Judgment:
1. These two appeals have been filed by the appellants being aggrieved by the order dated, 9-2-1988 passed by the Collector, Central Excise, Pune. The Collector, Central Excise, in his order, had held: "The issue to be decided in this case is whether the two units taken together can be treated as an industrial unit. It is ascertained from the Deputy Director of the Directorate of Industries that for the purpose of granting registration as a small scale 'Industrial unit' if a manufacturer had more than one factory in the same district, the value of plant and machinery in all these units is clubbed and all such factories are regarded as a single industrial unit. Moreover, in this case, as Applied Research and Engineering Private Ltd., is a partner in ARE Educational Equipment, M/s.
Applied Research & Engineering is the manufacturer in both the units and hence value of the clearances from the two factories belonging to the same manufacturer can be clubbed in terms of Notification No. 77/85-C.E. and also as per CEGAT decision in the case of Shree Packaging and Bhagwandas Kanodia. As the value of plant and machinery in both the units is required to be clubbed for computing the value of clearances as per small scale exemption Notification applicable.
The demand in this case is, therefore, liable to be confirmed as the combined value of the industrial unit is more than 20 lakhs. Setting up a separate partnership with the private Ltd. company as one of the partners is a colourable device to avoid payment of duty. In this regard the Supreme Court decision in the McDowell case is a fitting one.
The demand of Rs. 34,681.35 issued on the assessee is hereby confirmed. It is reported that they have already paid Rs. 18,396.20.
If so, the remaining amount of Rs. 16,285.15 should be paid immediately." 2. The facts of the case are that a show cause notice was issued on 31-3-1986 to M/s. Applied Research & Engineering Pvt. Ltd. and M/s. ARE Educational Equipment Pvt. Ltd. asking them to explain as to why Central Excise duty amounting to Rs. 34,681.35 should not be recovered from them for the period 1-4-1985 to 31-1-1986 and in case they have already paid Rs. 18,396.20 why the balance amount should not be recovered from them. It was alleged that the aforesaid two appellants situated in the same plot were manufacturing goods falling under T.I.68 of the erstwhile Central Excise Tariff. The officers while verifying the records, noticed that according to the licence agreement dated 25-1-1985 executed between M/s. Applied Research & Engineering Pvt.
Ltd., Miraj and ARE Educational Equipment Pvt. Ltd., the manufacturing activities have been transferred to new unit from 1-1-1985 along with the machinery of M/s. Applied Research and Engg. Pvt. Ltd., manufacturing premises, raw materials and initial finance required to start with. It was also noticed that the old firm was to look after the marketing of the products of both the units. The office was also in the same building. It was also found that Shri M.K. Gune was the Managing Director of Applied Research & Engg. Pvt. Ltd. and looks after the entire management, production, marketing etc. It was also noticed that M/s. Applied Research & Engg. Pvt. Ltd. shared 90% profit in the business of ARE Educational Equipment and 10% profit was shared by three partners of the new firm. It was also noticed that the partners of the new firm are Directors of the Applied Research & Engg. Pvt. Ltd. 3. In reply to the show cause notice and during the course of personal hearing, the appellants argued that the position had changed since 1-4-1985 as M/s. Applied Research & Engg. Pvt. Ltd. had shifted to other premises situated more than 3 kms. away from the premises of M/s.
ARE Educational Equipment; that second proviso to Notification No.77/83 reading as "Provided further that the total, value of first clearances of the said goods from any factory by or on behalf of one or more manufacturers at nil rate of duty under this Notification, shall, in any case, exceed Rs. 30 lacs in a financial year"; that the appellants have been allowed the benefit of Notification No. 175/86 for the period 1986-87 and 1987-88 without clubbing the clearances of the two units. It was also submitted before the lower authorities that M/s.
ARE Educational Equipment was formed in Nov. 1984; that they took on lease, premises of M/s. Applied Research & Engg. Pvt. Ltd.; that is a private limited company; that ARE Educational Equipment took charge of the factory from 1-1-1985; that the main allegation that both the units produced goods in the same factory did not exist now as M/s. Applied Research & Engg. have started manufacturing in separate premises from October, 1986. After careful consideration of the submissions made, the ld. Collector, Central Excise, confirmed the demand and also imposed personal penalty.
4. Shri A.P. Kumtakar, the ld. Constt. appearing for the appellants submitted that the order passed by the ld. Collector, Central Excise was without jurisdiction inasmuch as the cases for demand of duty within six months fall within the jurisdiction of the Asstt. Collector; that in the process, the appellants have been deprived of right of second appeal to the Tribunal;that the ld. Collector has mixed up the two issues namely, the quantum of exemption to industrial units and capital investment; that Notification No. 77/85 refers to capital investment of plant and machinery of an industrial unit with reference to a factory and should not exceed Rs. 20 lacs; that this Notification does not refer to clearances of goods from the factory. In support of this contention, the ld. Constt. cited and relied upon the decision reported in 1984 (16) E.L.T. 30. (Bom.) 5. The ld. Constt. submitted that the ld. Collector relied upon the certificate given by the Dy. Director of Industries; that this certificate was [neither] a part of the show cause notice nor were the appellants given an opportunity to rebut it and, therefore, the certificate cannot be relied upon as evidence. It was argued by the ld.Constt. that the Director of Industries himself had issued separate SSI registration certificates to the appellants recognizing the appellants as Independent SSI units; that capital investment did not exceed Rs. 20 lacs in their case even when clubbed together; that there was no basis to hold that the value of clearances from the two factories should be clubbed together because the appellants are two distinct, different units holding different central excise licence, SSI certificates, sales tax, income tax registration. In support of this contention, the ld.Constt. cited a lot of case-law reported in 1981 E.L.T. 587, 1985 (22) E.L.T. 271, 1987 (32) E.L.T. 94 and 1987 (32) E.L.T. 204.It was argued by the ld. Constt. that the ld. Collector did not discuss the case-law cited by them, on the contrary, the ld. Collector erroneously held that Shree Packaging Corporation, Hyderabad case and Bhagwandas Kanodia and Ors. cover his findings; that there was no provision in Notification No. 77/85 which requires the clubbing of the value of investment of two separate independent units; that McDowell cited and relied upon by the Collector has no bearing in the present case inasmuch as in this case their Lordship observed that tax planning in legitimate provided it is within frame-work of law. It was argued by the ld. Constt. that formation of two units is not tax planning shows the growth of industries. The ld. Constt. contended that clubbing of capital investment in two separate factories is not justified for denying the exemption under Notification No. 77/85. In support of this contention, he cited and relied upon the judgments reported in 1985 (19) E.L.T. 87 and 1987 (30) E.L.T. 1019. The ld. Constt. also challenged the imposition of penalty stating that there was neither any suppression of facts or any misdeclaration and, therefore, the imposition of personal penalty was not warranted in the present case.
6. Shri A.K. Agarwal, the learned SDR reiterated the findings of the ld. Collector, Central Excise and submitted that M/s. Applied Research & Engg. Pvt. Ltd. had created M/s. ARE Educational Equipment only when they found that they were to cross the exemption limit; that the new unit was created by creating a partnership concern in which 90% profit was shared by Applied Research and Engg. Pvt. Ltd. and the other partners who were Directors of M/s. Applied Research & Engg. Pvt. Ltd. had created the firm; that the entire financing was done by M/s Applied Research & Engg. Pvt. Ltd. He submitted that this proved that the two appellants had financial link-up inasmuch as the goods were being sold only by one appellant and that both the units were controlled by the same person.
7. Heard the submissions of both sides. The first question that has been raised in the grounds of appeal is about jurisdiction. We find that under Section 11A, the Asstt. Collector is competent to adjudge a case in which the demand is for a period of six months. However, we did not see any prohibition in the Central Excise Rules that in such a case, the case cannot be adjudicated by the Collector. On the contrary, we find that the Collector can exercise the powers vested in any officer subordinate to him and thus the question of jurisdiction is answered in the negative. It was argued by the ld. Constt. that the Collector has mixed up the issue of exemption under Notification issued under Rule 8(1) with respect to the quantum of exemption to an industrial unit and capital investment to two separate factories owned by separate legal entities. We find that there are two provisos to Notification No. 77/85 issued under Rule 8(1) of the Central Excise Rules. The first proviso reads "Provided that an officer not below the rank of an Asstt. Collector of Central Excise is satisfied that the sum total of the value of the capital investment made from time to time on plant and machinery installed in the industrial unit in which the said goods, under clearance, are manufactured, is not more than rupees twenty lacs." The second proviso reads "Provided further that the aggregate value of clearances of the said goods from any factory by or on behalf of one or more manufacturers in any financial year shall not exceed rupees twenty lacs, five lacs and fifteen lacs respectively in terms of Clauses (a), (b) and (c) of this paragraph." Thus we find -that these two provisos are distinct, one deals with capital investment and the other with the aggregate value of clearances. Thus there is no mix up nor any confusion insofar as the provisos of Notification No. 77/85 are concerned. On the question whether the two units described as M/s. Applied Research & Engg. Pvt. Ltd. and M/s. ARE Educational Equipment Pvt. Ltd. are one and the same. We find that a lot of case-law was cited and relied upon by the appellants. Examining the case-law, we observe that this Tribunal in the case of Shree Packaging and Corp. reported in 1987 (32) E.L.T. 94 had held in paras 5, 6, 8, 9 and 16 which are reproduced below : Reliance was also placed on the decision of this Tribunal in the case of Bhagwan Das Kanodia and Ors. reported in 1987 (32) E.L.T. 204 had held in paras 6,7,8, 9,10,11 and 18 which are reproduced below :* * * * * 8. In the case of industrial unit, the appellants cited and relied upon the judgment of this Tribunal in the case of Malleable Iron & Steel Castings Co. P. Ltd. v. C.C.E., Bombay reported in 1987 (30) E.L.T.1019. In Para 17 of this judgment, the Tribunal about industrial unit had held that "The value of machinery producing Item 68 goods alone should be included for the purpose of construing the term 'industrial unit' occurring in Notification No. 89/79." The Hon'ble Bombay High Court in the case of Devidayal Electronics & Wires Ltd. and Anr. v. UOI and Anr. reported in 1984 (16) E.L.T. 30 had held that Notification No.74/78 uses the words 'factory' and 'industrial unit', it must therefore, be assumed that these two words are intended to bear different, meanings. Put differently, the word 'industrial unit' must mean something other than 'factory'. An industrial unit must mean that separate isolated part of the plant which is exclusively used in the manufacture of goods on which exemption is claimed. Thus, while computing the capital investment made on the plant and machinery installed in an industrial unit, the capital investment made on that part of plant and machinery would also be taken into account which is exclusively vised in the manufacture of goods which are subject-matter of exemption notification." The Hon'ble Madras High Court in the case of Bapalal & Co. v. Government of India and Ors. reported in 1981 (8) E.L.T. 587 had held : "5. It is not disputed that the petitioner firm has been registered in the Register of Firms as M/s. Bapalal and Co. (Manufacturing Department) with the registration No. 63 of 1933. M/s. Bapalal and Co. (Diamonds) has been registered separately with the registration No. 64 of 1933. It is admitted that the petitioner firm has nine partners, while M/s. Bapalal & Co. (Diamonds) has six partners. Six partners are common to both. It is not disputed that for purpose of sales tax and income tax the two firms are considered and treated as different entities. For the purpose of sales tax M/s. Bapalal and Co. (Diamonds) is given No. CST 1367 and TNGST No. 23746, while the petitioner is given No. CST NM 1370 and TNGST 23501. These facts clearly show that the two firms are distinct and separate entities.
No doubt, both the firms hold a common licence under the Gold Control Act, and the Central Excise Act and some of the partners are common. However, these facts cannot in any manner prove that the two firms are one and the same. As a matter of fact Mr. Balasubrahmanian did not seriously contend that the petitioner and M/s. Bapalal & Co.
(Diamonds) are one and the same. I have, therefore, no hesitation in holding that the two firms are not one and the same but are independent of each other." 9. Now examining the facts of the present case, we find that the period covered by the show cause notice was from 1-4-1985 to 31-1-1986. During this period only, the unit situated at Plot No. L-4, Industrial Estate, Miraj was working. The record also shows that the investment in this unit was only Rs. 4 lacs and, therefore, the investment was less than the one provided for in the proviso to Notification No. 77/85. We, therefore, observe that the findings of the ld. Collector, Central Excise in the impugned order that combined value of industrial unit is more than Rs. 20 lacs is erroneous as it is not based on fact.
10. Another issue that arises for consideration is whether M/s. ARE Educational Equipment is a dummy unit of M/s. Applied Research & Engg.
Pvt. Ltd. We find that M/s. Applied Research and Engg. Pvt. Ltd. is a limited company whereas M/s. ARE Educational Equipment is a partnership concern. No doubt, there are some common factors but all these factors have been adequately dealt with in the case cited and relied upon by the appellants and are quoted in the preceding paragraphs. Having regard to the ratio of the judgments cited supra, we hold that M/s. ARE Educational Equipment and M/s. Applied Research & Engg. Pvt. Ltd. are two distinct and different units and, therefore, the question of clubbing the aggregate value of clearances of these two units does not arise. They will be eligible to the benefit of Notification No. 77/85, individually.
11. As we have already held that M/s. Applied Research & Engg. Pvt.
Ltd. and M/s. ARE Educational Equipment are two different, distinct and separate legal entities and are eligible for claiming the benefit of Notification No. 77/85, therefore, the question of imposition of penalty on the firm does not arise.
In the result, the impugned order is set aside and the appeals are allowed.