AI Drafter 
TaxTMI 
TaxTMI 
2024 (9) TMI 914
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....ajan, Proprietor, M/s. Sangama Equipments, Mr. Pradeep A., Proprietor, M/s. Pack Spin Industries, Mr. Geevar Paul, Proprietor, G-Tech Industries, Ms. Elizabeth, Proprietor, M/s. Isaacs Industries, Mr. Eldho Varghese, Proprietor, M/s. World Pack Industries, Ms. Solly, Proprietor, M/s. Crown Industries and Ms. Bini Aji, Proprietor, M/s. Pol Mart HON'BLE DR. D.M. MISRA, MEMBER (JUDICIAL) HON'BLE MRS R BHAGYA DEVI, MEMBER (TECHNICAL) Mr.Ravi Raghavan and Mr. Himanyush Chopra, Advocates for the Appellants Mr. H. Jayathirtha, Superintendent (AR), for the Respondent ORDER PER : DR. D.M. MISRA These appeals are filed against the impugned Order-in-Original No. COC-EXCUS-000-COM-052& 053/15-16 dated 23.12.2015 passed by the Commissioner of Central Excise, Customs & Service Tax, Cochin Commissionerate. Since common issues are involved, these appeals are taken up together for hearing and disposal. The details of the appeals are as tabulated below:- SL. No. Appeal Nos. Appellants Period of Dispute OIO Nos. /OIA No. & Date Duty demanded Penalty imposed 1 E/20509/2016 Sepack India December 2009 to March 2014 OIO No. 052 & 053/2015- 16 ....
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.... premises of the appellant against mahazar dated 07.01.2013, 1372 numbers of sealing machines valued at Rs. 10,42,390/- were seized from the premises of M/s. Speed Pack against mahazar dated 28.01.2013 and 1477 numbers of sealing machines valued at Rs. 11,37,569/- were seized from the premises of M/s. Global Pack Industries. A show-cause notice was issued on 14.06.2013 proposing confiscation of the goods seized under Rule 25 of the Central Excise Rules, 2002; proposed imposition of penalty on the appellant and other notices under Rule 26 of the Central Excise Rules, 2002. On completion of the investigation, show-cause notice was issued to Sepack on 06.01.2015 alleging that they had adopted the modus operandi of manufacturing the goods through dummy units called mother units in or around Kizhakkambalam by splitting the turn-over among the said so called mother units and consequently proposed for recovery of the duty amounting to Rs. 5,77,88,539/- for clubbing the clearance of excisable goods manufactured by all mother units during the period December 2009 to March 2014 along with interest and proposal for penalty. Also, notices were issued to the Managing Director of Sepack and the ....
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.... recruited their own employees, trained them on their own and are paying remuneration to them on their own; ➢ All DMUs are separately registered with the tax and other statutory authorities for purposes such as Sanitation Certificates, Income Tax etc. ➢ It is further pertinent to note that eight DMUs have already stopped supplies to Sepack and closed down their business at different points of time. M/s. Angel Tech has, in fact, diversified into a different business altogether. ➢ The discussion in the monthly meetings in mainly to keep up with the constant change in the cost of raw materials and is essential to ensure the smooth and efficient conduct of business. ➢ From the statements of various persons recorded by the department it is clear that Sepack has a negligible role to play in the day-to-day functioning and operations of the DMUs. Therefore, it is clear that the DMUs operate independently without any effective control from Sepack. ➢ The Appellant submits that the courts have consistently in similar circumstances laid the tests/principles for ascertaining the independent existence of DMUs/other u....
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....t is submitted that M/s. Polypack Industries and M/s. G Tech industries were already in existence and were manufacturing and marketing sealing machines even before Sepack was incorporated and started doing business. Therefore, the case of the department that the DMUs were set up merely as dummy units falls flat. Reliance in this regard is placed on the decision in Jagatjit Agro Industries v. CCE Ludhiana [2014 (309) ELT 301 (Tri. - Del.)] which categorically held that when the units that are alleged to be dummy units were in existence much prior, clubbing of clearances cannot be effected. ➢ As far as the allegation regarding manufacturing taking place at the hands of Sepack due to quality control and affixing of label by Sepack, it is submitted that Sepack deploys freelance quality engineers for pre-delivery inspection. The same is similar to the pre-delivery inspection done by a car dealer before delivering the car to the customer. It is submitted that merely by performing the above activity of pre-delivery inspection, Sepack cannot be considered to be the manufacturer. Reliance in placed on the decision in (i) CCE v. Cosme Farma Laboratories [2015 (318) ELT 545 (S....
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....ion of Hon'ble High Court of Bombay in the case of CCE vs. Rafique Malik, 2018 (360) ELT 454 (Bom.), (iv) CCE vs. Johnson & Johnson, 2005 (188) ELT 467 (SC), (v)Chromaprint (India) Pvt. Ltd. vs. Commissioner of GST, 2024-VIL-245-CESTAT-CHE-CE, this Hon'ble Tribunal reiterated that activity of printing labels and affixing it on the carton boxes would not amount to manufacture. ➢ It has been submitted by the Respondent that Sepack procures the sealing machines from the DMUs and sells them after adding a significant amount of margin. Therefore, there is price or value addition by Sepack and this price fixation results in manufacture. The said contention is incorrect as evident from the judgment of the Hon'ble Supreme Court in CCE vs. SR Tissues, [(2005) 186 ELT 385] and Maruti Suzuki India vs. CCE, AIRONLINE [2015 SC 477]. ➢ Further It is submitted that the decision of the Hon'ble Supreme Court in CCE v. MM Khambatwala [1996 (84) ELT 161 (SC)] squarely covers the issue at hand. The department has itself, in the instant case, recognized the independent existence of each of the DMUs and has attributed separate and distinct recognition to the DMUs. The goo....
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....Biju Philipose, Managing Director of Sepack and of Rs. 50,000/- on the various proprietors of the DMUs. In this regard, it is submitted that three ingredients must be satisfied for imposition of penalty under Rule 26: a) there must be removal of goods, b) the goods should be excisable and c) there should have been knowledge or reason to believe that the goods are liable to confiscation. Reliance is placed on Kamdeep Marketing Pvt. Ltd. v. CCE, [2004 (165) ELT 26 (Tri.- Del.)] wherein it was reiterated that the condition for imposition of penalty under Rule 26 is physically handling the excisable goods. Reliance is placed on the decision in Anil Kumar Saxena v. CCE, [2001 (129) ELT 351], wherein penalty was set aside on the same grounds mentioned above 4. Per contra, the learned AR for the Revenue reiterated the findings of the learned Commissioner and has submitted the following:- ➢ The Department would like to place the factual matrix/details with reference to the situations under which Sepack and DMUs are related in a way that Sepack controls the DMUs right from the procurement of raw materials to the clearance of finished goods. The same is based on the docume....
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....nd job-work income. ➢ Procurement of raw materials and raw material price negotiation: Sepack have admitted the fact of identifying the suitable suppliers of raw materials, negotiating the rate and instructing the DMUs to purchase such goods from those identified units. They also stated that DMUs which used die cast components had clearly stated that they purchased those components from the specified industries only to maintain the standard of required quality. The advantage of making bulk purchase from the raw material supplier should be one of the reasons for Sepack to negotiate the rate directly with such suppliers. Sri Biju Philipose, Managing Director, in his statement has deposed that they identified suppliers of raw materials required to manufacture sealing machines, negotiate price with them and instruct DMUs to purchase raw materials from such suppliers for the purpose of minimising the cost of raw materials of the BMUs, itself proves that fact. By effecting purchases of raw materials/ inputs from units identified by Sepack, the DMUs get inputs satisfying requirement and specification of buyer at the least possible price and they will not have to bear blame....
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....eveal the costing of their products and percentage of profit to the buyers. There may be price negotiations, but not fixation of price by the buyer. Even when there are variations in the cost of raw materials, the same is passed on to the buyer and are not absorbed by the processors as it normally happens in a principal-to-principal agreements. In view of the above facts, it is clear that the transactions are not principal-to- principal terms and are controlled by the buyer viz., Sepack by fixing the price for transfer of manufactured goods from DMUs to Sepack. The said transaction cannot be considered to be a sale in terms of Section 4(1) and the value cannot be accepted to be a transaction value. ➢ Sepack is the sole buyer of the sealing machines manufactured by majority of the DMUs. It is a fact that entire goods processed by majority of the DMUs are given to Sepack against recovery of agreed transfer price. This fact has been accepted by the DMUs as well as Sepack. Majority of the DMUs have confirmed that they manufacture and sell goods only to Sepack vide their statements recorded under Section 14 of CEA. From the statements it revealed that Sepack, procures th....
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.... of the goods from DMUs to Sepack as transfer and the price to be transfer price. It is very clear that the value adopted is not transaction value and the sale is not there in these cases since the transaction is not at arm's length. The buyer and seller in this case are undoubtedly related and the value adopted is not the sole consideration for the said clearance. Accordingly, there is no sale involved in the clearance of goods from DMUs to Sepack. ➢ The representatives of DMUs in their respective statements admitted that after assembling of the machines, the machine are subjected to thorough quality checking in the premises of DMUs by quality checking inspectors engaged by Sepack. Only after clearance from the said Inspectors, the goods are transferred to Sepack. It has been stated that the DMUs used to keep the machines manufactured by DMUs without the bottom cover and the quality inspectors of Sepack will inspect the quality and working condition of the machines and put the sticker on which QC passed, part number, etc. by ink print or paper sticker are there. After that the bottom cover is fixed and then the printed sticker on the machine are put on which QC pas....
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....other particulars is a process incidental to completion of the manufacture of sealing machines in a marketable form and the said conversion/processes amount to 'manufacture' in terms of above cited Chapter Note 6. ➢ The decision of the Hon'ble Supreme Court in the case of M/s Khambatwala, is in different circumstances hence not applicable. The following decisions on the matter of clubbing of clearances for SSI exemption are being relied upon: i. 2011 (263) E.L.T. 15 (S.C.) - PARLE BISLERI PVT. LTD. ii. 2012 (278) E.L.T. 223 (Tri. - Del.) - HIMANSHU TRADERS iii. 2014 (313) E.L.T. 87 [Tri.-Del.] - BRITISH SCAFFOLDING INDIA PVT LTD iv. 2015 (323) E.L.T. A124[S.C.] - EURO SCOFF (INDIA) LTD. ➢ On the issue of limitation, the judgment in Sparr Engineering vs CCE Bangalore II reported at 2007(207) ELT 545 [Tri.Bang.] and the Apex Court in the case of Kalvert Foods India Pvt. Ltd. [2011 (270) ELT 643 (S.C.)] is applicable to the present case. ➢ With regard to the proceedings under SCN dated 14.06.2013, the adjudicating authority has rightly found that by floating manufacturing units, by holding non- marketa....
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....e of sealing machines manufactured by each of the Units(called as mother units) be denied SSI exemption under Notification No.08/2003CE dt.01.3.2003 being dummy Units created and controlled by Sepack and duty with interest is payable by Sepack as the 'manufacturer' of the sealing machines during the period 2009- 2014; penalty is imposable on Sepack. ii. goods seized at M/s. Sepack India Pvt. Ltd., M/s. Global Pack Industries and M/s. Speed Pack are liable to be confiscated and penalty imposable on them; duty is payable on the seized goods by M/s. Sepack India Pvt. Ltd. iii. imposition of penalty under Rule 26 of CER 2002 on other appellants are justified. 7. The undisputed facts are that the appellant(M/s. Sepack) during the relevant period engaged in trading, inter alia, of sealing machines. These sealing machines were manufactured by various independent units (DMUs) and supplied to Sepack at the price mutually agreed. The appellant after affixing their brand name and packing the sealing machines cleared to the end consumer at a price higher than the price at which the same were purchased from different units. Each of the DMUs engaged in the manufacture of sea....
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....ure of any specified goods within the factory of production of the specified goods. Nil 2. The exemption contained in this notification shall apply subject to the following conditions, namely : - (i) ... ... (ii) ... ... (iii) ... ... (iv) ... ... (v) ... ... (vi) ... ... (vii) the aggregate value of clearances of all excisable goods for home consumption by a manufacturer from one or more factories, or from a factory by one or more manufacturers, does not exceed rupees three hundred lakhs in the preceding financial year. ... ... ... ... [Notification No. 8/2003-C.E., dated 1-3-2003] 8. The allegation of the Revenue is that the individual units which are described as Decentralized Mother Units (DMUs) are dummy units being created and controlled by Sepack only for the purpose of claiming SSI exemption benefit under Notification No.8/2003-CE dated 01.03.2003 on the turnover of each of the said Units. Secondly, it is also alleged by the Revenue that the product sealing machines at the premises of the DMUs were not fully finished and attained the character of a marketable commodity; ....
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....ed that all negotiations, understandings and business supports provided by the appellant to various DMUs are in the nature of commercial supports/relations and there is no shareholding in the form of investment by Sepack in DMUs, nor financial flow-back or any soft interest free financial loan extended by the appellant to various DMUs; therefore, the DMUs are independent units and had manufactured the sealing machines by employing their own machinery, labour and finance having separate PAN, file income tax returns and complied with all the statutory requirements in running business of their manufacturing unit. Therefore, calling them dummy units of Sepack without any shareholding, financial flow-back or sharing of profits, supply of infrastructure is contrary to the principles of settled law in this regard; hence, could not be accepted. 11. We find that the approach of the Department is ambivalent. At the first instance, it is alleged that the DMUs are dummy units i.e. effective control of the DMUs are in the hands of the Sepack; therefore the sealing machines manufactured and cleared by each of the DMUs to Sepack be considered as if the said sealing machines are manufactured by....
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....partners in the said firm are different, though they may be related. Since establishment, respondent No. 2 firm and its unit were situated at Kagal at a distance of about 50 K.M. From Kolhapur. M/s. Ganesh Industries shifted the manufacturing operations from Kagal to MIDC, Shiroli, Kolhapur sometime in 1992-93. Both the respondents had independently taken loans from the Banks. They had also submitted their separate declarations about the production. It appears that the respondent No. 2 had submitted returns about production for the year 1990-91 at Kagal. During the year 1992-93, because it was in the process of shifting from Kagal to Shiroli, the production was much less, as production was undertaken only for three months. Independent account books were maintained by them even after shifting of respondent no. 1 from Kagal to Shiroli. Both the units were not situated on the same property. The respondent No. 1 was situated at Plot No. B- 15, while respondent no. 2 was situated on Plot No. B-16 of MIDC, Shiroli. Merely because both the firms were dealing in the same type of production and because one of the partners in both the firms was same, it could not be concluded that respondent....
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....f profit they should make. Therefore, the Commissioner wonders that in such circumstances, who is really running these enterprises. He holds that the managerial control is not demonstrated by having separate sales-tax, income-tax, excise, ESI, P.F. and other registrations, but in his view, it is demonstrated by the right to determine its price and profit level. Those who are managing these enterprises can be said to be in control if they had demonstrated their sovereignty in deciding the price they want to charge for selling of the goods they manufacture and the quantum of profit they want to make while selling such goods. He has held that they, like a paid employee, manufacture, then compute the cost data, supply it to MICO and leave the decision to MICO. He has held that although the ancillaries state that they are happy with the profit they are making (or getting) but the sharing of cost data with the buyer militates against the doctrine of "Indoor Management". He has held that determination of price or the profit level (or loss) should be the policy decision of the Management in-charge of the company. In such a policy matter, if determined by somebody else, it demonstrate that ....
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....tioning independently with their own constitution and incorporations. The loss or the profit is not taken over by MICO and MICO cannot be held responsible for all the actions of the ancillary units. The determination of price, so long as it is independent and not influenced by any factors of under valuation as laid down under Section 4 of the Central Excise Act, then such negotiated price is required to be accepted. Section 4 of the Central Excise Act, deals with the aspect pertaining to the related persons, and even in such cases, the price of a related person cannot be rejected so long as the price is a mutually arrived at one and not fixed by any consideration and that there is no flow back in any form. When the price of related persons is the same as that of other dealers and in such circumstances also the price is required to be accepted. In the present case, the department is not proceeding on the basis of ancillary units being related persons but as Commissioner has analysed, they have proceeded on the basis that the goods are manufactured under the management, direction and control of MICO. All units being ancillaries manufacture goods according to design and specifications....
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.... that the manufacturing programme is drawn up jointly by the buyer and seller and not merely by the buyer, and that the buyer is obliged to purchase the manufactured product from the seller only if it conforms to the buyer's standard. For this purpose, the buyer is entitled to test a sample of each batch of the manufactured product and it is only on approval by him that the product is released for sale by the seller to the buyer. On other words, the buyer has the right to reject the goods if he does not approve of them. If the manufactured goods are not in accordance with the buyer's standard, they are either reprocessed to bring them up to the requisite quality, or if that is not possible, the goods are sold to the buyer for a different purpose if they are compatible with the specifications of some other product and provided that the buyer has a need for that product, or the goods are sold to others in the market as sub-standard goods at a lower price or the goods are destroyed. It is significant to note that the buyer is not obliged to purchase the goods manufactured by the seller regardless of their quality and that in the event of rejection by the buyer the alternatives present....
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.... not find any merit in this appeal and hence this appeal is rejected. 16. We find that the learned Commissioner has observed that there is a financial flow-back from the appellant to DMUs inasmuch as the Sepack identify the supplier of raw materials who would supply the inputs at the least possible price to the DMUs; the reduction in the production cost by various methods including procurement of raw materials at a cheaper price and through other mutual efforts benefitting both Sepack and the DMUs; the benefit that accrues to Sepack by such means would definitely be considered as a financial flow-back to Sepack. Further, he has observed that when the die-casting units suggested by the appellant refused to invest in mould and supply to DMUs, the appellant had supplied the moulds free of cost to die-casting units of which 50% of the cost of dies invested by Sepack and balance contributed by the DMUs. The said reasoning of the learned Commissioner has been rebutted by Sepack in their Director's statement and also by adducing evidence of reduction in the cost price of the sealing machine by procuring raw material at a cheaper price benefits both DMUs as well as Sepack, all negotiati....
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....ent in moulds cannot be sustained as it is within the normal practice of the trade. 17. Further, the Commissioner has concluded that it is difficult to accept the fact that Sepack has exercised effective control since all key activities of DMUs including important decisions as to what production to be made; from where to purchase raw materials, what should be the transfer price etc.. Besides, he has observed that there is a huge difference in the price of sealing machines of the appellant and the transfer price of the machines by DMUs to the appellant. The reasoning of the learned Commissioner that selecting the raw material suppliers, advising the DMUs to purchase the raw material and periodical interaction with the personnel of DMUs in ascertaining the cost of production and determining the price of the machines which resulted cost benefit to the Sepack as well as to the DMUs be considered as financial flow-back from the DMUs to the appellant, are issues/factors considered by the Tribunal in its various judgments as insignificant factors in deciding whether Units are dummy or otherwise. Also, it is not brought on record that there is common workforce or supervising staff share....
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....orking expenses have been liberally advanced by Sepack to DMUs and there is accounted / unaccounted transfer of funds / profits from the business either from Sepack to DMUs and vice-versa. All the negotiations, meetings and reductions in cost resulted into such meetings that were carried out in a transparent manner and based on pure commercial terms. Therefore, it is difficult to accept that there are extra commercial dealings between Sepack and DMUs leading to a conclusion that the DMUs are not in existence and operational. 19. The learned advocate for the Sepack also vehemently argued that in the event the Department considers the DMUs are dummy units; then the adjudicating authority after directing confiscation of the goods seized from the premises of the said DMUs, and demanding duty from the appellant should not have allowed it to be redeemed by the respective DMUs, thereby acknowledged that DMUs are in existence as a separate entity and not a dummy unit of the Sepack. In support, the learned advocate referred to the judgment of the Hon'ble Supreme Court in the case of Gajanan Fabrics Distributors Vs. CCE, Pune [1997(92) ELT 451 (SC)]. We find merit in the contention of the....
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....ase. 21. The second alternate allegation of the Revenue is that the sealing machines cleared by the DMUs to the Sepack were incomplete, since the processes of branding, packing and placing warranty cards have been undertaken by the Sepack in their premises. It is the Revenue's contention that these processes are ancillary and incidental; therefore, resulted into manufacture of sealing machines. The learned advocate for the appellant referring to the judgment of Hon'ble High Court of Bombay in the case of CCE Vs. Rafique Malik (supra) submitted that mere packing, affixing their brand name and providing warranty to the customers would not result into manufacture as the sealing machines which were received by Sepack were in fully finished condition and capable of being bought and sold in the market as the goods were already in marketable condition. Therefore, the reasoning of the Commissioner that the sealing machines become complete and marketable after carrying out the processes of packing and affixing the brand name of the appellant would result into manufacture cannot be sustained. The Hon'ble Bombay High Court in Rafique Malik's case observed as follows:- 10. Thus, it....