1. The appeals Nos. 1 to 5, above, are directed against the order dated 26-9-1989 passed by the Collector of Central Excise & Customs, Aurangabad. By this order, the Collector has demanded duty of Rs. 5,13,190.10 from the appellants, M/s. Sinkhai Synthetic & Chemicals and Rs. 7,66,499.80 from the appellants, M/s. Masiha Medica and Rs. 14,27,073.27 from the appellants, M/s. Vivomed Laboratories under Rule 9(2) read with Section 11A of Central Excises & Salt Act, 1944. He also imposed penalty of Rs. 5 lakhs on the appellants under Rule 173Q of Central Excise. A penalty of Rs. 10 lakhs has been imposed on appellant, Sami Khatib and Rs. 5 lakhs on appellant, Sohel Khatib under Rule 209A Central Excise Rules. The other order of the Collector against which the appeal No. E/2770/90-C has been preferred, is dated 10-4-1990 by which he had demanded a duty of Rs. 12,78,098.47 for the period from April, 1987 to February, 1989 which is subsequent to the period covered by the earlier order, from the appellants, Vivomed Laboratories.
2. The facts leading to the appeal briefly are that the appellants, Vivomed Laboratories ("Vivomed"), Masiha Medica ("Masiha"), Sinkhai Synthetic & Chemicals ("Sinkhai"), it is alleged by the Department, are manufacturers of P or P Medicines falling under Chapter 30 of the Schedule to the Central Excise Tariff Act, 1985. The technical knowhow and the product formulation were obtained by these units from M/s.
Medley Laboratories Pvt. Ltd., Bombay and according to the Department, the goods were also marketed by M/s. Medley Labs. through the distributing agencies which are partnership firms. M/s. Medley Labs.
is, basically, a research and development centre. On a reasonable belief that the three units, namely, Vivomed, Sinkhai and Masiha are evading Central Excise duty by suppressing the fact that they have mutual interest in the business of each other and also with M/s. Medley Pharmaceuticals (P) Ltd. and on this basis had wrongly availed of Central Excise Small Scale Industries Exemption under Notification 83/83 dated 1-3-1983, 85/85 dated 17-3-1985 and 175/86 dated 1-3-1986, the Divisional Preventive staff paid a surprise visit to the three units and recovered incriminating records and documents. It was revealed that Medley Labs., Bombay is the founder company in Medley group of companies engaged in research and development which had developed new products and handed them over to the associates like M/s.
Vivomed, M/s. Masiha, M/s. Sinkhai and M/s. Medley Pharma. This company (Medley Pharma) is also engaged in marketing of the goods through three distributing agencies and the Department found that as and when this company finds that no new product can be passed on to the existing units, new companies are formed to undertake manufacturing of the medicines developed by that company. In 1986, this company had formed two new companies, namely, M/s. Masiha and M/s. Sinkhai. It was the Department's case that all the five units have mutual business and financial interest in each other and there was inter-locking of management, finance and other incidents of the business of manufacture/sale of P.P. Medicines. In these circumstances, for purposes of determining eligibility under the exemption notifications, as above, the value of clearances of all the five companies of Medley group, the Department found, have to be taken together and it appeared that these companies have evaded payment of Central Excise duty by suppressing the above facts of their inter-relationship and thereby wrongly availed the exemption meant for small scale industrial units. A show cause notice was, therefore, issued on 21-4-1988 to these companies (Vivomed, Masiha and Sinkhai), the Chairman and Executive President, Sh. Sami Khatib and Vice-President, Shri Sohel Khatib calling upon them to show cause why a penalty should not be imposed on them under Rule 173Q and why Central Excise duty amounting to Rs. 14,27,076.27, Rs. 7,66,499.80 and Rs. 5,13,190.10 respectively should not be recovered from them under Rule 9(2) read with Section 11A(1) of the Central Excises & Salt Act, 1944. The Collector confirmed the demand and adjudicated the case by his order dated 14-3-1989 which was challenged before the Tribunal and the W.R.B. of the Tribunal, by its order dated 31-7-1989, remanded the case to the Collector on the ground that opportunity for personal hearing had not been extended and directed the Collector to decide the case afresh after hearing the appellants in the matter. Accordingly, the appellants herein, were offered personal hearing by the Collector. After considering the submissions made, the Collector adjudicated the case afresh by the order dated 27-9-1989 which is presently challenged before the Tribunal. The other order of the Collector was only a further logical extension of this order by which duty was being demanded for a subsequent period.
3. Sh. S. Ganesh, the Ld. Counsel appearing for the appellants, submitted that the Collector's order is bad in law both on the grounds of limitation and also on merits. The Ld. Counsel pointed out that a show cause ..otice has been issued for a period beyond six months for demanding duty under Section 11A. According to the appellants, there can be no ground for alleging suppression of facts by the appellants.
In this connection he pointed out that the period for which the duty has been demanded is between March, 1982 to February, 1987 for which the show cause notice had been issued only on 21-4-1988. The facts show, however, that there was no suppression of facts by the appellants. Prior to the commencement of the manufacturing activity, the appellants (Vivomed) had specifically informed the authorities that they were entitled to the exemption available under Notification 80/80 and also sought confirmation that since they were in the exempted category, they need not to take out a Central Excise licence. The Superintendent received the said communication and also confirmed that they need not take out a licence. They had also submitted a classification list on 1-3-1984 listing all their products effective 1-3-1984 and submitted labels in respect of each of its products. The classification list was duly approved by the Department. On 27-3-1984, the Superintendent wrote to the appellants following an audit report and pointed out that the audit had found that Sh. Sami Khatib is also the Chairman of M/s. Medley Pharma and the Executive President of M/s.
Vivomed and, therefore, it is felt by the audit that the quantum of value of clearances of M/s. Medley Pharma should also be taken into account for considering the applicability of Notification 83/83 dated 1-3-1983 and that since the value of clearances of M/s. Medley Pharma runs into crores the exemption availed during 1982-83 and 1983-84 is inadmissible. This was denied by the appellants saying that they were a separate entity having their own land, building and plant as well as staff and were not connected with M/s. Medley Pharma. The matter was not pursued further by the Department. Again on 28-5-1984, the Range Superintendent, enquired from the appellants about the proprietary interest, if any, which the appellants (Vivomed) might have in the business of Medley Pharma or vice versa. Again, this was replied to by the appellants (Vivomed) upon which the Department requested for copies of the Memorandum of Articles of Association of their Co. (Vivomed) as well as of Medley Pharma which was also sent to them. The appellants (Vivomed) also clarified vide their letter dated 8-1-1985 that they were a separate company having a separate independent identity and that they have no proprietary interest in any other unit manufacturing P or P Medicines and also in Medley Pharmaceuticals. Thus, it was contended that the Department had investigated the very same issue of inter-relationship with the other firm which had been raised in the show cause notice leading to the impugned order. Secondly, the Ld.
Counsel contended that there is no question of suppression of facts by the appellants (Vivomed). As regards the other appellants, namely, Masiha and Sinkhai, they had also applied and obtained the Central Excise licence and duly submitted the classification lists in which they had enclosed labels which show that they are part of the Medley group of companies and after satisfying themselves, the Department had approved the classification lists and, therefore, there will be no case for alleging suppression of facts, according to the appellants. The Ld.
Counsel, in this context, relied upon the decision of the Supreme Court in the case of Collector of Central Excise, Hyderabad v. Chemphar Drugs and Liniments -1989 (40) ELT 276 wherein it has been held that the demand under Section 11A could not be extended beyond six months in cases where it could not be said that the manufacturer has withheld any information about the drugs manufactured by them deliberately.
Something positive other than mere inaction or failure on the part of manufacturer is to be proved and conscious or deliberate withholding of information is required to be established before the extended period can be invoked. In this case, as has been stated above, all the facts had been furnished to the Department. He also relied upon the Supreme Court decision in the case of Padmini Products v. CCE, Bangalore - Judgment Today -1989 (3) SC 404 where the Supreme Court followed the Chemphar Drugs decision and held that mere inaction or failure or negligence on the part of the manufacturer to take out licence in case there was scope for doubt whether licence is required to be taken out would not attract Section 11A of the Central Excises & Salt Act, 1944.
The Ld. Counsel pointed out, in this connection, that even upto June, 1988, the classification list had been approved which was only modified by the other order of the Collector against which also an appeal has been preferred now. As regards the order of the Collector, clubbing clearances of the units, herein, the Ld. Counsel submitted that the appellants (Vivomed) was established in 1979 whereas the Medley Pharmaceuticals had come into being in 1975. He also referred to the statement on record listing shareholders and their respective shareholdings in Medley Pharmaceuticals and Vivomed to show that the two units are not controlled by the same persons because the majority of the shares are held by persons not related to Sami Khatib or Sohel Khatib. Further, the products, produced by the two units are also different. It was also pointed out that the shareholders' percentage, as indicated in the Collector's order of the various firms, is factually incorrect as can be seen with reference to the list of shareholdings now produced. The Ld. Counsel also referred to the list of managerial personnel and their functions and submitted that when the shareholding of the firms is not 100% in the hands of the same person, no clubbing can be ordered. As regards the project report, on which the Collector has relied upon in his order at page 29 thereof, it was contended that there was nothing wrong in the contents of the project report and it was a usual commercial practice whereby the manufacture of new products is given to new company instead of loading it on to an existing firm. The project report only contained a commercial justification which is nothing unusual. The Ld. Counsel also submitted that reliance has been placed on certain financial transactions, between the firms without charging of interest. However, it was pointed out that none of these transactions were in the nature of long-term loans and where it exceeded a period of three months, interest had been charged. The Ld. Counsel, further, cited the following case law to show that even where there is certain aspect of commonality and pooling of resources among firms, it has been held in the orders by the Tribunal that there can be no clubbing of clearances : (i) 1983 ELT 1994 (T) - G.D. Industrial Engineers v. CCE, Chandigarh, (iii) 1987 (32) ELT 204 (T) - Bhagwan Das Kanodia v. C. C. E. (Bom.).Annapurna Mills v. CCE 4. The Ld. Counsel referred to the case law and contended that the Tribunal had held that where the units are two distinet entities, they are not to be treated as one even if there are common or related persons in management and having inter se relationship and sharing of storage and telephone facilities and common personnel, and the clubbing is upheld only in such cases where it is shown that one unit is owned by the other or there is financial and production control by the other and there is evidence to show flow back of profit. None of these features are present in the case of appellants herein. Therefore, the appellants (Vivomed) and (Masiha) are to be treated as separate units.
Appellants, Sankhai and Masiha have no marketing organisation of their own and hence they have entered into an agreement with the Medley Pharmaceuticals who have such facility of established marketing organisation for creating a demand for their product. But the Counsel contended that the selling operations were those of Sinkhai and Masiha only and for the services rendered by the Medley Pharmaceuticals, they are paid a commission as business expenses which had also been admitted by the Income-tax Department. Regarding personal penalty on appellants, Sami Khatib and Sohel Khatib, the Ld. Counsel pointed out, that the show cause notice in this case was issued under Section 173Q without any personal allegation against these two appellants except bare statement in the Order-in-Original that they had planned and executed the wrongful availment of exemption by creating new units. The personal penalty had been imposed under Rule 209A without even amending the show cause notice to bring in this Rule. Even for imposing penalty under Rule 209A, it should be shown that the person concerned had committed an illegality which has not been brought out in the show cause notice or in the Order-in-Original. As regards the personal penalty on the appellant companies, there could be no ground for such penalty, according to the Ld. Counsel, because these appellants had not held back any information from the Department deliberately as has already been submitted supra.
5. Sh. Narasimha Murthy, the Ld. SDR appearing for the Department, argued that the extended period has correctly been invoked in the facts of present case because the appellants, nowhere, indicated in their classification lists, that they were associated firms with the Medley Pharmaceuticals. It was not disclosed in their letter to the Department also by M/s. Vivomed. According to the Ld. SDR, the show cause notice brings out the charge against the appellants Sami and Sohel Khatib also. It was also contended by the Ld. DR that label alone will not show relationship of the appellants with Medley Pharmaceuticals. He also, in this connection, referred to the reasoning of the Collector in his impugned order rebutting the claims of the appellants. The fact that the classification list had been approved, will not be a bar for demanding short levied duty based on certain information regarding inter-linking of the appellants' firms which the Department discovered only on visiting their units and on scrutiny of the documents recovered. Therefore, there was suppression justifying demand for a period beyond six months under Section 11A of the Act. As regards the merits of the case, the Ld. DR pointed out that there is evidence on record to show that the two appellants, Sami Khatib and Sohel Khatib are the persons really in control of the units as has been brought out by the Collector in his order. The firms, Masiha and Sinkhai have been promoted by Sami Khatib and in this connection, the Ld. DR referred to the documentary evidence showing the control of all the units by Sami Khatib and the financial and other interests of each other among them.
The application for term loan submitted to the Maharashtra State Financial Corporation, by M/s. Masiha dated 11-2-1986 in Column 1.06 thereof, which is for details of associate/subsidiary concerns or concerns in which the promoters are interested, the names of Medley Pharmaceuticals, Medley Laboratories, Vivomed Laboratories and Masiha Medica in that order have been shown. Similar is the case for similar loan application by M/s. Sinkhai. The note on group of activities of the firm at Page 249 of the Paper Book shows that all the four firms were promoted by Sami Khatib. Further, in the application for loan dated 20-3 1986 to the Maharashtra State Financial Corporation from M/s. Sinkhai, it has been clearly stated that Sami Khatib is the Executive President of the Medley group of companies, namely, Medley Pharmaceuticals, Medley Laboratories and Vivomed Laboratories and is totally incharge of all the business functions which also brings out the financial and administrative inter-linking of the firm. According to the Ld. DR the facts of this case are similar to the case decided by the Tribunal Order No. 431/432/84D, dated 30-7-1984 in the case of Suresh Industries and Krishna Industries v. CCE, where the Tribunal found clubbing justified. The evidence clearly shows in this case, according to the Ld. DR, that the firms have been created with a view to remain within the exemption limit. The show cause notice is also clear that the appellants, Sami Khatib and Sohel Khatib were in control of all the units and the Ld DR contended that the citing of wrong Rule (Rule 173Q) in the show cause notice will not be a bar for imposing penalty under Rule 209A so long as the authority imposing it has the power to do so. Therefore, the demand was justified as also the personal penalty.
6. We have carefully considered the submissions made by the Ld. Counsel and the Ld. DR. Taking up the question whether the demand beyond six months is hit by limitation, we are of the view that the facts on record would show that such invoking of the extended period will not be justified on the facts and in the circumstances of the case. This is because even in 1984, on 27-3-1984 by his letter, the Superintendent, Central Excise, Aurangabad, following the audit report No. 67/63 had conveyed the audit objection that from the copy of the provisional registration of the certificate of M/s. Vivomed (appellants) as small scale industry, it was seen that the unit address is C/o. Sami Khatib who is also the Chairman of Medley Pharmaceuticals and is Executive President of M/s. Vivomed and therefore, the question of clubbing the clearances has to be considered. On obtaining the reply from the appellants, M/s. Vivomed, saying that they are separately registered with the Registrar of Companies, Bombay, having their own land, plant and machinery and staff also denying any connection with Medley Pharmaceuticals as they have their own registration certificate, separate factory licence and Central Excise licence as well as Sales Tax registration, the Department seems to have carried out investigations and the classification list, submitted by the appellants, Vivomed, had been duly approved. Again on 28-5-1984, there was query by the Superintendent asking to know whether Vivomed have any other unit or proprietary interest in other units manufacturing these specified goods and the letter also says "from the label of the product GROMIN, it appears that the said product is manufactured by Vivomed Lab. Pvt. Ltd. as well as Medley Pharmaceuticals Pvt. Ltd. Please clarify whether these units have any proprietary interest in each others business". The reply was also considered in which they denied having any proprietary interest. Thereafter, the memorandum of articles of association of Vivomed and M/s. Medley Pharmaceuticals had been scrutinised and a further query was raised by a letter dated 25-12-1984 with reference to the statement on the label indicating an agreement with Medley Pharmaceuticals. This query was also answered by the appellants, Vivomed on 8-1-1985 that they are a separate company not having any proprietary interest in any other units manufacturing P or P medicines or in M/s. Medley Pharmaceuticals. This query, it may be noted, arose out of a perusal of the label, which the appellants, Vivomed, submitted with the classification list and the Department, apparently, had not made any further query.
The classification list had also been approved. In such circumstances, it will be difficult to sustain the charge of suppression of facts which is raised in the show cause notice which came to be issued much later on 21-4-1988. The same reason should hold in respect of the classification' list submitted by the appellants, Masiha and Sinkhai because there also the labels indicating the marketing of the products by Medley Pharmaceuticals was present and when the Department had this material before it and when no further enquiry was made on that basis, as they had in fact done on the basis of similar remarks in the label, while scrutinising the classification list of the appellants, Vivomed, then the submission that there was no suppression of the facts on the part of the appellants, will gain a lot of force and has to be accepted. As regards the question whether the clearances of the appellants can be clubbed for the purpose of determining eligibility to the small scale industries exemption notifications, it is seen that the Department is relying upon the position that the appellant firms Sinkhai and Masiha have been created by appellants Sami Khatib as strategy by fragmenting the existing units in order to keep within the exemption limit. It would appear from the records that each of these firms are separately registered private limited companies. The details of the shareholders have also been given. It cannot be said that the shareholders in all these firms are the same group of persons so as to vest control with a single group of persons for all the units. In fact, it is also seen that the financing of the firms has been through separate application for loan from financial institutions like Maharashtra State Financial Corporation. The units also have been registered separately under the various Acts, like Income-tax Act, Sales Tax and separate Central Excise licences which have been granted after approval of the ground plan for the premises. No doubt, certain features are noticeable to show that Sami Khatib and Sohel Khatib have an over-all say in policy matters in the Medley Group of Companies. But that by itself may not be a criterion for clubbing the clearances of these firms because of the fact that the personnel discharging various functions, administration, production, in each of the firms, is not the same. There is also no conclusive evidence regarding financial flow back among these firms. In the case of Kinjal Electricals v. CCE -1989 (43) ELT 327, this Tribunal had emphasised that the question whether two firms were independent would depend much on the question whether they have separate legal entities and functioned independently of each other though they may have transactions among themselves.
One of the primary considerations for a resolution of such a dispute would be whether there was any financial flow back from one to the other except in the course of normal commercial transactions. In the present case, the Department is relying upon certain interest-free loans that had been advanced between these firms which should indicate, according to the Department, financial link-up. However, these had not been shown to be long-term loans and it is also submitted by the appellants that interest was charged where the period exceeded 3 months. This very aspect had been considered in another case by the Tribunal in the case of Jagjivan Das & Co. v. CCE -1985 (19) ELT 441 where the Tribunal held in the facts of that case that since the transactions between three firms were duly accounted for, the mere fact that they did not charge interest against one another on the transactions, when they were doing so against others could not be a conclusive circumstances to find against the appellants that their clearances were for and on behalf of one another. It is also not possible to hold from the contents of the project report, as the Collector has done in his order, that the observation therein, is indication of a strategy of fragmentation in order to remain within the exemption limit. In fact, the project report says that a number of new products are in the pipeline and looking to the production and marketing activities of the existing companies, it is not advisable that they should handle more number of products. The submission in this context that this was more in the nature of commercial justification, sounds plausible. As regards the tie-up with M/s. Medley Pharmaceuticals by appellants, Sinkhai and Masiha for marketing purposes, the appellants explained that the services rendered are also paid for in terms of an agreement between them and Medley Pharmaceuticals for availing of the services of their marketing organisation. So long as the actual selling operation is that of the appellants, it cannot be held that this tie-up would justify the clubbing of the clearances of the units. In this connection, it is useful to recall the criteria laid down by this Tribunal for justifying such clubbing of clearances in Bhagwan Das Kanodia v. CCE -1987 (32) ELT 204. In that case, the lower authorities concluded that 16 powerlooms owned by four units which were separate legal entities were in reality producing the fabrics for and on behalf of the same person, namely, the selling agent, in view of the evidence of common purchase of yarn, common source of funds, etc. and were held to be ineligible for exemption. The Tribunal noted that the units had been treated by the Income-tax authorities as separate assessees. They were registered separately under the Central Sales-tax Act and they had separate tax mark from Textile Commissioner as well as separate electric connections, besides, separate Central Excise licences.
The Tribunal in this case held that there was no justification for the conclusion of the lower authorities that though the four units were separate legal entities they created a separate fifth entity akin to a consortium (which is similar to an unregistered partnership) is not correct. The Tribunal held that the four units were functioning independently though there was some amount of pooling of resources but with separation of benefits and liabilities periodically and adjustment of accounts. From the facts surrounding the units involved in the present appeal before us, the criteria adopted by the Tribunal would be applicable. In the same decision, the Tribunal observed that to establish the case against the appellants for imposing duty liability on them, something more would be required for example, the existence of a person or a body of persons who, in reality owned, directed and controlled the production in the four separate units which would show that the four units were only facade to avail of the exemption. In the present case also, as discussed above, it cannot be said that there is total ownership of all the units by the appellants, Sami Khatib and Sohel Khatib although there is evidence that they do have a say in the policy and business operations. There is also lack of evidence to establish financial flow back among the firms, not adjusted in their account. In these circumstances, on the facts and in the circumstances of the case and in the light of the case law referred to supra, it has to be held that the various circumstances which have been held against the appellants by the Department have been plausibly explained by the appellants. The Misc. applications are for seeking additional grounds relating to the determination of value under Section 4(4)(d)(ii) of the Central Excises and Salt Act which does not fall for consideration now in view of the findings as above and the applications are accordingly disposed of. The demand for duty by clubbing the clearances of all these firms is not maintainable in law and accordingly it is set aside.
As a consequence, there will be no justification for imposing penalty on the firms and the appellants, Sami Khatib and Sohel Khatib which is also accordingly set aside. The appeals are, therefore, allowed.