Mettur Spinning Mills Ltd. and Others Vs. Cce Salem - Court Judgment

Jyoti Balasundaram

On 27.4.2002, the officers of DGCEI, Coimbatore visited the factory premises of Mettur Spinning Mills Ltd. (hereinafter referred to as MSML) who are manufacturers of cotton yarn, on the basis of specific information that they were manufacturing and clearing yarn without accountal thereof in their books of accounts, without following Central Excise procedure and without payment of Central Excise duty. Shortage of cotton was noticed on the date of visit. Cone labels with the names of Shalini Textiles and Vishnu Textiles and HDPE bags meant for packing cotton yarn with the name of MSML, Shalini Textiles and Vishnu Textiles, were noticed in the packing section of the factory; residences of the Deputy Sales Manager and Factory Manager of MSML and of P.Balakrishnan, Managing Director of C.P. Spinning Mills (P) Ltd. (hereinafter referred to as CPSML) were visited and documents such as personal diaries and computer printouts and delivery challans etc. relating to annual production and clearance of cotton yarn were recovered. Shortage of cotton and cone yarn was also detected in MSML during second visit of the officers on 26.6.02. During the period from 1.8.2000 to 26.4.2002, MSML received 39,41,871 Kgs. of cotton (this quantity excluded 7,72,002 kgs. of cotton sent to other mills). Actual consumption as brought out from various statements was 20,31,051 kgs. during the period 1.4.01 to 31.12.01 and the actual consumption for the entire period of dispute namely 1.8.2000 to 26.4.2002 was worked out as 39,36,944.5 kgs. while only 19,67,752 kgs. of cotton was accounted in the statutory records. Statements of various officers of MSML and CPSML were recorded. Statements were also recorded from dealers in cotton yarn.

2) The result of the investigation was that (a) MSML received cotton without invoices and in the name of Prathiv Spinning Mills (P) Ltd., CPSML etc. and used the same in the manufacture of cotton cone yarn without accounting the same in the statutory records (b) MSML received cone labels and HDPE bags for the packing of cotton on cones, which were disproportionate to the production of yarn accounted for Central Excise purposes (c) MSML manufactured cotton yarn on cones and packed them in the names of Shalini Textiles and Vishnu Textiles and without any name, with intention to evade payment of duty (d) during the period in dispute, MSML manufactured and cleared cotton yarn on cones without payment of duty in the guise of cotton hank yarn to evade payment of duty (e) MSML cleared cotton yarn on cones without payment of duty to S.P.Trading / S.P.Textiles of Somanur, Shri Kathiresan of Bhagvathy Yarns, Palladam, and P.K.Mahamune of Preetha Cotton / PKM Garments, Tirupur without accounting the same in the statutory records (f) the unaccounted cotton yarn on cones was transported using certain vehicles and (g) the sale proceeds of unaccounted cotton yarn on cones were received by Shri P.Balakrishnan through the employees of CPSML and MSML.

3) On the above basis, show-cause notice was issued proposing recovery of duty of Rs.2,90,92,416/- on cotton yarn under the proviso to Section 11A(1), proposing levy of interest under Section 11AB, and proposing penal action under Section 11AC of the Central Excise Act, 1944 as well as under the relevant provisions of Central Excise Rules, 1944 and Rule 25 of Central Excise Rules, 2001 and 2002. Notice also proposed imposition of penalty on the other appellants. Pleas raised by MSML that they were not manufacturers of cotton yarn but that CPSML were the manufacturers thereof as CPSML had complete control over the affairs of MSML and, therefore, MSML could not be considered as independent job worker/manufacturer of the yarn, that even if it is held that they are the manufacturers, liability to pay duty shifts to CPSML in view of the fact that CPSML had filed declaration under Notification No.214/86-CE dt. 25.3.86, undertaking to discharge duty liability on the yarn received in their factory and that computer printouts relied upon for the purpose of quantification of duty could not be relied upon as the safeguards prescribed in the above rule were not followed, were rejected by the Commissioner, who hence upheld the duty demand together with interest, and imposed penalty of Rs.2,79,92,416/- on MSML under Rule 9(2), 52A, 173Q and 210 of the Central Excise Rules, 1944, Rule 25 of the Central Excise Rules, 2001 and 2002 Rules read with Section 11AC of the Central Excise Act, 1944, and penalty of Rs.2.75 lakhs on P.Balakrishnan, Penalties of Rs.10 lakhs each on P.K.Mahamune and D.Krishnan (proprietor of SP Trading Company) and Rs.5 lakhs on M.Kathiresan. The mills and the individuals have filed appeals against duty confirmation and penalty; Revenue is in appeal against the reduction of the penalty from amount equal to duty.

4) We have heard both sides and record our findings as under :-

(i) Who is the manufacturer of the goods in question?:-

MSML contends that the duty demand confirmed against them is not sustainable as they cannot be considered as manufacturer and that it is CPSML who is the manufacturer of the goods. They rely upon Memorandum of Understanding dt. 8.7.2000 entered into between K.Rajagopal Chetty, Managing Director of MSML and P.Balakrishnan of CPSML according to which MSML allowed CPSML to run the mills as per the conditions mentioned therein. The MoU was further extended. During the period in dispute, CPSML had purchased material such as raw cotton required for the manufacture of cotton yarn on its account and sent the same to MSML under the cover of challan under Notification No.214/86-CE dt. 25.3.86. MSML contends that the entire control and supervision over the manufacture was by CPSML the sale proceeds of cotton yarn was deposited by Shri M.Ramakrishan Accounts Clerk of CPSML in his account and the amount was withdrawn as per instructions of Balakrishnan, Managing Director of CPSML; cash was withdrawn by Manikandan as per instructions of Balakrishnan and the amount was handed over to Balakrishnan for meeting the day-to-day expenses of the mills; gratuity to employees of MSML was paid by CPSML; CPSML had purchased machinery and installed the same in MSML premises, and had also sold old/worn out machines of MSML. According to MSML, the above would show that their management had completely divested the control over the unit in favour of CPSML. They submit that CPSML is not only a raw material supplier but exercises complete control over MSML who, therefore, cannot be treated as independent job workers/manufacturers and that CPSML is to be held to be the manufacturer of the yarn in question.

We see no merit in the above submission. MSML is registered with the Central Excise department as a manufacturer and they have not surrendered their licence. On the other hand, CPSML has not taken out a licence for the manufacturer of cotton yarn. MoUs between MSML and CPSML also do not establish, as contended by MSML, that CPSML became the manufacturer of the yarn. Memorandum of Understanding dt. 8.7.2000 is reproduced herein below :-

‘MEMORANDUM OF UNDERSTANDING

Memorandum of Understanding entered into on this the 8th day of July, 2000 at Chennai, by and between Sri K.Rajagopal Chettiar representing the existing shareholders of Mettur Spinning Mills Ltd., Chennai hereinafter referred to as TRANSFERRORS and

Shri P.Balakrishnan representing the existing shareholders of M/s.C.P.Spinning Mils Private Limited, Dindigul hereinafter known as the TRANSFEREES.

Whereas the TRANSFERORS have decided to transfer their interest in Mettur Spinning Mills Limited, having its registered office at No.234, Mint Street, Chennai 600 003 (hereinafter referred to as the Mills) to a prospective person who would be interested in taking over and run the mills and whereas the TRANSFEREES have evinced interest and hereby agrees to take over the mills in as is where is condition and to run it as a going concern.

Whereas the parties herein deem it expedient to enter into a memorandum of understanding (MOU) for the aforesaid purpose as per the terms and conditions setforth hereunder.

1. The TRANSFERORS hereby undertake to settle whatever balance due to the Term Lending institutions of mills namely IDBI, IFCI, ICICI and to the NBFCs and give no dues clearance certificates from all the institutions, to the TRANSFEREES

2. The TRANSFERORS hereby undertake to bear and clear all the trade creditors of the Mills existing as on 17th July 2000 as well as the liabilities due to their associate concerns as on the said date.

3. The TRANSFERORS will also take over all the amounts due to the Mills from their associate concerns as on 17th July 2000.

4. The TRANSFERORS hereby undertakes to, settle the crystallized liability of the Mills to its bankers, Syndicate Bank, Madras Main Branch and State Bank of India, Industrial Finance Branch, Chennai, and further to relieve the TRANSFERORS FROM ALL THE PERSONAL guarantees, corporate guarantees and other guarantees executed by the TRANSFERORS and their associated concerns, with the said banks, and also to get the collateral securities given by the TRANSFERORS to secure the above stated dues released within a period of one year. The TRANSFEREES hereby undertake to indemnify the TRANSFERORS of any claims or actions for realizing the above liabilities by the banks.

5. The TRANSFEREES further undertake to settle the existing and future liability towards gratuity payable to the eligible employees as and when they accrue.

6. In consideration of the transfer of shares in the Mills by the Transferors to the Transferees and further undertakings mentioned above, the Transferees have agreed to pay to the Transferor a sum of Rs.25.00 lakhs (Rupees twenty five lakhs only.

7. The TRANSFEROR has settled all statutory dues towards Provident Fund, Employees State Insurance as also salary payable, relating to the employees till 9th September 1999, the date of suspension of operation and the TRANSFERROR states that there are no dues towards any of these expenditures.

.............’

Another MoU was entered between MSML and CPSML on 3.8.2000 as per which MSML undertook conversion of cotton yarn and supply thereof to CPSML, by its own employees and workers and MSML ensured production of good quality yarn out of cotton supplied by CPSML. This would clearly show that MSML is an independent job worker/manufacturer as yarn quality could not be guaranteed by anyone other than a job worker/manufacturer. Further, it is not the case of MSML that they are a dummy unit and it has been held by the apex court in Collector Vs 1995 ELT (80) A.279 (SC) that unless the job worker is a dummy unit, supplier of raw material to the job worker is not a manufacturer. This being so, they cannot contend that they are not the manufacturers of the cotton yarn. There is yet another reason for considering MSML to be the manufacturer and that is, manufacture of cotton yarn by MSML for others such as S.P.Trading and S.P.Textiles, proprietary concerns of Shri D.Krishnan, dealer in cotton cone yarn who has stated that yarn was manufactured at MSML s premises as per his directions. Yarn dealer namely Mahamune has deposed regarding purchase of cotton yarn from MSML during the relevant period. Yarn buyer Kathiresan has also stated that he made purchases of cotton yarn directly from MSML. The defence of MSML that they are not independent job workers/manufacturers, therefore, falls to the ground. Accordingly, we reject the submission that CPSML is to be treated as the ‘manufacturer’, and held that it is MSML who is the manufacturer of the cotton yarn in question.

(ii) CPSML is required to discharge duty liability as per declaration filed by them in terms of Notification :-

Notification No.214/86-CE reads as under :-

‘In exercise of the powers conferred by sub-rule (1) of rule 8 of the Central Excise Rules, 1944, the Central Govt. hereby exempts goods specified in column (1) of the Tale hereto annexed (hereinafter referred to as the said goods ) manufactured in a factory as a job work and :-

(a) used in relation to the manufacture of final products, specified in column (2) of the said Table,

(i) on which duty of excise is leviable in whole or in part; or

……

from the whole of duty of excise leviable thereon, which is specified in the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986).

(2) The exemption contained in this notification shall be applicable only to the said goods in respect of which,

(i) the supplier of the aw materials or semi-finished goods gives an undertaking to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise having jurisdiction over the factory of the job worker that the said goods shall be

(a) used in or in relation to the manufacture of the final products in his factory; or

(b) removed from his factory without payment of duty

----

Explanation I. For the purposes of this notification, the expression job work means processing or working upon of raw materials or semi-finished goods supplied to the job worker/so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the said process.

……….

The Notification enjoins the raw material supplier to discharge duty liability in respect of final products manufactured out of raw material supplied by him. The language of the Notification clearly lends itself to the view that it is only that the raw material supplier is required to pay duty on accounted final products made out of accounted raw material. No notification can shift the liability to pay duty even on goods manufactured and clandestinely removed, from the job worker/manufacturer to the raw material supplier. The decisions of the Tribunal relied upon by the assessee namely Aggarwal Rolling Mills Vs CCE New Delhi, 1997 (93) ELT 615 (Tribunal), Excel Corrugated Boxes (P) Ltd.Vs CCE Cochin, 2005 (182) ELT 485, Sree Rayalaseema Dutch Kasssenbouw Ltd. Vs CCE Tirupathi, 2006 (203) ELT 248, Suvikram Plastex (P) Ltd. Vs CCE Bangalore, 2008 (225) ELT 282 (Tri.-Bang.), Bharat Industries Vs CCE Mumbai, 2008 (229) ELT 281 (Tri-Mumbai) in the context of Notification No.214/86 and its successor Notification No.83/94 are distinguishable as in none of those cases the issue as to liability of raw material supplier for discharge of duty liability on goods clandestinely cleared was considered.

We, therefore, reject the argument of MSML that CPSML is required to pay duty on clandestinely removed yarn and hold that it is MSML who is liable to pay duty thereon.

(iii) Quantification of demand :-

MSML challenges the evidentiary value of computer printouts on the ground that the conditions prescribed in Section 36 (b) of the Central Excise Act, 1944 are not satisfied. However, we note that the printouts were not generated from the computer during investigation but were recovered from the residential premises of the officers of MSML and CPSML/office premises. The Revenue s stand is further corroborated by other evidence such as notings in private diary of M.Swaminatan, Deputy Sales Manager of MSML, his letter dt. 22.3.01 to CPSML drawing the attention of N.S.B.Sundaresan, records of the brokers who had supplied cotton, which was not accounted, records maintained by dealers who had purchased cotton yarn on cones, transporters documents and the fact of deposit of sale proceeds in the account opened in the name of M.Ramakrishnan. M/s.MSML have not challenged the corroborative evidence. Further, no duty has been demanded on the yarn converted from the cotton sent by CPSML to MSML in terms of Notification No.214/86 dt. 25.3.86. Therefore, we agree with the department that the duty demand has been correctly quantified.

In the light of the above discussion, we uphold the duty demand confirmed on MSML and as well as penalty imposed thereon, and dismiss Appeal No.E/84/07. Appeal No.E/309/07 of the Revenue is allowed by enhancing the penalty to Rs.2,90,92,416/- (Rupees Two Crores, Ninety Lakhs, Ninety two thousand, Four hundred and Sixteen only) being duty demand confirmed.

(iv) Individual penalties :-

The Commissioner has discussed individual roles played by P.Balakrishnan, M.Kathiresan, P.K.Mahamune and D.Krishnan and we uphold the finding that they are liable to penalty. However, having regard to the totality of facts and circumstances of the case, we reduce the penalties on the individuals as under :-

1) P.Balakrishnan (Rs.50,00,000/-)

2) M.Kathiresan, (Rs.2,50,000/-)

3) P.K.Mahamune (Rs.5,00,000/-) and

4) D.Krishnan (Rs.5,00,000/-)

Appeal Nos.E/85 to 87/07 and E/256/07 are thus partly allowed by reduction in penalties.

(Operative part of the order was pronounced in open court 16.4.2009)