TaxTMI 
TaxTMI 
2003 (3) TMI 713
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....terial 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 ₹ 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 ....
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....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 notice was issued. The allegation made was that....
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....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. (xxi) Directors namely Shri....
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....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 cut the costs of the CTV (as highlighted in their project ....
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....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 Commissioner observed that there was nothing wro....
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....y, 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 the Supreme Court in the case o....
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....or [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 howe....
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....ever, 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 directed that the differential duty of ₹ 5,48,92,612/- be recovered from BIL. 29. The second part of the demand related to the later period commencing from 1-4-1996 when the proprietary unit of JRCE was taken over by JRC, a private limited company. He held that the show cause notice had not disclosed any evidence to suggest that there was any relationship between the two companies. They were not interested in each others business. The situation having been radically altered, it could not be said that the privat....
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....ged 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, wrong interpretation and application of several judgments was made. The judgment in the case of Alpha Toyo was correctly applicable but it had not been understood and appreciated by the Commissioner. It was claimed that financial control and management control were the two essential features establishing the identity of a master and a dummy. The show cause notice having brought out these two aspects fully, the law should apply without distinction. It was claimed that the Commissioner had failed to recogn....
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....ers 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 enable Shri Gupta to ensure that the unit was set up early. For the time spent by him on the job policy, JRE had compensated BIL. Therefore, the mere fact of Gupta holding the power-of-attorney did not constitute managerial control. Even otherwise, in the absence of financial control, mere managerial supervision did not do away with the independence of the job workers. 5. The quantum of duty confirmed by the Commissioner was challenged. It was claimed that the entire amount spent on advertisement should have been permi....
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....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 Rizvi, there was another Director namely Shri Anand. Thus there was no similarity between the proprietary unit and the limited company. 46. The duty confirmed in the contested proceedings were calculated after allowing certain deductions. Both sides advanced arguments on the methodology and quantification of such deductions. Shri Chandrasekharan claimed that under the guise of trade discount inadmissible deductions were granted. He stated that where free gifts were given there was no cause for deduction of value of such free....
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....lesced 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 involved in these case. Therefore this batch of cases does not give any ratio where valuation is disputed. 52. The thrust of the show cause notice in these proceeding is that JRE was a dummy of BIL, that they were more of a hired labour of BIL than an independent manufacturer, that in the circumstances BIL should be held to be the actual manufacturer and therefore the prices at which BIL sold the goods to their dealers should be taken to be the basis for calculation of the assessable value. 53. Section 4(....
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....rials, 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 the definition of 'manufacture' has undergone a change, the definition of "Manufacturer" has remained the same. It would appear that the definition evolved in a period where goods were manufactured by individuals who occasionally also employed "hired labour" in the manufacturing process. Thus, if the physical manufacture was done by a labourer, the liability to pay duty remained with the person who had hired the labour. As the industry evolved, the independent job workers emerged. For quite some ....
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....ominent 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 as well as the Tribunals were aware that the person who (corporate of individual) undertook the physical manufacture could not continue to be classified as " Hired labour". Therefore, the law evolved that the manufacturer in terms of the said section was not the customer or the primary manufacture but that it was the job worker. One of the earlier judgments to this effect was of the Andhra Pradesh High Court judgment in the case of Andhra Re-Rolling Works, 1979 (4) E.L.T. (J600) (A.P.). The Supreme C....
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....pton 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 BBLIL/HLL. The nature and type of machinery to be put into use is as per the directions of BBLIL/HLL. The manufacturer does not have any liberty to market its goods. The price of goods is determined by BBLIL/HLL and any cost found extra is pruned/cut down by BBLIL/HLL. Even the margin of profit is determined by BBLIL/HLL. There is a mutuality of interest between the appellant and the buyer inasmuch as the buyer has given an interest free deposit of ₹ 50 lakhs to the appellant besides payment....
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.... 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 as either belonging to JRE or were shared by them; (c) That JRE had no funds of their own and that all the funds were given by BIL but were shown to be those possessed by JRE; (d) That all the raw materials were given free without any expenditure including their importation post importation and attendant expenditure; (e) That the entire project report made by BIL was with the intention to implement a scheme as set out above; with the intent to evade duty; (f) That conversion of JRE into JRC wa....
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....tes 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 and the original statements of the persons to the effect that there was no interest stipulated would show the cover up. It was also claimed that there was doubt as to the validity of the agreements. We are unable to find substance in these submissions. The C.A. who certifies a state of finances would normally do so only on full examination of the accounts kept by the client. He is aware that wrong certification would lead to loss of his licence to practice. We further observe that till the issue of the show cause n....
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....w. 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 Shri Rizvi could not be available at all times at the site and that somebody had to set up the unit. It was time and again claimed that such assistance was a perfectly acceptable commercial transaction especially when compensations were being made by JRE on the expenditure quantified by the salaries and wages of these people. 75. In the notice and in the arguments it was brought out that even the household expenses of Shri Rizvi were being paid by BIL. Since JRE was a proprietary unit, such exp....
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....ulchandani. 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. There is a world of difference between a proprietary firm and a private limited company. The liability of the proprietor to the third parties is limitless where as in a company it is limited. A proprietorship unit is not subject to the dictates of the Companies Act. In fact it is a simplistic statement to claim that when a proprietorship firm converts into a private limited company nothing changes. In the remaining paras on this area the various allegations made in the earlier....