TaxTMI 
TaxTMI 
2000 (5) TMI 47
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.... weaving unit under the name Suzuki Processors in village Guda, Tehsil Mandal, District Bhilwara and finances for the purposes were arranged by securing loans from IDBI. According to the case set up by the petitioner, the processing section of the Suzuki Processors was leased out to another company namely PGO Processors (Pvt.) Ltd. which was incorporated in 1994 and the said lease was duly registered on 3rd June, 1997. As a result of this transaction, M/s. Suzuki Processors applied for amending its certificate of registration under the Central Excise Rules on 2-6-1997 and PGO Processors (Pvt.) Ltd. applied for grant of registration certificate under the said rules so that with effect from 3-6-1997, the date of lease the manufacturing activities carried out in the process house become the manufacturing activities of the lessee and the lessee became liable for payment of excise duty under the Central Excise Act. To the extent manufacturing/processing done at the unit leased out to the PGO Processors the lessor is denuded of its liability to account for and pay excise duty on the manufacture of goods (processing of man-made grey fabrics) carried on by the lessee at the said process ho....
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.....08, 52.09, 54.06, 54.07, 55.11, 55.12, 55.13 and 54.14 manufactured or processed by it with the aid of hot air stenter. This required a declaration to be filed by the 'independent processors' claiming benefit under the notification. The PGO Processors, the lessee, which was registered under the Central Excise Rules, sought to file declaration as 'independent processor' under the Notification No. 36 of 1998 which was refused to be accepted by the respondent officers, presumably on the basis of pending investigation as a consequence of the aforesaid search. This action on the part of the respondents of not accepting the declarations by the PGO Processors (Pvt.) Ltd. under Notification No. 36 of 1998 led to filing of Writ Petition No. 11 of 1999 seeking a writ of mandamus for directing the Deputy Commissioner to entertain the declaration filed by the petitioner and to determine the annual capacity of the production of the process house under the notification and determine the levy of excise duty under the said notification in its favour and it was prayed that the petitioner be allowed to clear the goods availing the benefit of Notification No. 36 of 1998, dated 10-12-1998. The contro....
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....ited as well as the petitioner then before the Court, M/s. PGO Processors (Pvt.) Ltd., the Court said : "The respondents have issued show cause notice for cancellation of registration certificate granted under Rule 174 of the Central Excise Rules though they have not issued for revocation/suspension of the registration certificate and have not as yet decided to revoke/suspend the registration certificate. Grounds on which Registration Certificate once granted can be revoked/ suspended under sub-rule (11) of Rule 174 have also not been taken in the show cause notice which has been issued on the premises that the petitioner company does not own the unit and in fact the unit is owned by M/s. Suzuki Textiles Ltd. They cannot therefore contend that the petitioner company is not an independent manufacturer or independent processor at this stage and cannot stop the petitioner company from exercising its right to clear goods on payment of excise duty under Section 3A of the Act and notifications issued thereunder." 4.The Court also held as a premise for reaching its conclusion that the registration certificate granted to the company will have to be taken as valid recognition of its s....
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....ice one fact which during the course of the arguments has been brought to our notice that the very show cause notice Ex. 2, dated 15-1-1999 as well another show cause notice dated 31-5-1999 issued to PGO Processors (Pvt.) Ltd. were also made subject-matter of challenge in D.B. Civil Writ Petition No. 2179/99 filed at the behest of by M/s. PGO Processors (Pvt.) Limited. The common notice dated 15-1-1999 was subject-matter of challenge to the Petition Nos. 1266/99 and 2179/99 as well as the present petition. The said petition No. 2179/99 by PGO was decided with direction to the respondent No. 1, the Commissioner, Central Excise, Jaipur, to furnish authenticated copies of the documents relied on in the notices dated 15-1-1999 and 31-5-1999 as enumerated in the petitioner's (PGO's) letter dated 19-6-1999 addressed to the respondent No. 1 and proceed to adjudicate on the show cause notice only after supply of such copies. Substantive relief to quash notice itself was not granted. 7.The principal contention in this petition is that in view of the categorical finding of the Court in its order dated 22-4-1999 in Writ Petition No. 11/99 that until registration of PGO Processors (Pvt.) Lt....
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....r, the petitioner has its remedy to proceed against such adjudication under the provisions of Central Excise Act and Rules, which provide complete code of levy and collection of Excise Duty payable thereunder. No question as to vires of any provision or and inherent lack of jurisdiction to initiate such proceedings under Section 11A of the Central Excise Act has been made out. Therefore no ground is made for examining the merits of the show cause notices at this stage by this Court in exercise of its extraordinary jurisdiction. The petition deserves to be dismissed. 9.There cannot be any dispute about the settled principle that extraordinary jurisdiction is not ordinarily to be exercised to interfere with the show cause notices where the question as to the final outcome of the show cause notice can be adjudicated by the authority itself except where it is shown that the authority issuing show cause notice has no jurisdiction to invoke his authority either on account of non-fulfilment of any condition precedent, existence of which is required before assuming jurisdiction as in the case of issuing notices under Section 148 of the Income tax Act or for re-assessments under various ....
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....understood in the context of controversy that was before the Court. 11.From 3-6-1997 to 23-2-1998 the PGO Processors had been subjected to Excise duty in respect of fabrics processed at the process house owned by Suzuki as lessee under the lease agreement. However, since 24-2-1998, such processed fabrics, as were owned by Suzuki were subjected to excise duty on the basis of sale price of such processed fabric charged by present petitioner Suzuki Processors. The same was being paid by the PGO Processors (Pvt.) Ltd. for which refund applications were made by the said company. The proceedings in pursuance of search in the months of January and February, 1998 were pending investigation. Until issuance of Notifications No. 36 of 1998 and 42 of 1998, the Revenue was recovering the duty as if it was payable by a manufacturer processing his own goods for sale and no question of payment of less duty whether by Suzuki or by PGO really arose so far as levy of duty on the excisable event viz. the manufacture (processing) was concerned since 24-2-1998. On 10-12-1998, notification in exercise of powers under sub-section (3) of Section 3A of the Central Excise Act was issued where under the 'i....
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....r its consideration that the Court has searched for an answer on the basis of material that was before it. We may recall here that when the writ petition was filed though a search had been conducted on the premises of the present petitioner as well as on the PGO Processors way back in January and February, 1998, no proceedings in pursuance thereof had been initiated against any of the company and the matter was pending only at the stage of investigation of the material found during the course of that search and collected thereafter. During the pendency of the petition, show cause notices dated 15-1-1999 had been issued to both Suzuki Processors as well as to PGO Processors which is also the subject-matter of the present writ petition by the present petitioner. The said show cause notice had been filed before the Court in Writ Petition No. 11 of 1999 as a defence to that action. The show cause notice is a joint show cause notice to both the petitioners Suzuki Processors as well as PGO Processors (Pvt.) Limited. The part of the notice requiring PGO to show cause reads as under :- "Para 49. M/s. PGO Processors (Pvt.) Ltd., Bhilwara are also required to show cause to the Commissione....
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.... independent processors given in Notification No. 42 of 1998 laying rules for determination of annual capacity of production for the purposes of Notification No. 36 of 1998 in Explanation II which is as under :- "Explanation III. - For the purposes of this notification, an "independent processor" means a manufacturer who is engaged exclusively in the processing of fabrics with the aid of power and who also has the facility in his factory (including plant and equipment) for carrying out heat-setting with the aid of power or steam in a hot-air stenter, and who has no proprietory interest in any factory engaged in the spinning of yarn or weaving of fabrics." 14.With these premises, namely (i) registration under the Central Excise Act of the PGO Processors was subsisting, (ii) whether PGO Processors was an independent processor or not was yet to be determined, and that (iii) lack of allegation in the show cause notice either that the PGO Processors (Pvt.) has any proprietory interest in any factory engaged in the spinning of yarn or weaving of fabrics, the status of PGO Processors (Pvt.) Ltd. could be denied at this stage status of 'independent processor', the Court observed : ....
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....ch the PGO Processors was running the process house owned by Suzuki Textiles Limited. The observation in the judgment dated 22-4-1999 on which the bedrock of the contention was founded is reproduced herein below :- "The respondents have issued show cause notice for cancellation of registration certificate granted under Rule 174 of the Central Excise Rules though they have not issued it for revocation/suspension of the Registration Certificate and have not as yet decided to revoke/suspend the Registration Certificate. Grounds on which Registration Certificate once granted can be revoked/suspended under sub-rule (11) of Rule 174 have also not been taken in the show cause notice which has been issued on the premises that the petitioner company does not own the unit and in fact the unit is owned by M/s. Suzuki Textiles Ltd. They cannot therefore contend that the petitioner company is not an independent manufacturer of independent processor at this stage and cannot stop the petitioner company from exercising its right to clear goods on payment of excise duty under Section 3A of the Act and notifications issued thereunder." These observations at best can be that so long as the regi....
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.... Assistant Commissioner inasmuch as the other impugned notices Ex. 4 to 7 have all been issued subsequent thereto for different periods but are founded only on facts alleged in show cause notice dated 15-1-1999 (Ex. 2). After details of factual matrix, the Ex. 2 significantly levels the allegations against M/s. Suzuki Processors, Bhilwara and M/s. PGO Processors (Pvt.) Ltd., Bhilwara concerning the lease agreement dated 3-6-1997 under which Suzuki Processors claims to have divested itself of the status of processor of the fabrics in question by transferring the process house under a lease agreement to M/s. PGO Processors (Pvt.) Ltd., to be operated by the lessee. The relevant excerpts are reproduced below : Para 36 It appears that M/s. Suzuki Processors, Bhilwara and M/s. PGO Processors (Pvt.) Ltd., Bhilwara have suppressed material facts, made wiful mis-declaration and contravened various provisions of Central Excise Act and Rules with intent to evade payment of duty of excise in the manner discussed in foregoing paras as : (i) They have suppre....
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.... the excisable goods should not be confiscated, under the provisions of sub-rule (2) of Rule 173Q of Central Excise Rules, 1944. 17.Here, it is also apposite to notice the substance of the dispute which is at the centre of the controversy as to show cause notice of short levy/non-levy against Suzuki. The question has been raised sometime in past whether the processors of bleaching, dyeing, printing, mercerising dyeing, mercerising carried out by process in respect of a grey cotton fabric and man-made fabric belonging to the customer and entrusted by him for processing amount to manufacture at all within the meaning of the Central Excise Act. In corollary to this, another question has also been drawing attention of the Court as to what is the excise duty leviable in terms of Section 4 of the Central Excise Act on the processed fabric where the processing is done by the processor as job work and the fabric does not belong to him. This is to say while the duty is leviable ad valorem on the price at which the manufactured article is sold by the manufacturers, in the case of a job work there is no sale price of the manufacturer inasmuch as he being not owner of the commodity manufact....
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....e view taken by the Court earlier in Ujagar Print's case [1987 (27) E.L.T. 567 (S.C.) = AIR 1987 S.C. 874], and Empire Industries v. Union of India [1985 (20) E.L.T. 179 (S.C.) = AIR 1987 S.C. 281 (sic)], that if processes carried out in respect of grey cotton fabrics and man-made fabrics belonging to customer and entrusted by him for processing amount to manufacture within the meaning of the Act. It also approved the principle enunciated by the Supreme Court in case of Atic Industries v. Asstt. Collector of Central Excise [1978 (2) E.L.T. (J 444) (S.C.) = AIR 1975 S.C. 960] that the value of the goods for the purposes of excise duty must take into account only the manufacturing cost and the manufacturing profit and it must not be loaded with post-manufacturing costs or profits arising from post- manufacturing operations. 19.While dealing with this question, the Court said : "The nature of the goods and the conditions of the trade, excise is not concerned with what happens subsequently to the goods. It is the first immediate contact between the manufacturer and the trader that is made decisive for determining the wholesale cash price which is to be the measure of the value of....
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....ation as to the price at which he would be selling the processed goods in the market, would include only the price or deemed price at which the processed fabric would leave the processor's factory plus his profit Rule 174 of the Central Excise Rules, 1944 enjoins that when goods owned by one person are manufactured by another the information is required relating to the price at which the said manufacturer is selling the said goods and the person so authorised agrees to discharge all the liabilities under the said Act and the rules made thereunder. The price at which he is selling the goods must be the value of the grey-cloth or fabric plus the value of the job-work done plus the manufacturing profit and the manufacturing expenses but not any other subsequent profit or expenses. It is necessary to include the processor's expenses, costs and charges plus profit but is not necessary to include the trader's profits who gets the fabrics processed, because those would be post-manufacturing profits." 21.From the aforesaid background it becomes clear that where a processor of fabric is engaged in the processing on job work basis for processing of the grey fabric owned by customers, he i....
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....ocessors at the process house, in question. 22.We are here not called upon to decide this issue as it is the subject-matter of the show cause notice. We have only clarified the contours of the controversy which is required to be determined under the show cause notices impugned in the present writ petition. The contours of controversy against PGO prima facie is confined to cancellation of registration certificate and also proceeding against him for furnishing incorrect particulars about lease agreement now alleged to be sham and bogus and if such finding is reached it will face consequences thereof. 23.A great deal of arguments have been raised on the basis of opinion expressed by the Division Bench in Writ Petition No. 11 of 1999 in its judgment dated 22-4-1999 concerning Rule 174(11). Rule 174(11) reads as under :- Any registration certificate granted under"174(11) this rule may be revoked or suspended by the proper officer, if the holder or any person in his employ, is found to have committed a breach of any conditions of the Act or these rules or has been convicted of an offence under Section 161, read with Section 109 or with Section 116 of the Indian Penal Code.....
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....re substituted. Explanation. - Where the service of the notice is stayed by an order of a Court, the period of such stay shall be excluded in computing the aforesaid period of six months or five years, as the case may be." 27.While Section 11A authorises initiation of proceedings for recovery of any duty of excise which has not been levied or paid or short paid erroneously within a period of 6 months from the relevant date i.e. to say the date on which it became payable, the proviso to sub-sec. (1) in clear term envisages where any duty of excise has not been levied or paid or which has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of the Act or the rules made thereunder with intent to evade payment of duty by such person or his agent, the case falls under Section 11A with longer period of limitation within which action can be initiated in respect of past periods. The period within which the proceedings under Section 11A can be initiated in such cases is five years. We have referred to the proviso which make it clear that where a levy has been ....
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....ght forward way." 32.Gujarat High Court in CIT v. Sakarlal Balabhai [(1968) 69 ITR 186 (Guj.)] observed : "Tax avoidance postulates that the assessee is in receipt of an amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as occurring to another person, at the same time making it available for use and enjoyment to the assessee …………… But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income." The aforesaid decision of the Gujarat High Court was affirmed by the Supreme Court in CIT v. Sakarlal Balabhai [(1972) 86 ITR 2 (SC)]. 33.Justice R.N. Misra, delivering leading judgment in M/s. McDowell & Co. Ltd. v. CTO (AIR 1986 S.C. 649), examining the question about the jurisdiction of the tax authorities to lift the veil of any transaction and to obliterate method of tax evasion and avoidance of tax through tax planning said : "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of the tax planning and it is wr....
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....ollow a notice to show cause against such proposal to treat any act as a colourable device of tax avoidance or evasion. Outcome depends on conclusions reached as a result of such enquiry. 37.We are here not called upon to decide whether petitioner Suzuki Processors infact has entered into an unreal transaction or the transaction of lease is a bona fide genuine transaction to serve legitimate commercial end, as that is the subject-matter of enquiry under the show cause notice. Undoubtedly, under Section 11A when any competent authority under the Central Excise Act believed on the basis of any relevant material that burden of excise duty has been reduced by misrepresenting facts or by devising a colourable transaction to conceal the real nature of transaction, the necessary jurisdiction to initiate proceedings for recovering such short levy or non-levy whether from the person who has altogether escaped from the levy or from the person who has been subjected to short levy, cannot be doubted. The show cause notices directly impinge on the real nature of the transaction of lease between petitioner and the PGO Processors (Pvt.) Ltd. In the background of principles enunciated in Ujagar....