J.N. Marshall Pvt. Ltd. Vs. Collector of Central Excise - Court Judgment

Excerpt:
1. the five appellants are m/s. j.n. marshall (p) ltd. (for short, jnm), m/s. j.n.m. systems & services (p) ltd., (for short, jnmss), m/s.krohne marshall (p) ltd., (for short, krohne), m/s. forbesons engineers (p) ltd., (for short, forbesons) and m/s. area controls (p) ltd. (for short, arc a). they have filed these appeals being aggrieved by the order sr no. 172/c. ex./1988, dated 16-6-1988 passed by the collector of central excise, pune. the collector confirmed the demand of rs. 15,21,214.98, apportioning the unit wise liability as follows : jnm rs. 9,052.05 he also imposed penalty of rs. 5 lakhs on jmm under rule 173q of the central excise rules, 1944 (for short, the rules).2. the order was passed on the basis of a show cause notice dated 28-9-1987 issued to the appellants and two other concerns, namely, m/s.cambridge instruments (i) private ltd. (for short, cambridge) and m/s.spirex marshall ltd. (for short, spirex) as also the directors of the various concerns. the dates of incorporation of the seven concerns, and their activities are summarised as follows :-1. jnm 1958 manufacturer of plant, machinery,precision instruments and appliances.2. spirex 1959 manufacturer of steam recovery equipment.5. krohne 20-6-1984 manufacturer of flow density and level instruments.6. forbesons 18-10-1985 manufacturer of electronic precision instruments.jnm, the oldest of the concerns, has factory and extensive piece of land in poone. jnm was prior to 1972 known as m/s. hindustan precision instruments pvt. ltd. spirex and cambridge came to occupy portions of the said land. in 1975, jnm, spirex and cambridge obtained a composite central excise licence in their joint names as functioning at the same premises. jnmss started functioning in 1981 on a part of the same premises allegedly on rental basis. similarly krohne started functioning in another part of the same premises allegedly on rental basis. applications were allegedly made for alteration in the ground plan of composite licence. arca has been functioning at a premises in pimpri. krohne, forbesons and arca have separate central excise licences and ssi registrations. spirex, krohne and arca have foreign equity participation to the extent of 40%, 40% and 33 1/3% respectively. jnm, spirex and cambridge were clearing the manufactured goods on payment of central excise duty without claiming benefit of any exemption as ssi units. jnmss, claiming to be a trading concern did not pay any excise duty. krohne, forbesons and arca were clearing manufactured goods claiming benefit of exemption as ssi units under successive notification nos. 77/85 and 175/86. the period in dispute in these appeals is from 1-4-1985 to 31-7-1987.3. it appears shri j.n. marshall is the founder of the group. many of the directors of the various concerns are related to him or his daughter married to shri durious forbes. the particulars of the common directors are as follows :jnm j.n. marshall (chairman), dorious forbes, forhad forbes, m.d. forbes, n. forbesspirex j.n. marshall (chairman), d. forbes, s.j. marshallcambridge j.n. marshall (chairman), d. forbes, s.j. marshall, f. forbes 4. the main aspects covered by the show cause notice dated 28-9-1987 issued to all the seven concerns are: (a) jnmss manufactured 25 units of 60 mm recorder and cleared the same evading excise duty of rs. 25, 527.12 and without observing excise formalities during the period 1985-1987. (b) manufacture of excisable goods at arca was also without observing central excise formalities and without payment of excise duty. (c) the seven units are controlled and managed by one person or the same group of persons and since their clearances are required to be clubbed, none of them is a ssi unit entitled to the benefit of exemption, but such exemption was wrongly availed by krohne, forbesons and arca. (d) there was a single manufacturer of excisable goods, in different factories and the clearances are required to be clubbed. (e) excisable goods of krohne, forbesons and a part of the goods of jnm were sold entirely to jnmss who sell the same at a margin of over 30% and the price structure of jnmss was decided by the common costing department based on norms fixed by the common management. jnmss is a favoured buyer. (f) jnm exercises administrative and financial control over all the units. the directors are more or less the same. jnmss is related person. excise duty has to be paid on the prices charged by jnmss to buyers. (g) the six concerns were created with the intention of evading excise duty by fragmentation of factory premises of the original concern, namely, jnm. manufacturing activities are attended to by one or other of the units and transactions are evidenced by raising debit notes on each other. such debit notes relate to processing charges, warehousing charges, technical consultancy, development of material requirements, use of different machinery, supply of different raw materials, use of different facilities within the premises, recovery and repair charges, contributions to provident fund, fpf, esi, property tax, security, audit fees, supply of power, car and petrol expenses, hospital charges, travelling expenses, lta, power supply, water supply. (h) two or more units have common staff. staff of one unit are transferred to another. (j) the units have certain common departments, namely, purchase, edp, personnel and costing. (k) goods of krohne, arca and forbesons are marketed exclusively to jnmss who also attend to publicity and sales promo tion. (1) processes are carried out in more than one unit in respect of the same goods. (n) three units having common licence carry out processing for the other units. (o) forbesons undertakes research and development work for all the units. (p) the sales to jnmss are not at arms length. its price structure is decided under common control. it is an artificial unit created with a view to evade duty. (q) jnm and jnmss are also engaged in turn-key projects and instructions are given to all branches, office-heads and service departments. where there are 50% or more bought out items used, order has to be placed on jnmss and otherwise by jnm. while preparing offers under jnmss proprietory items prices are increased by 10% ostensibly to cover excise duty and other incidentals. (s) jnm purchases raw materials on behalf of other units and debit notes are issued for the price. raw materials are transferred by jnm to other units. processing for other units is done by jnm and transactions are settled by debit notes. the units use each others' machinery and expertise. (t) there has been artificial fragmentation of units with the intention of evading excise duty by misusing exemption for ssi units. colourable devices have been used so as to project the units as separate and independent manufacturing units though in reality they are a single entity under common administrative and financial control. the clearances of all the units have to be clubbed and if so, ssi exemption would not be available, excise duty would be payable. (u) the units are inter-related and "related". in particular, jnmss is related to the other units. hence the assessable value should be based on the prices charged by jnmss to customers. (v) there has been deliberate failure to observe excise formalities, mis-declaration of value, wrongful claim to ssi exemption and wilful suppression of correct information and true state of affairs. (w) the transactions between the units were only paper transactions brought about with the intention of making the excise department believe that each unit is a separate entity.5. the contentions raised in the replies to the show cause notice can be summarised as follows: the seven concerns are all separate and independent concerns, separately incorporated. there is foreign equity participation in three of them. the six manufacturing concerns manufacture different products. three of them voluntarily obtained a composite excise licence in their joint names. their clearances cannot be clubbed with those of the other three concerns. the manufacturing concerns are operating under rule 56b of the rules. the notice is barred by limitation and the larger period under the proviso to section 11a of the central excise act, 1944 (for short, the act) cannot be invoked. jnm has observed all excise formalities and not suppressed any information and had not evaded duty. at the time of renting out a part of the premises to some of the other concerns, applications had been submitted to the department. so also while seeking permission under rule 56b of the rules. rt 12 returns for the period have been finalised after scrutiny of relevant records. the various administrative arrangements are businesslike and made for the sake of economy and efficiency and negate the allegation of fragmentation. the ssi units have their own manufacturing staff and each has total control over the respective staff. the utilization of common staff and recoveries towards various services etc. was not suppressed and does not attract the principle of clubbing. proper utilization of human resources cannot be a factor which supports the case of the department. so also common facilities and recovery of proportionate share by debit notes. there is nothing suspicious in the transactions relating to raw materials. the price of such materials is covered by debit notes which are settled periodically. price structure of jnmss is not controlled by jnm or other concerns. such an inference based on utilization of costing facility is not warranted. use of costing facility is charged and charges are recovered. fees are charged similarly for all common facilities. jnmss is a marketing organization and has no interest other than the interest of commercial nature and as such is not a related person. krohne, arca, forbesons are independent entities for the purpose of income-tax, sales-tax, shops and establishment act, central excise and have been recognized as small scale units by the directorate of industries. their affairs are administered and managed by the respective boards of directors. the concerns do not have shareholding in each other. the seven concerns do not have mutuality of interest in the business of each other.6. the collector passed the impugned order overruling the contentions raised by the various concerns and confirming the demand proposed in the show cause notice. however, he apportioned the amount of demand among the five appellants. penalty of rs. 5 lakhs was imposed on jnm, the persons connected with whom were alleged to have adopted various colourable devices with intent to evade duty.7. learned counsel appearing for jnm contended that the finding that jnmss is related to jnm or the other concerns or that there is any relationship between them is not sustainable since the requirements of section 4(4)(c) of the act are not established and the decision to club the clearances of all the manufacturing concerns is erroneous as it has not been established that this is a case of single manufacturer manufacturing excisable goods in more than one factory as required by the ssi exemption notifications. according to him, the concept of a group of companies has no relevance to the principle of clubbing. he contended that the transactions coverd by debit notes are neither mere facade or paper transactions nor do they evidence any flow back as held by the collector. on the other hand, according to him, debit notes have been accepted and settled and this proves that the transactions are genuine transactions between separate and independent legal entities.there is no evidence to show that jnm has been in overall control of all the concerns. he pointed out there was only one instance of manufacture by jnmss which will attract ssi exemption. in any event, he pointed out, there was no justification to demand duty at the tariff rate, duty should have been calculated according to slab rates in the appropriate notifications. there was no justification to impose penalty on jnm against whom there was demand of only about rs. 9,000/-. the order, he contended, is unsustainable in the absence of evidence to show that it was a case of single manufacturer clearing excisable goods from various factories.learned counsel for the other appellants, besides supporting the above contentions, submitted that if it is a case of a single manufacturer, demand cannot be made on the other concerns. according to him, without mutuality of interest in the business of each other, there cannot be a finding of "relationship" and without evidence of common funding and financial flow back there cannot be clubbing. jnmss, though a distributor is not related as contemplated in the schedule to the companies act, 1956.shri m. ali, jdr rebutting the above submissions, took us through the impugned order and supported the findings and reasoning contained therein. he pointed out that the clearances of all the concerns put together in 1986-87 exceeded rs. 1.5 crores and tariff rate of duty would be payable with effect from 26-6-1987. according that to him, the materials available clearly established that it is a case of single manufacturer clearing excisable goods in several factories warranting clubbing and debit notes, according to him, were devices to camouflage flowback of profits. the various transactions referred to in the show cause notice were mere transactions. he contended that it was a case of a single management in total administrative and financial control of the activities of all the concerns.both sides referred to a number of decisions to throw light on the legal issues arising from the facts.8. section 4(4)(c) of the act defines a related person as a person who is so associated with the assessee that they have interest directly or indirectly, in the business of each other and as including a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. the expressions "holding company", "subsidiary company" and "relative" have the same meanings as in the companies act, 1956. there is no case that any one of the seven concerns in this case is a holding company vis-a-vis any of the or all the remaining concerns. there is also no evidence to show that jnm or the three concerns having a composite excise licence on the one hand and the other four concerns or any of them on the other hand have mutual interest, directly or indirectly, in the business of each other. even if jnmss is regarded as distributor, it is not a "relative" (as defined in the companies act, 1956) of jnm or any of the other concerns. all these concerns are legal persons but the expression "relative" has personal connotation. assuming that these concerns have some connection with each other, but that is not sufficient to regard them as "related persons" within the meaning of the expression as defined in section 4(4)(c) of the act. in this view it is unnecessary to consider if such "relationship" would warrant clubbing of clearances of all these concerns for the purpose of the ssi exemption notifications 77/85 and 175/86.9. the question of clubbing value of clearances arises in connection with the limit of exemption prescribed in these notifications. these notifications relate to exemption for goods falling under erstwhile t.i. 68. exemption relates to first clearances of the goods for home consumption "by or on behalf of a manufacturer from one or more factories". the limit of exemption prescribed in notification no.i05/80 is first clearances upto a value not exceeding rs. 30 lakhs cleared during a financial year. the eligibility depends on such clearances not exceeding rs. 30 lakhs in the preceding financial year.notification no. 77/83 grants similar relief to a manufacturer whose clearances during the preceding financial year did not exceed rs. 40 lakhs in value. notification no. 77/85 allowed graded exemption at different levels of value of clearances, and fixed the eligibility criterion at rs. 75 lakhs as the value of clearances in the preceding financial year which was increased to rs. 150 lakhs in notification no.175/86. hence regards must be had to the clearances of "a manufacturer" from one or more factories. this aspect gives rise to the modality of "clubbing". if there are clearances from more than one factory by or on behalf of a manufacturer, they have to be taken together or clubbed to determine the eligibility and level of exemption. the notifications do not throw any light on the aspect as to when it can be said clearances from more than one factory can be attributed to "a manufacturer". the circumstances and features available in a given case must be such that it can be reasonably inferred that the clearances can be attributed to "a manufacturer". this provision has been made in these notifications to ensure that the exemption is enjoyed only by genuine small scale manufacturers and to prevent manipulation by large scale manufacturers by setting up multiplicity of factories or by fragmentation of units.such an activity will be a fraud on the exemption scheme. persons who are prepared to commit such fraud will naturally try to take all measures to see that the clearances appear to be by different manufacturers. hence the fact that on paper the factories are under different ownership or management is not decisive. the statutory authority entrusted with the responsibility of arriving at a decision, must look to the reality behind the facade or appearance.in shree packaging corporation v. collector of central excise, hyderabad - 1987 (32) e.l.t. 94, it was indicated that common funding and financial flow back are important and mere circumstance of common storage but with evidence of separate accounting of receipts and utilization by two firms functioning in adjacent premises and stray usage of an employee of one firm by the other in the context of partners being related is not sufficient to warrant clubbing. in bhagiuan das kanodia and ors. v.collector of central excise, bombay - 1987 (32) e.l.t. 204 (tribunal) the allegation was that sixteen powerlooms belonging to four individuals (four each) were being operated by a consortium of these individuals based on evidence in the shape of common purchase of yarn, pooling of some resources but with separation of benefits and liabilities periodically and adjustment of accounts. it was observed that something more was necessary, for example, the existence of a person or a body of persons, who, in reality, owned, directed and controlled the production in the four units which would show that the four units were only a facade to avail of the exemption. if common purchases were for proper reasons and accounted for in respect of each unit separately and no unaccounted common benefit was derived, such purchases have no significance. so also the circumstance of a single manager, provided separate accounts were maintained. in international dyestuff mfg. co. v. collector of central excise - 1991 (53) e.l.t. 85 (tribunal) it was held that close relationship of the partners of one concern and the proprietor of other concern and sharing technical staff was not decisive without proof that the finances of the second concern flowed out of the first concern and that the proof or a part of the profits flowed back to the first concern. in alpha toyo ltd. v.collector of central excise, new delhi -1994 (71) e.l.t 689 (tribunal), it was explained that a dummy unit is a unit which is not in existence in reality, but is created on paper only and the physical existence of such a unit is not to be found in terms of investment of capital, machinery and labour. even if a unit is in existence, if it is totally controlled in terms of money flow back, profit sharing, management control, the clearances can be clubbed. the aspect of flowback of profits or money or sale proceeds from one unit to the other has been emphasized in rang udyog v. collector of central excise, ahmedabad - 1996 (83) e.l.t. 648 (tribunal). in renu tandon v. union of india - 1993 (66) e.l.t. 375 (raj.), the aspect of common funding and financial flowback has been stressed. in some of the above decisions, it has been indicated that mere personal relationship of partners of firms or directors of companies, common use of one or more workers, common managerial control, use of machinery or telephone of one unit for the purpose of the other, common electric connection by itself is not sufficient to warrant clubbing. in double bee enterprises v. collector of central excise, new delhi - 1995 (78) e.l.t. 261 (tribunal), the circumstances of both units being under one roof with common gate and without demarcation of premises, common machinery, painting facility, electric meter, common workers, single integrated manufacturing facility, purchases of raw materials at a single point, non-segregation of stocks, common accounts were found sufficient to warrant clubbing.in metrosyl v. collector of central excise, patna -1995 (77) e.l.t 130 (tribunal) it was held that common use of premises for certain purposes without payment of rent, of telephone staff, of telephone without any charge, common use of some workers are not sufficient to warrant clubbing since there was separate management and separate financial control and funding. in supreme engineering works v. collector of central excise, pune - 1996 (82) e.l.t. 102 (tribunal) dealing with a partnership of two brothers, another firm with the wives as partners and a company two of the four directors of which were the brothers, it was held that circumstances of sales among the units at price lower than price to outsiders, manipulation of accounts, common control of production and sales and special financial relationship not on principal to principal basis warranted clubbing of clearances inspite of the units having separate indentities, separate ssi registration, s.t. registration and separate income tax assessment.11. what we understand from the above decisions is that regard must be had to all the circumstances established in a given case but emphasis must be on common control of production and sales or on management control and special financial relationship existing between the units or profit sharing or financial flow back. if the combination of circumstances create a pattern indicative of the clearances from the plurality of units being made by "a manufacturer" clubbing is warranted. we will examine the circumstances in the case in this perspective.12. the factual averments in the show cause notice were not disputed in the reply to show cause notice, nor are they disputed by learned counsel for appellants in the course of their submissions. they do not plead any additional facts and object to the inferences drawn by the collector from the undisputed factual averments. we have summarised the factual averments in paragraph 4 supra. the submission is that these facts do not establish common funding and financial flow back. however, we have pointed that in double bee enterprises case and supreme engineering works case clubbing was held justified though there was no case of common funding and financial flow back, but relying on certain sigrafittin|"(c)qhintn factors or common control of production and sales and special financial relationship. jnm, spirex and cambridge, though different legal entities on paper as they are separate companies (of which spirex has foreign equity participation) were registered as one unit under the factories act, 1948. their products enjoyed exemption from payment of duty till 1975 and became dutiable in 1975 and then the three companies were brought voluntarily under a single central excise licence thereby treating the three companies, functioning in a single premises as a single unit. appellants have never objected to the clubbing of the clearances of these three companies. it must follow that the clearances in the name of these three units are legally attributable to a single manufacturer. of the six relations involved as directors, five are directors of jnm, three are directors of spirex and four are directors of cambridge. of the six persons, one who is not a director of jnm. is a director of spirex or cambridge. in other words, all the six persons are directors of one or more of the three companies operating under a single factories act registration and a single central excise licence. the directors of the other four companies are among these six persons. it is admitted that spirex, krohne and arca have foreign equity participation. though foreign equity participation, without anything more would have some significance, in the facts of the case, we do not attach any significance to the fact that krohne and arca have foreign equity participation since spirex registered along with jnm and cambridge as a single factory and operating under a single licence also has foreign equity participation. from the admitted and proved facts, it is seen that the four companies have close situational and functional connection with one or more of the three companies covered by a single factory registration and single central excise licence. the three companies were incorporated in 1958, 1959 and 1962 respectively. the fourth company incorporated was krohne in 1984. manufacture commenced in krohne on 1-6-1985. the declaration submitted on 22-7-1985 by krohne claimed exemption under ssi notification no. 77/85. application was also submitted by krohne under rule 56b of the rules for permission to remove goods to jnm for processing. the total value of clearances of the first three companies exceeded the limit of rs. 75 lakhs in the year 1984-85. the incorporation of the fourth company in 1984 and commencement of manufacture in its name in june, 1985 assumes considerable significance. the object must have been to arrange a device to secure ssi exemption for the goods produced in the name of krohne. forbesons was incorporated in october, 1975 and declaration was submitted on 28-6-1987. value of clearances exceeded rs. 1.50 crores in 1986-87. arca was incorporated in october, 1985 and declaration claiming ssi exemption under notification no. 175/86 was filed on 28-6-1987. the sequence of these events is tell-tale.13. we have referred to the circumstance that a group of six directors involved in the first three companies, which are admitted to be a single unit for purposes of factories act, 1948 and central excise act, 1944. some of these persons are involved as directors in the four companies incorporated subsequently at significant timings. the units function in the same premises, though according to appellants in portions demarcated separately and on rental basis in support of which no documents have been shown to us. the aspect of common control of production and sales or management control is also present as can be seen from certain undisputed facts. appointment of staff in all the units is attended to by the personnel department of jnm, which is so to say, the first company founded by shri j.n. marshall and having five out of the six persons referred to above as directors. there is the feature of transfer by this department of staff from one unit to another. the purchase department of jnm acts as common purchasing department. units supply raw materials to each other. the costing department of jnm attends to costing work of all the units. price structure of jnmss is based on norms fixed by the costing department.all these circumstances clearly indicate near total administrative control of all the units by jnm or at any rate the group of six directors referred to earlier who are directors of the first three companies operating under, a single central excise licence. all the products of krohne and forbesons and part of the products of jnm are marketed through jnmss who gets a margin of 30% or more in regard to most of the products. the responsibility for publicity and sales promotion of krohne, forbesons and arca has been entrusted to jnmss.all the procedures from the stage of procuring raw materials to the stage of clearance of finished products are laid down in circular issued by jnm to all the departments of all the units. krohne and forbesons had obtained permission under rule 56b of the rules to send goods to jnm for processing. payments towards pf, epf, esi, property tax, and security, audit fees for statutory audit in respect of all the units are made by jnm, though it is stated debit bills are raised in respect thereof by jnm against the other units. expenses of various units on account of power supply, expenses of car, petrol charges, hospital charges, travel expenses etc. are met by jnm, though in this regard also, according to appellants, debit bills are raised. it is also contended that in regard to supply of raw materials, salaries and common services, debit bills are raised. we asked learned counsel if there is any evidence to show settlement or adjustment of debit bills periodically or at any time but our attention has not been invited to any such evidence. these circumstances clearly establish common funding and financial flow back to a substantial extent. the circumstances such as separate licence, registration for sales tax, separate income tax assessment do not have much relevance in this context since if the intention is to evade duty by securing ssi exemption benefit without being entitled to it, the manufacturer can be expected to see that on paper the units appear to be distinct, separate and independent. we hold that the clearances of all the units must be attributable to a single manufacturer. the debit bills constitute mere facade hiding the reality of financial flow back. in this view, the conclusion of the collector that the value of clearances of all the units have to be clubbed for the purpose of working out the benefits available under the ssi notifications is correct.14. it is contended that in any event, the collector was in error in calculating duty at the tariff rate. appellants point out that notifications prescribe different rates of exemption according to slabs based on value of clearances and this scheme should have been adopted.this could have been done if the manufacturer had satisfied the eligibility criterion stipulated in notification in force in each of the relevant years. eligibility depends on the value of clearances during the preceding financial year remaining below the limit prescribed. if the clearances of all the units are to be clubbed, the total value of clearances during the respective preceding financial years would exceed the respective limits stipulated and the manufacturer has no eligibility. in this view, the above contention fails.15. the collector has determined duty liability but apportioned the same among the different units based on clearances attributable to each on paper. however, all the clearances' are attributable to a single manufacturer. hence the fact that the share of differential duty assigned to jnm is only about rs. 9,000/- does not matter. jnm, as already pointed, is the company incorporated first and, so to say, is the base company. the manufacturer has systematically and deliberately violated central excise laws with the intention of availing the benefit of ssi notification without eligibility therefore and of evading central excise duty. we find no error in the imposition of penalty on jnm. in view of the systematic and sustained manipulation made in violation of central excise laws and evasion of duty, the quantum of penalty imposed does not appear to be excessive.16. no other contentions have been urged before us. for the reasons indicated above, the appeals are dismissed.

Judgment:
1. The five appellants are M/s. J.N. Marshall (P) Ltd. (for short, JNM), M/s. J.N.M. Systems & Services (P) Ltd., (for short, JNMSS), M/s.

Krohne Marshall (P) Ltd., (for short, KROHNE), M/s. Forbesons Engineers (P) Ltd., (for short, FORBESONS) and M/s. Area Controls (P) Ltd. (for short, ARC A). They have filed these appeals being aggrieved by the order SR No. 172/C. Ex./1988, dated 16-6-1988 passed by the Collector of Central Excise, Pune. The Collector confirmed the demand of Rs. 15,21,214.98, apportioning the unit wise liability as follows : JNM Rs. 9,052.05 He also imposed penalty of Rs. 5 lakhs on JMM under Rule 173Q of the Central Excise Rules, 1944 (for short, the Rules).

2. The order was passed on the basis of a show cause notice dated 28-9-1987 issued to the appellants and two other concerns, namely, M/s.

Cambridge Instruments (I) Private Ltd. (for short, CAMBRIDGE) and M/s.

Spirex Marshall Ltd. (for short, SPIREX) as also the Directors of the various concerns. The dates of incorporation of the seven concerns, and their activities are summarised as follows :-1. JNM 1958 Manufacturer of plant, machinery,precision instruments and appliances.2. SPIREX 1959 Manufacturer of steam recovery equipment.5. KROHNE 20-6-1984 Manufacturer of flow density and level instruments.6. FORBESONS 18-10-1985 Manufacturer of electronic precision instruments.

JNM, the oldest of the concerns, has factory and extensive piece of land in Poone. JNM was prior to 1972 known as M/s. Hindustan Precision Instruments Pvt. Ltd. SPIREX and CAMBRIDGE came to occupy portions of the said land. In 1975, JNM, SPIREX and CAMBRIDGE obtained a composite central excise licence in their joint names as functioning at the same premises. JNMSS started functioning in 1981 on a part of the same premises allegedly on rental basis. Similarly KROHNE started functioning in another part of the same premises allegedly on rental basis. Applications were allegedly made for alteration in the ground plan of composite licence. ARCA has been functioning at a premises in Pimpri. KROHNE, FORBESONS and ARCA have separate central excise licences and SSI registrations. SPIREX, KROHNE and ARCA have foreign equity participation to the extent of 40%, 40% and 33 1/3% respectively. JNM, SPIREX and CAMBRIDGE were clearing the manufactured goods on payment of central excise duty without claiming benefit of any exemption as SSI units. JNMSS, claiming to be a trading concern did not pay any excise duty. KROHNE, FORBESONS and ARCA were clearing manufactured goods claiming benefit of exemption as SSI units under successive Notification Nos. 77/85 and 175/86. The period in dispute in these appeals is from 1-4-1985 to 31-7-1987.

3. It appears Shri J.N. Marshall is the founder of the Group. Many of the Directors of the various concerns are related to him or his daughter married to Shri Durious Forbes. The particulars of the common Directors are as follows :JNM J.N. Marshall (Chairman), Dorious Forbes, Forhad Forbes, M.D. Forbes, N. ForbesSPIREX J.N. Marshall (Chairman), D. Forbes, S.J. MarshallCAMBRIDGE J.N. Marshall (Chairman), D. Forbes, S.J. Marshall, F. Forbes 4. The main aspects covered by the show cause notice dated 28-9-1987 issued to all the seven concerns are: (a) JNMSS manufactured 25 units of 60 mm recorder and cleared the same evading excise duty of Rs. 25, 527.12 and without observing excise formalities during the period 1985-1987.

(b) Manufacture of excisable goods at ARCA was also without observing central excise formalities and without payment of excise duty.

(c) The seven units are controlled and managed by one person or the same group of persons and since their clearances are required to be clubbed, none of them is a SSI unit entitled to the benefit of exemption, but such exemption was wrongly availed by KROHNE, FORBESONS and ARCA. (d) There was a single manufacturer of excisable goods, in different factories and the clearances are required to be clubbed.

(e) Excisable goods of KROHNE, FORBESONS and a part of the goods of JNM were sold entirely to JNMSS who sell the same at a margin of over 30% and the price structure of JNMSS was decided by the common costing department based on norms fixed by the common management.

JNMSS is a favoured buyer.

(f) JNM exercises administrative and financial control over all the units. The Directors are more or less the same. JNMSS is related person. Excise duty has to be paid on the prices charged by JNMSS to buyers.

(g) The six concerns were created with the intention of evading excise duty by fragmentation of factory premises of the original concern, namely, JNM. Manufacturing activities are attended to by one or other of the units and transactions are evidenced by raising debit notes on each other. Such debit notes relate to processing charges, warehousing charges, Technical Consultancy, Development of material requirements, use of different machinery, supply of different raw materials, use of different facilities within the premises, recovery and repair charges, contributions to Provident Fund, FPF, ESI, Property Tax, Security, audit fees, supply of power, car and petrol expenses, hospital charges, travelling expenses, LTA, power supply, water supply.

(h) Two or more units have common staff. Staff of one unit are transferred to another.

(j) The units have certain common departments, namely, purchase, EDP, personnel and costing.

(k) Goods of KROHNE, ARCA and FORBESONS are marketed exclusively to JNMSS who also attend to publicity and sales promo tion.

(1) Processes are carried out in more than one unit in respect of the same goods.

(n) Three units having common licence carry out processing for the other units.

(o) FORBESONS undertakes research and development work for all the units.

(p) The sales to JNMSS are not at arms length. Its price structure is decided under common control. It is an artificial unit created with a view to evade duty.

(q) JNM and JNMSS are also engaged in turn-key projects and instructions are given to all branches, office-heads and service departments. Where there are 50% or more bought out items used, order has to be placed on JNMSS and otherwise by JNM. While preparing offers under JNMSS proprietory items prices are increased by 10% ostensibly to cover excise duty and other incidentals.

(s) JNM purchases raw materials on behalf of other units and debit notes are issued for the price. Raw materials are transferred by JNM to other units. Processing for other units is done by JNM and transactions are settled by debit notes. The units use each others' machinery and expertise.

(t) There has been artificial fragmentation of units with the intention of evading excise duty by misusing exemption for SSI units. Colourable devices have been used so as to project the units as separate and independent manufacturing units though in reality they are a single entity under common administrative and financial control. The clearances of all the units have to be clubbed and if so, SSI exemption would not be available, excise duty would be payable.

(u) The units are inter-related and "related". In particular, JNMSS is related to the other units. Hence the assessable value should be based on the prices charged by JNMSS to customers.

(v) There has been deliberate failure to observe excise formalities, mis-declaration of value, wrongful claim to SSI exemption and wilful suppression of correct information and true state of affairs.

(w) The transactions between the units were only paper transactions brought about with the intention of making the excise department believe that each unit is a separate entity.

5. The contentions raised in the replies to the show cause notice can be summarised as follows: The seven concerns are all separate and independent concerns, separately incorporated. There is foreign equity participation in three of them. The six manufacturing concerns manufacture different products. Three of them voluntarily obtained a composite excise licence in their joint names. Their clearances cannot be clubbed with those of the other three concerns. The manufacturing concerns are operating under Rule 56B of the Rules. The notice is barred by limitation and the larger period under the proviso to Section 11A of the Central Excise Act, 1944 (for short, the Act) cannot be invoked.

JNM has observed all excise formalities and not suppressed any information and had not evaded duty. At the time of renting out a part of the premises to some of the other concerns, applications had been submitted to the department. So also while seeking permission under Rule 56B of the Rules. RT 12 Returns for the period have been finalised after scrutiny of relevant records. The various administrative arrangements are businesslike and made for the sake of economy and efficiency and negate the allegation of fragmentation. The SSI units have their own manufacturing staff and each has total control over the respective staff. The utilization of common staff and recoveries towards various services etc. was not suppressed and does not attract the principle of clubbing. Proper utilization of human resources cannot be a factor which supports the case of the department. So also common facilities and recovery of proportionate share by debit notes. There is nothing suspicious in the transactions relating to raw materials. The price of such materials is covered by debit notes which are settled periodically.

Price structure of JNMSS is not controlled by JNM or other concerns.

Such an inference based on utilization of costing facility is not warranted. Use of costing facility is charged and charges are recovered. Fees are charged similarly for all common facilities.

JNMSS is a marketing organization and has no interest other than the interest of commercial nature and as such is not a related person.

KROHNE, ARCA, FORBESONS are independent entities for the purpose of Income-tax, Sales-tax, Shops and Establishment Act, central excise and have been recognized as small scale units by the Directorate of Industries. Their affairs are administered and managed by the respective Boards of Directors. The concerns do not have shareholding in each other. The seven concerns do not have mutuality of interest in the business of each other.

6. The Collector passed the impugned order overruling the contentions raised by the various concerns and confirming the demand proposed in the show cause notice. However, he apportioned the amount of demand among the five appellants. Penalty of Rs. 5 lakhs was imposed on JNM, the persons connected with whom were alleged to have adopted various colourable devices with intent to evade duty.

7. Learned Counsel appearing for JNM contended that the finding that JNMSS is related to JNM or the other concerns or that there is any relationship between them is not sustainable since the requirements of Section 4(4)(c) of the Act are not established and the decision to club the clearances of all the manufacturing concerns is erroneous as it has not been established that this is a case of single manufacturer manufacturing excisable goods in more than one factory as required by the SSI exemption notifications. According to him, the concept of a group of companies has no relevance to the principle of clubbing. He contended that the transactions coverd by debit notes are neither mere facade or paper transactions nor do they evidence any flow back as held by the Collector. On the other hand, according to him, debit notes have been accepted and settled and this proves that the transactions are genuine transactions between separate and independent legal entities.

There is no evidence to show that JNM has been in overall control of all the concerns. He pointed out there was only one instance of manufacture by JNMSS which will attract SSI exemption. In any event, he pointed out, there was no justification to demand duty at the tariff rate, duty should have been calculated according to slab rates in the appropriate notifications. There was no justification to impose penalty on JNM against whom there was demand of only about Rs. 9,000/-. The order, he contended, is unsustainable in the absence of evidence to show that it was a case of single manufacturer clearing excisable goods from various factories.

Learned Counsel for the other appellants, besides supporting the above contentions, submitted that if it is a case of a single manufacturer, demand cannot be made on the other concerns. According to him, without mutuality of interest in the business of each other, there cannot be a finding of "relationship" and without evidence of common funding and financial flow back there cannot be clubbing. JNMSS, though a distributor is not related as contemplated in the schedule to the Companies Act, 1956.

Shri M. Ali, JDR rebutting the above submissions, took us through the impugned order and supported the findings and reasoning contained therein. He pointed out that the clearances of all the concerns put together in 1986-87 exceeded Rs. 1.5 Crores and tariff rate of duty would be payable with effect from 26-6-1987. According that to him, the materials available clearly established that it is a case of single manufacturer clearing excisable goods in several factories warranting clubbing and Debit Notes, according to him, were devices to camouflage flowback of profits. The various transactions referred to in the show cause notice were mere transactions. He contended that it was a case of a single management in total administrative and financial control of the activities of all the concerns.

Both sides referred to a number of decisions to throw light on the legal issues arising from the facts.

8. Section 4(4)(c) of the Act defines a related person as a person who is so associated with the assessee that they have interest directly or indirectly, in the business of each other and as including a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. The expressions "holding company", "subsidiary company" and "relative" have the same meanings as in the Companies Act, 1956. There is no case that any one of the seven concerns in this case is a holding company vis-a-vis any of the or all the remaining concerns. There is also no evidence to show that JNM or the three concerns having a composite excise licence on the one hand and the other four concerns or any of them on the other hand have mutual interest, directly or indirectly, in the business of each other. Even if JNMSS is regarded as distributor, it is not a "relative" (as defined in the Companies Act, 1956) of JNM or any of the other concerns. All these concerns are legal persons but the expression "relative" has personal connotation. Assuming that these concerns have some connection with each other, but that is not sufficient to regard them as "related persons" within the meaning of the expression as defined in Section 4(4)(c) of the Act. In this view it is unnecessary to consider if such "relationship" would warrant clubbing of clearances of all these concerns for the purpose of the SSI exemption Notifications 77/85 and 175/86.

9. The question of clubbing value of clearances arises in connection with the limit of exemption prescribed in these notifications. These notifications relate to exemption for goods falling under erstwhile T.I. 68. Exemption relates to first clearances of the goods for home consumption "by or on behalf of a manufacturer from one or more factories". The limit of exemption prescribed in Notification No.i05/80 is first clearances upto a value not exceeding Rs. 30 Lakhs cleared during a financial year. The eligibility depends on such clearances not exceeding Rs. 30 Lakhs in the preceding financial year.

Notification No. 77/83 grants similar relief to a manufacturer whose clearances during the preceding financial year did not exceed Rs. 40 Lakhs in value. Notification No. 77/85 allowed graded exemption at different levels of value of clearances, and fixed the eligibility criterion at Rs. 75 Lakhs as the value of clearances in the preceding financial year which was increased to Rs. 150 Lakhs in Notification No.175/86. Hence regards must be had to the clearances of "a manufacturer" from one or more factories. This aspect gives rise to the modality of "clubbing". If there are clearances from more than one factory by or on behalf of a manufacturer, they have to be taken together or clubbed to determine the eligibility and level of exemption. The notifications do not throw any light on the aspect as to when it can be said clearances from more than one factory can be attributed to "a manufacturer". The circumstances and features available in a given case must be such that it can be reasonably inferred that the clearances can be attributed to "a manufacturer". This provision has been made in these notifications to ensure that the exemption is enjoyed only by genuine small scale manufacturers and to prevent manipulation by large scale manufacturers by setting up multiplicity of factories or by fragmentation of units.

Such an activity will be a fraud on the exemption scheme. Persons who are prepared to commit such fraud will naturally try to take all measures to see that the clearances appear to be by different manufacturers. Hence the fact that on paper the factories are under different ownership or management is not decisive. The statutory authority entrusted with the responsibility of arriving at a decision, must look to the reality behind the facade or appearance.In Shree Packaging Corporation v. Collector of Central Excise, Hyderabad - 1987 (32) E.L.T. 94, it was indicated that common funding and financial flow back are important and mere circumstance of common storage but with evidence of separate accounting of receipts and utilization by two firms functioning in adjacent premises and stray usage of an employee of one firm by the other in the context of partners being related is not sufficient to warrant clubbing. In Bhagiuan Das Kanodia and Ors. v.Collector of Central Excise, Bombay - 1987 (32) E.L.T. 204 (Tribunal) the allegation was that sixteen powerlooms belonging to four individuals (four each) were being operated by a consortium of these individuals based on evidence in the shape of common purchase of yarn, pooling of some resources but with separation of benefits and liabilities periodically and adjustment of accounts. It was observed that something more was necessary, for example, the existence of a person or a body of persons, who, in reality, owned, directed and controlled the production in the four units which would show that the four units were only a facade to avail of the exemption. If common purchases were for proper reasons and accounted for in respect of each unit separately and no unaccounted common benefit was derived, such purchases have no significance. So also the circumstance of a single manager, provided separate accounts were maintained. In International Dyestuff Mfg. Co. v. Collector of Central Excise - 1991 (53) E.L.T. 85 (Tribunal) it was held that close relationship of the partners of one concern and the proprietor of other concern and sharing technical staff was not decisive without proof that the finances of the second concern flowed out of the first concern and that the proof or a part of the profits flowed back to the first concern. In Alpha Toyo Ltd. v.Collector of Central Excise, New Delhi -1994 (71) E.L.T 689 (Tribunal), it was explained that a dummy unit is a unit which is not in existence in reality, but is created on paper only and the physical existence of such a unit is not to be found in terms of investment of capital, machinery and labour. Even if a unit is in existence, if it is totally controlled in terms of money flow back, profit sharing, management control, the clearances can be clubbed. The aspect of flowback of profits or money or sale proceeds from one unit to the other has been emphasized in Rang Udyog v. Collector of Central Excise, Ahmedabad - 1996 (83) E.L.T. 648 (Tribunal). In Renu Tandon v. Union of India - 1993 (66) E.L.T. 375 (Raj.), the aspect of common funding and financial flowback has been stressed. In some of the above decisions, it has been indicated that mere personal relationship of partners of firms or directors of companies, common use of one or more workers, common managerial control, use of machinery or telephone of one unit for the purpose of the other, common electric connection by itself is not sufficient to warrant clubbing. In Double Bee Enterprises v. Collector of Central Excise, New Delhi - 1995 (78) E.L.T. 261 (Tribunal), the circumstances of both units being under one roof with common gate and without demarcation of premises, common machinery, painting facility, electric meter, common workers, single integrated manufacturing facility, purchases of raw materials at a single point, non-segregation of stocks, common accounts were found sufficient to warrant clubbing.

In Metrosyl v. Collector of Central Excise, Patna -1995 (77) E.L.T 130 (Tribunal) it was held that common use of premises for certain purposes without payment of rent, of telephone staff, of telephone without any charge, common use of some workers are not sufficient to warrant clubbing since there was separate management and separate financial control and funding. In Supreme Engineering Works v. Collector of Central Excise, Pune - 1996 (82) E.L.T. 102 (Tribunal) dealing with a partnership of two brothers, another firm with the wives as partners and a company two of the four directors of which were the brothers, it was held that circumstances of sales among the units at price lower than price to outsiders, manipulation of accounts, common control of production and sales and special financial relationship not on principal to principal basis warranted clubbing of clearances inspite of the units having separate indentities, separate SSI registration, S.T. registration and separate income tax assessment.

11. What we understand from the above decisions is that regard must be had to all the circumstances established in a given case but emphasis must be on common control of production and sales or on management control and special financial relationship existing between the units or profit sharing or financial flow back. If the combination of circumstances create a pattern indicative of the clearances from the plurality of units being made by "a manufacturer" clubbing is warranted. We will examine the circumstances in the case in this perspective.

12. The factual averments in the show cause notice were not disputed in the reply to show cause notice, nor are they disputed by Learned Counsel for appellants in the course of their submissions. They do not plead any additional facts and object to the inferences drawn by the Collector from the undisputed factual averments. We have summarised the factual averments in paragraph 4 supra. The submission is that these facts do not establish common funding and financial flow back. However, we have pointed that in Double Bee Enterprises case and Supreme Engineering Works case clubbing was held justified though there was no case of common funding and financial flow back, but relying on certain sigrafittin|"(c)QHintn factors or common control of production and sales and special financial relationship. JNM, SPIREX and CAMBRIDGE, though different legal entities on paper as they are separate companies (of which SPIREX has foreign equity participation) were registered as one unit under the Factories Act, 1948. Their products enjoyed exemption from payment of duty till 1975 and became dutiable in 1975 and then the three companies were brought voluntarily under a single central excise licence thereby treating the three companies, functioning in a single premises as a single unit. Appellants have never objected to the clubbing of the clearances of these three companies. It must follow that the clearances in the name of these three units are legally attributable to a single manufacturer. Of the six relations involved as directors, five are directors of JNM, three are directors of SPIREX and four are directors of CAMBRIDGE. Of the six persons, one who is not a director of JNM. is a director of SPIREX or CAMBRIDGE. In other words, all the six persons are directors of one or more of the three companies operating under a single Factories Act registration and a single central excise licence. The directors of the other four companies are among these six persons. It is admitted that SPIREX, KROHNE and ARCA have foreign equity participation. Though foreign equity participation, without anything more would have some significance, in the facts of the case, we do not attach any significance to the fact that KROHNE and ARCA have foreign equity participation since SPIREX registered along with JNM and CAMBRIDGE as a single factory and operating under a single licence also has foreign equity participation. From the admitted and proved facts, it is seen that the four companies have close situational and functional connection with one or more of the three companies covered by a single factory registration and single central excise licence. The three companies were incorporated in 1958, 1959 and 1962 respectively. The fourth company incorporated was KROHNE in 1984. Manufacture commenced in KROHNE on 1-6-1985. The declaration submitted on 22-7-1985 by KROHNE claimed exemption under SSI Notification No. 77/85. Application was also submitted by KROHNE under Rule 56B of the Rules for permission to remove goods to JNM for processing. The total value of clearances of the first three companies exceeded the limit of Rs. 75 lakhs in the year 1984-85. The incorporation of the fourth company in 1984 and commencement of manufacture in its name in June, 1985 assumes considerable significance. The object must have been to arrange a device to secure SSI exemption for the goods produced in the name of KROHNE. FORBESONS was incorporated in October, 1975 and declaration was submitted on 28-6-1987. Value of clearances exceeded Rs. 1.50 Crores in 1986-87. ARCA was incorporated in October, 1985 and declaration claiming SSI exemption under Notification No. 175/86 was filed on 28-6-1987. The sequence of these events is tell-tale.

13. We have referred to the circumstance that a group of six directors involved in the first three companies, which are admitted to be a single unit for purposes of Factories Act, 1948 and Central Excise Act, 1944. Some of these persons are involved as directors in the four companies incorporated subsequently at significant timings. The units function in the same premises, though according to appellants in portions demarcated separately and on rental basis in support of which no documents have been shown to us. The aspect of common control of production and sales or management control is also present as can be seen from certain undisputed facts. Appointment of staff in all the units is attended to by the personnel department of JNM, which is so to say, the first company founded by Shri J.N. Marshall and having five out of the six persons referred to above as directors. There is the feature of transfer by this department of staff from one unit to another. The purchase department of JNM acts as common purchasing department. Units supply raw materials to each other. The costing department of JNM attends to costing work of all the units. Price structure of JNMSS is based on norms fixed by the costing department.

All these circumstances clearly indicate near total administrative control of all the units by JNM or at any rate the group of six directors referred to earlier who are directors of the first three companies operating under, a single central excise licence. All the products of KROHNE and FORBESONS and part of the products of JNM are marketed through JNMSS who gets a margin of 30% or more in regard to most of the products. The responsibility for publicity and sales promotion of KROHNE, FORBESONS and ARCA has been entrusted to JNMSS.All the procedures from the stage of procuring raw materials to the stage of clearance of finished products are laid down in circular issued by JNM to all the departments of all the units. KROHNE and FORBESONS had obtained permission under Rule 56B of the Rules to send goods to JNM for processing. Payments towards PF, EPF, ESI, property tax, and security, audit fees for statutory audit in respect of all the units are made by JNM, though it is stated debit bills are raised in respect thereof by JNM against the other units. Expenses of various units on account of power supply, expenses of car, petrol charges, hospital charges, travel expenses etc. are met by JNM, though in this regard also, according to appellants, debit bills are raised. It is also contended that in regard to supply of raw materials, salaries and common services, debit bills are raised. We asked learned Counsel if there is any evidence to show settlement or adjustment of debit bills periodically or at any time but our attention has not been invited to any such evidence. These circumstances clearly establish common funding and financial flow back to a substantial extent. The circumstances such as separate licence, registration for sales tax, separate income tax assessment do not have much relevance in this context since if the intention is to evade duty by securing SSI exemption benefit without being entitled to it, the manufacturer can be expected to see that on paper the units appear to be distinct, separate and independent. We hold that the clearances of all the units must be attributable to a single manufacturer. The debit bills constitute mere facade hiding the reality of financial flow back. In this view, the conclusion of the Collector that the value of clearances of all the units have to be clubbed for the purpose of working out the benefits available under the SSI Notifications is correct.

14. It is contended that in any event, the Collector was in error in calculating duty at the tariff rate. Appellants point out that Notifications prescribe different rates of exemption according to slabs based on value of clearances and this scheme should have been adopted.

This could have been done if the manufacturer had satisfied the eligibility criterion stipulated in notification in force in each of the relevant years. Eligibility depends on the value of clearances during the preceding financial year remaining below the limit prescribed. If the clearances of all the units are to be clubbed, the total value of clearances during the respective preceding financial years would exceed the respective limits stipulated and the manufacturer has no eligibility. In this view, the above contention fails.

15. The Collector has determined duty liability but apportioned the same among the different units based on clearances attributable to each on paper. However, all the clearances' are attributable to a single manufacturer. Hence the fact that the share of differential duty assigned to JNM is only about Rs. 9,000/- does not matter. JNM, as already pointed, is the company incorporated first and, so to say, is the base company. The manufacturer has systematically and deliberately violated central excise laws with the intention of availing the benefit of SSI Notification without eligibility therefore and of evading central excise duty. We find no error in the imposition of penalty on JNM. In view of the systematic and sustained manipulation made in violation of Central excise laws and evasion of duty, the quantum of penalty imposed does not appear to be excessive.

16. No other contentions have been urged before us. For the reasons indicated above, the appeals are dismissed.