G.D. Industrial Engineers Vs. Collector of Customs and Central - Court Judgment

Excerpt:
1. the question that arise for decision in this and two other appeals (appeal nos. 163 and 164 of 1982), by three partnership firms are- (a) (i) whether, in the facts and circumstances of the case, and in the context of the language of notification no. 89/79, the benefit of exemption therein is to be availed on the basis of value of the goods cleared from each of the three factories severally owned by the appellant in each of the appeals; (hereinafter called the "appellants"); (ii) notwithstanding their separate ownership each by one of the appellants, should the clearances from all three of the factories be aggregated and cumulatively considered for extension of the benefit of the notification, since the partners of all three firms are common; (iii) does the expression "by or on behalf.....

Judgment:
1. The question that arise for decision in this and two other Appeals (Appeal Nos. 163 and 164 of 1982), by three partnership firms are- (a) (i) Whether, in the facts and circumstances of the case, and in the context of the language of Notification No. 89/79, the benefit of exemption therein is to be availed on the basis of value of the goods cleared from each of the three factories severally owned by the Appellant in each of the Appeals; (hereinafter called the "Appellants"); (ii) Notwithstanding their separate ownership each by one of the Appellants, should the clearances from all three of the factories be aggregated and cumulatively considered for extension of the benefit of the notification, since the partners of all three firms are common; (iii) Does the expression "by or on behalf of a manufacturer from one or more factories" occurring in the aforesaid notification, warrant the integration of the totality of the goods cleared by each of the Appellants for the purposes of the notification (v) In view of the composition of the three Appellants/partnership firms, is each of the individual partners a "manufacturer" (b) Was there any contravention by any of the Appellants of the various rules specified in the show cause notice dated 17-12-1981 (d) Were the show cause notices and the adjudication order vitiated on account of absence of territorial jurisdiction in regard to the factory owned by the Appellant herein.

2. (a) Notification No. 89/79 dated 1-3-1979, in so far material exempts goods, falling under item 68 of the 1st Schedule to the Act, cleared by or on behalf of a manufacturer, from one or more factories, from the whole of the duty leviable in respect of first clearances upto an aggregate value of Rs. fifteen lakhs, subject to certain conditions which are not material for the present purpose; since they are indisputably fulfilled.

(b) The said notification was superseded/modified by Notification No. 105/80 dated 19-6-1980 which, inter alia, raised the limit of the value of goods eligible for the exemption to thirty lakhs (from fifteen) subject to certain conditions, which are again immaterial.

(a) the Appellants are partnership firms composed of identical partners; although their shares in each firm varied; (b) while the appellant herein was constituted as a partnership firm, in 1961, the Appellant in Appeal No. 164/82 came to be constituted in 1932 and the Appellant in Appeal No. 163 of 1982, in 1946. The Appellant firm herein was dissolved on 31-7-1980 and the Appellants firms in Appeal Nos. 163/82 and 164/82 dissolved on 18-10-1980 and 31-3-1981 respectively; (c) each of the Appellants was assessed separately to Sales Tax and Income Tax and also separately registered as small scale unit-the Appellants in Appeal Nos. 163 and 164 of 1982 in Punjab and the Appellant herein in Haryana; (d) three separate L-4 licences were issued one to each of the Appellants by the Excise authorities. The applications for the licences made by the Appellants in the Appeal herein and Appeal No. 163 of 1982 as well as the licence granted to the latter disclosed the names of identical partners; (e) the Appellant in Appeal No. 164 of 1982 and the Appellant in Appeal No. 163/82 had, on 17-6-1975, informed the Excise authorities of the fact that the partners in all the three Appellant firms were common and sought exemption from duty, since the factories were registered separately and in reply by letter dated 30th December, 1975 were granted the exemption applied for; (f) nevertheless, notices to all the three Appellants was issued on or about 17-12-1981,- (i) alleging, inter alia that, having common partners, they contravened the provisions of Rules 9(1), 52-A, 53, 173F, 173G 173-PP of the Central Excise Rules, 1944 "inasmuch as they jointly removed excisable goods falling under T.I. 68 of the Central Excise Tariff valued at Rs. 17,14,747.08 without payment of Central Excise duty during the year 1979-80 and similarly, goods valued at Rs. 16,98,714.40 during the year 1980-81 and also without observing other statutory formalities like issue of gate passes, maintenance of daily stock account as prescribed under the aforesaid Rules," - and (ii) requiring them to show cause as to why central excise duty amounting to Rs. 2,13,076.88 should not be demanded from them under Rule 9(2) of the said Rules and why penalty should not be imposed on them under Rule 173-Q for contravention of the aforesaid rules; (g) in the aforesaid notices, the values of goods cleared severally by the three Appellants during the year 1979-80 were clubbed together and the benefit of the exemption in Notification No. 89/79 dated 1-3-1979 was given in respect of such aggregated quantity of goods in the year 1979-80. Similarly, the values of the goods cleared by the Appellants in the three Appeals during the year 1980-81 were aggregated for the period during which the Appellant firms were in existence during that year but it does not appear that the benefit of the notification No. 89/79, dated 1-3-1979 as amended by Notification No. 105/80, dated 19-6-1980 was actually afforded, although it was stated in the notice that the said notifications had been taken into account for the computation of the value of goods exempted thereunder; (h) the three Appellants in their replies, while disputing the allegations in the aforesaid show cause notices, contended inter alia that- (i) each Appellant is a distinct and a separate partnership firm-each a different entity-with different constitutions, although the partners were identical, separately registered with the Registrar of firms as well as the Income Tax and the. Sales Tax authorities; (ii) the Central Excise Department itself had issued separate L-4 licences to each of the Appellants thus recognizing them as distinct and separate manufacturers; (iii) in the premises, the goods cleared by all three Appellants during the period in question cannot be aggregated for the purpose of ascertaining the eligibility of the exemption in the notifications. If the goods cleared by each of the Appellants are taken separately and by themselves it would be found that the exemption limit in the notification has not been exceeded; (iv) there has been no contravention of Rule 9(1) of the Central Excise Rules inasmuch as each of the Appellants had been granted a separate L-4 licence to the knowledge of the Central Excise authorities; (v) for the same reasons, there has been no contravention of any other rules specified in the show cause notice; and 4. In adjudication, the Collector of Central Excise and Customs, Chandigarh had held on the facts and on a construction of the notifications, that- (a) each of the partners in all the three Appellant firms is a "manufacturer" and consequently, the contention that it is the firm/Appellant in each Appeal that is a manufacturer and not the individual partners constituting it was untenable; (This was contrary to the allegations in the show cause notice).

(b) notwithstanding, that the Central Excise authorities had been informed in 1975-76 of the common partners that constituted the Appellants (partnership firms), in consequence of their failure to fulfil the conditions in the notification No. 89/79, dated 1-3-1979, speaking as it did of clearances in a financial year from one or more factories of the manufacturer, the period of limitation is five years and the bar of limitation as pleaded is not also tenable; (c) consequently, the contravention of the Rules had been established and each of the partners of the three Appellants is liable to pay central excise duty on excisable goods removed from the factories owned by all of them during the financial years 1979-80 and 1080-81; (d) in the result, each of the partners was required to pay central excise duty amounting to Rs. 2,13,76.88 under Rule 9(2) of the Central Excise Rules, 1944 on the excisable goods manufactured and cleared during the financial years 1979-80, 1980-81; (e) significantly, however, the learned Collector refrained from imposing any penalty on any one of the partners of the three Appellants. He gave no reasons for doing so.

5. In the Appeals before us and in the course of the hearing of the case, it was inter alia submitted by the learned counsel appearing in the three Appeals, that - (a) each Appellant is a separate legal entity and, in excise law, the expression "manufacturer" applies with greater appropriateness to a firm engaged in manufacture than to the individual partners composing it; (1961 ELT 59-Rice and Oil Mills Partnership Firm v. Dy. Superintendent of Central Excise, Trichur) (b) the excisable goods manufactured by all three Appellants cannot be aggregated for the purpose of Notifications No. 89/79, dated 1-3-1979, or 105/80, dated 19-6-1980 for they cannot be a single manufacturer; much less so, when they were manufacturing diverse goods-the Appellant herein, Firebricks and the Appellants in Appeal Nos. 163 and 164, refractories and machine tools; (c) in the facts and circumstances of the case, there was no wilful mis-statement or suppression of the facts on the part of any Appellant and consequently, the larger period of limitation of 5 years was inapplicable, much less so when there has been no finding that the duty demanded had not been levied or paid by reason of either fraud or collusion or any wilful mis-statement or suppression of facts; (d) nor was there any finding that the failure to pay duty was on account of contravention of any rule with intent to evade duty.

Indeed the failure of the Collector to impose any penalty would itself establish the absence of any such malafide intention on the part of each of Appellants.

6. Shri Lakshikumaran for the Revenue tried to distinguish the case reported in 1981 E.L.T. 59 on the ground that it was not a case where all the partners were identical in the various firms as in this case.

Relying upon the decision reported in 1981 ELT 128 (Jainson & Nicholson (India) Ltd. v. Union of India) and 1981 ELT 906 (Madras Rubber Factory Ltd. v. Union of India). He contended that the benefit of exemption is computable on the consolidated output of all the factories belonging to a "manufacturer". He us in further drew our attention to the inclusive definition of the word "manufacturer" in Section 2(f) of the Act and argued that in accordance with the said definition a person on whose behalf goods are manufactured is also a manufacturer. He submitted that the separate existence of three partnership firms does not necessarily mean that they are not manufacturing goods on account of or on behalf of one of them, particularly so when the partners of the three partnership firms are identical.

7. On the various submissions made and even otherwise it appears to regard to the questions mooted in l(a) supra, that- (a) Section 2(f) of the Act defines "manufacturer" to include any process incidental or ancillary to the completion of a manufactured product and proceeds further to lay it down that the word "manufacturer" shall be construed accordingly, so as to include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages in the production or manufacturer on his own account. Accordingly, "manufacturer" is a person. He may be one who would be "manufacturer" within the ordinary meaning of the word. He himself brings into existence an article or product that is excisable. He may also bring into existence an article or a product through the instrumentality of hired labour. Both these categories of persons are "manufacturers" in terms of the inclusive definition of the said word; (b) it is not for the first time that the word "manufacturer"/person in the context of aggregation of goods manufactured in one or more factories by or on behalf of the same person when he happens to be a partner in a plurality of firms, had arisen for construction- (i) item 12A(V) inserted in 1954 in the First Schedule to the Central Excises and Salt Act, 1944 exempted rayon and artificial silk fabrics produced or manufactured in one or more factories by or on behalf of the same person in which less than 25 powerlooms in all were installed. The question was if the powerlooms owned by a plurality of partnership firms in which the assessee was a partner, were to be aggregated for the purposes of determining the eligibility to the exemption. The Supreme Court in 1978 ELT (J 317) (Asst. Collector of Central Excise & Customs v. Shri J.C. Shah and Ors.) held that while it is true that, under the law of partnership, each partner is an agent of all others, the partnership itself is a person distinct from the partners in terms of Section 3(42) of the General Clauses Act, 1897. Accordingly, a partner of the firm is not the same person as the firm itself. Where, therefore, a person manufactures artificial silk fabrics for himself in a factory owned by him and happens to be a partner in two partnership firms, it cannot be said that there is a manufacture by or on his behalf in the partnership firms as well. The manufacture in the partnership firms is not by or on his behalf but on behalf of the partnership firms. Consequently, the looms in the factory owned by him and the looms owned by the two partnership firms cannot be treated as a collective entity for central excise purposes;(Kerala) (Rice & Oil Mills v. Deputy Superintendent of Central Excise, Trichur) wherein it was held that the expression "manufacturer" applies with greater appropriateness to a firm engaged in manufacture than to the individual partners composing it, relying on an observation the Privy Council in AIR 1948 P.C. 100 (Bhagwanji Morarji Gokul Das v. Olympic Chemical Works Company) to the effect that- "the Indian Partnership Act goes further than the English Partnership Act, 1980 in recognizing that a firm may possess a personality distinct from the persons constituting it, the law in India in that respect being more in accordance with the law of Scotland than that of England";(Chandra Sekhara Bharathi Weaving Mills and Ors. v. Asst. Collector of Central Excise, Sivakasi and Anr.), the Madras High Court held, in construing Rule 96J of the Central Excise Rules, that a person owning a share in a partnership firm is not to be identified with the partnership for the purposes of levy of duty. A person who happens to be partner in a plurality of firms cannot be said to own the sum total of powerlooms possessed by the firms, nor can a plurality of partnership firms treated as one entity because of a common partner's, if a person is a partner in two partnership firms, those two firms cannot be treated as one and the same ; (iv) finally, in 1981 ELT 177 (Jaswant Sugar Mills Ltd., Meerut v. Union of India, a Division Bench of the High Court of Delhi had held on a construction of Section 2(f) of the Act and Notification No. 13/65 read with Section 3(42) of the General Clauses Act that, where a person owned as a sole proprietor a factory at Meerut and was a partner in another factory at Bijnore, in so far as the latter in concerned, he is a person distinct and apart from the partnership controlling manufacture and accordingly, the production of sugar at Bijnore and Meerut Mills could not be clubbed together for grant of rebate under the notification in question; (c) it makes for no difference for the applicability of the ratio of the aforesaid decisions if, instead of one or two persons happening to be partners in a plurality of firms, all the partners in one firm are identical with those in the other firms, as in this case. A partner in any of the three firms is distinct from each of the three firms and vice versa. Each of the three firms is separate and distinct from the other two and also distinct from the individual partners composing them, albeit they are all identical; (d) once this is so, it cannot be said that the manufacturer in each of the three appeals is identical just because the three appellants are having common partners although, admittedly, their shares vary and they are not one firm but three separate firms each having separate independent existence. Nor can it be held, as was by the adjudicating authority, that each individual partner in all the three Appellant firms is a "manufacturer". If that were so, the exemption limit becomes applicable to each one of the partners.

Indeed, if each of the several partners is a "manufacturer" as held by the Collector, contrary to the allegations in the show cause notice, the goods manufactured by or in his behalf in all the three factories cannot exceed the limit of the exemption. It would appear from the penultimate para of the adjudication order that there were five partners in all the Appellant firms. If the total value of goods cleared by the Appellants in 1979-80 was Rs.32,14,747.08, each of the five partners must be deemed to have cleared goods of the value of Rs. 6,42,949 only-much below the exemption limit. Similarly for the year 1980-81 if the five partners-each a manufacturer- cleared in all goods of the value of Rs. 16,98,714 only, it works out to a value of merely Rs. 3,35,743 in respect of each partner; (e) the two decisions cited by the learned representative for the Revenue are not in point seeing that the question of construction of the word "manufacturer" in the context of a plurality of partnership firms did not arise in either of them for consideration; (f) accordingly, it is not a case of clearance of goods from more than one factory by or on behalf of a single "manufacturer" but three different "manufacturers" severally clearing diverse goods -refractories, firebricks or machine tools, as the case may be - and the goods cleared by them, in the words of the Supreme Court, cannot be treated as a collective entity for the purposes of extending the benefit in Notifications Nos. 89/79 or 105/80. Aggregation of their goods in 1979-80 or 1980-81 or the issue of the show cause notice in question was wholly misconceived and the adjudication order as well as the demand for payment of duty therein have to be set aside.

8. Although, in the view we had taken supra, it is unnecessary to consider the other issues that arise, in the interest of completeness, we proceed to decide the other issues as well.

9. Much prior to 17-12-19^1, when the show cause notices were issued, Rule 10 of the Central Excises and Salt Act, 1944 was omitted from the Rules and re-enacted as Section 11-A of the Act itself. A perusal of Rule 9 and Section 11-A would disclose that- (a) the removal of excisable goods from the place of manufacture without payment of duty leviable in the manner prescribed and permission of the proper officer on an application made to him in an appropriate form is prohibited, subject, however, to some exceptions, not germane for the present purpose ; [Rule 9(1)]; (b) the manufacturer is bound to pay on written demand within the period specified in Sec. 11-A of the Act, the leviable duty, in respect of goods removed from the place of manufacture, in contravention of Rule 9(1) [Rule 9(2)]; (c) in any case of such contravention, the manufacturer becomes liable to a penalty extending upto two thousand rupees and the goods shall be liable to confiscation [Rule 9(2)]; (d) when duty had not been levied or has been short levied, or where there has been an erroneous refund, the Central Excise officer may, within six months of the "relevant date" serve a notice requiring the person chargeable to show cause as to why he should not pay the amount specified in the notice [Sec. 11-A]; (i) fraud, collusion or any wilful misstatement or suppression of facts; or (ii) contravention of any of the rules with intent to avoid payment of duty; by such person or his agent, the period within which the aforesaid notice could be issued is 5 years instead of six months.

(Proviso to Sec. 11-A); (f) "relevant date" had been separately defined to mean, in the context of the facts of this case, the date when the duty was to be paid under the Act or the Rules; (g) the Asst. Collector shall consider the reply to the show cause and determine the appropriate quantum of duty payable by the manufacturer and thereupon the amount so determined shall be paid.

[Sec. 11-A].

10. Rule 173(Q) of the Rules provides for confiscation and penalty, inter alia, for removal of goods in contravention of any of the Rules, failure to account, manufacture without licence, and contravention of the rules with intent to evade duty, when the goods are liable to confiscation and a penalty not exceeding three times the value of the goods in respect of which the rules had been contravened or Rs. 5,000/- whichever is greater, has to be imposed.

11. If Sec. 9 and 11-A of the Central Excises and Salt Act, 1944 and Rules 9 & 173(Q) are examined in juxtaposition, it would be observed that-the intent in the removal of goods in contravention of the Act or the rules is immaterial for the enforcement of the penal provision in Sec. 9 of the Act in a prosecution. Nevertheless, for the levy of a penalty in adjudication for contravention of the rules, the intent to evade duty is an essential requisite; 12. In the facts and circumstances of the case, it cannot but be held that- (a) the manufacture of diverse goods severally in each of the factories owned by one each of the Appellants-each a separate entity-was within the knowledge of the Revenue and even with their concurrence in the context of the L-4 licences and the letters exchanged between the parties in 1975-76 ; (b) just because, the Notification Nos. 89/79 or 105/80 exempted goods cleared by a "manufacturer" from one or more factories, it was not obligatory for the Appellants again to apprise the excise authorities of their composition even though - (ii) the law in regard to aggregation of goods manufactured severally by partnership firms is well settled.

The Appellants could not have anticipated an aggregation contrary to law ; (c) their failure to reiterate the constitution of the Appellants with identical partners, cannot, per se, be an act of "fraud" or "wilful mis-statement" or "suppression of facts" in terms of Sec.

11-A of the Central Excises and Salt Act; (d) "fraud" has not only to be alleged but particulars thereof have necessarily to be furnished; there was not even an allegation of fraud in the show cause notice ; or of mis-statement or suppression of facts; (e) in the premises, the three cases of the Appellants do not fall within Clause (1) of the proviso to Sec. 11-A so as to attract the five year period of limitation to govern the adjudications; (f) nor does the second clause of the proviso to Sec. 11-A apply when there has been no contravention of the rules much less with the intent to evade payment of duty. The charged parties, namely the individual partners of the three Appellant firms cannot be so many "manufacturers" so that it can be postulated that they transgressed the Central Excise Rules. Reliance on the proviso to Sec. 11-A was obviously an after thought and misconceived; (g) once the proviso to Sec. 11-A was inapplicable, the show cause notice issued on or about 17-12-1981 for payment of duty in terms of Rule 9(2) for the year 1979-80 was obviously barred under Sec. 11-A; (h) for the year 1980-81, the show cause notice was vitiated in that the benefit of the exemption was not taken into account at all in making the demand after aggregation of the goods manufactured severally by the Appellants. The entire value of the aggregated goods was taken into account without exempting any part of it. Even though not barred by limitation, in the view we had taken on aggregation, it cannot sustain.

13. The allegation that the appellants had contravened any of the rules, as already stated arises out of misconstruction of the notifications in question. In the view, we had taken of the said notifications, it has to be held that the appellants had not contravened any of the rules specified in the show cause notices.

14. In the context of the language of notifications Nos. 89/79 & 105/80, we are of the view that there is no substance in the plea relating to jurisdiction. When the notifications speak of "manufacturer" having a plurality of factories, it will not exclude even by implication factories situated in diverse jurisdictions.

15. In the result, we allow the appeal herein as well as the other two (Appeal Nos. 163 & 164 of 1982).