TMI Blog2003 (3) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... s manufactured by them were sold exclusively to BIL and that BIL exercised quality control checks for such CTVs. The costing data revealed that the job worker was getting ₹ 190/- to ₹ 250/- as conversion charges and profit. It also appeared that the imports made by BIL were under valued to keep the overall cost low. The premises of JRE and BIL were searched. Statements of the employees and persons in charge of both the units were recorded. The action plan prepared by M/s. BIL for establishing their credentials with M/s. Akai was also examined. The imports were of CTVs in SKD form. All raw materials except packing material which was locally procured, were sourced from Akai with M/s. Dynasty operating as C F agent. 2. Shri Jafer Rizvi was a manufacturer/exporter of embroidery work. He later on started an electronic factory named as M/s. J.R. Electronics at Vasai but was about to close it because he was making a loss. 3. He was supplying embroidery to Mrs. Mulchandani one of the Directors of BIL. She requested him to start a unit for manufacture of electronics at Noida. Shri S.C. Gupta, Director, BIL was given the power-of-Attorney and the unit was started and comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the units. 6. The investigating authorities probed the nature of relationship between the two units. Vinod Chabra, who was the power-of-attorney holder of JRE supplied to the investigating officers a letter dated 19-10-94 from BIL to JRE. Vide this letter, JRE were permitted to affix the Akai brand name on the CTVs manufactured by them provided that they were supplied exclusively to BIL. Yet another agreement dated 24-6-94 was also supplied which on investigation was found to be not authentic. The agreement appeared to be an improvement upon that initially tendered on 19-10-94. The officers were of the impression that the agreement was a made up document to camouflage the fact that JRE was merely a dummy of BIL. 7. Before the investigating officers, it was claimed that there existed a provision for payment of 18 per cent interest on all the loans and advances made to JRE by BIL. The investigating officers found that for the financial year 1994-95 the accrual of such interest had not been shown in the books of BIL. 8. On the basis of these facts, the show cause notice was issued. The allegation made was that JRE was not an independent job worker but was a dummy of BIL, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks (blank) and statutory documents. The cheque books were used by BIL in the manner as discussed in the show cause notice by way of deposit of money into account of JRE. (xv) Raw material indenting, shipping, clearances at customs, payment of customs duty, clearing charge, license procurement were done by BIL in respect of JRE. (xvi) Raw material was provided on credit by BIL by way of routing the supply through M/s Dynasty Enterprise. The balance items supplementary to the product were imported by BIL in their own name. (xvii) Supply of raw material to JRE imported by BIL in its name was done on credit without JRE incurring any expenditure towards it. (xviii) JRE, in addition to financially being dependent on BIL, was under control of BIL as without PCBs and Remote controls provided by BIL on credit to JRE, JRE was not in a position to complete the manufacture. (xix) Payments were being made by BIL (directly/by way of credit into accounts operated in the name of JRE) on behalf of JRE in respect of transport, custom duty, clearance charges, sales tax, supplies of the raw material on regular basis. (xx) Sales tax accounting and its payment done by BIL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emained in the hands of BIL. 9. The Notice proceeded to allege that in view of foregoing, JR Electronics could not be considered an independent manufacturer. BIL was running a factory of JRE in the manner discussed in the show cause notice out of the funds provided by BIL without investment of funds by J.R.E. The factory of JRE was not only erected and managed by BIL but also the billing of AKAI Brand Products was for BIL. JRE was nothing but a captive manufacturer devised by BIL for the purpose of tax evasion. JRE was used by BIL as a colourable device for evasion of tax by way of subterfuge. The contention that the support was done on principal to principal basis holds no water in light of the evidence discussed in the show cause notice. More important than the agreements and the constitution of the unit was the examination of the fact how the transactions between JRE and BIL were taking place. The dealings between BIL and J.R.E. were not that of a principal with another principal but were in the nature of a principal and agent. The dealings between them were not at arms length. There was mutuality of interest between J.R.E. and BIL. The design and the intent of M/s. BIL to cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to penalties. 12. Three more show cause notices were issued for subsequent periods where the allegations were the same. Further duty allegedly short levied and demanded in these SCNs amounted to ₹ 25,96,56,276/-. 13. The noticees filed replies. All the noticees were heard by the Commissioner. The Commissioner thereafter passed the order. The Commissioner opined that at the time when the project report was prepared by M/s. BIL, the CTVs attracted specific rate of duty and therefore the aim of the project report namely of reduction of the manufacturing cost could not be called a device to reduce the burden of duty. He mentioned the market realities that the consumer products required a very substantial outlay on the advertisement of the product which induces a buyer to buy a product manufactured by a particular manufacturer, in preference to a similar product manufactured by another manufacturer, where both the products may be identical and equally good. A small sector manufacturer working on job contract basis clearing his goods without affixing the brand name is not concerned about marketing and therefore does not incur any cost except those of manufacture. The Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically manufactured in Noida factory, JRE were the manufacturers in terms of Section 2(f) of the Central Excise Act, 1944. They were not the hired labourer of BIL and therefore BIL could not be called to the manufacturer. 17. On the aspect of payment of interest by JRE to BIL, he took notice of the statements made by a number of employees of both the units to the effect that BIL had provided interest free loan to JRE. He held that the C.A. certificate and the balance sheet showed that whatever advances were received were paid back in all cases with interest. The documentary evidence thus superceded the spoken word. 18. He then examined the various aspects on which the show cause notice alleged that JRE was a dummy of BIL. On the aspect of total financial control, he observed that every item of expenditure was funded by BIL on the basis of need based revolving loan. Meticulous accounting was made and the expenditure so incurred was cyclically repaid by JRE. He observed that the books of account of both units showed all the financial transactions and also witnessed that each loan along with the interest thereupon was returned. He compared the situation with that covered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atwala v. Collector [1996 (84) E.L.T. 161]. As regards clearance of imported parts of the same licences, he observed that a specific license could not be used by two entities and SIL being transferable licence, could have been used by JRE on payment of appropriate fees. 23. As regards allegation that the assessable value was fixed by M/s. BIL, the Commissioner held that there was nothing unusual in this. The principal manufacturer would always ensure that he got a good bargain by keeping the value of a job worker limited to job work charges. This did not establish the status of the job worker as a dummy. 24. The Commissioner referred to the statements of some officers to the effect that the loans were free of interest. He stated that the statement was obviously wrong because the fact of interest being paid was duly documented. 25. The Commissioner then examined the various judgments cited before him by the revenue wherein it was held that one unit was the dummy of the other unit. He distinguished the judgments on facts from the issues before him. 26. In the absence of relationship between JRE and BIL, he held that JRE was an independent entity and not a dummy of BIL. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free on account of purchase of high number of TVs by a customer, he held the discount to be admissible. He then examined the deductions claimed on account of supply of boughtout items as gifts along with the CTVs which gift items were not manufactured by JRE. After examining the relevant judgments, the Commissioner allowed this discount. As regards advertisement expenses, he recalled the Supreme Court s judgment in the Bombay Tyre Intl. case wherein it was held that such expenses could not be claimed at abatement. He, however, referred to the Phillips India judgment of the Supreme Court [1997 (91) E.L.T. 540] where the contest was an account of trade discount specifically given so that the dealer could bear a part of the cost of advertising. In the face of the Bombay Tyre judgment also, the Supreme Court had allowed such deduction as trade discount for calculating the assessable value. Since the dealers name were also prominently brought out on the advertisements, he allowed 50% of the advertisement expenses as deduction. The sum of ₹ 2,44,81,174/- claimed at (c) above was allowed deduction following the MRF judgment. Holding that JRE was not an independent manufacturer, he d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere controlled by BIL. 34. As regards the deductions given on the assumption that the price charged by BIL to their dealers was the basis for assessment, it was claimed that the discounts allowed for various special schemes could not qualify for deduction. For want of detailed working, the correct deductable amount on account of freight could not have been quantified. The appeal memorandum challenged the admission of all the claimed amount on account of freight. 35. The appeal memorandum challenged the belief of the Commissioner that no evidence has been brought on record to show that JRC was the dummy of BIL. It is claimed that the entire game plan of BIL included the conversion of JRE into JRCE. It was claimed that all the factors remaining the same, the mere change in the name did not alter the dummy position of JRCE also. It was claimed that the Commissioner had glossed over pertinent facts disclosed in para 25 of the show cause notice. The case law on which reliance was placed by the Commissioner was claimed to be not relevant to the facts of this case. On this ground, the ratio thereof was urged as not admissible. It was claimed that in appreciating the evidence, wro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction which had not been dealt with by the Commissioner. 2. The show cause notice seek to recover duty u/s 11A of the CSA 1944 without identifying and pin pointing the person charged with the responsibility of payment of duty. On this ground also, the notice was invalid and demand made in pursuance thereon was not sustainable. 3. The Commissioner accepted that JRE and JRCE were not fictitious units but were commercial entities. He accepted that there was no flow back of funds from the job workers to the BIL. He discussed each aspect of evidence disclosed in the show cause notice and arrived at a conclusion that the transaction between the two units were on a principal to principal basis and that JRE was not a dummy of BIL. In spite of this clear distinctions made, the action of the Commissioner in confirming the demand although in part, is without basis and should be set aside. 4. The fact that Shri Gupta had power-of-attorney did not establish the existence of managerial control being exercised by BIL over JRE. The Commissioner having accepted this fact could not have held that BIL were exercising managerial control over JRE. Power-of-attorney was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inances, staff, expertise etc. Shri Laxmikumaran claimed that not only the agreements but also the subsequent behaviour of the parties showed that in the initial period JRE was helped by BIL but that later JRE took off on their own. He emphasized that BIL was merely a trader whereas JRE was a manufacturing unit with over 250 people who were technically qualified at the working level. He claimed that even though initially the money was advanced by BIL and even through from time to time finances/loans were made, the accounts and the C.A. certificates would show that everything was paid back to BIL. 45. Shri Chandrasekharan claimed that JRCE was as much a dummy unit of BIL as was JRE. The mere fact that its constitution was changed, did not alter the ground realities in any manner. Along with the assets and liabilities the status of a dummy also stood transferred to JRCE. Shri Laxmikumaran submitted that there could be no comparison between an individual enterprise and a limited company. At the time when it came into existence, it had his own accommodation, machinery and the loan out of which these goods had been acquired had already been paid back with interest. Apart from Shri Ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed unit wise. A number of offence cases were booked by the department alleging unity of such units. Several cases were held as not established by the Tribunal as also by the Courts. It was held that commonality or persons in charge was not an element to establish unity, nor did the pooled raw materials etc. indicate commonality. In a number of cases, unity was established, the clearances were clubbed together and the duty short levied was ordered to be payable by the principal unit, Later, the judgments were coalesced into giving certain parameters on which the facts were to be tested. Considerable case law has been established in this area where certain guidelines have emerged. The law evolved, in simple terms is that where one unit has total financial and/or managerial control over the other unit, the two units are actually one and their clearances are required to be clubbed. 51. It should be understood that the issue involved in cases of clubbing do not relate to valuation as governed under Section 4 of the Central Excise Act, 1944 but that they relate to the calculation of total value of permissible clearances. The determination of assessable value is not a question involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the processors. This was in the belief that the processors were hired labour of the traders. This concept was ultimately negated by the Supreme Court in the judgment in the case of Ujagar Printing Works and Others v. U.O.I [1988 (38) E.L.T. 535 and 1989 (39) E.L.T. 493] where the job worker was held to be the manufacturer in terms of Section 2(f) of the Act and the basis of assessment of the goods cleared by him to the principal manufacturer was determined as the sum total of cost of raw materials, cost of conversion and a reasonable margin of profit. By a later clarificatory order, the Supreme Court ruled that although these goods would be ultimately sold by the trader in the market at a price higher than determined by the formula given, the margin received by the trader was not addable to the assessable value and for computation of duty when the job worker cleared the goods to the trader or the principal manufacturer. At this stage, it is recalled that Shri Laxmikumaran had maintained that BIL were trader and not a manufacturer. 58. The Tribunal in their judgment reported in 2001 (135) E.L.T. 751 (Ekbote Interiors Pvt. Ltd. v. CCE, Pune), observed as under : Although th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r judgment in the case of Apex Electricals Pvt. Ltd., 1992 (61) E.L.T. 413 held that ownership of the raw materials was not a relevant factor in determining the identity of the manufacturer. The confusion as to the identity of the manufacturer when the physical manufacturer was done by an entirely independent from the one who gave out the job continued for quite sometime. A view was held for a very long time that the supplier of the raw material continued to be the manufacturer. This was most prominent in the case of grey fabrics supplied to the independent processors of fabrics. Such traders were required to file an application for exemption from licensing control and had to undertake that they would pay the duty payable in case of default by the processors. This was embodied in Notification 305/77-C.E. initially and later in Notification No. 27/92. The second area in which job working prevailed was the manufacture of medicaments. It was common for a Company to obtain registration from the Food Drug Administration without having any manufacturing facility and to get the pharmaceuticals manufactured from another person having a factory. However, at the same time the Courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the ratio of Ujagar Prints Judgment holding that the job worker s factory gate was the deemed factory gate as envisaged under Section 4. 60. The ratio of this judgment was followed by the Tribunal in the case of Ultra Lubricants (India) Pvt. Ltd. v. Commissioner [2002 (150) E.L.T. 580]. The judgment however does not give the underlying facts, which come out in the latter judgment in the case of Kwality Ice Cream Co. v. Commissioner [2002 (145) E.L.T. 584 (T)]. In this case Brooke Bond Lipton India Ltd. had entered into an agreement with Kwality Ice Cream Co., where the later were to manufacture Ice Cream for the former. The point of dispute is highlighted in para 4 of the Tribunal Order as follows :- The Assistant Commissioner while confirming the above finding placed reliance on certain other points also. Commissioner (Appeals) took the view that the terms and conditions of the agreement between the appellant and BBLIL/HLL do not leave any scope to indicate that the appellant has any independence to run their unit. Starting from the procurement/purchase of raw material to the manufacture of the final product, all the activities of the appellant are fully controlled by B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Ice Cream the Tribunal held that the job worker and the principal manufacturer were not related persons, the transaction between them was one of principal to principal basis and that the price being the sole consideration, the assessable value should not be based upon the sale price of the buyer. 62. The Tribunal judgment in the case of Dixon Utilities Exports Ltd. v. Commissioner - [2000 (121) E.L.T. 780 (T) = 2000 (41) RLT 130] is most akin. Dixon were manufacturing CTVs assembled with the material supplied by a number of brand holders. The Tribunal following the Ujagar Prints Judgment held that the prices were to be taken at which the goods were sold by the job worker. 63. With this background it is necessary to examine the various grounds raised in the proceedings to establish the relationship between JRE BIL. 64. We have listed earlier the allegations made in the Show Cause Notice. These can be condensed and set out as below :- (a) That Shri Z.H. Rizvi had no experience of manufacture of CTVs and that he was a puppet or dummy in the hands of BIL; (b) That the facilities such as premises, godowns and personnel owned and employed by BIL were shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eements were a subterfuge and that the statements of certain persons showed that the advances made were without interest and therefore it is suggestive of the unity between JRE and BIL. The very legality of the agreements produced was questioned. But Shri Lakshmikumaran stated that the proof of repayment of the advances alongwith interest is reflected in the accounts and that these are certified by the Chartered Accountants and are reflected in the books of accounts. We have seen the documents. There are two certificates on record, one by Shri Deepak Agarwal, Chartered Accountant, certifying the payment of interest by JRE and the second by Shri P.R. Shah, Chartered Accountant, who had examined the accounts of BIL witnessing the receipt of the same by BIL same from the books of accounts. There are several such certificates all evidencing payments by JRE to BIL on account of rents to BIL, services rendered by BIL s staff and other Misc. expenses. These specifically refer to Gupta, Bhatt and others. 68. With regard to these certificates and accounts a very interesting suggestion was made during the hearing. It was claimed by Shri Chandrasekaran that these were a cover up operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principal manufacturer could take Modvat credit. 72. At a couple of places the show cause notice make the allegation that there was an element of undervaluation in the case of goods supplied by Dynasty. The same allegation is made in the present appeal filed by the Revenue also. However, at neither place was any specific instance cited to support this claim. For lack of any substantiation we need not pay any attention to such vague allegations. 73. It is not that Shri Rizvi is a man of straw. The Show Cause Notice in para 5.3 shows that he was a manufacturer of machine made embroideries and that he was running a factory for over 10 year. It has come up in the said para that in the same unit Shri Rizvi was running a factory making audio equipments also. The Show Cause Notice itself admits that Rizvi is a manufacturer who had good knowledge of operating the business as well as factory. It also shows that he owned a residence in the medium end location in Mumbai. 74. Much has been made in the show cause notice about the participation of officers of BIL viz. Gupta, Bhatt and Cooper who had assisted in the setting up of the factory. What is claimed on his behalf is that Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the relationship between the two corporate persons was not as between two principals. He claimed that it was not necessary to show afresh in the evidence when nothing had changed except the name of the unit. 80. We have seen the contents of para 26 of the Show Cause Notice. This para reiterates the earlier claim that JRE was a dummy. It brings out the friendship between Rizvi and Anand, who were the Directors of the private limited company and J.R. Mulchandani and Kabir Mulchandani. It shows that the assets and the liabilities of the proprietary unit stood transferred to the limited company. It says that all that happened was that the unit was thereafter run not by BIL but a confidant of BIL . It shows precious little as to how the change does not alter the legal status or realities. It is alleged that this step was merely to perpetuate a fraud already existing. If this was the confirmed belief in the minds of the revenue they could have recorded statements of the concerned persons to show the futility of this exercise. But it was not done by the investigative agency. In this regard our comments earlier on the fact of payment of interest would bear repetition here. 81. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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