AI Drafter 
TaxTMI 
TaxTMI 
2003 (3) TMI 713
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....Enterprises, Hong Kong, that some material was given by BIL to them, that the CTVs 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 Rs. 190/- to Rs. 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. Gup....
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....hough ultimately all the parts went to JRE only. The import licences were also shared by both 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 notic....
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....change of their employment from BIL to JRE. After changeover they continue to report to management of BIL. (xiii) Technical problems, problems related to spares, instruments etc. were taken care of by BIL. (xiv) The role of Shri Zaffer Hussain Rizvi, (Proprietor-JRE) was limited to a mere signatory of Bank cheque books (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....
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....in the name of JRE by BIL for the purpose of evasion of Central Excise duty and other taxes. (xxxi) The instruments, Jigs, Fixtures were identified by BIL. The instruments were arranged by BIL from overseas and the ownership remained with BIL. (xxxii) JRE was manufacturing division of BIL created by way of funding J.R.E. which is to be treated as loan/advance in name of J.R.E. The use of loan/advance remained 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....
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....at the selling price of BIL in the market. The notice then proceeded to arrive at the assessable value based on the selling price of BIL. Admissible deductions were given. Special scheme deductions were not accepted. Differential excise duty was computed at 27,58,18,413.14. The show cause notice demanded this duty jointly and severally from both BIL and JRC and alleged that both the units and the various persons named therein were liable 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 Rs. 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....
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....s given and had also paid 18% interest. He observed that the show cause notice itself did not allege that profits were shared or that there were any flowback of profits from JRE to BIL. He held that taking the tribunal judgment in the case of Alpha Toyo Ltd., as the basis, the noticees before him were on a much sounder footing. 16. He held that the job worker had a physical identity, that they had machinery and personnel. Since the goods were physically 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....
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.... materials being routed in this manner. He maintained that for all the raw materials received payments had been made by BIL for their own sake as well as for the imports made by JRE from the revolving funds made available by BIL. He cited case law to the effect that even when all the raw materials were supplied by the principal manufacturer, the job worker was still the manufacturer under the Central Excise Law. He relied upon the Supreme Court's decision in the case of M.M. Khambatwala 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....
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....d the deduction as under (d). He examined the various discounts claimed under (b). He allowed the deduction on account of cash discounts. Where a TV was supplied 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. ....
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....t was claimed that although JRE were working on a fixed margin, they could not be called as job workers since they had no independent existence and that all their activities were 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 Co....
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....ubmissions were made : 1. The show cause notice demands duty jointly and severally from BIL as well as JRE and as such, the notice is liable to be discharged. This was raised as a preliminary objection 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....
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....entire period the interest was paid by JRE to BIL. 44. Shri Chandrasekharan maintained that the show cause notice had disclosed very substantial evidence in support of the charges made therein. The Commissioner had dealt with them superficially and had glossed over a number of disclosures which were material to the charge that JRE was a dummy. He stated that right from the inception, JRE was and continued to be a shadow entity without its own finances, 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 chang....
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....ed to duplicate their manufacturing facility so as to gain multiple benefits for the split units from the notification. Thus a person inside a single shade may establish three units all under his control where all the facilities, machinery and labour would be pooled together. Each unit would be registered separately under the excise law and would also obtain separate registration under Sales tax, Income-tax, Octroi and the Shop Establishment Act etc. Invoices for sale would be issued 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 simp....
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....worker was considered to be hired labour of the principal manufacturer. It is in this belief that the Central Excise authorities required a licence to be obtained by the principal manufacturer even where the actual production was done by the job worker. Notifications such as 305/77-C.E. exempted the traders who sent grey fabrics for processing to a process house from licensing control provided they gave a declaration as to the valuation of a grey fabric and also undertook to pay the duty if not paid or short paid by 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 trad....
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....he case of Bajrang Gopilal Gajabi reported in [1986 (25) E.L.T. 609]. But with the increase in scale and also the increase in the complexities of the manufacturer, it was not possible to get the work done by utilizing hired labour. The work of the manufacturer came to be entrusted to the job worker who had a separate legal identity. Some were firms and some were Ltd. Companies. These job workers obviously were not "Hired labour" and therefore, had to be held as independent manufacturers. The Gujarat High Court in their 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 contr....
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.... of raw material plus conversion charges but that it had to be the price charged by BIL in the market. The Judgment in the case of Ujagar Prints (supra) was cited before the Tribunal. But the Tribunal following the wording of Section 4 of the Central Excise Act, 1944 denied the ratio of the Ujagar Prints altogether. It was held that the concept of "open market" did not exist where the job worker had given the goods to the principal manufacturer. The Supreme Court reversed this judgment [2000 (120) E.L.T. 24]. The Court applied 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 highl....
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....Ltd.'s case (supra). The Tribunal held that the job worker was the real manufacturer placing reliance on the Judgment of the Supreme Court in the case of Union of India v. Playworld Electronics Pvt. Ltd. - 1989 (41) E.L.T. 368 to the effect that in identical circumstances and even where the brand name of the principal manufacturer was affixed on the goods and even when the entire production was required to be purchased by the principal manufacturer, there was no existence of relationship. Thus in the cited case of Kwality 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 ....
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....e is that these agreements were not in existence but were later fabricated to prove their independence. It was also claimed that there was nothing shown as an accrual of profits in the accounts of BIL although in the books of JRE such expenditure was shown. The counter was made by Shri Lakshmikumaran that such transaction in each period were covered by a Chartered Accountant's certificate and that even if some persons had made statements that loans were free of interest, the statements needed to be pleaded at a lower footings in the face of proof of return of loans with payment of interest. 67. The point of compensation attracted the maximum discussion. The claim of the Revenue is that the agreements 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 d....
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....s also made a big issue of in the Show Cause Notice. In the case of Ujagar Prints (supra) the basic raw material was always given by the traders. In a number of cases it has been held that the entire raw material being supplied by the principal manufacturer, did not change the position of the job worker as the manufacturer. We do not see any illegality in such importation by BIL and supply to JRE. In fact in a large number of cases especially in the Modvat area under the Central Excise law it has been held that a principal manufacturer would source and direct the source to supply the material directly to the job worker, and even where the material would not reach or be routed through the place of principal manufacturer, 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.&em....
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....arged by the job worker to the principal manufacturer was the value for assessment and that the traders' margin when the goods were finally sold in the market would not enter the calculation for quantifying of assessable value. 79. We now come to the later period when JRE (a proprietary unit) was converted into JRCE a Private Limited Company. The show cause notice makes light of this change and says that the ground reality had not changed and that the relationship continued to be of hired labourer as was in the case when the unit was a proprietorship. Shri Chandrasekaran claimed that in effect nothing was changed except that the mask was of a different colour. He attacked the belief of the Commissioner that no independent evidence had been led to show 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 t....