2025 (5) TMI 59 - AT - Central Excise

Demands of Central Excise duty on freight along with interest and penalty - clubbing of the value of purchases - addition of freight with clearance value to deny the benefit of SSI exemption on the first clearance value - HELD THAT - From the Profit and Loss Account of the appellant company we observe that the appellant has been involved in trading of the control panel purchased from MCG Electrocontrols Pvt in addition to their own manufacturing of the control panels. Thus it is clear that the Department has accepted the trading activity of the appellant company. However the trading value pertains to the purchases made by the appellant company from MCG Electrocontrols Pvt. Ltd. has not been considered as trading activity of the appellant company. We observe that there is no evidence brought on record to include the trading value along with their own manufactured goods. Therefore we hold that the Department has not brought in any evidence to establish that MCG Electrocontrols Pvt Ltd. is a dummy unit of the appellant. Accordingly we hold that the demand of central excise duty confirmed in the impugned order by including the value of purchase made by the appellant from MCG Electrocontrols is not sustainable and hence we set aside the same. Since the demand of duty is not sustainable the question of demanding interest and imposing penalty does not arise. Hence we set aside the impugned order and allow the appeal filed by the appellant with consequential relief if any as per law.

Summary

The core legal issues considered by the Tribunal include:

(i) Whether the freight charges are includable in the value of clearance for the purpose of calculating the SSI exemption limit;

(ii) Whether the value of clearances of two companies, the appellant and MCG Electrocontrols Pvt. Ltd., can be clubbed for denial of SSI exemption, on the ground that MCG Electrocontrols Pvt. Ltd. is a dummy unit of the appellant;

(iii) Whether the Department has discharged the evidentiary burden to prove that MCG Electrocontrols Pvt. Ltd. is a dummy unit of the appellant company;

(iv) Whether the demand of central excise duty, interest, and penalty confirmed by the adjudicating authority is sustainable in light of the above issues.

Regarding the inclusion of freight in the value of clearance, the relevant legal framework involves the valuation principles under central excise law and prior departmental orders, specifically OIO No.08/Adjn/Electroteknica/RB/South CGST & CX/Kol/17-18 dated 08.11.2017. The Tribunal noted that the adjudicating authority erred in including freight charges amounting to Rs. 6,68,870/- in the clearance value for the Financial Year 2009-10. The prior order had already dropped the demand of central excise duty on freight for subsequent years (2011-12 and 2012-13). The Tribunal held that freight charges are not includable in the clearance value for determining SSI exemption limits. This interpretation is consistent with the established principle that freight, being a separate service component, should not be added to the assessable value of goods for exemption thresholds. Consequently, the denial of SSI exemption based on inflated clearance value including freight was held legally unsustainable, and the demand of duty on this ground was set aside.

On the issue of clubbing the clearances of the appellant and MCG Electrocontrols Pvt. Ltd., the Department alleged that MCG Electrocontrols Pvt. Ltd. is a dummy unit of the appellant, sharing common directors and financial interests, and lacking separate manufacturing machinery. The Department's contention was that both units should be treated as one for SSI exemption purposes, thus denying the exemption to the appellant. The Tribunal examined the evidence and found that the Department had not produced any substantive proof beyond the existence of a common director and shared premises. Importantly, the Department had accepted the independent existence of MCG Electrocontrols Pvt. Ltd. by recognizing its clearances to other customers as genuine and not clubbing the entire clearance value with that of the appellant.

The Tribunal relied on established precedents and legal principles, including the Circular issued by the Central Board of Excise & Customs in 1992 and the Tribunal's decision in the case of Tapsya Steels (P) Ltd. vs. Commissioner of Central Excise, Meerut. These authorities clarify that limited companies are separate legal entities distinct from their shareholders and directors, each entitled to independent SSI exemption limits. Clubbing is only justified where there is clear evidence of mutuality of business interest, common funding, and financial flow-back between units. Mere common directorship or proximity of premises is insufficient.

The Tribunal noted that the Department had not demonstrated any financial flow-back or mutual business interest between the two companies. The Profit and Loss Accounts and VAT/CST returns of MCG Electrocontrols Pvt. Ltd. showed independent manufacturing and sales activities. Moreover, the Department itself did not add the entire clearance value of MCG Electrocontrols Pvt. Ltd. to the appellant's assessable value, but only the value of goods purchased by the appellant from MCG Electrocontrols Pvt. Ltd., thereby implicitly recognizing the latter's separate existence.

Regarding the appellant's trading activities, the Tribunal observed that the appellant engaged in trading control panels purchased from MCG Electrocontrols Pvt. Ltd., as reflected in their Profit and Loss Account. However, the Department did not treat the entire trading value as part of the appellant's manufactured goods clearance. The Tribunal found no evidence to justify including the trading value with the manufactured goods for duty demand purposes, reinforcing the conclusion that the appellant and MCG Electrocontrols Pvt. Ltd. are distinct entities.

On the question of the demand for central excise duty, interest, and penalty, the Tribunal concluded that since the fundamental basis for the demand-the clubbing of clearances and inclusion of freight-was not sustainable, the entire demand was liable to be set aside. Without a valid duty demand, the imposition of interest and penalty also fell away.

The Tribunal's significant holdings include the following verbatim excerpts and core principles:

"We find that the freight value is not includable to arrive at the value of clearance of the appellant for the Financial Year 2009-10 and the denial the benefit of exemption on the first clearance value of rupees one hundred and fifty lakhs available to the appellant for the next financial year 2010-11 is not sustainable."

"The Department has not brought in any evidence to substantiate the allegation that M/s. MCG Electrocontrols Pvt Ltd is a dummy unit of the appellant except claiming that they are functioning in the same premises and one of the Directors is common in both the companies."

"Limited companies, whether public or private, are separate entities, distinct from the shareholders composing it and each limited company is manufacturer by itself and will be entitled to separate exemption limit."

"Unless there is mutual financial interest, the value of clearances of two units cannot be clubbed."

"The Department has accepted the trading activity of the appellant company. However, the trading value pertains to the purchases made by the appellant company from MCG Electrocontrols Pvt. Ltd. has not been considered as trading activity of the appellant company. We observe that there is no evidence brought on record to include the trading value along with their own manufactured goods."

"Accordingly, we hold that the demand of central excise duty confirmed in the impugned order by including the value of purchase made by the appellant from MCG Electrocontrols, is not sustainable and hence we set aside the same."

"Since the demand of duty is not sustainable, the question of demanding interest and imposing penalty does not arise."

In conclusion, the Tribunal determined that the freight charges should not be included in the clearance value for SSI exemption calculation, and that the Department failed to prove that MCG Electrocontrols Pvt. Ltd. was a dummy unit of the appellant. Consequently, the demand of central excise duty, interest, and penalty based on these grounds was set aside, and the appellant's appeal was allowed with consequential relief.