TMI Blog1995 (5) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... with other officers of this Collectorate visited M/s. Santha Industrials and the other ten units and scrutinised the records and recovered certain documents. On further scrutiny and investigation conducted by M/s. Santha Industrials, the following facts are said to have come to light : (1) Shri R. Doraiswamy, Proprietor of M/s. Santha Industrials had designed a Tilting Type Wet Grinder and registered the same in his name and the same is patented under the Indian Patents and Designs Act, 1911 in his name. The patent number is 156166. The brand name and the Logo embossed on the wet grinders were applied for registration by him as proprietor of M/s. Santha Industrials. These patented tilting type wet grinders were manufactured only from his own unit till 1985. In this connection, it was found that Shri R. Doraiswamy had given advertisement in newspapers prohibiting the use of his design, trade name and Logo by others without his consent. (2) These goods were classified under TI 68 prior to 1-3-1986. From 1-3-1986 onwards, it was contended by the Department that it fell under sub-heading No. 8509.00. All the 11 units were said to be availing the benefit of the exemption under Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which Shri R. Doraiswamy had placed orders, given schedule of supply and also confirmed the prices on behalf of all the units. (e) For procurement of Stainless Steel tubes required for the stand of the Wet Grinders Shri R. Doraiswamy had undertaken placing of orders by fixing the prices on behalf of all the units. Similar involvement of Shri R. Doraiswamy in procurement of various parts of Wet Grinders such as Knurling Bush, Rubber, Gasket, D Ring etc. were found. The evidence showing the involvement of Shri R. Doraiswamy in procuring the raw-materials was also listed out in the schedule of the show cause notice. (f) The machining and fabrication of wet grinder parts for all the units were done by the three units viz. D.K.B. Fabricators, Balaji Industrial Feeders and Sangeetha Machine Works set up by the workers and partners of Shri Doraiswamy using machineries belonging to M/s. Santha Industrials. (g) Financial accommodations were made by M/s. Santha Industrials for the payments to be made by the other units in respect of their dues to raw-material suppliers and others as detailed in the Annexure to the show-cause notice. (h) The correspondence and accounts of all the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, all the clearances made through the said units were alleged to be clubbable with the clearances of M/s. Santha Industrials and the appropriate duty on these clearances is demandable under Rule 9(2) invoking the extended period of 5 years under Section 11A of Central Excises Salt Act. Therefore, a show-cause notice, dated 17-7-1989 was issued to M/s. Santha Industrials and calling upon them as to why the duty amount of Rs. 1,26,03,022.03 on the goods manufactured and cleared during the period from 1-4-1986 to 31-5-1989 without payment of duty as worked out in Annexure IV Duty Work Sheet to show-cause notice should not be demanded from them under the said proviso and also why penalty should not be imposed on them under Rule 9(2), 173Q of Central Excise Rules, 1944. 6. Other 10 units were also issued show-cause notice to explain [as to why] penalty should not be imposed on them under the said Rules. A show-cause notice dated 11-7-1989 was issued to M/s. Deepalakshmi Industries, Coimbatore, asking them to show as to why duty amount of Rs. 4,00,424.25 should not be demanded from them under the said provision and also the penalty should not be imposed to them. 7. M/s. Santha In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the respective manufacturer would not make the brand name holder Shri R. Doraiswamy, the manufacturer of tilting type wet grinders actually manufactured by one of the remaining ten units covered in the show-cause notice. The conventional type of wet grinders manufactured by the respective units of their own name plate and sold directly to respective dealers and through marketing division of M/s. Santha Industrials. ix. The allegation that the entire production of tilting type wet grinders was totally removed to M/s. Santha Industrials and sale thereafter by them is incorrect, and entirely several of the units manufacturing such tilting type wet grinders as well as motors have been selling part of their manufacture directly to customers without reference to M/s. Santha Industrials and part of their production in pursuance of the selling agency agreement. x. The allegation is incorrect that the raw materials were entirely procured by M/s. Santha Industrials and manufactured FRP bodies were being supplied on principal to principal basis. xi. They denied that the supplies were being made by M/s. Plastic Kraft Industries and the orders of M/s. Santha Industrials though they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort supply to dealer or over-stocking, a consolidated order was placed with ABC Plastics and this should not lead to any other inference. xviii. Tubes were being used by all the units, M/s. Decora Tubes (P) Ltd., Indore was willing to manufacture stainless tubes provided a minimum off-take was assured, hence a consolidated order was placed. The allegation that the price was arrived at between M/s. Santha Industrials and M/s. Decora Tubes is incorrect. xix The manufacturer and supplier do not accept orders of small quantity in respect of Knurling Bush. M/s. Santha Industrials on selling agency agreement with other units placed two orders in their letter dated 4-3-1988 13-5-1988 for supply of required quantity to each unit functioning each unit independently without reference to M/s. Santha Industrials. xx. In order to avail special discounts and bulk orders they placed consolidated orders in consultation with other units, payments were made by each unit. M/s. O.K.B. Fabricators (2) Balaji Industrial Feeders; and (3) Sangeetha Machine Works were doing fabrication and machining respectively is factually incorrect. xxi. On occasions payments were made by Santha Industrials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The only connection among units is selling agency agreement in which product manufactured, marketed through marketing division of M/s. Santha Industrials, interested in production schedule to be kept up. xxix. M/s. Equipment Agencies and M/s. Ramakrishna Co. were suppliers of raw-materials and dealers of goods manufactured by M/s. Santha Industrials and other units. xxx. The transactions were on principal to principal basis and never have been single occasion, the payment made by M/s. Santha Industrials without subsequent recovery from the concerned units. The fact that the payments made by M/s. Santha Industrials is entirely wrong. xxxi. The value of clearance for the year 1986-87 in respect of wet grinders against M/s. D.J. Industrials figure is incorrect and it is Rs. 14,80,280.00 only borne out by R.T. 12 returns themselves. xxxii. All the 11 units had filed necessary declarations, classification list, price lists, R.T. 12 and observed all the formalities required in the law. The physical verification of a stock including pre-budget stock inspecting of records were done by excise officers. The department is fully aware of manufacturing and clearance activity of the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accommodation, on the ground that it is only a myth and not a reality. The reasons given by the appellants to purchase plastic granules in bulk from M/s. ABS Plastics Ltd. were also rejected by the ld. Collector on the ground that it is a travesty of truth and likewise, the supply of stainless steel stands, Knurling Bush or brass inserts, rubber gaskets and ball bearings, which had been procured in bulk and supplied to each unit by Shri R. Dorai-swamy and advances taken by them was rejected and has been held that nexus between Shri R. Doraiswamy and the other units stands established on account of bulk raw-materials and supplied to the other appellants. Ld. Collector has also held that there is a good amount of financial accommodation between them. Therefore, it means that 10 units were not only using common design, logo of Shri Doraiswamy but also, because of the group concept adopted by them, enjoyed among themselves a good lot of financial support and therefore, he has held that it can be unhesitatingly said that their production should be clubbed together for examining their eligibility for exemption under the said Notification. He has also noted about the payments made by Sant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units are managed by people who are closed relatives of Shri Doraiswamy. Therefore, he has held that the fragmentation of manufacturing facilities has been done with a view to evade duty by taking exemption under the said notification. He has held that Shri Doraiswamy not only owned Santha Industrials but was also a partner of Santha Enterprises and Santha Engineers besides Shri Doraiswamy directing and controlling the production of all the units involved in this case. He has held that the manner in which he controls, namely, by issue of internal memo, by placing orders for procuring raw-materials, parts and components would prove the case of the department. [He] has rejected the plea that the Department cannot proceed against each of the 10 units mentioned in the show cause notice. He has held that all the 10 units are liable for penalty for the simple reasons that they have abetted in the scheme of evasion of duty through a novel method of fragmentation. He has also rejected the plea of leasing of machinery by Santha Industrials was a normal commercial transaction. He has held that the concept of machinery leasing and job worker do not fit in this case. He has also rejected the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the product. Ld. Advocate pointed out to the tariff entries and submitted that the ld. Collector has not given any reasons for classifying the goods under sub-heading 8509.00 which reads : Electro-mechanical Domestic appliances with self-contained electric motor 30% He submitted that the correct classification of the product will be under Chapter sub-heading 8479.00 which reads : Machines and mechanical appliances having individual functions, not specified or included elsewhere in this chapter 15% He submitted that the item wet grinder is without electric motor and therefore, sub-heading 8509.00 is clearly ruled out. He also referred to the Madras High Court judgment rendered in the case of Collector of Central Excise v. Alco Industries as reported in 1991 (55) E.L.T. 184, wherein it has been held that wet grinder is not an electrically operated machine. He submitted that in a wet grinder, the electric motor is separately fixed and connected by a separate `V -belt and it is not like a case where the motor forms part and parcel of the appliances, as is found in the case of mixi, vacuum cleaner, hair dryer or electric shaver. He submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification subsequent to 1986, therefore, each of the unit has to be seen as an independent entity . He submitted that notwithstanding the fact that each of the unit was held by a person who is related to Shri Doraiswamy yet they were to be considered as an independent entity. He submitted that other 10 units were independently incorporated and registered units in several legislations and they were not dummy units as held by the ld. Collector. He submitted that the concept of dummy units has already been gone into by the Tribunal in several of its orders. Therefore, mere financial arrangements or supply of raw-materials or commonness of partners or commonness of few employees would not give rise to a conclusion that the 10 units are dummy units. What was required to have been proved by the Department was that these 10 units had been set up with a view to defraud the revenue and there is a financial flow-back to Shri Doraiswamy. He submitted that it is a well settled law that when the transactions are on the basis of principal to principal and when a product is manufactured with a brand name also and where the principal manufacturer lays down strict specifications to maintain standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce and each of the item of supply and amount had been explained. None of the factors or allegations would show that the 10 units were dummy units and had been fragmented for the purpose of evasion of duty. He also submitted that ABS Plastics Ltd. were not willing to accept the order for supplies for lesser than one m.t. at a time. Therefore, each of the manufacturing unit had directed Santha Industrials to supply the raw-materials. Hence, they had obtained suitable quantities of this material from M/s. ABS Granules, for utilisation by the different manufacturing units. He submitted that the accounts had been maintained in respect of these aspects and the ld. Collector has not looked into it, therefore, it showed pre-meditated mind on the part of the Collector, to uphold the allegations. He further submitted that even if all the clearances are clubbed, if proper computation of duty and classification is adopted then no duty liability would arise in this case. On the aspect pertaining to time bar, ld. Advocate pointed out to the statements recorded by the department in the investigation conducted during 1985. He specifically referred to the statements of Devraj Others, who had s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fully established. 14. Ld. Advocate countered the arguments by submitting that the matter cannot be remanded for determination of fresh classification, as fresh show-cause notice would be barred by time. In this context, the ld. Advocate relied on the ruling rendered in the case of Jyothi Laboratories as reported in 1994 (72) E.L.T. 669 (Tri.) = 1994 (50) ECR 36. 15. We have carefully considered the submissions made by both the sides and have perused the records and the citations referred before us. The questions that arise for our consideration are as to (i) whether the classification of the product `Tilting Type Grinder can be confirmed under sub-heading 8509.00 (ii) whether the clearances of all the appellants can be clubbed for the purpose of considering the eligibility or denying the benefit of the Notification No. 175/86-C.E., dated 1-3-1986, on the grounds urged in the show-cause notice ? (iii) whether the demands are barred by time? (iv) whether penalty is imposable? (i) Whether the classification of the goods can be confirmed under sub-heading 8509.00 As rightly pointed out by both the sides, the ld. Collector has not dealt with this point at all. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the wet grinder by `V -Belt, the article in question cannot be treated to be an electrical appliance which is an essential pre-requisite to make it fall within Item 33-C of the Central Excise Tariff in addition to the same being a domestic appliance. Though excise duty is levied on the incidence of manufacture or production and removal of the goods for consumption, there is no need so far as the case on hand is concerned to detain ourselves to dwell in detail the aspect as to the nature of the process involved in fitting the electric motor to the steel frame, of the wet grinder in the space allotted for the same, in as much as prima facie we consider that by mere process of assembling the electric motor in the already existing grinder no commercially new product as such emerges by [any] manufacturing process. That apart, we are also concerned more about the identity of the commodity and as to whether it answers the description of the domestic electrical appliance which we have answered in the negative already". As can be seen, the classification pertains to old tariff, however, the ratio on whether a wet grinder can be considered as a domestic electrical appliance has been disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the benefit or denying the benefit of the Notification No. 175/86, dated 1-3-1986 on the grounds urged in the show-cause notice? (i) The ld. Collector has held that Shri Doraiswamy has not collected royalty from the ten units and hence the close relationship with the units is established. There is no denial about the persons managing the ten units being blood relatives of Shri Doraiswamy. This relationship is a different aspect than the collecting of royalty. It was explained that there was a judgment of Principal Distt. Judge, Coimbatore against Shri Doraiswamy and he was in appeal before Madras High Court. Ld. Collector has noted this point but has rejected this plea and held that as the royalty is not claimed, hence the charge is proved. This is a strange finding. We have perused the copy of the judgment of Principal Distt. Judge. It is clear from the finding of the Court that Shri Doraiswamy has no exclusive rights under the Patent and Designs Act. In such a circumstance, how could Shri Doraiswamy claim royalty and therefore, this finding cannot be given much credence. (ii) The ld. Collector has referred to sale of the production of ten units to Shri Doraiswamy as a circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jan 75% 10,000/- D. Chandra 25% 5,000/- 11. Santha Industrials Proprietorship R. Doraiswamy 3,15,666.38 own funds Birth Bankers loan SSI date Sales Tax C.E. Licence (6) (7) (8) (9) (10) 12-4-1983 SBI loan Rs. 4 lakhs 29-1-1985 29-1-1985 3-9-1985 9-3-1986 4-2-1985 SBI loan Rs. 5 lakhs 18-3-1986 6-2-85 16-9-1985 9-4-1979 SBI loan Rs. 3 lakhs 29-10-1988 9-4-1979 5/EM/85 4-6-1984 SBI Nil 31-10-1988 6-1-1981 3/EM/85 27-2-1978 SBI Rs. 3.90 lakhs 7-8-1989 1978 1985 7-9-1983 SBI cash credit Rs. 1 lakh Machinery Loans Rs. 1 lakh 24-3-1989 7-9-1983 1983 14-2-1983 SBI loan Rs. 1.70 lakhs + Rs. 1 lakhs Not stated 14-2-1983 1986 1-7-1987 SBI 24-1-1989 14-2-1983 1989 24-11-1984 SBI loan Nil Not stated 24-11-1983 1986 12-8-1988 SBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt benami fake units or the ostensible name lender. This has been held so in a circumstance, when the principal unit has pumped all the finances and has drawn profits for themselves, in total exclusion of the other units. There should be no semblance of independence in the other units, in terms of business transactions, loans, payments of taxes, wages, salaries, litigations and as an independent juristic person. Where units are having independent stature, existence and creation, performing individual businesses by virtue of independent sales, purchases manufacture and arranging all their activity, independently of the other; as is so required to be done by any independent juristic person; then such transactions have to be upheld as independent of the other and can therefore by no stretch of imagination be held to be dummy ones or a facade or a fake or a fragmented unit. The burden of showing the units have been created or fragmented, solely to evade payment of taxes is very heavy on the Revenue and it is required to be proved by cogent, acceptable, believable and reliable evidence. Normal business dealings and routine business practices of arranging the schedule of purchases, payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.R. 348. (iii) Whether the demands are barred by time? It is seen that department had initiated proceedings against 1.Zenith Industries, by SCN dated 18-7-1986 and order-in-original dated 31-3-1987, 2.DSB Industrials, SCN dated 8-8-1985 and order-in-original dated 30-9-1985 3.Deepalakshmi Enterprises, SCN dated 23-4-1984, order-in-original dated 25-6-1985 4.D.J. Indl., SCN dated 26-9-1986 and order-in-original dated 16-3-1987. The proceedings pertain to manufacture of Jet pumps, mono-blocks and electric motors. The demands have all been confirmed in the said orders-in-original. The statement of K. Devaraj, Partner of DSB Industrials was recorded on 4-2-1985 by Asstt. Collector, CE H. Qtr., Coimbatore. He has clearly answered that he is manufacturing `Santha Tilting Wet Grinder and has given particulars of Regd. Design Nos. and affixing of brand name. The sample of name plate with brand name was also furnished. The appellants have produced gate passes with seal of the department of the year 1988, showing the brand name of `Santha . The declarations have also been filed. All these details clearly disclose that the department had the knowledge of the manufacture of Til ..... X X X X Extracts X X X X X X X X Extracts X X X X
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