1. All the above appeals arises from a common order-in-original dated 27-7-1990 passed by Collector of Central Excise, Coimbatore.
2. By this order, the ld. Collector has held that the benefit of Notification No. 175/86-C.E. is not available to them and that the fragmentation of manufacturing activities has been done in a manner to avail the benefit of the said notification only to evade payment of duty. In that view, he has confirmed the duty invoking larger period under Section 11A of the Act to the extent of Rs. 1,25,88,822.03 and also imposed penalty of Rs. 1,00,000/- on M/s. Santha industrials and Rs. 25,000/- each on the other ten units. The facts of the case arising in his appeals are that on 7-1-1989, the Headquarters Preventive Unit along with other officers of this Collectorate visited M/s. Santha Industrials and the other ten units and scrutinised the records and recovered certain documents. On further scrutiny and investigation conducted by M/s. Santha Industrials, the following facts are said to have come to light: (1) Shri R. Doraiswamy, Proprietor of M/s. Santha Industrials had designed a Tilting Type Wet Grinder and registered the same in his name and the same is patented under the Indian Patents and Designs Act, 1911 in his name. The patent number is 156166. The brand name and the Logo embossed on the wet grinders were applied for registration by him as proprietor of M/s. Santha Industrials. These patented tilting type wet grinders were manufactured only from his own unit till 1985. In this connection, it was found that Shri R. Doraiswamy had given advertisement in newspapers prohibiting the use of his design, trade name and Logo by others without his consent.
(2) These goods were classified under TI 68 prior to 1-3-1986. From 1-3-1986-onwards, it was contended by the Department that it fell under sub-heading No. 8509.00. All the 11 units were said to be availing the benefit of the exemption under Notification No. 175/86, dated 1-3-1986 as amended in respect of these tilting type wet grinders and the Electric Motor required for the same by splitting the clearances of M/s. Santha Industrials, among these units created as partnership and proprietorship firms by close relatives of Shri R. Doraiswamy. The department alleged that this type of indulgence in resorting to the subterfuge of showing the clearances from a number of units created with the close relation of Shri R. Doraiswamy was in order to evade payment of duty on the clearances of Tilting type wet grinders and electric motors used for these wet grinders and therefore, it was alleged that the entire facts established the allegations. It was alleged by resorting to this pattern only a change in documentation has taken place. But the manufacture, clearance, sale, realisation of sale proceeds were said to be controlled by the said R. Doraiswamy only as explained below: (a) The goods are continued to be manufactured on the same design as patented by Shri R. Doraiswamy in the brand name 'Santha'. For the goods claimed to have been manufactured by the other units, no royalty said to have been collected by Shri R. Doraiswamy. Further these goods do not bear the manufacturer's name on them to identify the goods with the claimed manufacturers.
(b) The entire production of tilting type wet grinders with the brand name 'Santha' and the Electric Motor required for the above grinders claimed as manufactured by other units are totally removed to Santha Industrials and the sale of these goods is made only by M/s. Santha Industrials through its branches and dealers.
(c) The raw materials required for the manufacture of fibre glass body of the grinder is entirely procured by M/s. Santha Industrials and the bodies were manufactured by them through a job worker and these bodies were supplied to the other units who are engaged by the said Shri R. Doraiswamy for the manufacture of these patented Tilting Type Wet Grinders.
(d) The bottom plate and top cover required for the Grinders were obtained from M/s. Plastic Craft Ltd., Madras by placing orders in respect of all the units by M/s. Santha Industrials till Feb., 1986.
Afterwards also the bottom plates and top covers were got manufactured from M/s. Prabhu Plastics, Avanashi, on job work basis by supply of raw-materials processed from M/s. ABS Plastics Ltd. for which Shri R. Doraiswamy had placed orders, given schedule of supply and also confirmed the prices on behalf of all the units.
(e) For procurement of Stainless Steel tubes required for the stand of the Wet Grinders Shri R. Doraiswamy had undertaken placing of orders by fixing the prices on behalf of all the units. Similar involvement of Shri R. Doraiswamy in procurement of various parts of Wet Grinders such as Knurling Bush, Rubber, Gasket, D'Ring etc. were found. The evidence showing the involvement of Shri R. Doraiswamy in procuring the raw-materials was also listed out in the schedule of the show cause notice.
(f) The machining and fabrication of wet grinder parts for all the units were done by the three units viz. D.K.B. Fabricators, Balaji Industrial Feeders and Sangeetha Machine Works set up by the workers and partners of Shri Doraiswamy using machineries belonging to M/s.
Santha Industrials.
(g) Financial accommodations were made by M/s. Santha Industrials for the payments to be made by the other units in respect of their dues to raw-material suppliers and others as detailed in the An-nexure to the show-cause notice.
(h) The correspondence and accounts of all the units were maintained at M/s. Santha Industrials Office by a common accountant. Even the statutory records such as R.G. 1, G.P. 1 of some of these units were kept at M/s. Santha Industrials' Office.
(i) Materials procured in the name of M/s. Santha Industrials were also transferred to. all the other units as evidenced from the stores stock account of M/s. Santha Industrials.
(j) Internal Memo directing the other units for payment of dues to the supplier was issued by Shri R. Doraiswamy.
(k) It is alleged that Shri R. Doraiswamy, Proprietor of M/s. Santha Industrials in his statement dt. 1-3-1989 had inter alia admitted that the Tilting Type Wet Grinders was patented in his name and he had given advertisement prohibiting the manufacture and sale of this patented Tilting Type Wet Grinder by others but had permitted the other 10 units (though not in writing) listed in Annexure I to manufacture the patented Tilting Type Wet Grinders with the brand name 'Santha'. He also said to have admitted that he is not receiving any royalty from the 10 units, and that he had placed orders for procurement of raw-materials in respect of the said 10 units.
3. All the above facts, it was alleged in the show-cause notice, clearly establish the effective control exercised by Shri Doraiswamy over the other units in manufacturing of the said Tilting Type Wet Grinders and Electric Motor used therein and the ultimate sale of such goods. Therefore, it was alleged that the interlacing or interlocking of management, finance and other aspects of the respective business of the other units by Shri R. Doraiswamy of M/s. Santha Industrials was quite evident.
4. It was alleged that all the goods were really manufactured and cleared on behalf of M/s. Santha Industrials through these colourable devices to evade payment of duty and therefore, the entire clearances from all the units were attributable to M/s. Santha Industrials.
5. Therefore, it was alleged that this subterfuge was resorted to by Shri R. Doraiswamy with an intention to evade payment of duty by wrongfully availing the concession under the said Notification suppressing the facts of his control, involvement in the manufacture and clearances of the goods, thereby channelising the clearances through these subterfuges in order to misuse the exemption under the said notification with an intention to evade payment of duty.
Therefore, all the clearances made through the said units were alleged to be clubbable with the clearances of M/s. Santha Industrials and the appropriate duty on these clearances is demandable under Rule 9(2) invoking the extended period of 5 years under Section 11A of Central Excises & Salt Act. Therefore, a show-cause notice, dated 17-7-1989 was issued to M/s. Santha Industrials and calling upon them as to why the duty amount of Rs. 1,26,03,022.03 on the goods manufactured and cleared during the period from 1-4-1986 to 31-5-1989 without payment of duty as worked out in An-nexure IV Duty Work Sheet to show-cause notice should not be demanded from them under the said proviso and also why penalty should not be imposed on them under Rule 9(2), 173Q of Central Excise Rules, 1944.
6. Other 10 units were also issued show-cause notice to explain [as to why] penalty should not be imposed on them under the said Rules. A show-cause notice dated 11-7-1989 was issued to M/s. Deepalakshmi Industries, Coimbatore, asking them to show as to why duty amount of Rs. 4,00,424.25 should not be demanded from them under the said provision and also the penalty should not be imposed to them.
7. M/s. Santha Industrials and the other ten appellants filed a common reply dated 24-1-1990. The summary of reply as brought out in the order-in-original is noted hereinbelow : i. This reply with reference to the show-cause notice is being sent on behalf of all the eleven firms to which notices have been addressed.
ii. They have not contravened any of the provisions of the Central Excise Rules, 1944 or wrongly availed any exemption under Notification 175/86, dated 1-3-1986 as alleged in the show cause notice and denied the allegations. The entire show-cause notice is based on presumption, mis-construction of facts and on incorrect interpretation of statutory provisions of Rules and Notification.
iii. No duty is payable on the wet grinders manufactured by all the units without electric motors attached thereto at the time of removal and, the show-cause notice is not sustainable as far as the demand made in this manner.
iv. Several units came into existence at different time and commenced to function as independent units with licences for their own benefit without reference to M/s. Santha Industrials, except to the extent of selling agency agreement for sale to establish its own goodwill in the market. The transanction between the 11 units were on principal to principal basis only and they have never been any financial flow back at any time.
v. The demand for duty from M/s. Santha Industrials and all these electric motors as if they had been manufactured by M/s. Santha Industrials is not valid, as no duty could be payable even though on the electric motors manufactured by them, as the quantum of aggregate clearance on all such motors would be less than the exemption level.
vi. The assumption that the wet grinder and electric motor manufactured and cleared by M/s. Santha Industrials and other ten units with intent to evade payment of duty is totally unfounded and incorrect.
vii. It is only with reference to tilting type wet grinders that the design had been registered under Designs Act, 1911 and Designs Rules 1933; the pattern has been applied for under Patents Act, 1970 by Shri R. Doraiswamy and the tilting type wet grinder manufactured by all the 11 units for its own benefits, and part of manufacture in connection with sales entered into selling agreements with M/s.
Santha Industrials marketing division.
viii. Mere fact that the brand name or the logo is affixed by the respective manufacturer would not make the brand name holder Shri R. Doraiswamy, the manufacturer of tilting type wet grinders actually manufactured by one of the remaining ten units covered in the show-cause notice. The conventional type of wet grinders manufactured by the respective units of their own name plate and sold directly to respective dealers and through marketing division of M/s. Santha Industrials.
ix. The allegation that the entire production of tilting type wet grinders was totally removed to M/s. Santha Industrials and sale thereafter by them is incorrect, and entirely several of the units manufacturing such tilting type wet grinders as well as motors have been selling part of their manufacture directly to customers without reference to M/s. Santha Industrials and part of their production in pursuance of the selling agency agreement.
x. The allegation is incorrect that the raw materials were entirely procured by M/s. Santha Industrials and manufactured FRP bodies were being supplied on principal to principal basis.
xi. They denied that the supplies were being made by M/s. Plastic Kraft Industries and the orders of M/s. Santha Industrials though they were to be consumed by other units is totally incorrect as the orders were being placed by respective units and payments were made on the same by them directly.
xii. It is only a working arrangement with M/s. Plastic Craft Industries s and M/s. Essor Agencies, and thereupon ESSOR Agencies may make payment to M/s. Plastic Craft Industries and debit in the account of M/s. Santha Industrials and subsequently M/s. Santha Industrials would make suitable debit in respect of these amounts and recover the same from other units in the interest of production schedule being kept up.
xiii. Payments were made by adjustment and recovered by raising debit against M/s. Santha Enterprises by way of business ac-comodation between different Independent units in the normal course of business.
xiv. The charge in respect of goods supplied by M/s. Plastic Craft Industries to M/s. D.J. Industrials, the payment being made by M/s.
Santha Industrials as M/s. D.J. Industrials was not able to utilise the supply at that time on arrangement M/s. Santha Industrials purchase the same for its own requirements.
xv. The letter-head of M/s. Santha Industrials is purported for use the bottom plates paid for through a draft enclosed with a letter dated 14-5-1985 is for purchase and consumption by M/s. Santha Engineering Industrials. The letter appears to have been, by oversight prepared in the letter-head of M/s. Santha Industrials instead of M/s. Santha Engineering Industrials. It is incorrect to allege that supplies were made by M/s. Plastic Craft Industries on the orders placed by M/s. Shantha Industrials.
xvi. Each unit made its arrangements with M/s. Prabhu Plastic Industries, Coimbatore for manufacture of bottom plates and top covers on job work basis, if raw-materials are supplied by them for their individual requirements. Bottom plates are manufactured utilising POLYSTRON, ARP: YLENE CPPN 1050 and PILENE PPR 320T obtained from respective manufacturers or suppliers directly by the units and sent to M/s. Prabhu Plastics for moulding, the top covers are manufactured utilising ABS granules only.
xvii. In the manufacture of top covers out of ABS granules there was a problem for supply of granules by M/s. ABS Plastics Ltd., as they do not accept order for supplies less than one metric ton at a time and due to selling agency agreement with M/s. Santha Industrials and in order to avoid short supply to dealer or over-stocking, a consolidated order was placed with ABC Plastics and this should not lead to any other inference.
xviii. Tubes were being used by all the units, M/s. Decora Tubes (P) Ltd., Indore was willing to manufacture stainless tubes provided a minimum off-take was assured, hence a consolidated order was placed.
The allegation that the price was arrived at between M/s. Santha Industrials and M/s. Decora Tubes is incorrect.
xix The manufacturer and supplier do not accept orders of small quantity in respect of Knurling Bush. M/s. Santha Industrials on selling agency agreement with other units placed two orders in their letter dated 4-3-1988 & 13-5-1988 for supply of required quantity to each unit functioning each unit independently without reference to M/s. Santha Industrials.
xx. In order to avail special discounts and bulk orders they placed consolidated orders in consultation with other units, payments were made by each unit. M/s. O.K.B. Fabricators (2) Balaji Industrial Feeders; and (3) Sangeetha Machine Works were doing fabrication and machining respectively is factually incorrect.
xxi. On occasions payments were made by Santha Industrials in respect of dues by any of the units was done on temporary adjustments. The necessary debit/credit entries being made in the account of M/s. Santha Industrials and other units. The payments and adjustments were always on principal to principal basis, there was selling agency agreement with running account between M/s. Santha Industrials and other 10 units, payments were part of this running account.
xxii. They deny that the correspondences and accounts of all the 11 units are maintained in the office of M/s. Santha Industrials by a common accountant.
xxiii. Shri N.R. Ramaswamy, Accountant of M/s. Santha Industrials and M/s. Santha Engineering Industries, Shri Wilfred Benjamin a part time accountant in DSB Industrials and M/s. Deepalakshmi Enterprises looking after booking orders on behalf of M/s. Santha Industrials and receiving commission for such work. Shri P. Ramakrishnan, a part-time accountant of M/s. Santha Enterprises, for convenience of work he used to keep the account books of all the five units in the premises of M/s. Santha Industrials.
xxiv. The ten manufacturing units had selling agency agreement with M/s. Santha Industrials which necessitated periodical reconciliation of accounts and there were adjustments by way of loan of raw materials and occasional payments and adjustment of repayments, hence for the convenience of accounts they used to sit in a common place, payments were made by the particular units only. The allegations that excise records of several units kept in the office of M/s. Santha Industrials is denied and totally incorrect.
xxv. Materials were sent on loan basis on occasion from the stock of the units in temporary need in the nature of friendly accommodation.
xxvi. The internal memo dated 29-8-1988 was sent by Shri Doraiswamy drawing their attention to the dues and requesting to make payments is in no measure amounts to proof of control by him on other units.
xxvii. Payments were made by the respective units from their own funds with reference to supply before 1985-1986 of aluminium components for manufacture of monoblock pumps, electric motors and not any components for tilting type wet grinders or motors.
xxviii. The assumption is totally incorrect and based on misconstruction of the documents as the 11 units are distinct from each other having separate identity, dealers, contractors, suppliers, transactions. The only connection among units is selling agency agreement in which product manufactured, marketed through marketing division of M/s. Santha Industrials, interested in production schedule to be kept up.
xxix. M/s. Equipment Agencies and M/s. Ramakrishna & Co. were suppliers of raw-materials and dealers of goods manufactured by M/s.
Santha Industrials and other units.
xxx. The transactions were on principal to principal basis and never have been single occasion, the payment made by M/s. Santha Industrials without subsequent recovery from the concerned units.
The fact that the payments made by M/s. Santha Industrials is entirely wrong.
xxxi. The value of clearance for the year 1986-87 in respect of wet grinders against M/s. D.J. Industrials figure is incorrect and it is Rs. 14,80,280.00 only borne out by R.T. 12 returns themselves.
xxxii. All the 11 units had filed necessary declarations, classification list, price lists, R.T. 12 and observed all the formalities required in the law. The physical verification of a stock including pre-budget stock inspecting of records were done by excise officers. The department is fully aware of manufacturing and clearance activity of the units, and in the light of the arguments made earlier, the demand raised in the Show Cause Notice is hit by time bar.
xxxiii. Lastly it was mentioned that there is no case for imposition of penalty on any one of the units to which the notice has been issued and they requested for personal hearing and opportunity to cross examine persons whose statements were relied upon in show-cause notice by the department.
8. M/s. Deepalakshmi in their reply submitted that they had obtained an SSI Certificate on 24-1-1989 and the duty demand without reference to the said certificate is incorrect.
9. The ld. Collector after hearing the appellants passed the impugned order. The ld. Collector has discussed each of the ground of allegations and given his findings on these charges. As regards the use of Trade Name 'Santha' by the other appellants and no collection of royalty by Shri R. Doraiswamy. Ld. Collector after referring the case filed by Shri R. Doraiswamy against another party in the Court, has come to the conclusion that as Shri Doraiswamy has not filed any case against the 10 units for royalty. Therefore, it stands to reason to conclude that Shri R. Doraiswamy had a separate or more close relationship with these ten units than the other units which were also found to be manufacturing tilting type of wet grinders. The ld.Collector has held that it is immaterial as to whether the entire production was sold through Santha Industrials or only part of the product was sold through them. He has held that the point under consideration is that there has been a deliberate attempt 'to evade duty' towards fragmentation of units in order to avail the benefit of exemption under the said notification. Therefore, he has rejected the plea of the appellants on this ground. The ld. Collector after examining the evidence has rejected the plea that there is principal to principal relationship between these 10 units. The basis for this conclusion is about the bulk order placed on M/s. Plastic Craft Industries by Shri R. Doraiswamy on behalf of all the units. Therefore, he has held that this amply proves that M/s. Santha Industrials had been taking a lead-role to procure the raw-materials and get them manufactured for all the ten units and therefore, they were not independent of each other. He has rejected the argument advanced that this arrangement is only in the nature of financial accommodation, on the ground that it is only a myth and not a reality. The reasons given by the appellants to purchase plastic granules in bulk from M/s. ABS Plastics Ltd. were also rejected by the ld. Collector on the ground that it is a travesty of truth and likewise, the supply of stainless steel stands, Knurling Bush or brass inserts, rubber gaskets and ball bearings, which had been procured in bulk and supplied to each unit by Shri R. Doraiswamy and advances taken by them was rejected and has been held that nexus between Shri R. Doraiswamy and the other units stands established on account of bulk raw-materials and supplied to the other appellants. Ld. Collector has also held that there is a good amount of financial accommodation between them. Therefore, it means that 10 units were not only using common design, logo of Shri Doraiswamy but also, because of the group concept adopted by them, enjoyed among themselves a good lot of financial support and therefore, he has held that it can be unhesitatingly said that their production should be clubbed together for examining their eligibility for exemption under the said Notification. He has also noted about the payments made by Santha Industrials on behalf of the other units to pay back various dues and hence he has held that there is financial flow back between the units.
The ld. Collector has also noted about the correspondence and the accounts of all the 11 units being maintained in one place and also about part-time Accountant maintaining the accounts of five units. Ld.
Collector has also noted about common part-time Accountant who was looking after the booking orders on behalf of Santha Industrials and receiving commission for such work. Therefore, he has held that the maintenance of common accounts and engagement of employees to maintain these accounts to show nexus between the appellants. He has also noted about the transfer or loan of raw-materials from one unit to the other and also has pointed out to admission made by the parties themselves.
He has rejected the defence that it is in the nature of friendly accommodation, as the transactions have been more than one occasion and therefore, he cannot be treated as friendly accommodation.
10. The ld. Collector has also referred to the admission of Shri Doraiswamy pertaining to the control over the affairs of all the units through issue of an 'internal memo'. The ld. Collector has held that this conclusively demonstrates and proves Shri Doraiswamy's control over the affairs of other units. He has remarked that "one swallow may not make a summer, but one drop does poison the milk". He has also referred to the admission made by the appellants that each unit had a selling agency agreement with Santha Industrials Marketing Division.
Therefore, this shows a vital interest of the other units and the production schedule of these units being kept up properly. Therefore, the ld. Collector has held that this proves that Shri Doraiswamy was not only interested in the well being of these units but also took concrete action to see that their day-to-day manufacturing activities did not suffer for want of either raw-material or finance. Ld.
Collector has agreed with the clearance figures of wet grinders for 1986-87 as Rs. 14,80,280/-. He has rejected the plea of M/s. D.J.Industrials about any connection with M/s. Santha Industrials. Ld.
Collector had referred to the close relationship of all the 11 units inasmuch as the relationship is that of (1) wife (2) wife's father (3) wife's brother and (4) sister's sons. Therefore, he has held that 11 units are managed by people who are closed relatives of Shri Doraiswamy. Therefore, he has held that the fragmentation of manufacturing facilities has been done with a view to evade duty by taking exemption under the said notification. He has held that Shri Doraiswamy not only owned Santha Industrials but was also a partner of Santha Enterprises and Santha Engineers besides Shri Doraiswamy directing and controlling the production of all the units involved in this case. He has held that the manner in which he controls, namely, by issue of internal memo, by placing orders for procuring raw-materials, parts and components would prove the case of the department. [He] has rejected the plea that the Department cannot proceed against each of the 10 units mentioned in the show cause notice. He has held that all the 10 units are liable for penalty for the simple reasons that they have abetted in the scheme of evasion of duty through a novel method of fragmentation. He has also rejected the plea of leasing of machinery by Santha Industrials was a normal commercial transaction. He has held that the concept of machinery leasing and job worker do not fit in this case. He has also rejected the plea that transfer or loan of materials between the units should not be constructed to show that the units are inter-related, in view of the role played by Shri R. Doraiswamy. He has rejected the plea that merely because they maintained separate Income-tax return and Sales Tax return, they should be considered as independent units. He has also rejected the plea that there is no financial flow-back in the case. Ld. Collector has relied on the ruling of Priya Corporation v. CCE, 1990 (48) E.L.T. 26 and Batliboi & Co.
Pvt. Ltd. v. UOI and Ors., 1980 (8) E.L.T. 1 (Bombay) wherein the Tribunal under similar circumstances had held the clubbing up clearances to be justifiable. Ld. Collector has also rejected the plea that the demands are time barred and also the Department was aware of the manufacturing activities, including issue of licences to all the units. He has held that: 'It is true that the department had issued licences, but, it cannot be said that the department was aware of the inner dealings and the various transactions which took place between the various units. All these factors and much more came to light when the department took up investigations. But for the investigations, most of the factors brought out in the show-cause notice would not have come to light.
Moreover, when the department proceeded against some of the units for violations of law, those units or others connected with them did not reveal more than what was, perhaps, just necessary. This again is a clear indication and reinforces the view that there has been deliberate act of suppression of facts and materials which would have gone against the interests of the parties. Therefore, I did not agree with the contention of the parties.' In that view of the matter, the ld. Collector has held the charges as proved and has confirmed duty for the said amount besides imposing penalties as stated above.
The ld. Collector, however, has not given any reasoning for the classification of the product in question, although it was a very important issue, which would have considerably reduced the duty liability.
11. We have heard Shri V. Lakshmi Kumaran, ld. Advocate for the appellant and Shri A.K. Singhal, ld. JDR for the Revenue. Ld. Advocate made submissions on each of the points raised by them in the memo of appeal. The first point raised by him was pertaining to the classification of the product. Ld. Advocate pointed out to the tariff entries and submitted that the ld. Collector has not given any reasons for classifying the goods under sub-heading 8509.00 which reads: "Electro-mechanical Domestic appliances with self-con- 30% tained electric motor He submitted that the correct classification of the product will be under Chapter sub-heading 8479.00 which reads : "Machines and mechanical appliances having individual 15% functions, not specified or included elsewhere in this chapter He submitted that the item wet grinder is without electric motor and therefore, sub-heading 8509.00 is clearly ruled out. He also referred to the Madras High Court judgment rendered in the case of Collector of Central Excise v. Alco Industries as reported in 1991 (55) E.L.T. 184, wherein it has been held that wet grinder is not an electrically operated machine. He submitted that in a wet grinder, the electric motor is separately fixed and connected by a separate 'V'-belt and it is not like a case where the motor forms part and parcel of the appliances, as is found in the case of mixi, vacuum cleaner, hair dryer or electric shaver. He submitted that in the present case even if the classification under sub-heading 8509.00 is upheld, even then the demands are unsustainable as the item does not have a motor and the variation valuation arrived at by the department is totally incorrect.
He submitted that even if fresh working of the valuation is done without motor, then considerable duty demand will be reduced. He also pointed out to para 3 to the reply of SCN, wherein the parties had taken a specific plea that wet grinders were removed without any electric motor attached thereto and that the show-cause notice is not sustainable in so far as the demand therein relates to duty demanded on the wet grinders manufactured and removed by these 11 units.
12. On the finding, that Shri Doraiswamy had filed a case against the third party in District Court for claiming royalty and that he had not filed similar cases against the 10 units and thereby Shri Doraiswamy had a separate or more relationship with these 10 units, the ld.Advocate submitted that this finding is totally perverse. The reason being that the Distt. Judge in his judgment in Original Suit No.179/83, dated 12-12-1983 had held that Doraiswamy had not registered Tilting Type Wet Grinder and therefore, he had not proved his case, and thus, had dismissed his suit. Therefore, Shri Doraiswamy has filed an appeal before Hon'ble Madras High Court. He submitted that in view of this Court order, he could not collect royalty from the 10 parties. The copy of the judgment had been submitted to the Collector and that they had explained the facts of the case yet, the ld. Collector has come to a wrong conclusion. As regards the finding of the fragmentation of this unit done with a sole aim of evading payment of excise duty, the Ld.
Advocate pointed out to paper book in Annexure III and Annexure IV, which comprised of high documentary evidence, to show the independence of each unit. He submitted that the ld. Collector had totally ignored and not considered this evidence at all. He submitted that as during the relevant period, the notification dealt with the words and there was no reference in the notification to other manufacturers using the brand name or trade name of the manufacturer and the denial of benefit on that account. He submitted that "by on behalf of manufacturers was incorporated by amending notification subsequent to 1986, therefore, each of the unit has to be seen as an independent entity". He submitted that notwithstanding the fact that each of the unit was held by a person who is related to Shri Doraiswamy yet they were to be considered as an independent entity. He submitted that other 10 units were independently incorporated and registered units in several legislations and they were not dummy units as held by the ld.Collector. He submitted that the concept of dummy units has already been gone into by the Tribunal in several of its orders. Therefore, mere financial arrangements or supply of raw-materials or commonness of partners or commonness of few employees would not give rise to a conclusion that the 10 units are dummy units. What was required to have been proved by the Department was that these 10 units had been set up with a view to defraud the revenue and there is a financial flow-back to Shri Doraiswamy. He submitted that it is a well settled law that when the transactions are on the basis of principal to principal and when a product is manufactured with a brand name also and where the principal manufacturer lays down strict specifications to maintain standard that by itself will not be a factor to consider the other units as dummy units. He submitted that merely because Shri Doraiswamy procured orders or made supplies of raw materials, which had been done to maintain standards that by itself could not give rise to the conclusion that the other 10 units are dummy units or that there is a financial flow-back in this case. He submitted that merely because there was some business arrangement in terms of supplies of raw-materials and fixing up of its price towards payment for purchases of the impugned goods, that by itself is not a sufficient ground to hold that there is mutuality of interest and financial flow-back. He submitted that all the 10 units had independent sales and sometimes M/s. Santha Industrials were making purchases from these units. He also submitted that payments were directly made by individual units to the suppliers of raw-materials i.e. M/s. Plastic Craft Industries. The ld.Collector had not looked into this evidence at all which had been enclosed in Annexure XII. He submitted that all the payments to the suppliers had been made through bank by the 10 units. He submitted that Santha Industrials had not accepted any components on their behalf nor payment made by them towards the inputs or raw-materials. M/s. Santha Industrials had only procured orders for component to place supplies.
This was only meant to maintain standards and specifications of the impugned product.
He submitted that merely because there was a common marketing agency that by itself could not be a ground to hold that the other units are dummy units. He submitted that the transactions are on principal to principal basis and this issue had not been gone into the light of the evidence produced by the appellants. He submitted that the ld.Collector had merely repeated the allegations made in the SCN. He submitted that the units had been set up prior to 1-4-1986 and it was only 1986, the notification had come into existence and therefore, to hold that the fragmentation had been done for availing the benefit is nothing short of figment of imagination. He submitted that none of the reply to the show-cause notice had been adverted to by the ld.Collector and therefore, it could not be said that the order of the Collector is a speaking order. He submitted that each of the allegation had been made with detailed replies supported by evidence and each of the item of supply and amount had been explained. None of the factors or allegations would show that the 10 units were dummy units and had been fragmented for the purpose of evasion of duty. He also submitted that ABS Plastics Ltd. were not willing to accept the order for supplies for lesser than one m.t. at a time. Therefore, each of the manufacturing unit had directed Santha Industrials to supply the raw-materials. Hence, they had obtained suitable quantities of this material from M/s. ABS Granules, for utilisation by the different manufacturing units. He submitted that the accounts had been maintained in respect of these aspects and the ld. Collector has not looked into it, therefore, it showed pre-meditated mind on the part of the Collector, to uphold the allegations. He further submitted that even if all the clearances are clubbed, if proper computation of duty and classification is adopted then no duty liability would arise in this case.
On the aspect pertaining to time bar, ld. Advocate pointed out to the statements recorded by the department in the investigation conducted during 1985. He specifically referred to the statements of Devraj and Ors., who had stated that they were manufacturing the goods in the brand name of "Santha". He also referred to the order-in-original dt.
30-9-1985 passed against DSB Industries. Thus, it clearly established about these units are independent and that the entire facts were within the knowledge of the department. He also referred to the separate gate passes issued by the units and the evidences produced in volumes in annexures, which has not been adverted to by the department at all.
The ld. Counsel filed a list of catena of judgements on all the issues argued by him, to buttress his argument that the relationship of the first appellant with the other ten units is on principal to principal basis and that merely because of commonness of account, or by virtue of supply of raw-material or by sales & agency agreement, or by use of brand name, the clearances of all units cannot be clubbed. He further submitted that there was no cause for imposing penalty in these cases at all. He also pointed out that eventually the ld. Collector had not concluded against whom the duty amount was to be recovered but had merely confirmed the same.
13. Ld. DR in his usual fairness submitted that the ld. Collector should have given a finding on classification issue, however, he submitted that even otherwise, the case of clubbing of clearances can be established. He justified the findings on the issues discussed by ld. Collector, especially about Shri Dorai-swamy not collecting royalty from the other units and the owners of other units being blood relatives of Shri Doraiswamy. In this context, ld. DR relied heavily on the ratio of these cases -FOB Pharmaceuticals v. Collector of Central Excise - 1975 (76) E.L.T. 616Rakesh Bulb Industries and Ors. v. Collector of Central Excise, Pune and Ors.PILCO Pharma v. Collector of Central Excise, Kanpur - 1987 (29) E.L.T. 523Priya Corporation v. Collector of Central Excise -1990 (48) E.L.T. 26 Ld. DR also referred to centralised procurements made by Shri Doraiswamy, supply of raw-materials, fixation of prices, tranfer of stocks from Santha Industrials, financial accommodation and interest of Shri Doraiswamy on three units.
He also submitted that many new facts had emerged, which had not come to light during previous investigations and hence the allegation of supression of facts had been fully established.
14. Ld. Advocate countered the arguments by submitting that the matter cannot be remanded for determination of fresh classification, as fresh show-cause notice would be barred by time. In this context, the ld.Advocate relied on the ruling rendered in the case of Jyothi Laboratories as reported in 1994 (72) E.L.T. 669 (Tri.).
15. We have carefully considered the submissions made by both the sides and have perused the records and the citations referred before us. The questions that arise for our consideration are as to (i) whether the classification of the product Tilting Type Grinder' can be confirmed under sub-heading 8509.00 (ii) whether the clearances of all the appellants can be clubbed for the purpose of considering the eligibility or denying the benefit of the Notification No. 175/86-C.E., dated 1-3-1986, on the grounds urged in the show-cause notice (iii) whether the demands are barred by time? (iv) whether penalty is imposable? (iv) Whether the classification of the goods can be confirmed under sub-heading 8509.00 As rightly pointed out by both the sides, the ld. Collector has not dealt with this point at all. The ld. Advocate pointed out that tariff sub-heading 8509.00 deals with "Electro-mechanical domestic appliances with self-contained electric motor", "Machines & mechanical appliances having individual functions, not specified or included elsewhere in this chapter".
We notice from para (3) of the reply to the show-cause notice that the appellants have challenged the raising of demand under sub-heading 8509.00 and have also urged that the wet grinders are without any electric motors attached thereto at the time of removal. It has also been pleaded that electric motors are separately procured by buyers and it is [connected] by 'V'-Belt. Therefore, the ld. Collector ought to have examined this contention and determined the correct classification. The tariff sub-heading 8509.00 is for 'Electro-mechanical domestic appliances with self-contained electric motor'. Therefore, a wet grinder without a self-contained electric motor, will not, prima facie, fall under this sub-heading. The Hon'ble Madras High Court in the case of Collector of Central Excise v. Alco Industries as reported in 1991 (55) E.L.T. 184 (Mad.) has held that in paras 13 & 14 of the judgment at page 188 as follows : "13. In the light of the various pronouncements referred to supra, we are of the view that in order to bring an article or commodity within the meaning of Tariff Item-33C and within the meaning of the expression "domestic electrical appliance", it is necessary that electrical appliances should be inbuilt in the commodity concerned.
As electrical appliance is not the same as electrically operated machinery and all electrically operated machineries cannot be said to answer the description of electrical appliances. The presence of an electric motor in an apparatus or machinery notwithstanding that electric motor formed a distinct, severable and separate unit, cannot have the effect of rendering the machinery or apparatus an electric appliance merely because the said motor also was fixed as a distinct component of wet grinder, connected by a 'V'-Belt.
14. We are of the view that having regard to the fact that indisputably the manufacturer of wet grinder and the trade have purchased electric motors from third parties and thereafter fitted the latter into the steel frame of the wet grinder and connected the motor with the wet grinder by 'V'-Belt, the article in question cannot be treated to be an electrical appliance which is an essential pre-requisite to make it fall within Item 33-C of the Central Excise Tariff in addition to the same being a domestic appliance. Though excise duty is levied on the incidence of manufacture or production and removal of the goods for consumption, there is no need so far as the case on hand is concerned to detain ourselves to dwell in detail the aspect as to the nature of the process involved in fitting the electric motor to the steel frame, of the wet grinder in the space allotted for the same, in as much as prima facie we consider that by mere process of assembling the electric motor in the already existing grinder no commercially new product as such emerges by [any] manufacturing process. That apart, we are also concerned more about the identity of the commodity and as to whether it answers the description of the domestic electrical appliance which we have answered in the negative already".
As can be seen, the classification pertains to old tariff, however, the ratio on whether a wet grinder can be considered as a "domestic electrical appliance" has been discussed and its ratio, would apply to a new tariff, provided the headings are pan materia and relevant. The Hon'ble Supreme Court has upheld this ruling as can be noted from 1994 (73) E.L.T. - A131. Therefore, in absence of any finding on the classification and in terms of the above ratio, the confirmation of classification under sub-heading 8509.00 has to be set aside. The ld.DR sought for remand of the case on this point countering this plea, ld. Advocate pointed out that for change of classification, a fresh show cause notice is required to be issued and in such an eventuality, the demands would be hit by limitation. In this context, he relied on the ratio of the judgment rendered in the case of Jyothi Laboratories.
We find force in this submission. Indeed it has been held so in the cited case. The third member agreeing on this point with Member (J) held in para 151 at page 75 of the report as follows : "151. As for the validity of the second show-cause notice a perusal, thereof, shows that it is not in the nature of a corrigendum. On the other hand, it sets up a new case for the appellants to answer by proposing to change the classification of the product from sub-headings 3204.30 to 3204.90. In such a situation, the second notice cannot be called corrigendum. The fact that in such a situation the rate of duty is the same under both the headings, will make no difference to the necessity of undertaking fresh proceedings as has been found by the Tribunal in the case of Bright Brotliers (supra). Therefore, on this point also, it is to be stated that the demand based on such a show-cause notice will be hit by limitation.
In the result, the order proposed by the Hon'ble Member 0udicial) is concurred with.
Therefore, the classification of the goods "Tilting Wet Grinders" under sub-heading 8509.00 cannot be sustained. It is open to the department to determine the correct classification, subject to limitation on the demands, for the period and in the light [of] the ratio of the above cited case. However, we are clear in our mind that the ratio of the above ruling would apply, if the department raises a fresh show-cause notice for changing the classification.
(ii) whether the clearances of all the appellants can be clubbed for determining the eligibility of the benefit or denying the benefit of the Notification No. 175/86, dated 1-3-1986 on the grounds urged in the show-cause notice? (i) The ld. Collector has held that Shri Doraiswamy has not collected royalty from the ten units and hence the close relationship with the units is established. There is no denial about the persons managing the ten units being blood relatives of Shri Doraiswamy. This relationship is a different aspect than the collecting of royalty. It was explained that there was a judgment of Principal Distt. Judge, Coimbatore against Shri Doraiswamy and he was in appeal before Madras High Court. Ld.
Collector has noted this point but has rejected this plea and held that as the royalty is not claimed, hence the charge is proved. This is a strange finding. We have perused the copy of the judgment of Principal Distt. Judge. It is clear from the finding of the Court that Shri Doraiswamy has no exclusive rights under the Patent and Designs Act. In such a circumstance, how could Shri Doraiswamy claim royalty and therefore, this finding cannot be given much credence.
(ii) The ld. Collector has referred to sale of the production of ten units to Shri Doraiswamy as a circumstance for considering deliberate fragmentation. This is not a sustainable finding. The reason being, that the Notification is dt. 1-3-1986 while the units have been in existence merely prior to 1986 and the goods had been classified under TL 68. All the units had been registered under various legislations and the department had initiated proceedings in 1975.
It is seen that the units had come into existence on the dates given below. The other details are also listed :-------------------------------------------------------------------------S. Name of Unit Nature Share- Source &No. holding Investment-------------------------------------------------------------------------(1) (2) (3) (4) (5)------------------------------------------------------------------------- Rs.2. Santha Engineering Partnership 75% 15,000/- Industrials R. Doraiswamy own funds Shri K. Soundararaj 25% 5,000/- Enterprises Shri D. Rajendran 15,000/- loan Industries S/Shri D. Rajendran 50% 50,000/- K.P. Padmanabhan 50% 50,000/- Shri D. Jagathesan 10,000/- Loan from Mother Industries S/Shri K. Soundararaj 5,000/- own funds9. Deepalakshmi Proprietorship 10,000/- Enterprises K. Devaraj10. Barathi Partnership 75% 10,000/- Industrial D. Selvarajan11. Santha Proprietorship 3,15,666.38 Industrials R. Doraiswamy own funds-------------------------------------------------------------------------------------------------------------------------------------------------- Birth Bankers & SSI date Sales Tax C.E. loan Licence------------------------------------------------------------------------- (6) (7) (8) (9) (10)------------------------------------------------------------------------- 12-4-1983 SBI loan 29-1-1985 29-1-1985 3-9-1985 & Rs. 4 lakhs 9-3-1986 4-2-1985 SBI loan 18-3-1986 6-2-85 16-9-1985 Rs. 5 lakhs 9-4-1979 SBI loan 29-10-1988 9-4-1979 5/EM/85 Rs. 3 lakhs 27-2-1978 SBI Rs. 3.90 7-8-1989 1978 & lakhs 1985 7-9-1983 SBI cash 24-3-1989 7-9-1983 1983 credit Rs. 1 14-2-1983 SBI loan Not stated 14-2-1983 1986 Rs. 1.70 lakhs 1964 SBI loan 30-9-1978 1-4-1981 13-1-1986 Rs. 9 lakhs As can be seen from above, the dates of registration of each unit are different, and so also the persons owning them. The loans on each unit from bank are independent transactions, so also its independent registrations under SSI, Sales Tax, Income Tax and CE Licences.
Therefore, to conclude, that these fragmentation of units had been done with a view to avail the benefit of the notification as held by ld.Collector, does not stand to reason, in the light of enormous evidence produced before us.
16. The ld. Collector has examined the sales agency agreement and the control and supply of inputs from M/s. Plastic Craft Industries and M/s. ABB Plastics Ltd. This has been sufficiently explained and the explanation accepts credence and acceptance. The reason being that the goods are sold in the brand name of 'Santha'. Therefore, the owner of the brand name will certainly be concerned about its make, quality, standard and market reputation. There is no bar in the notification at the relevant time for the brand holder to get his products manufactured through other independent units on principal to principal basis, on supply of raw-materials and by quality control. Such arrangements have been upheld in several judgments. This does not lead to the conclusion that the other units are dummy units and such fragmentations are done to evade duty. The manufacturers are allowed to enter into business arrangements for supply of inputs, production as per design and specified quality including financial arrangements, by loans and also to retain common telephones and employees. This can never be interpreted by tax authorities, so long as law permits them for such arrangements. In case, if these factors are held against the manufacturers, in absence of any such law to the effect, then it would be placing unreasonable restrictions on free business and enterprise.
No business can survive, if every transaction of this nature is doubted and held to be fake. What is required to be examined in a case of fraudulent transaction is to see as to whether the units are dummy ones and the same had been set up with a view to evade taxes also to examine, as to whether the dummy ones are facade and the real owner in all aspects is the main unit and not the apparent benami fake units or the ostensible name lender. This has been held so in a circumstance, when the principal unit has pumped all the finances and has drawn profits for themselves, in total exclusion of the other units. There should be no semblance of independence in the other units, in terms of business transactions, loans, payments of taxes, wages, salaries, litigations and as an independent juristic person. Where units are having independent stature, existence and creation, performing individual businesses by virtue of independent sales, purchases manufacture and arranging all their activity, independently of the other; as is so required to be done by any independent juristic person; then such transactions have to be upheld as independent of the other and can therefore by no stretch of imagination be held to be dummy ones or a facade or a fake or a fragmented unit. The burden of showing the units have been created or fragmented, solely to evade payment of taxes is very heavy on the Revenue and it is required to be proved by cogent, acceptable, believable and reliable evidence. Normal business dealings and routine business practices of arranging the schedule of purchases, payments, inter se loans either of materials or dues; supply of raw-materials, financial arrangements, keeping of accounts, common premises, telephones or employees, are, therefore, not the factors for clubbing the clearances of the goods manufactured by each in-dividual independent units, more so in a case where transactions are on principal to principal basis.
17. We have examined the Annexures HI to XIV produced by the appellants running to several hundred pages. Each of the units have produced enormous evidence to show their independent transactions of sales with various parties for different periods. There is independent separate payments for purchases of inputs to M/s. Plastic Craft Industrials as well as to M/s. ABB Plastics Ltd. Santha Industrials has merely made arrangements for procuring the same, as is clearly seen from the documents produced. The various accounts produced also clearly show about independent purchases and sales and payments by the individual units (See Annexures III to XIV). These documents have not been examined by ld. Collector at all and it is very evident that ld.Collector has just passed the order mechanically, without due application of mind and has failed to decide the case in the light of the several decided cases on this issue. Therefore, each of the findings on the factors delineated by ld. Collector is required to be negatived.
18. The citations referred to by ld. DR are clearly distinguishable and do not apply to the facts of the case and to the clause of the notification, as in existence at the relevant time.
19. We rely on the ratios of the ruling rendered in the following cases; which are also based on several citations :Polymers Ltd. v. Collector of Central Excise -1991 (56) E.L.T. 665 ii. A Rathinam and Ors. v. Collector of Central Excise -1992 (60) E.L.T. 451Cheryl Laboratories v. Collector of Central Excise -1993 (65) E.L.T. 596Kanan Foam Industries v. Collector of Central Excise - 1993 (68) E.L.T. 368Prima Controls (P) Ltd. and Anr. v. Collector of Central Excise - 1994 (72) E.L.T. 62Alpha Toyo Ltd. and Ors. v. Collector of Central Excise -1994 (71) E.L.T. 689Elgi Tyres & Tread Ltd. and Ors. v. Collector of Central Excise -1994 (51) E.C.R. 363Steel Treaters (Mysore) Pvt. Ltd. and Ors. v. Collector of Central Excise 1. Zenith Industries, by SCN dated 18-7-1986 and order-in-original dated 31-3-1987, 2. DSB Industrials, SCN dated 8-8-1985 and order-in-original dated 30-9-1985 3. Deepalakshmi Enterprises, SCN dated 23-4-1984, order-in-original dated 25-6-1985 4. D.J. Indl, SCN dated 26-9-1986 and order-in-original dated 16-3-1987.
The proceedings pertain to manufacture of Jet pumps, mono-blocks and electric motors. The demands have all been confirmed in the said orders-in-original. The statement of K. Devaraj, Partner of DSB Industrials was recorded on 4-2-1985 by Asstt. Collector, CE H. Qtr., Coimbatore. He has clearly answered that he is manufacturing 'Santha' Tilting Wet Grinder and has given particulars of Regd. Design Nos. and affixing of brand name. The sample of name plate with brand name was also furnished. The appellants have produced gate passes with seal of the department of the year 1988, showing the brand name of 'Santha'.
The declarations have also been filed. All these details clearly disclose that the department had the knowledge of the manufacture of Tilting Wet Grinders, in the brand name of 'Santha'. The department had adjudicated also on some of the items manufactured by same units. All units are situated in close proximity. Therefore, it cannot be said that the department had no knowledge of manufacture of the 'Santha' brand Tilting Wet Grinders, which brand name was owned by Shri Doraiswamy. The department had considered four units as independent units and now it cannot be said that there are factors, which have not come to light and hence there is suppression of facts to lead to conclusion of evasion of duty. The findings of the ld. Collector and the relied references of the department do not inspire us to confirm the said conclusions of the ld. Collector. Hence, we hold the demands as barred by limitation. We also notice one infirmity and that is, the ld. Collector has not specified clearly for confirmation of demands on any one unit. As we have held that each of the units are independent their clearances for six months period also cannot be clubbed. In that view of the matter, no penalty is also leviable and hence the impugned order is set aside and all the appeals are allowed [with] consequential reliefs, if any.