Jogindernath Mehra Vs. Commissioner of Customs

M/s. L.D. Textiles Industries Ltd. were incorporated in 1995. Three brothers namely J.K. Mehra, T.K. Mehra and V.K. Mehra were its directors. On 14-11-1986 the Additional Chief Controller of Imports and Exports passed an order whereby L.D. Textiles and their directors were debarred from making any imports, receiving import licences/CCPs, buying from canalising agencies and importing any goods under OGL upto March, 2000. In 1995 M/s. Obron Impex Pvt. Ltd. was formed. The directors were Ajay Mehra son of J.K. Mehra and Sachin Mehra son of V.K. Mehra. In August, 1997 certain goods were imported by Obron Impex. Pursuant to an information that Obron was a front company created to overcome the obstacle of debarment, the customs monitoring such imports. Polyester staple fibre imported by Obron was seized. Statements of the concerned persons were recorded and documents seized from their premises were examined. The investigations showed that in order to save octroi duty the industrial licence of L.D. Textiles was changed to of Obron. The investigation showed that the correspondence leading to the present imports was made by L.D. Textiles. The contract was signed by T.R. Mehra. For covering the importation the licence was purchased by Obron but the payment was made by L.D. Textiles. The correspondence with the Karnataka Bank showed that two units were entirely interdependent. The statements of Sachin Mehra showed that Obron did not have any office premises, factory or any shops but that it was entirely a front company of L.D. Textiles. In terms of the statement of T.R. Mehra also it was shown that although on paper certain transactions were shown to have been undertaken between the two companies, the entire activity of financing and actual importation was done by L.D. Textiles in the name of Obron. Sachin Mehra in his statement dated 22-12-1997 made a clear admission that the entire facade of Obron was created to overcome the handicap of L.D. Textiles. V.K. Mehra in his statement clearly averred that the sole purpose in creating Obron was to facilitate the dealings of L.D. Textiles. These statements were corroborated by the other directors in their statements and have never been retracted thereafter. The show cause notice also contained the depositions made by G.M. Surana, Finance Controller, L.D. Textiles. The following sentence occurs in his statement .

"In other words it can be said that Obron is the front company of M/s. L.D. Textiles Industries Ltd. for doing import export work on behalf of M/s. L.D. Textiles Industries Ltd." This fact was also illustrated in the statements of R.G.K. Nair, Purchase Supervisor. The statement of Sachin Mehra later recorded indicated the mutual shareholding of the two companies. Sachin in his later statement also gave complete details of the financial transactions between the two companies and reiterated that the present imports were meant for L.D. Textiles through the front company. Similar averments were made by V.K. Mehra also. Shri J.M. Mehra also fully supported these statements. Ajay Mehra the other director of Obron corroborated these facts. The show cause notice also displayed the shareholding pattern of the two companies and fully established that Obron was a shadow unit of L.D. Textiles. The show cause notice also showed that the imports made prior to the present imports were made for and utilised by L.D. Textiles. The show cause notice alleged liability to confiscation of the seized goods and also of penalty of the concerned persons. After hearing the noticees, the Commissioner of Customs confiscated the goods totally valued at Rs. 1,50,05,9857- but permitted their redemption on payment of a fine of Rs. 15 lakhs. He imposed penalties of Rs. 25 lakhs on M/s. Obron as well as on L.D. Textiles. He imposed penalty of Rs. 25 lakhs on Sachin Mehra and of Rs. 20 lakhs each on V.K. Mehra, T.R. Mehra, J.M. Mehra and Ajay Mehra. The order also confirmed the demand of Rs. 11,15,302/- being duty on earlier consignment similarly cleared. Against this order these seven appeals have been filed.

2. Shri Willingdon Christian, learned counsel for all the appellants, drew attention to the provisions of Section 2(33) of the Customs Act, 1962 which defines prohibited goods. It was his submission that the goods, viz. polyester staple fibres were at the material time importable under OGL. He also referred to the provisions of the Imports and Exports (Control) Act as well as the Imports and Exports (Control) Order, 1947. It was his submission that the goods conformed to and were eligible to be imported under the import licence submitted and therefore the goods could not be termed as prohibited goods. Attention was invited to Clause 11(4) of the Import (Control) Order, 1955 whereby goods covered under OGL were held as not prohibited goods. It was claimed that Obron was the real importers in terms of Section 2(26) of the Customs Act. In this respect reference was made to the Tribunal judgment in the case of Dhirubhai N. Sheth v. CC, 1995 (75) E.L.T. 697 as also the Supreme Court judgment in the case of Sampatraj Dugar & Another -1992 (58) E.L.T. 163 (S.C.). It was further claimed that once the appropriate authority had finalised the assessment under Section 47 no show cause notice such as this could be issued. Case law in support was cited. Plea on limitation was advanced. It was claimed that there was no commonality of directors in the two companies and that both being limited companies unity could not be alleged. Case law in this respect was cited. In interpreting the provisions of Clause 6(1)(d) of the Order it was claimed that the language thereof was such that the provisions could not be invoked against L.D. Textiles also. Some other points were also raised to contest the debarment order. The claim was also made that the authority to take action in the present circumstances rested with the licensing authority and not with the Customs authorities. It was claimed that if the Customs were of the opinion that the imports had been made in contravention of the licensing provisions, it was mandatory for the Customs to have referred the matter to the licensing authorities for them to take appropriate action and the present action was clearly beyond the competence of the Customs.

3. Shri Deepak Kumar arguing for the revenue stated that where any imports were made to overcome the provisions of the Import Trade (Control) Legislation, the goods were rendered liable to confiscation.

In making the statement he cited the Supreme Court judgment in the case of Sharp Business Machines Pvt. Ltd. v. CC - 1990 (49) E.L.T. 640.

Citing the judgment of the Tribunal in the case of Indian Potash Ltd. v. CC -1991 (55) E.L.T. 236, he claimed that even if the imports were made in the name of Obron the actual importers were still L.D.Textiles. He stated that in valuation of the goods and also in determining the identity of the importer, the relationship between two entities was necessary to be established.

5. We have carefully perused the show cause notice which is extremely well documented and steins from an enquiry made in a competent manner.

On perusal of the evidence disclosed therein there is little doubt that the two companies, although separate legal entities on record, were in fact a single entity. Learned counsel at the time of personal hearing also did not make a very serious attempt to counter the averments in the show cause notice.

6. In the cited judgment in the case of Calcutta Chromotype Ltd. v. CCE - 1998 (99) E.L.T. 202, the Supreme Court examined the need for lifting the corporate veil to determine the actual situation in a given case.

In paragraph 14 of the said judgment the court was commenting upon the scope of the provisions of Section 4(4)(c) of the Central Excise and Salt Act, 1944 and principles attracted in defining a related person.

This judgment of the Supreme Court endorsed the power of the Taxation authorities to critically examine the interrelationship of two corporate entities to determine whether their transactions were at arms length or whether the two companies were related. In the ambit of the Central Excise Law where fragmentation is resorted to take benefit of value based exemption limits given to small sector units, the courts have upheld the findings of the Excise authorities denying the benefit where the unity of two or more corporate entities is established on record by evidence. A recent judgment is that of the Supreme Court in the case of Gajanan Fabrics Distributors 1997 (92) E.L.T. 451 (S.C.).

The Tribunal have held in like manner as evidenced in the case of J.N.Marshal Pvt. Ltd. v. CCE, Pune 7. As we have observed above, the details disclosed in the show cause notice which are not seriously contested, establish the fact that Obron, although created on record, as an independent unit, was merely a shadow or dummy of L.D. Textiles. Therefore the ban which was imposed on L.D. Textiles would affect the imports made by Obron also.

8. The various case law on which reliance placed do not come to their rescue. The Clause 6(1) of the Import (Control) Order does not afford any protection against the action taken under Clause (8) of that Order.

As regards the submission that once the assessment is finalised under Section 47 of the Customs Act, 1962, the assessment cannot be reopened, we find that in the cited judgment of the Delhi High Court in the case of Jain Shudh Vanaspati -1982 (10) E.L.T. 43 (Del.) there exit a rider and caution. The judgment says that the assessment reaches finality unless it is shown successfully that there was fraud or deliberate suppression of facts. The suppression very clearly exists in the present case and therefore the protection of the judgment is not available. The contention that the Customs authorities have no jurisdiction to seize the goods is equally fallacious. If there was a ban in terms of another Act and if that ban was violated, then the very language of Section 111(d) renders the goods liable to confiscation.

9. In the present case it has to be held that Obron was a shadow unit of L.D. Textiles, and since L.D. Textiles was prohibited from importing any goods even under the OGL, the present imports must be deemed to be prohibited goods and consequently their confiscation has to be upheld.For the same reasons there can be no protection for the imports earlier made. Those imports were also made in a similar manner. In view of the element of fraud, the plea of limitation is also without merit.

10. A fine of about 10% has been prescribed for redemption of the goods. We do not find the quantum to be excessive or harsh. The plea that the appellants had to incur a substantial demurrage cannot go to reduce the quantum of fine.

11. As regards the penalty, we find that once it is held that the two units were in fact one, the orders of imposition of penalty on M/s.

Obron Impex Pvt. Ltd. which is a dummy unit would not survive. In holding this, we are following the cited judgment of the Supreme Court in the case of Gajanan Fabrics Distributors (supra). Given the planning made by L.D. Textiles Industries Ltd. to circumvent the prohibitions imposed upon them, we find the quantum of penalty imposed upon them to be reasonable and do not interfere therewith.

12. We have given careful consideration to the pleas advanced on the imposition of penalties on the directors of the two companies. It is claimed that the company, namely M/s. L.D. Textiles Ind. Ltd. were prohibited from importing any goods, but the prohibition did not extend to the directors thereof. It is claimed that the directors had independent identity and were entirely free to import the subject goods in their individual capacities. We find little merit in this plea since the debarment order itself prohibits the directors also. We also find little merit in the plea made in the appeal memorandum that the debarment order is still under challenge before the High Court.

13. We are, however, of the opinion that once the company has been penalized, there is little reason to impose equal penalties on the persons floating the company. The statements on record show that V.K.Mehra, T.R. Mehra, Ajay Mehra and Sachin Mehra had played predominant role in the scheme of creation of the corporate well. There is no direct implication made by anyone of J.N. Mehra apart from, admitting that he was one of the directors in L.D. Textiles. This fact would also be taken in judging the adequacy or excess of the penalties.

(1) The orders of the confiscation of the goods and their redemption on payment of fine as well as the quantum of fine are upheld. (2) The orders of confirmation of duty on the goods earlier imported and cleared without payment of duty are also upheld. (4) The penalty imposed upon M/s. Obron Impex Pvt. Ltd. is remitted in full.

(5) The penalties imposed upon the following persons are reduced to the following amounts :(i) T.K. Mehra Rs. 20,00,000/- Rs. 10,00,000/-(ii) V.K. Mehra Rs. 20,00,000/- Rs. 10,00,000/-(iii) J.N. Mehra Rs. 20,00,000/- Rs. 5,00,000/-(iv) Ajay Mehra Rs. 20,00,000/- Rs. 10,00,000/-(v) Sachin Mehra Rs. 25,00,000/- Rs. 15,00,000/-