9911796707
TMI Blog2000 (5) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... lwara and finances for the purposes were arranged by securing loans from IDBI. According to the case set up by the petitioner, the processing section of the Suzuki Processors was leased out to another company namely PGO Processors (Pvt.) Ltd. which was incorporated in 1994 and the said lease was duly registered on 3rd June, 1997. As a result of this transaction, M/s. Suzuki Processors applied for amending its certificate of registration under the Central Excise Rules on 2-6-1997 and PGO Processors (Pvt.) Ltd. applied for grant of registration certificate under the said rules so that with effect from 3-6-1997, the date of lease the manufacturing activities carried out in the process house become the manufacturing activities of the lessee and the lessee became liable for payment of excise duty under the Central Excise Act. To the extent manufacturing/processing done at the unit leased out to the PGO Processors the lessor is denuded of its liability to account for and pay excise duty on the manufacture of goods (processing of man-made grey fabrics) carried on by the lessee at the said process house since 3-6-1997. The registration was also granted to PGO Processors (Pvt.) Limited with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the aid of hot air stenter. This required a declaration to be filed by the 'independent processors' claiming benefit under the notification. The PGO Processors, the lessee, which was registered under the Central Excise Rules, sought to file declaration as 'independent processor' under the Notification No. 36 of 1998 which was refused to be accepted by the respondent officers, presumably on the basis of pending investigation as a consequence of the aforesaid search. This action on the part of the respondents of not accepting the declarations by the PGO Processors (Pvt.) Ltd. under Notification No. 36 of 1998 led to filing of Writ Petition No. 11 of 1999 seeking a writ of mandamus for directing the Deputy Commissioner to entertain the declaration filed by the petitioner and to determine the annual capacity of the production of the process house under the notification and determine the levy of excise duty under the said notification in its favour and it was prayed that the petitioner be allowed to clear the goods availing the benefit of Notification No. 36 of 1998, dated 10-12-1998. The controversy raised before the Division Bench in the said writ petition was whether the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt said : "The respondents have issued show cause notice for cancellation of registration certificate granted under Rule 174 of the Central Excise Rules though they have not issued for revocation/suspension of the registration certificate and have not as yet decided to revoke/suspend the registration certificate. Grounds on which Registration Certificate once granted can be revoked/ suspended under sub-rule (11) of Rule 174 have also not been taken in the show cause notice which has been issued on the premises that the petitioner company does not own the unit and in fact the unit is owned by M/s. Suzuki Textiles Ltd. They cannot therefore contend that the petitioner company is not an independent manufacturer or independent processor at this stage and cannot stop the petitioner company from exercising its right to clear goods on payment of excise duty under Section 3A of the Act and notifications issued thereunder." 4.The Court also held as a premise for reaching its conclusion that the registration certificate granted to the company will have to be taken as valid recognition of its status as distinct and separate manufacturer or processors irrespective of the activities of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery show cause notice Ex. 2, dated 15-1-1999 as well another show cause notice dated 31-5-1999 issued to PGO Processors (Pvt.) Ltd. were also made subject-matter of challenge in D.B. Civil Writ Petition No. 2179/99 filed at the behest of by M/s. PGO Processors (Pvt.) Limited. The common notice dated 15-1-1999 was subject-matter of challenge to the Petition Nos. 1266/99 and 2179/99 as well as the present petition. The said petition No. 2179/99 by PGO was decided with direction to the respondent No. 1, the Commissioner, Central Excise, Jaipur, to furnish authenticated copies of the documents relied on in the notices dated 15-1-1999 and 31-5-1999 as enumerated in the petitioner's (PGO's) letter dated 19-6-1999 addressed to the respondent No. 1 and proceed to adjudicate on the show cause notice only after supply of such copies. Substantive relief to quash notice itself was not granted. 7.The principal contention in this petition is that in view of the categorical finding of the Court in its order dated 22-4-1999 in Writ Petition No. 11/99 that until registration of PGO Processors (Pvt.) Ltd. is cancelled in accordance with the provisions of Rule 174(11), the PGO Processors (Pvt.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entral Excise Act and Rules, which provide complete code of levy and collection of Excise Duty payable thereunder. No question as to vires of any provision or and inherent lack of jurisdiction to initiate such proceedings under Section 11A of the Central Excise Act has been made out. Therefore no ground is made for examining the merits of the show cause notices at this stage by this Court in exercise of its extraordinary jurisdiction. The petition deserves to be dismissed. 9.There cannot be any dispute about the settled principle that extraordinary jurisdiction is not ordinarily to be exercised to interfere with the show cause notices where the question as to the final outcome of the show cause notice can be adjudicated by the authority itself except where it is shown that the authority issuing show cause notice has no jurisdiction to invoke his authority either on account of non-fulfilment of any condition precedent, existence of which is required before assuming jurisdiction as in the case of issuing notices under Section 148 of the Income tax Act or for re-assessments under various other taxing statutes, or the authority inherently lacks jurisdiction on the subject-matter whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 the PGO Processors had been subjected to Excise duty in respect of fabrics processed at the process house owned by Suzuki as lessee under the lease agreement. However, since 24-2-1998, such processed fabrics, as were owned by Suzuki were subjected to excise duty on the basis of sale price of such processed fabric charged by present petitioner Suzuki Processors. The same was being paid by the PGO Processors (Pvt.) Ltd. for which refund applications were made by the said company. The proceedings in pursuance of search in the months of January and February, 1998 were pending investigation. Until issuance of Notifications No. 36 of 1998 and 42 of 1998, the Revenue was recovering the duty as if it was payable by a manufacturer processing his own goods for sale and no question of payment of less duty whether by Suzuki or by PGO really arose so far as levy of duty on the excisable event viz. the manufacture (processing) was concerned since 24-2-1998. On 10-12-1998, notification in exercise of powers under sub-section (3) of Section 3A of the Central Excise Act was issued where under the 'independent processors' of fabric under various tariff items referred to above in the facts narrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore it. We may recall here that when the writ petition was filed though a search had been conducted on the premises of the present petitioner as well as on the PGO Processors way back in January and February, 1998, no proceedings in pursuance thereof had been initiated against any of the company and the matter was pending only at the stage of investigation of the material found during the course of that search and collected thereafter. During the pendency of the petition, show cause notices dated 15-1-1999 had been issued to both Suzuki Processors as well as to PGO Processors which is also the subject-matter of the present writ petition by the present petitioner. The said show cause notice had been filed before the Court in Writ Petition No. 11 of 1999 as a defence to that action. The show cause notice is a joint show cause notice to both the petitioners Suzuki Processors as well as PGO Processors (Pvt.) Limited. The part of the notice requiring PGO to show cause reads as under :- "Para 49. M/s. PGO Processors (Pvt.) Ltd., Bhilwara are also required to show cause to the Commissioner of Central Excise, Jaipur-II, New Central Revenue Building, C-Scheme, Statue Circle, Jaipur as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apacity of production for the purposes of Notification No. 36 of 1998 in Explanation II which is as under :- "Explanation III. - For the purposes of this notification, an "independent processor" means a manufacturer who is engaged exclusively in the processing of fabrics with the aid of power and who also has the facility in his factory (including plant and equipment) for carrying out heat-setting with the aid of power or steam in a hot-air stenter, and who has no proprietory interest in any factory engaged in the spinning of yarn or weaving of fabrics." 14.With these premises, namely (i) registration under the Central Excise Act of the PGO Processors was subsisting, (ii) whether PGO Processors was an independent processor or not was yet to be determined, and that (iii) lack of allegation in the show cause notice either that the PGO Processors (Pvt.) has any proprietory interest in any factory engaged in the spinning of yarn or weaving of fabrics, the status of PGO Processors (Pvt.) Ltd. could be denied at this stage status of 'independent processor', the Court observed : "The question whether the petitioner is an independent processor or not will have to be answered on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment dated 22-4-1999 on which the bedrock of the contention was founded is reproduced herein below :- "The respondents have issued show cause notice for cancellation of registration certificate granted under Rule 174 of the Central Excise Rules though they have not issued it for revocation/suspension of the Registration Certificate and have not as yet decided to revoke/suspend the Registration Certificate. Grounds on which Registration Certificate once granted can be revoked/suspended under sub-rule (11) of Rule 174 have also not been taken in the show cause notice which has been issued on the premises that the petitioner company does not own the unit and in fact the unit is owned by M/s. Suzuki Textiles Ltd. They cannot therefore contend that the petitioner company is not an independent manufacturer of independent processor at this stage and cannot stop the petitioner company from exercising its right to clear goods on payment of excise duty under Section 3A of the Act and notifications issued thereunder." These observations at best can be that so long as the registration certificate under the Central Excise is continuing in favour of PGO Processors (Pvt.) Ltd. and not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eto for different periods but are founded only on facts alleged in show cause notice dated 15-1-1999 (Ex. 2). After details of factual matrix, the Ex. 2 significantly levels the allegations against M/s. Suzuki Processors, Bhilwara and M/s. PGO Processors (Pvt.) Ltd., Bhilwara concerning the lease agreement dated 3-6-1997 under which Suzuki Processors claims to have divested itself of the status of processor of the fabrics in question by transferring the process house under a lease agreement to M/s. PGO Processors (Pvt.) Ltd., to be operated by the lessee. The relevant excerpts are reproduced below : Para 36 It appears that M/s. Suzuki Processors, Bhilwara and M/s. PGO Processors (Pvt.) Ltd., Bhilwara have suppressed material facts, made wiful mis-declaration and contravened various provisions of Central Excise Act and Rules with intent to evade payment of duty of excise in the manner discussed in foregoing paras as : (i) They have suppressed material facts relating to the control, supervision and management of the Process house during the period of lease/rent. (ii) That they have wilfully contravened the provisions of Central Excise Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, another question has also been drawing attention of the Court as to what is the excise duty leviable in terms of Section 4 of the Central Excise Act on the processed fabric where the processing is done by the processor as job work and the fabric does not belong to him. This is to say while the duty is leviable ad valorem on the price at which the manufactured article is sold by the manufacturers, in the case of a job work there is no sale price of the manufacturer inasmuch as he being not owner of the commodity manufacture, he does not sell the commodity at all. In other words, where the processor processes his own fabric and sells the processed fabric, there is sale price of the manufactured commodity at the factory gate of such processor and therefore excise duty is leviable on such sale price. However, on the other hand, if same fabric if it is processed at a process house owned by other person as job work, such other person who is engaged in manufacturing does not make any sales and the question that posed for an answer was what should be the sale price or value of such manufactured article for the purposes of determination of levy ad valorem? The process houses were con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the manufacturing cost and the manufacturing profit and it must not be loaded with post-manufacturing costs or profits arising from post- manufacturing operations. 19.While dealing with this question, the Court said : "The nature of the goods and the conditions of the trade, excise is not concerned with what happens subsequently to the goods. It is the first immediate contact between the manufacturer and the trader that is made decisive for determining the wholesale cash price which is to be the measure of the value of the goods for the purpose of excise. The second or subsequent price, even though on wholesale basis, is not material. If excise were levied on the basis of second or subsequent wholesale price, it would load the price with a post-manufacturing element, namely, selling cost and selling profit of the wholesale dealer. That would be plainly contrary to the true nature of excise as explained in Voltas case. Secondly, this would also violate the concept of the factory gate sale which is the basis of determination of the goods for the purpose of excise." 20.The concept of value of the goods on which excise duty is to be determined in the case of processors engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done plus the manufacturing profit and the manufacturing expenses but not any other subsequent profit or expenses. It is necessary to include the processor's expenses, costs and charges plus profit but is not necessary to include the trader's profits who gets the fabrics processed, because those would be post-manufacturing profits." 21.From the aforesaid background it becomes clear that where a processor of fabric is engaged in the processing on job work basis for processing of the grey fabric owned by customers, he is not engaged in selling activity, and therefore, a notional sale price has to be determined on the basis of a notional sale at factory gate of the processor, which would include the value of the grey cloth in the hands of the processor plus value of the job work done plus manufacturing profit and manufacturing expenses which will either be included in the price at the factory gate or deemed to be the price at the factory gate for the processed goods. Obviously, such price would not be the price at par with the price at which the person owning the fabric would be setting at the factory gate of the process house run by such owner of goods himself as manufacturer. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion expressed by the Division Bench in Writ Petition No. 11 of 1999 in its judgment dated 22-4-1999 concerning Rule 174(11). Rule 174(11) reads as under :- Any registration certificate granted under"174(11) this rule may be revoked or suspended by the proper officer, if the holder or any person in his employ, is found to have committed a breach of any conditions of the Act or these rules or has been convicted of an offence under Section 161, read with Section 109 or with Section 116 of the Indian Penal Code." 24.Prima facie, revocation envisaged under Rule 174(11) refers to prospective revocation and suspension of an existing registration certificate on finding some breach of conditions of the licenses or other conditions of the Act. Apparently, a registration certificate unless it is revoked for breaches referred to under Rule 174 remains in force. We are of the opinion that Rule 174(11) if it is taken in restrictive format as has been contended by learned Counsel for the petitioner then it must be held that so far as controversy whether a lease agreement is a real or unreal does not at all form part of the enquiry required for revocation under Rule 174(11) but is independe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any wilful mis-statement or suppression of facts or contravention of any of the provisions of the Act or the rules made thereunder with intent to evade payment of duty by such person or his agent, the case falls under Section 11A with longer period of limitation within which action can be initiated in respect of past periods. The period within which the proceedings under Section 11A can be initiated in such cases is five years. We have referred to the proviso which make it clear that where a levy has been short levied or has not been levied because of any wilful mis-statement or suppression of fact with intent to evade payment of tax by any person or his agent, the proceedings of bringing such levy or non-levy is permissible under law under Sec. 11A of the Act. 28.So far as permissible devices to reduce the tax burden and to choose the course of conducting a business by any person so as to minimise his tax liability also cannot be doubted. In the oft quoted words of Lord Tomlin in IRC v. Duke of West Minster (19 Tax Cases 490) : "Every man is entitled if he can to order his affair so that the tax attaching under the appropriate Acts is less than it otherwise would be". 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Sakarlal Balabhai [(1972) 86 ITR 2 (SC)]. 33.Justice R.N. Misra, delivering leading judgment in M/s. McDowell Co. Ltd. v. CTO (AIR 1986 S.C. 649), examining the question about the jurisdiction of the tax authorities to lift the veil of any transaction and to obliterate method of tax evasion and avoidance of tax through tax planning said : "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of the tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is obligation of every citizen to pay the taxes honestly without resorting to subterfuges." 34.Justice O. Chinnappa Reddy in his concurring judgment said : "In our view the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it." Therefore, it must now be taken to be settled that methodolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able transaction to conceal the real nature of transaction, the necessary jurisdiction to initiate proceedings for recovering such short levy or non-levy whether from the person who has altogether escaped from the levy or from the person who has been subjected to short levy, cannot be doubted. The show cause notices directly impinge on the real nature of the transaction of lease between petitioner and the PGO Processors (Pvt.) Ltd. In the background of principles enunciated in Ujagar Print's case and other cases referred to above the enquiry have direct nexus with the correct determination of levy of excise duty which in turn depends on the basis to be adopted for determination of the excise duty depending upon the conclusion that may be reached, namely whether the fabrics belonging to Suzuki Processors can be said to be processed really by PGO Processors as job work by running the process house on lease in its legitimate commercial pursuit and the manufacturing process is completed at the leased premises and the subsequent transaction of sale is effected by the Suzuki Processors; or in reality the lease being not real, the processing done at the process house in question though ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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