other DMUs are individual proprietorship or partnership concerns. In such a case, it is absurd to state that a corporate entity has mutuality of interest or financial flow back from individuals. ➢ It is further submitted that all the DMUs are located in rural areas and it has been the policy of the government to promote employment and industry in rural area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of the sealing machines have not been done, and activities such as insertion of warranty card have not been performed, the sealing machines procured by Sepack are not marketable. It is submitted that the sealing machines are procured by Sepack, are capable of performing the functions for which they are designed even without undertaking the further processes of packaging and branding. Further, the process of quality check undertaken is to merely ensure that the quality of the sealing machines conforms to the standards maintained by Sepack. However, the same would not mean that without the quality check, the procured sealing machines are not marketable. Reliance is placed on the decision of the Allahabad Bench of this Hon ble Tribunal in the case of Xerox India vs. CCE, 2018 (359) ELT 49 (Tri. All.). ➢ In the present case, the Respondent has failed to show as to how the sealing machines procured by Sepack were an incomplete/unfinished article, having the essential character of a complete/finished good. Further, the activities of merely packaging, branding and quality control cannot be said to make the sealing machines into complete articles and therefore, the said process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sepack also shows that the said units are not dummy units. Reliance is place on the decision in Gajanan Fabrics Distributors v. CCE, Pune [1997 (92) ELT 451 (SC)]. ➢ It is submitted that the officials of the department visited Sepack s corporate office as well as godown premises on 18.12.2012 and seized various documents. Several subsequent searches were also conducted. Further, Sepack was also issued Show Cause Notice dated 14.06.2013 for confiscation of goods on the same set of facts. Therefore, the activities of the Appellants have been in the knowledge of the department for a sizeable period of time, hence the entire demand is barred by limitation. Reliance is placed on the decision in Nizam Sugar Factory v. CCE [2008 (9) STR 213 (SC .Further reliance is placed on Studioline Interior Systems v. CCE [2006 (201) ELT 250 (Tri. Bang.)]. ➢ The impugned order has imposed penalty on Sepack, Global Pack and Speed Pack under Rule 25 of the Central Excise Rules, 2002. It is submitted that no specific relevant clause of Rule 25 has been cited in the impugned order to impose penalty. As held in CCE v. Al-Amin Exports, [2007 (211) ELT 305 (Tri. Ahmd.)], the same is sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or producing base and rocker arm to be supplied to DMUs. It is not clear as to when Sepack had entered into written agreement with inputs/component/die cast manufacturers, why they had not entered into a written agreement with any of the DMUs. The reason for this would be that they had entered into agreement with die casting units as they were independent and functioned independently, and whereas, the entire business/operation with regard to manufacture of sealing machines of DMUs was monitored and were under the complete control of themselves, they never considered making any agreement and they had not beheld any necessity for making an agreement. The absence of written agreement for manufacture of PB sealing machines has been accepted confirmed from all the relevant stake holders in their statements drawn during the investigation. This itself is sufficient to prove that the DMUs were not independent. ➢ Though DMUs are registered separately with statutory departments, they are not independent they are mutually dependent: It is observed that though the DMUs are separately registered with statutory departments like VAT, etc., the control exercised by Sepack on these units wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sealing machines supplied by DMUs [transfer price or transfer rate] has been determined by adding the agreed profit margin to the sum of all components of manufacturing costs, including material cost, assembling charges, royalty and even interest. ➢ Further, in the statements recorded, all the representatives of the DMUs as well as Sepack have deposed that the DMUs will submit the raw material cost,, assembling charges, interest charges of cost of materials, wastage, royalty and the billing price is fixed/decided after discussion with Sepack during the meetings. Many of the DMUs have also deposed that Sepack never accepted the price proposed by them. ➢ The practice adopted shows that the final say in the fixation of the price transfer price is of Sepack and the prices proposed by the DMUs are verified/enquired by M/s Sepack. It has also been deposed that Sepack will never accept the price quoted by DMUs. This mechanism reveals that the DMUs cannot even fix their profit margin. The prices are immediately amended based on the revision of prices of the raw materials. This system of fixing of price by the principal manufacturer that too based on the cost of raw materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. ➢ It is also found that when the die casting units identified by Sepack refused to invest in mould required for making base and rocker arm of machines as per the requirement of Sepack, they themselves made the required mould and supplied to the die casting units free of cost to manufacture and supply parts exclusively to DMUs. By adding interest element involved in investment made by DMUs, Sepack indirectly met the cost of financing the activities undertaken by the DMUs. It is evident that there is financial flow/financial support from Sepack to DMUs. Hence, the contention of the Sepack as well as the DMUs that the Sepack has not funded any of the activities connected with processing of goods by DMUs or management of DMUs and has got no role in establishing and running the DMUs cannot be accepted. ➢ It is stated that as and when there is reduction in the cost of the raw materials, the transfer price is immediately reduced to that extent and the profit accruing out of the said reduction in the cost of raw materials is passed on the appellants by the DMUs. By ensuring minimum processing cost to DMUs and by determining the processing charges on the basis of such proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said goods are transferred to Sepack by the DMUs for a consideration termed as transfer price approved fixed by the said Sepack. Only after ensuring that each individual machine is capable of performing the intended purpose with required precision, it become a marketable commodity. It is evident that what emerges out of the processing undertaken by the DMUs is not a fully manufactured marketable commodity and it becomes marketable only after requisite further checking has been undertaken by Sepack in their premises also. ➢ It is a settled law that the testing/quality checking is a mandatory and an essential part of the manufacturing process and until the said process is completed, the goods manufactured cannot be considered as marketable. The above matter has been held as such by various Tribunals and Courts and have nullified the view that the goods before testing is marketable. ➢ It was also alleged in the SCN dated 14.06.2016 that though the product processing gets finished at the premises of DMU, it acquires it marketable stage at the premises of Sepack. This is because of the mandatory processes undertaken by Sepack at their premises. This aspect is completely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (345) E.L.T. 256 [Tri.-Mumbai] Komatsu India Ltd. v. 2017(4) GSTL 264[Tri.Del.] Star Estate Management Ltd. ➢ Further, being the Managing Director and over all in- charge of the company, and mastermind of the evasion, hence penalty under Rule 26 of Central Excise Rules 2002 is imposable. Similarly, the authorized representatives/ proprietors of various DMUs being in-charge of the said respective units and had played a vital and important role in evasion of Central Excise duty on sealing machines by being hand-in-glove with M/s Sepack, they are liable for penalty. ➢ The goods seized from the premises of M/s Sepack are procured by them from the DMUs without observing/following Central Excise formalities. Also, the goods seized from the premises of M/s Global Pack Industries and M/s Speed Pack were manufactured without Central Excise Registration as specified under Rule 9 and also in violation of provisions of Rule 10. Accordingly, the said seized goods were held liable for confiscation in terms of Rule 25 of CER. Further, it was held that since the goods have been released on execution of B-11 Bond, fine in lieu of confiscation was imposed. 5. Heard both sides and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escription specified in the Annexure appended to this notification (hereinafter referred to as the specified goods), from so much of the aggregate of, - (i) the duty of excise specified thereon in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) (hereinafter referred to as the First Schedule); and (ii) the special duty of excise specified thereon in the Second Schedule to the said Central Excise Tariff Act, 1985 (hereinafter referred to as the Second Schedule), as is in excess of the amount calculated at the rate specified in the corresponding entry in column (3) of the said Table : Provided that nothing contained in this notification shall apply to a manufacturer who has availed the exemption under notification No. 39/2001-Central Excise, dated the 31st July, 2001, published in the Gazette of India vide number G.S.R. 565 (E), dated the 31st July, 2001, in the same financial year. S. No Value of clearances Rate of duty (1) (2) (3) 1. First clearances up to an aggregate value not exceeding one hundred lakh rupees made on or after the 1st day of April in any financial year. Nil 2. All clearances of the specified goods which are used as inputs for further manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner analysing the statements and other evidences held that since the Sepack identifies and recommends suitable supplier of raw materials from whom the DMUs were required to purchase the raw materials; fixing the price of the goods on negotiation with DMUs, suggests methods for cost reduction in the monthly meeting with DMUs, subjecting the goods to quality check before being accepted by Sepack, indicate that there is a direct control by Sepack exercised on various DMUs, from the first stage of procurement of raw materials till the finished goods received by them; even though these DMUs are declared independent on paper but in fact all these units are dummy units being controlled by the appellant. Also, he has held that the goods manufactured at the premises of the DMUs were incomplete and attains the condition of marketability only at the premises of Sepack, hence Sepack is the manufacturer and the liability to pay duty is on Sepack. 10. The learned advocate for the appellant on the other hand has argued that all negotiations, understandings and business supports provided by the appellant to various DMUs are in the nature of commercial supports/relations and there is no share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the facts of each case. There cannot be any generalization or rule of universal application. Two basic features which prima facie show interdependence are pervasive financial control and management control. . 14. Hon ble High Court of Bombay in the case of CCE, Pune-II Vs. Ravi Batteries [2009(244) ELT 167 (Bom.) observed as: 5. We have carefully perused the orders passed by the Commissioner of Central Excise as well as all the three Members of the Tribunal. The record reveals that the respondent No. 1 M/s. Ravi Batteries is a partnership firm established in 1978 having four partners. This firm is a manufacturer of Lead Battery Plates. The firm is carrying on its business at Plot No. B-15, MIDC, Shiroli, Kolhapur. The respondent No. 2-M/s. Ganesh Industries is also a registered partnership firm. It was established in the year 1991 with three partners. Out of them, Prabhakar Joshi was partner in both the firms. The remaining partners in the said firm are different, though they may be related. Since establishment, respondent No. 2 firm and its unit were situated at Kagal at a distance of about 50 K.M. From Kolhapur. M/s. Ganesh Industries shifted the manufacturing operations fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haser (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 regarded as sale of goods at which they are ordinarily sold in the wholesale trade. This is the concept which has kept on analysing the statements and agreements to draw the conclusion that the monetary consideration for the transaction were determined by MICO. In para 37 of the impugned order, the Commissioner goes on to state that by extension of even the profit level of the ancillary company is determined by MICO; actually that ought to have been the exclusive preserve of the management incharge of ancillary companies. All these ancillary units have ceded one vital managerial function to MICO, i.e. determining the level of profit they should make. Therefore, the Commissioner wonders that in such circumstances, who is really running these enterprises. He holds that the managerial control is not demonstrated by having separate sales-tax, income-tax, excise, ESI, P.F. and other registrations, but i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 maintain the business. Such fixation of price by MICO with its ancillary units cannot be said to be a control as to make the ancillary units a hired labour, which is different concept; wherein a hired labour has no role to play except to receive his wages and the contract is that of employer and employee and the hired labour services can be terminated and that he can seek reinstatement or sue for compensation or for enforcement of the contract obligation. While in the present case, the relationship is not of a hired labour as admitted facts are that the ancillaries have come up on their own, with their own finances, functioning independently with their own constitution and incorporations. The loss or the profit is not taken over by MICO and MICO cannot be held responsible for all the actions of the ancillary units. The determination of price, so long as it is independent and not influenced by any factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) E.L.T. 596 (Tribunal) in a similar circumstances the 3-Member Bench held that a buyer cannot be considered as a manufacturer and two persons cannot be held to be manufacturers of the same product. The Bench cited the Supreme Court judgment in the case of Union of India v. Cibatul Ltd. as reported in 1985 (22) E.L.T. 302 (S.C.). Hon ble Supreme Court in para 6 and 7 answered the question whether the goods are manufactured by the seller or are manufactured by the seller on behalf of the buyer. The Hon ble Supreme Court noted the relevant provisions of the agreement and other materials on record which showed that the manufacturing programme is drawn up jointly by the buyer and seller and not merely by the buyer, and that the buyer is obliged to purchase the manufactured product from the seller only if it conforms to the buyer s standard. For this purpose, the buyer is entitled to test a sample of each b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceed and the impugned order is set aside and appeals allowed. 16. We notice that this Bench in the case of R. Venkatachalam v. CCE - 2000 (115) E.L.T. 192 likewise held that 9 units cannot be clubbed with the main unit merely because there is common telephones, common business, common employees, and like allegations made in the present case. The Tribunal upheld the assessee s contention that 9 units therein were not dummy units nor they were in the nature of hired labour of the main noticee. Even grounds of limitation has been answered in assessee s favour. This judgment of the Tribunal has since been affirmed by the Apex Court as noticed in extracted from 2000 (118) E.L.T. A242. The Commissioner s (Appeal) before the Apex Court has since been rejected. In view of the findings and the judgments cited above, we uphold the contention raised by the Ld. Sr. Counsel and do not find any merit in this appeal and hence this appeal is rejected. 16. We find that 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; t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with diecasting units viz. M/s. Vabs Tools Dies Pvt. Ltd., M/s.Lighting Resource India Pvt. Ltd. for production of base and rocker arms and supply of the same to the parties approved by 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. 17. Further, the Commissioner has concluded that it is difficult to accept the fact that Sepack has exercised effective control since all key activities of DMUs including important decisions as to what production to be made; from where to pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Sepack would have unilaterally circulated implementing a price list arrived at by itself without involvement of DMUs. Besides, no evidence has been brought on record by the Revenue that the payments towards procurement of raw materials, payment to labours and other day-to-day working expenses have been liberally advanced by Sepack to DMUs and there is accounted / unaccounted transfer of funds / profits from the business either from Sepack to DMUs and vice-versa. All the negotiations, meetings and reductions in cost resulted into such meetings that were carried out in a transparent manner and based on pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aders (supra) case relates to consideration of a miscellaneous application seeking rectification of mistake ; hence not applicable. In British Scaffolding India Pvt. Ltd. s case (supra), the issue before the Tribunal was clubbing the clearances of the appellant with clearances of other companies closely controlled by the directors of the appellant company. In the said scenario, the Tribunal after lifting the corporate veil held that the benefit of SSI exemption notification cannot be extended to the appellant. In the present case, none of the family members of Sepack are holding any shares or partners in the DMUs; therefore the said judgment is also not applicable to the present case. Similarly, the other judgments cited by the learned AR are in a different set of facts and circumstances; hence cannot be made applicable to the facts of the present case. 21. 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since subjected to inspection at the premises of the Sepack, being received incomplete / unfinished condition and the activity of inspection makes the product complete and marketable. The learned advocate for the appellant referring to the judgment of Xerox India (supra), submitted that to attract the provision of Note 6 of Section XVI, it is necessary to establish that the sealing machines procured by Sepack were an incomplete / unfinished article, having the essential character of a complete / finished goods. We find 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 as discussed above, 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. 23. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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