Balsara Extrusions Pvt. Ltd. Vs. Collector of Central Excise and - Court Judgment

Excerpt:
1. balsara extrusions pvt. ltd. (bepl for short), the appellant before us was engaged in the manufacture extruded aluminium tubes. it began life as a partnership firm. its partners were originally balsara hygiene products ltd. (bhpl for short) and besta cosmetics private ltd. (besta for short), each holding 50% share. two other partner were inducted in 1990, those being aspi balsara and his wife hammy balsara.aspi balsara was managing director of balsara hygiene products ltd, and his wife its joint managing director. on 16^th october, 1990 the partnership firm became a private limited company. in addition to the four members of the erstwhile partnership, two other persons became its shareholders. these were s.w. deshpande and hilla mistry. deshpande was director of the appellant firm and general manager of bhpl. hilla mistry was a director of besta and aspi balsara's sister.2. the department investigated the relationship between the appellant, and bhpl and besta. the investment pattern in the earlier partnership firm and the company indicated to the officer that the losses were being divided equally between the partners despite the fact the their investment was not in that proportion. aspi balsara and his wife, the two partners who joined in 1990, did not invest any amount at all, were shared the loss. the officers also noted that bhpl and besta were the sole buyers of the appellant's products. from all these facts, the department concluded that the appellant was nothing other than a 'dummy' of bhpl and besta. the officer were also of the opinion that the value of the investment in the plant and machinery of firm (and later in the company) was in excess of rs. 35 lakhs in the year. notice issued to it in january, 1992 proposed, for these reasons, to disallow from september, 1989 to july 1991 the benefit of notification 175/86 which the appellant had availed of, and demanded duty which consequently became payable. the notice invoked the extended period contained in the proviso to sub-section (1) of section 11a on the ground that these two facts had not been disclosed to the department.adjudicating on the notice the collector found against the manufacturer on both counts, and confirmed the demand for duty. hence this appeal.3. in its decision in cce vs. agra leather goods (p) ltd 2000 (39) rlt 674 the tribunal has held that where a unit is certified by the appropriate authority to be a small scale industry it is not open to the department to determine that this certificate was not properly issued; it was bound by the contents of that certificate. this is for the reason that notification 175/86 did not contain any provision stipulating any limit in investment in plant and machinery in a small-scale undertaking, although the regulations for certification of a unit as a small-scale unit may prescribe such a limit. hence, the denial of the benefit on the ground that the plant and machinery exceeded rs. 35 lakhs has to be struck down. as a matter of fact, the evidence submitted by the appellant shows that the value of investment has exceeded rs. 35 lakhs. it is common ground that as on 1.4.1990 the value of such investment was rs. 32,36,594/-. addition to the extent of rs. 2,79,140/- was made in that year, taking the total investment to rs. 35,15,734, leading to the conclusion in the notice. however, there was reduction in the same period of the investment to the extent of rs. 80,337/-, caused by sale of machinery. if this is taken into account, the value of the investment falls to rs. 34,35,397/-. these are the figures in the balance sheet as on 31.2.1991, which was cited before the collector. he has evidently overlooked this balance sheet when he dismissed the claim regarding the sale of machinery as unsubstantiated evidence.4. it is not possible for us to conclude merely on the basis of the investment pattern that the appellant is nothing other than a 'dummy or extended arm' of bhpl and besta, as the collector has concluded. each of these was public limited company and there is no suggestion in the order that one of them was a dummy or mask of the other. if that is the case it is difficult to see how the appellant could be a 'dummy or extended arm' of both these companies. it can no doubt be so with regard to one of them but simultaneously cannot be a 'dummy or extended arm' of both of them. the consequence of a person being a dummy, facade or extended arm of another is that the goods nominally manufactured by that dummy are manufactured in reality by the other, which actually totally control or runs the dummy. hence, the goods claimed to be manufactured by the appellant before us were manufactured by bhpl and besta. in that case, to what extent it was a dummy of each of them - in other words, how much control each of them exercised over the dummy, and to what extent each of them manufactured the goods - would have to be determined. in addition, the appellant's being a dummy of both these persons necessarily presuppose that they both acted in concert. there is absolutely no mentioned in the show cause notice or order relating to these aspects.5. apart from this, no clear reason is forthcoming in the collector's order as to how the pattern of investment in the appellant leads to the conclusion that it is dummy. the collector's reasoning for this conclusion form the investment and stock holding pattern are as follows: "the above definitely give the impression that the factory was created by bhpl and bcl only with an aim to creat this factory and for providing plant and machinery and only for this purpose, bhpl and bcl invested money and started trading business as well as purchase of machinery and they also purchased machineries pertaining to manufacture of aluminium collapsible tubes. initially there were tow partners viz. bhpl and bcl, and bhpl invested huge amount in partner's capital account and share of profit and loss was equally distributed between bhpl and bcl. during 1989-90, shri a.r. balsara and smt. h.a. balsara joined as partners without investing any amount in capital account and the share holding in the factory is of bhpl, bcl, shri a.r. balsara and smt. h.a. balsara. even aluminium collapsible tubes were supplied to bhfl and bcl only. the factory procured land and constructd shed in daman with the capital investment of bhpl and bcl. even the machineries were bought out of these investments only. "from the foregoing, it is very difficult to substantiate that the factory was not dummy unit." 6. it is possible to understand the first part of his reasoning.evidently, bhpl and bcl decided to set up the appellant for manufacture of aluminium tubes. it was perfectly natural for each of them to invest money for this purpose. ow that is contrary to law is nt explained. nor is it possible for us to conclude control over the appellant by the other two companies from the fact that aspi balsara and his wife became partners without investing any amount. the fact that these two, who were the managing director and joint managing director of bhpl, should get the benefit of any profit that the appellant made without risking a paisa of their money is, we agree, not without significance. (the argument of counsel that the appellant did not made a profit, but incurred loss, is facile. he cannot claim that they got into the venture in order to made a loss, or that they would not have received part of the profit if it had accrued.) 7. after analysing numerous decisions on this issue the tribunal in its decisions in j.n. marshall pvt. ltd. vs. cce 1997 (96) elt 149 it summed up the legal position as follows: "what we understand form 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 unit 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 manufacture' clubbing is warranted." 8. by applying this test we are unable to conclude that the appellant was a dummy of either or both of the other two companies. there is no material that the collector cites to show that it do not have independent existence or more particularly that there was financial flow back. there is no material to show that the loss that aspi balsara and his wife incurred as a result of their participation in the appellant, or the share of the profit of the appellant, if it was made, which would accrue to them, would have been transferred to bhpl.9. the fact of employment of deshpande and mrs. mistry again by itself does not lead to any such conclusion. consideration of all these factors does not impel us to conclude that the test emerging in the tribunal's decision of financial flow back has satisfied.10. there is another defect in the collector's order. after holding that the appellant is a dummy or extended arm he proceeds to demand duty, not from the real manufacturer of whom the appellant is said to be a dummy, but from the dummy itself, and imposes penalty on it, leaving the so call actual manufacturer untouched. the observations of the supreme court in gujanan fabrics distributors vs. cce 1997 (92) elt 451 that by confirming the demand upon the so called dummies the adjudicating authority has implicitly recognised their existence would also have to be kept in mind.11. the demand for duty will fall on limitation. as we have noted that the notice cited two factors - the failure to declare that the investment limit has been exceeded and the failure to indicate the true nature of the relationship between the parties. in his order the collector has upheld the application of extended period only on the ground of failure to declare the investment in plant and machinery had exceeded rs. 35 lakhs. there was no requirement for the appellant to declare the extent of investment limit to the department. the notification, as we have noted, did not have any condition with regard to these. omission to declare a fact which the law does not required to be declared cannot attract the extended period contained in sub-section (1) section 11a.

Judgment:
1. Balsara Extrusions Pvt. Ltd. (BEPL for short), the appellant before us was engaged in the manufacture extruded aluminium tubes. It began life as a partnership firm. Its partners were originally Balsara Hygiene Products Ltd. (BHPL for short) and Besta Cosmetics Private Ltd. (Besta for short), each holding 50% share. Two other partner were inducted in 1990, those being Aspi Balsara and his wife Hammy Balsara.

Aspi Balsara was managing director of Balsara Hygiene Products ltd, and his wife its joint managing director. On 16^th October, 1990 the partnership firm became a private limited company. In addition to the four members of the erstwhile partnership, two other persons became its shareholders. These were S.W. Deshpande and Hilla Mistry. Deshpande was director of the appellant firm and general manager of BHPL. Hilla Mistry was a director of Besta and Aspi Balsara's sister.

2. The department investigated the relationship between the appellant, and BHPL and Besta. The investment pattern in the earlier partnership firm and the company indicated to the officer that the losses were being divided equally between the partners despite the fact the their investment was not in that proportion. Aspi Balsara and his wife, the two partners who joined in 1990, did not invest any amount at all, were shared the loss. The officers also noted that BHPL and Besta were the sole buyers of the appellant's products. From all these facts, the department concluded that the appellant was nothing other than a 'dummy' of BHPL and Besta. The officer were also of the opinion that the value of the investment in the plant and machinery of firm (and later in the company) was in excess of Rs. 35 lakhs in the year. Notice issued to it in January, 1992 proposed, for these reasons, to disallow from September, 1989 to July 1991 the benefit of notification 175/86 which the appellant had availed of, and demanded duty which consequently became payable. The notice invoked the extended period contained in the proviso to sub-section (1) of Section 11A on the ground that these two facts had not been disclosed to the department.

Adjudicating on the notice the Collector found against the manufacturer on both counts, and confirmed the demand for duty. Hence this appeal.

3. In its decision in CCE Vs. Agra Leather Goods (P) Ltd 2000 (39) RLT 674 the Tribunal has held that where a unit is certified by the appropriate authority to be a small scale industry it is not open to the department to determine that this certificate was not properly issued; it was bound by the contents of that certificate. This is for the reason that notification 175/86 did not contain any provision stipulating any limit in investment in plant and machinery in a small-scale undertaking, although the regulations for certification of a unit as a small-scale unit may prescribe such a limit. Hence, the denial of the benefit on the ground that the plant and machinery exceeded Rs. 35 lakhs has to be struck down. As a matter of fact, the evidence submitted by the appellant shows that the value of investment has exceeded Rs. 35 lakhs. It is common ground that as on 1.4.1990 the value of such investment was Rs. 32,36,594/-. Addition to the extent of Rs. 2,79,140/- was made in that year, taking the total investment to Rs. 35,15,734, leading to the conclusion in the notice. However, there was reduction in the same period of the investment to the extent of Rs. 80,337/-, caused by sale of machinery. If this is taken into account, the value of the investment falls to Rs. 34,35,397/-. These are the figures in the balance sheet as on 31.2.1991, which was cited before the Collector. He has evidently overlooked this balance sheet when he dismissed the claim regarding the sale of machinery as unsubstantiated evidence.

4. It is not possible for us to conclude merely on the basis of the investment pattern that the appellant is nothing other than a 'dummy or extended arm' of BHPL and Besta, as the Collector has concluded. Each of these was public limited company and there is no suggestion in the order that one of them was a dummy or mask of the other. If that is the case it is difficult to see how the appellant could be a 'dummy or extended arm' of both these companies. It can no doubt be so with regard to one of them but simultaneously cannot be a 'dummy or extended arm' of both of them. The consequence of a person being a dummy, facade or extended arm of another is that the goods nominally manufactured by that dummy are manufactured in reality by the other, which actually totally control or runs the dummy. Hence, the goods claimed to be manufactured by the appellant before us were manufactured by BHPL and Besta. In that case, to what extent it was a dummy of each of them - in other words, how much control each of them exercised over the dummy, and to what extent each of them manufactured the goods - would have to be determined. In addition, the appellant's being a dummy of both these persons necessarily presuppose that they both acted in concert. There is absolutely no mentioned in the show cause notice or order relating to these aspects.

5. Apart from this, no clear reason is forthcoming in the Collector's order as to how the pattern of investment in the appellant leads to the conclusion that it is dummy. The Collector's reasoning for this conclusion form the investment and stock holding pattern are as follows: "The above definitely give the impression that the factory was created by BHPL and BCL only with an aim to creat this factory and for providing plant and machinery and only for this purpose, BHPL and BCL invested money and started trading business as well as purchase of machinery and they also purchased machineries pertaining to manufacture of Aluminium Collapsible Tubes. Initially there were tow partners viz. BHPL and BCL, and BHPL invested huge amount in Partner's Capital Account and share of profit and loss was equally distributed between BHPL and BCL. During 1989-90, Shri A.R. Balsara and Smt. H.A. Balsara joined as Partners without investing any amount in Capital Account and the share holding in the factory is of BHPL, BCL, Shri A.R. Balsara and Smt. H.A. Balsara. Even Aluminium Collapsible Tubes were supplied to BHFL and BCL only. The factory procured land and constructd shed in Daman with the capital investment of BHPL and BCL. Even the machineries were bought out of these investments only.

"From the foregoing, it is very difficult to substantiate that the Factory was not Dummy Unit." 6. It is possible to understand the first part of his reasoning.

Evidently, BHPL and BCL decided to set up the appellant for manufacture of aluminium tubes. It was perfectly natural for each of them to invest money for this purpose. ow that is contrary to law is nt explained. Nor is it possible for us to conclude control over the appellant by the other two companies from the fact that Aspi Balsara and his wife became partners without investing any amount. The fact that these two, who were the managing director and joint managing director of BHPL, should get the benefit of any profit that the appellant made without risking a paisa of their money is, we agree, not without significance. (The argument of counsel that the appellant did not made a profit, but incurred loss, is facile. He cannot claim that they got into the venture in order to made a loss, or that they would not have received part of the profit if it had accrued.) 7. After analysing numerous decisions on this issue the Tribunal in its decisions in J.N. Marshall Pvt. Ltd. Vs. CCE 1997 (96) ELT 149 it summed up the legal position as follows: "What we understand form 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 unit 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 manufacture' clubbing is warranted." 8. by applying this test we are unable to conclude that the appellant was a dummy of either or both of the other two companies. There is no material that the Collector cites to show that it do not have independent existence or more particularly that there was financial flow back. There is no material to show that the loss that Aspi Balsara and his wife incurred as a result of their participation in the appellant, or the share of the profit of the appellant, if it was made, which would accrue to them, would have been transferred to BHPL.

9. The fact of employment of Deshpande and Mrs. Mistry again by itself does not lead to any such conclusion. Consideration of all these factors does not impel us to conclude that the test emerging in the Tribunal's decision of financial flow back has satisfied.

10. There is another defect in the Collector's order. After holding that the appellant is a dummy or extended arm he proceeds to demand duty, not from the real manufacturer of whom the appellant is said to be a dummy, but from the dummy itself, and imposes penalty on it, leaving the so call actual manufacturer untouched. The observations of the Supreme Court in Gujanan Fabrics Distributors Vs. CCE 1997 (92) ELT 451 that by confirming the demand upon the so called dummies the adjudicating authority has implicitly recognised their existence would also have to be kept in mind.

11. The demand for duty will fall on limitation. As we have noted that the notice cited two factors - the failure to declare that the investment limit has been exceeded and the failure to indicate the true nature of the relationship between the parties. In his order the Collector has upheld the application of extended period only on the ground of failure to declare the investment in plant and machinery had exceeded Rs. 35 lakhs. there was no requirement for the appellant to declare the extent of investment limit to the department. The notification, as we have noted, did not have any condition with regard to these. Omission to declare a fact which the law does not required to be declared cannot attract the extended period contained in sub-section (1) Section 11A.