[Order per : S.L. Peeran, Member (J)]. - All these set of appeals arise from a common Order-in-Original No. 67/97 passed by Commissioner, Central Excise, Bangalore. By this order, he has held that MICO are the real manufacturers of Fliter Inserts produced in the premises of various other appellants who are named herein and for all the clearances effected from the premises of other appellants, the Commissioner has held that the duty has to be confirmed on MICO to an extent of Rs. 3,10,73,971.52. In respect of clearances detected from the premises of other appellants during the period from 1-1-1990 to 31-12-1994 under proviso to Section 11A of Central Excise Act, 1944 in terms of allegations made in the show cause notice dated 2-3-1995. He has imposed a penalty of Rs. 30 lakhs under Rule 173Q(1) of Central Excise Rules, 1944. Further, he has imposed a penalty of Rs. 1,00,000/ - on each of the other appellants herein.

2. The facts of the case are that all the appellants including MICO Ltd. are independent manufacturers having independent Central Excise Licences and clearing the goods from their premises on payment of duty. However, there were proceedings earlier on the same issue, which has been adjudicated by the judgments of the Karnataka High Court vide Writ Petition No. 36/87 and others in favour of the appellants. The matter was also dealt with by the Tribunal vide Beaver Automotives Pvt. Ltd. v. C.C.E. as reported in . However, despite these rulings, the department again re-issued show cause notice concerned to allege the following allegations of contravention of :-

“Rules 9, 173F, 174 of the Central Excise Rules, 1944 read with Notification No. 305/77-C.E., dated 5-11-1977 and 27/92-C.E. (N.T.), dated 9-10-1992 for having failed to comply with the provisions prescribed under the said Notifications and further committed the offences specified in Rules 173Q(1)(a) and 173Q(1)(d) inasmuch as :-

(i) the goods were cleared from Sales Depot of MICO, after receipt from MICO factory as well as from the premises of vendors, at which point of time these filters entered the market stream for the first time.

(ii) Sale of filter inserts does not takes place till they are sold from the depots and therefore the transaction between the vendors and MICO, appears, in effect, nothing but only a transfer, based upon Transfer prices and also since the vendors are availing the benefit of exemption as per proviso to Section 5(3) of Karnataka Sales Tax Act, 1957 according to which M/s. MICO, as the owner of the Trade Mark, gets the goods manufactured by the vendors, under their Trade Mark, and as such the price at which the identical goods are sold from MICO, should be the price on which, the Central Excise duty is liable to be paid.

(iii) M/s. MICO have got filter inserts manufactured for and on their behalf, and as agents or an extended arm of MICO from the other units mentioned in Sl. No. 2 to 8 of page No. 1, without payment of appropriate Central Excise duty, on the filter inserts received by MICO for the other units on a value which does not constitute the normal price as stipulated under the provisions of Section 4 of the Central Excises & Salt Act, 1944 and further cleared such filter inserts at a higher value from their depots, resulting in undervaluation of excisable goods and consequential evasion of Central Excise duty, by resorting to colourable devices, and camouflaged the transaction to be on principal to principal basis.

(iv) The extent of evasion of duty works out to Rs. 3,10,73,971.52 for the period 1-1-1990 to 31-12-1994 as detailed in the worksheets enclosed."

3. It was further alleged that M/s. MICO had adopted the same prices for the sale of filter inserts from their depots, in respect of filter inserts manufactured by MICO (cleared on provisional assessment basis) or by the vendors, (other appellants) on their behalf. The Excise duty element paid, is less on the filter inserts procured from the vendors, than the duty that is recovered from the customers. As a result of which certain amount, which represents Central Excise duty, is retained unlawfully by MICO, which, appears liable to be paid forthwith to the Central Govt. under the provisions of Section 11D of the Central Excises and Salt Act, 1944. The amount so collected during the period September, 1991 to December, 1994 have been worked out to the extent of Rs. 2,49,44,003.94.

4. It was also alleged that the agreements between MICO and the vendors, the machineries lease agreements, the letter of intent are some vital documents which are relied to prove the nature of relationships between M/s. MICO and the vendors. It is alleged that non-disclosure of these documents had been admitted by MICO. Apart from the said documents there are several other documents, correspondences, etc., which are referred to in the Annexure, which disclose that the real manufacturer is only MICO and also regarding the effective management, absolute control, directions that were exercised by MICO on the vendors. From the evidences placed on records, it alleged that MICO have by dubious and colourable methods, suppressed certain vital facts from the knowledge of the department with the sole intention of evading payment of duty, thereby attracting the extended period of limitation of proviso to Section 11A of the Central Excises and Salt Act, 1944. Therefore, it was alleged that the above mentioned other manufacturers these appellants herein had committed the offence specified in Rule 209A of Central Excise Rules, 1944, inasmuch as, they had aided and abetted M/s. MICO in evasion of duty and concerned themselves in dealing with the excisable goods which they knew or had reason to believe, were liable to confiscation, under the Central Excises and Salt Rules, 1944 (sic) or the rules made thereunder, inasmuch as they appear to have :-

(i) wilfully misdeclared to the department as manufacturers, when they were actually acting as an agent/extended arm of MICO and producing goods on behalf of MICO;

(ii) paid duty on a transfer price/procurement price of MICO, and not on a value which had to be determined under the provisions of Section 4 of Central Excises & Salt Act, 1944, which resulted in the undervaluation of filter inserts;

(iii) deliberately camouflaged the transactions to be on principal to principal basis; and

(iv) wilfully aided and abetted MICO in a calculated manner, in adopting colourful and dubious methods of evasion of duty, by resorting to undervaluation.

Hence, MICO was show caused to explain as to why amounts to the extent indicated above for the said period including the amount of Rs. 2,49,44,003.94 should not be collected for the period Sept., 1991 to Dec., 1994 in respect of Filter Inserts sold and unlawfully retained by M/s. MICO under Proviso to Section 11A of Central Excise Act and also asking why penalty should not be imposed. Show cause notice contained the statement of facts, brief summary of investigations, General agreements, Agreement for lease of machinery, Letter of Intent, provision of providing Technical assistance and know-how, provision of constitution, setting up and providing interest-free loan, provision for effective management, direction and control, details of price fixation of filter inserts, details of ownership and brand name, regulation for quality control, procurement of raw materials and fixation of price, other vital points, provision of rejection of goods, requirement under other enactment to fulfil Standards of Weights and Measures Act, Karnataka Sales Tax Act, Non-compliance of requirements under Central Excise Act and the Rules, averments to show that violations of the terms of Notification Nos. 305/77 and 27/92 (N.T.); averments of violation of provisions of Section 11D in terms of sale pattern, sales price of inserts, price list submitted by MICO and lastly allegations as to why penal action should not be initiated.

5. Each one of the appellants filed their reply to the show cause notice denying the allegations levelled in the lengthy show cause notice.

6. MICO unit in their detailed reply stated that the transaction between them and the other appellants was on principal to principal basis. They stated that they are manufacturers of various motor vehicle parts including fuel engine pumps, filters and filter inserts, etc. and having been established in 1951 and their manufacture activity commenced in the year 1954. They have stated that in order to encourage small scale entrepreneurs, they had also been developing various sources for manufacture and supply of various items which were hitherto under their line of manufacture. This in the commercial terminology is referred to as `off loading of manufacturing activities’. They stated that they have given their business standards specifications, testing procedures, etc. and ordered manufacture and supply of filter inserts from various small scale industries. They had communicated to their respective units the method of testing the items in question so that it fully specifies their standards and specifications. As the item is very important component in the automobile industry and therefore quality and standards had to be ensured. They stated that small scale manufacturers are independent entities in investing their own funds, managing their own affairs and reaping the profits, if any, for themselves and the profits were never shared with MICO.

7. They stated that the item filter inserts manufactured by these small scale units are to be affixed with brand name of MICO. The manufacture and supply of the item to the factory of MICO for using as OE in the manufacture of other excisable goods and also to the depot of MICO for re-sale in the after market. The branded goods are exempted from payment of sales tax for sales effected from the year 1987. But the sales-tax is payable on inter-state sales, which is around 75% of the total sales of filter inserts by the vendors, (the appellants herein).

8. They stated that the department was entertaining view that if the brand name of a buyer is fixed and the entire production is supplied to such a buyer, such goods are to be deemed as manufactured for and on behalf of such buyers from the price at which the goods are supplied to the buyer is to be ignored and the price at which the buyer sales in the market is to be taken as a normal price for the purpose of determining the Section 4 of value of charging the duty. In view of such an interpretation, the duty was paid by the respective manufacturers with reference to the price at which MICO was selling such goods in the market. However, one of the vendors namely Indauto was clearing the goods by paying duty only at their sales price which was also accepted by the Department.

9. MICO further stated that Govt. issued Notification No. 175/86, dated 1-3-1986 to overcome the valuation problems faced by the small scale units. Since then the manufacturers in small scale industry sector have been paying excise duty on branded goods without claiming the concession applicable for small scale units. They stated that the Govt.’s intention was thus very clear that the SSI units were required to forego concession in respect of branded goods and no change was brought in this statute for levy of excise duty on branded goods cleared by the SSI units on the basis of the sale price ultimately adopted by the buyers. They stated that judicial pronouncements made the subject clear that the goods have to be valued only at the price at which the goods were sold by the SSI manufacturers to the owner of the brand name, i.e. MICO herein. They stated that all these factors and the details including the aspect pertaining to the machineries being rented/leased to vendors by MICO were within the knowledge of the Central Excise department. The department had initiated proceedings as early as in 1986 against the appellants herein namely Karnataka Filters (P) Ltd., Indauto Filters. Beaver Automotive Pvt. Ltd., and Russ Precision Products. Investigations were conducted from time to time by the department on the same issue. Statements were recorded and correspondences exchanged by the department with the vendors and also with MICO. The vendors were showing the manufacture and supply of branded goods in their Classification lists and Price lists filed from time to time. The vendors have been filing the invoice copies raised on MICO periodically. They stated that in the case of Karnataka Filters (P) Ltd., the issue was agitated right upto the Karnataka High Court and the vendor succeeded in the High Court. In the case of Indauto Filters, the same issue was raised by the department and the vendor’s stand was accepted by the Collector (Appeals). In the case of M/s. Beaver Automotives, the issue is pending adjudication in CEGAT (now adjudicated and decided in favour of the party) and in respect of Ms. Russ Precision, the show cause notices are under adjudication before the Assistant Commissioner of Central Excise. They stated that in spite of the above position, certain investigations were once again generated and it culminated with the issue of show cause notice dated 2-3-1995 by the Collector of Central Excise, Bangalore. In this show cause notice the allegation is that MICO is to be treated as the manufacturers and the manufacture of filter inserts by vendors should be considered as manufacture for and on behalf of MICO by the vendors acting as agents or as extended arm of MICO.

8. They heavily relied on the judgment of the Karnataka High Court in W.P. Nos. 669/87 and 17313/86 whereby the legality of the issue that is whether the vendor is an extended arm of MICO and the assessable value should be that of MICO sale price have been decided against the Revenue and the Revenue was also not successful in their appeals. Therefore, the matter had reached the finality and despite that the department has again raised show cause notice which has not justified. The MICO in their reply made to each of the allegations openly denied that they had floated the units with the help of ex-employees of MICO. They stated that the transaction is purely a commercial transaction and that they received leasing charges/rentals for such machines. The lease amount was not nominal taking into account the fact that these are old machines and the book value at the time of receiving those machines by vendors was very low. They stated that out of the 7 Vendor Notices, only three are ex-MICO employees ventures. While others are in existance for 12, 3, 9 & 12 years respectively. They stated that quantum of material supply, machinery leased and advances given are very marginal as compared to the material purchased, machinery installed and turnover of the vendors in question. They stated that the advances paid by MICO to the vendors had already been recovered and this fact has not been denied by the department in the notice. They stated that M/s. Demanik Enterprises had also paid duty on the notional interest accrued. They gave the figures of all the units. The appellant’s above turn over from Jan. 1990 to Dec. 1994, value of material received on loan from MICO, value of machines received from MICO and Advances received from MICO. They stated that the status of each of the vendors (other appellants) is analysed in detail from various aspects to establish that they are independent legal entities and they are independent manufacturers in their own right. MICO in their reply to the show cause notice have elaborately dealt on each of the points raised by the department, and the reply runs to 65 pages. The crux of the reply is that the relationship between MICO and other vendors is on principal to principal basis; the other appellants are not manufacturing on their behalf, but as an independent job workers and in terms of the settled law; the other appellants are required to be considered as manufacturers and hence there is no violation of any provision to notification of Excise law for fastening the duty on the value of the filter inserts sold by MICO.

9. The other appellants have also filed their individual replies holding that they are independent manufacturers and they have rightly discharged duty on the price-list filed by them. They stated that they affixed on the filter inserts the brand name of MICO and sell the entire production to MICO because they are fixed with MICO brand names. For the purpose of using OE parts or to their depots situated all over India for the purpose of sale. They stated that they pay Central Sales Tax for the supplies made to the depots of MICO situated in States other than Karnataka. The branded goods are exempted from payment of Karnataka Sales Tax under the Kanataka Sales Tax Act in respect of sales affected within the State of Karnataka. They stated that since the Central Excise duty is chargeable with reference to the goods in accordance with Section 4(1)(a) of the Central Excises and Salt Act, 1944, they were declaring the price at which they were selling the goods to MICO from time to time and accordingly paid the duty on the goods cleared by them. They stated that the price at which the goods are sold to MICO is the sole consideration for the sale. The sale price is fixed in the normal course of business taking into account all the commercial aspects. They produced the copy of the purchase order showing the price at which MICO pays for the sale of goods. They again referred to the issue having been raised by the department in the year 1986 and about the proceedings before the Karnataka High Court and about the aspect being settled in the reports on these aspects. They stated that they had taken valid Registration Certificate from SSI, including power from the Karnataka Electricity Board in their own name. They had independent Sales Tax Registration and Central Sales Tax Registrations. They had their own banking and financial arrangements. They have independently registered ESI Act and separate entity under Income Tax and had independent assessment numbers. They had invested their own funds and managed their own affairs and reaping their own profits and are profit making company and had no carry forward loss. They had their own manufacturing facilities with their own work-force. They denied the allegation that they have been paying duty on a price called “transfer price” and paid duty only on procurement price, i.e. on the sale price. They denied receiving sums for initial setting up of their units. They denied being agents or an extended arm of MICO and stated that their action and activities cannot in any way bind MICO. They cannot represent themselves as agents of MICO and it may not stand legal scrutiny and that their relationship with MICO and themselves are not as between the agent and principal but between its principal to principal. They stated that they do not function under the management, direction and control of MICO. They are only manufacturer, supplier and MICO is a buyer. Filter inserts is an engineering item and MICO, the brand owner has standardised the specifications, process, inspection procedures for the product. MICO being the buyer, as is the normal course in the case of engineering products, has to specify its requirement to the seller. This is done by indicating the specification, drawing and other parameters. The communication of requirement in an engineering industry is carried out by way of drawings, specifications including for raw materials, products structure, etc. Since the packing is also standardised, this is also communicated by the buyer. Therefore, there is nothing wrong in MICO clearly spelling out the parameters in respect of the goods which they propose to order/purchase from them. This is done in a more detailed manner firstly to ensure the quality of the products and secondly to put beyond all doubts the exact requirement of MICO so that they have the right to reject any goods which do not meet their specifications/specific requirements. Hence, the specification, drawing, etc. do not lead to direction. It is within the scope of specification only. They have replied to all other points in detail and stated that merely because they had agreement with regard to the sale of item to the MICO, it does not ipso facto make them agents. They stated that the procurement price is the purchase price and in terms of the commercial transaction. They further stated that they manage the affairs of their company and neither MICO nor any of its representatives are posted at their premises to carry on day-to-day activities. Finance, labour, administration, production, supervision, etc. are all managed, directed and controlled by themselves and not by MICO. Hence the question of observing that they are under the effective management, direction and control of MICO cannot at all arise.

10. They relied on the large number of judgments on this issue and stated that the issue is no longer res integra and the grounds raised in the show cause notice is mis-concealed as they are not dummy units but independent profit-making units without any flow back to the MICO and MICO does not have any financial dealing or interest or management in their business activities.

11. The Commissioner in the impugned order-in-original has proceeded to decide the case of all the units except the unit of M/s. Karnataka Filters (P) Ltd. in whose case there was a stay from the High Court of Karnataka. He has proceeded to observe that he find himself in agreement with the basic thrust of the show cause notice, i.e. MICO are the real manufacturers be that may branded as creating a legal friction. He states that his reasoning is simple and proceeds to hold that this so called vendors (job workers or the ancillaries) have ceded or abdicated their right to determine their own profit level and hence the price (or MICO has usurped this power). He states that in his view the basic indicator of control is the independence that any management have in determining their own profit level (and the price), whatever be the constitution of the enterprises. When this fundamental right of the enterprise is abdicated, such enterprise ceases to be an independent organisation. He has held that profit-making is the fundamental object of any business enterprises and generating more profit its constant endeavour. He has held that when these ancillary units contend that they are independent that independency should have been demonstrated by their sovereignty in determining their own price. But what he found was that these ancillary units prepare a cost estimate and the purchase (or the buyer) i.e. MICO fixes the prices. He has held that this runs counter to the concept of principal to principal dealing also. The purchaser viz. MICO has held the right to fix the price. He has held that the concept of determination of price by MICO is not an attribute of principal to principal relationship. Therefore, the arrangement of this type cannot be regarded as a case of sale of goods at a price at which they are ordinarily sold in the course of wholesale trade. In this regard he has discussed in various about the statements and from that he draws the conclusion that there is evidence to clearly indicate the state of affairs that is going on in the transaction between the so-called vendors and MICO. He has held these documents cited supra brings out the underlying factor to fore. The monetary consideration for the transaction is determined by MICO. Thus, by extension even the profit level of the ancillary company is determined by the MICO. He holds that that ought to have been the exclusive preserve of the management incharge of ancillary companies. He has held that all these ancillaries have ceded one vital managerial function to MICO i.e. determining the level of profit they should make. Therefore, he holds that in such circumstances, managerial control is not demonstrated by having separate sales tax, income tax, excise, ESI, PF and other registrations. He holds that it is demonstrated by the right to determine its price and profit level. Those who are managing these enterprises can be said to be in control if they had demonstrated their sovereignty in deciding the price they went to charge for selling of the goods they manufacture and the quantum of profit they want to make while selling such goods. He holds that determination of the price or the profit level (or loss) should be the policy decision of the management incharge of the company. In such a policy matter, if determined by somebody else, it demonstrates that such somebody is incharge of the management and this is precisely what the show cause notice alleges, i.e. the goods are manufactured under the management, direction and control of MICO and hence the allegation in the show cause notice is substantially correct and alleges that the goods are manufactured under the management, direction and control of MICO. He proceeded to confirm the larger period by extending the proviso to Section 11A as the investigation has been able to unearth a totally different fact which were hither not disclosed (or concealed) to the department. This new revelation changes the entire complexion of the issue. He has held that the changed scenario clearly shows that MICO are the real manufacturers and the ancillaries are the means (dubious one) by which the end was achieved. The real facts were unearthed by the Department by conducting concentrated and focussed investigation. Therefore, the allegation of suppression of facts sticks. Therefore, ld. Commissioner has held that having read and re-read the case records he is convinced that the non-disclosure of facts regarding fixation of price by MICO was deliberate and not an oversight, therefore he is unable to accept the unsaid plea that suppression, if any, may not be `wilful’. He has held that the way the law has been understood and followed leaves behind in its wake series of infraction. MICO, with the assistance of seemingly real looking but dubious entities, were able to clear the excisable goods on payment of duty much less than normally it would have paid (or have to pay) had those filter inserts were manufactured and cleared from the MICO’s own factory. Thus he holds that by resorting to colourable means, MICO have evaded payment of excise duty to the extent of Rs. 3,10,73,971.52 and hence that contravened the provisions of Rules 173F and 174 of Central Excise Rules, 1944 and extended period of limitation could justifiably invoked, and the case calls for imposition of penalty as well. He has proceeded to impose penalty. However, in the order despite noting that Counsel has cited case law, has not attempted to discuss except to say that the case law cited is distinguishable on the ground that the MICO, the buyer, was fixing the price at which the filter inserts were required to be cleared by the ancillaries to MICO and this type of arrangement/transaction were not in existance in the various case laws cited by the Counsel.

12. We have heard ld. Sr. Advocate Shri Chandra Kumar, R.C. Kumar, Advocate, Ms. Babita C. Rohra, K.S. Ravi Shankar, C.A. for the appellants and Shri Victor Thiagaraj, SDR and Ms. Aruna Gupta, JDR for the department in the matter.

13. Ld. Sr. Counsel took us through the various portions of the order, show cause notice, reply, grounds of appeals, case law including the judgment of Karnataka High Court in their own case and the Tribunal’s ruling on this issue in the case of one of the parties herein namely Beaver Automotive Pvt. Ltd. He also relies on large number of judgments on this point and submits that the ground taken by the Commissioner and the department’s totally new concept and the said concept is unknown and such a concept cannot be brought in when it is clear that all the units are independent units and the sale price is a negotiated price. He pointed out that admittedly there was no dispute about the negotiation on the price and the agreement being mutually arrived at to the mutual benefit so long as the agreement between the parties on price and transaction are not one sided, but are as a result of clear negotiation, therefore they are required to be considered as price arrived at independently after negotiation. He submits that the sweeping observation in the impugned order “these ancillary units prepare a cost estimate and the purchaser viz. MICO has usurped the right to fix the price” is totally misconceived. He stated that the appellants have not resorted to any usurpation of right nor have their vendors (not so called vendors) as branded in the impugned order) ceded or abdicated their managerial right of fixing the price of the goods in favour of the appellants as repeatedly observed in the impugned order. He argued that the impugned order has completely overlooked the well-known and well-established system of invitation of tenders/offers by organisation/companies in which the price is quoted by the tenderers/offerors and subsequent negotiations between the parties to arrive at the price and other conditions. He submitted that it is common knowledge that in all such transactions the process apparently indicates ultimate acceptance of price by the intended buyer/purchaser after negotiation during which the tenderers/offerors submit all the details in support of their evaluation of the price for consideration by the intended purchaser/buyer. Therefore he states that by no stretch of imagination the aforesaid process results in the tenderers/offerors surrendering their sovereignty of fixing the price to the organisation, as the Commissioner quotes in the order. He pointed out that the entire documents relied in paras 35, 36 and 39 in the order have been grossly is interpreted and has failed to appreciate the said documents in their true and correct perspective and the Commissioner has drawn absurd references in the said documents which are untenable in law. He submits in fact the documents clearly support the plea that all the appellants are independent and have their own managerial control. He cited in this regard the judgment of Tribunal in the case of V. Devaraj and Another v. C.C.E. reported in 1992 (42) ECR 562, where it has been held that two units which in that case were in fact, owned by husband and wife are separate and different, and cannot be clubbed together, when they have to geographical existence and have been periodically filing declarations before the authorities and the authorities also accepting them with separate assessments under State Acts and Central Acts. He submitted this was again followed in the case of Rang Udyog case reported in . He submitted that there is no provision in the Central Excise law envisaging demonstration of sovereignty of price determination as sine-qua-non for being construed as an independent unit, on which aspect also the appellant and their vendors (other appellants) stand on much stronger footing than the two units owned by husband and wife, which themselves have been held to be independent units in the aforesaid ruling. He submitted that the observation of the Commissioner that sharing of cost data with the buyer militates against the doctrine of “Indoor management” is totally unsustainable. He stated that as a matter of fact, it reflected only transparency on the part of the seller and an honest indoor management on their part and not a surrender of their independence as held by the Commissioner. He submitted this was the general practice in the industry who are having ancillaries and job workers and negotiated price under an agreement for supply of items in terms of drawings and specifications and it has been repeatedly held that such an arrangement does not ipso facto make the ancillary units hired labourers or such units to be as dummy units. The Bench noted several other contentions raised by ld. Advocate which has been brought out in the grounds of appeal. Other Advocates and Chartered Accountant appearing for the parties also supported the arguments and submitted that the ground on which the show cause notice and Commissioner proceeds is totally unsustainable and unknown to the provisions of Excise Act. They stated that so long as the units are independent, then such units are to be held as manufacturers and the price at which they sale the goods are the correct price in terms of Price-list filed by them, therefore the price at which the MICO sales the goods cannot be the factor for the purpose of evaluation.

14. Ld. SDR very spiritedly and strenuously argued the case and defended the order in the light of the findings given by the Commissioner.

15. On a careful consideration of the submissions, we notice that the Commissioner at the outset of the finding itself held that he is not determining the show cause notice to the Karnataka Filters (Pvt.) Ltd. It is seen that the show cause notice pertaining to Karnataka Filters (Pvt.) Ltd. has already been decided by Karnataka High Court in the writ petition cited supra and the same has been confirmed in the writ appeal. Along with the Karnataka Filters (Pvt.) Ltd. there were other units like Metacraft, M/s. Auto Com Engineers and M/s. Lakshmiprasad Enterprises, who had entered an agreement with MICO Industry had challenged the virus of the proceedings. The finding given by Karnataka High Court in the Writ Petition in para 6 to 16 extracted herein below :-

“6. The matter was heard for some time on the last occasion and it was adjourned to enable Shri Ashok Haranahally, learned Central Government Standing Counsel to find out whether the Department has taken up the said order of the Collector (Appeals) in further appeal before the Appellate Tribunal. It is submitted by the learned Counsel today that no appeal has been filed by the Department.

7.  In these circumstances, the conditions of purchase being identical in all these cases, the view taken by the Collector in case of M/s. Metacraft (W.P. No. 36/87) holds good to all these cases also in which the petitioner is the same, viz., W.P. No. 669/87 and W.P. No. 17313/1986 where the items manufactured are Diesel Pre-filter Inserts. The conditions of purchase being the same in these two cases also, any decision rendered in M/s. Metacraft case should apply on all fours to those two cases also.

8. However, since statement of objections is filed on behalf of the Department, it would be necessary to refer to the two decisions of the Supreme Court, which should govern these cases.

9. In the first case (Union of India & Others v. CibatuI Limited) on an examination of the terms of the agreement between the seller and the buyer, the Supreme Court held that the seller cannot be said to manufacture the goods on behalf of the buyer. The clauses of the agreement referred to in the said case are more or less similar to the conditions of purchase in these cases except perhaps a few other clauses which are inserted in the present cases, in addition ?

10. The question before the Supreme Court was whether the goods were manufactured by the seller on behalf of the buyer.

11. On a scrutiny of the clauses of the agreement and other material on record, the Supreme Court held that the manufacture by the petitioner was on their own.

12. In the case of Joint Secretary to Govt of India v. Food Specialities Ltd., which was delivered a few days after the decision in Union of India & Others v. Cibatul Limited was pronounced the Supreme Court took a similar view on the basis of the clauses of the agreement and other material considered in that case which were identical. Both the judgments were rendered by Pathak, J. (as he then was).

13. It is not in dispute that the petitioners in all these cases their own plant and machinery. The clauses of the purchase order in these cases are in no way different from those considered by the Supreme Court in the two cases referred to above. The only distinction pointed out by Shri Ashok Haranahally is that in these cases, the said raw materials were supplied by the buyers. But this alone cannot lead to an inference that the petitioners are not independent manufacturers. Even condition No. 19 which relates to supply of raw materials does not say raw material is compulsorily to be supplied by the buyers.

14. The other conditions which are normally stipulated relate to quality control by the buyers, rejection of goods which do not conform to the specifications, standard and several other clauses, were all considered by the Supreme Court in addition to the other materials, on an examination of which, the Court held they were independent manufacturers on their own account and the supply were on principal to principal basis.

15. The Collector, in the petitioners’ own case, took the correct view that M/s. Metacraft are independent manufacturers ‘on their own account’. The Collector’s order (Annexure-G) which was passed subsequent to the filing of the writ petition shall apply to these cases also both on facts as well as law.

16. The Department is therefore not able to make out any case to take a different view and deny the benefit of the exemption that is available to the petitioners under Notification No. 77/85. Though in some cases the petitioners have approached this Court after the Assistant Collector held against them and in some cases against the orders of the Appellate Collector, the writ petitions were entertained by this Court."

For the reasons stated above, the orders made by the Assistant Collector and/ or by the Appellate Collector, have to be set aside and the petitioners have to succeed in all these cases. The writ petitions are accordingly allowed and the impugned order in each case is quashed.

The difference of duty paid in Writ Petition No. 669/1987 and Writ Petition No. 17313/1986 shall be refunded to the petitioners.

This matter was taken up in Writ Appeal by the Department and the Division Bench dismissed the appeals by following the ratio of Union of India v. Alembic Glass Industries (LR 1991 Karnataka 1749) and upheld the finding given by the Single Judge in terms of the paras extracted above. The judgment of the Karnataka High Court in the present proceedings clearly lays down that all the units are independent and that merely because MICO supplies the materials and stipulated conditions for quality control by the buyer, rejection of goods which do not conform to specifications of standard and certain other clauses will not take away the independent nature of the manufacturers on their own account and held; that the supply were on principal to principal basis.

16. On this very issue the matter had been adjudicated by the Commissioner (Appeals) and the matter had come up before the Tribunal in the case of Beaver Automotive Pvt. Ltd. v. C.C.E. - (Tribunal) which follows as under :-

“[Order per : V.P. Gulati, Vice President]. - The issue in the appeal is whether the sales made by the appellants to M/s. MICO are to a related person and the assessments are to be done under Section 4(1)(a) proviso (iii).

2. The learned Counsel has pleaded that in the show cause notice these six factors have been set out as the ones by reason of which the appellants sales to M/s. MICO will have to be considered as sales to the related person. These six factors are enumerated herein below as set out in the show cause notice :-

(i) M/s. MICO Ltd. have financed a sum of Rs. 6 lacs to M/s. BAPL as early as 1983, which is interest free. This is a clear pointer to the fact that M/s. MICO Ltd. harbours an interest in M/s. BAPL. Even though the said amount is shown as advance, a sum of Rs. 2,08,500/- remained unadjusted as on 30-4-1988 despite supplies to the tune of Rs. 1.35 crores to M/s. MICO Ltd. (details of loan repayment are noted by M/s. MICO in their letter dated 28-11-1984).

(ii) From the letter of M/s. MICO Ref. EKF/LI/B/Misc., dated 2-4-1983, vide para 1, it is clear that M/s. BAPL was primarily set up to manufacture goods catering to the designed specifications of M/s. MICO. The items manufactured were also exclusively meant for M/s. MICO.

(iii) M/s. BAPL have also agreed vide S. No. 4 of the above said letter that they would seek the concurrence of M/s. MICO before diversifying into manufacturing or marketing other products. This establishes the fact that M/s. MICO have got a strangle hold over manufacturing/diversification of M/s. BAPL in other areas.

(iv) M/s. MICO have further provided restrictions regarding the exclusive usage of patent know-how etc. in respect of their goods (vide Sl. No. 3 of the aforementioned letter).

(v) Again, as per Sl. No. 5 of the aforesaid letter, M/s. MICO have provided on lease two vital critical machines viz., a calendering machine H.S./MW-1/2, Item No. 6514 - 1 No. for exclusive usage in the manufacture of ‘fuel filter inserts’ required by them only. The letter dated 19-3-1983 of M/s. MICO mis-states the same as `released on loan’. Thus a self controversy is noted between the two letters. The lease/loan payments were also not made periodically and punctually for which there is no reference/remark from M/s. MICO.

(vi) On a review of the records of M/s. BAPL and comparison of the price of the goods sold by M/s. MICO (received from M/s. BAPL) reveals that the price of M/s. MICO are higher than that of M/s. BAPL by 11 to 25%. To substantiate that such a huge difference in price would disprove sale on principal to principal basis.

He has urged that the learned lower authority after taking note of provision under Section 4(1)(a)(iii) without bringing out as to how it could be taken as a mutuality of interest between the appellants and M/s. MICO has held that for reason of these factors the appellants sales have to be considered as those to a related person. Dealing with each one of these factors, the learned Counsel has urged as under :-

(i) Interest free advance given by M/s. MICO to the appellants :

The learned Counsel has pleaded that initially M/s. MICO had sought to bind the appellants to produce the goods for M/s. MICO alone by their letter dated 2-4-1983. The appellants however resisted this condition and the same was not acted upon and the same therefore was waived in the same year itself. This position has been confirmed by their letter dated 8-1-1992, which has been filed in the paperbook at page 117. The appellants, all along, particularly in the relevant period, have been manufacturing goods to the specifications of other customers similarly placed as M/s. MICO and this fact can be verified by the RT 12 Returns which the appellants have been filing from time to time.

(ii) Know-how supply by M/s. MICO :

One of the factors held against them is that for the manufacture of goods for M/s. MICO know-how has been supplied to them. It is a normal business practice for customer in case he wants goods of particular specifications to supply designs and drawings and necessary know-how for the goods which he wants to be manufactured or supplied. In the present case, the know-how which was given was without any pre-conditions. He urged that supply of know-how cannot create any mutuality of interest. He stated that at best what could be held against them is that this supply of know-how may have a bearing on the price at which the goods have been supplied. It is for the deptt. to show that the appellants had supplied the goods at a price lower than the normal price or by reason of this any extra commercial consideration flowed having a bearing on the price. In any case, in that event, the assessments should have been done under the Valuation Rules and the provisions of Section 4(1)(a)(iii) could not come into play.

(iii) Lease of two machines :

He pleaded that the appellants have an outlay of over Rs. 1 crore in their factory and two machines valued at Rs. 80,000/- have been supplied by M/s. MICO as these machines are of certain specific designs and they have procured the same for the manufacture of the goods required by them. There is a lease agreement between the appellants and M/s. MICO under which they are paying a rental of Rs. 1,000/- per month for these machines. He pleaded that the appellants did not have any extra commercial consideration by taking these machines and, in any case, the supply of these two machines does not create any mutuality of interest.

In the above view of the matter, he pleaded that unless it could be shown by the authorities that there was a mutuality of interest by reason of the factors as enumerated above, the provisions of Section 4(1)(a)(iii) could not be invoked. He, therefore, prayed for setting aside the order of the learned lower authority. He cited the decision of the Hon’ble Supreme Court in the case of U.O.I. v. M/s. Hind Lamp Ltd. reported in (S.C.). Mutuality of interest has to be shown by reason of other mutual dealings or other common factors between the two which could show that both the parties have an interest in the business of each other. No such circumstance in the present case has been brought on record.

3. The learned SDR pleaded that there is a special relationship between the appellants and M/s. MICO. M/s. MICO had supplied the know-how and also allowed the appellants to use their brand name on the goods which have been manufactured for M/s. MICO. The learned SDR cited the decision in the case of M/s. Pilkay Footwear Co. v. U.O.I. reported in .

4. The learned Counsel in reply has pleaded that the ratio of this decision will not be applicable as in that case one company was controlling the other. They have financial interest inter se and common directors. These circumstances do not exist in the present case.

5. We have considered the pleas made by both sides. We observe that the point that falls for consideration is whether in the context of the business relationship between the appellants and M/s. MICO it can be said that there is a mutuality of interest inter se which would bring the appellants’ sales within the mischief of Section 4(1)(a)(iii). On going through the various factors which have been taken into reckoning by the learned lower authority, we observe that the factors which have been taken note of are deposit of money given to the appellants in 1983, lease of the two machines, use of the brand name and a stipulation that the appellants could not manufacture goods for others and the know-how. We observe that none of these factors by themselves taken individually or cumulatively on the face of it would lead to any conclusion that there was a mutuality of interest between the appellants and M/s. MICO. In regard to all these factors, we find that so far as the advance taken was concerned, the same had already been adjusted upto 1989. So far as manufacture of goods by the appellants are concerned, the clause restricting the appellants to manufacture only goods of M/s. MICO as it is, was not acted upon and this stands confirmed by the documents produced before us and the filing of RT 12 returns. So far as the taking of machinery on lease is concerned, at best it could only create a circumstance where it could be said that this has been one of the extra commercial consideration which could have a bearing on the price of the goods. The appellants are paying a rental of Rs. 1000/- in respect of the machines which is valued at Rs. 80,000/-. So far as the value of the machine is concerned, there is no challenge in respect of the same. This amount it would appear to be more rather on the higher side than on the lower side. If that be so, it is not understandable how it can have a bearing on the price of the appellant. The only circumstance which in our view can be taken to have a bearing would be that of supply of know-how. In that event, all that can be urged is that by reason of supply of know-how the appellants may have supplied the goods at slightly lower price than they would have in case the know-how had not been supplied. If it is established by the department that the know-how had a bearing on the price this extra commercial consideration alone can be added for arriving of the value and for that purpose, a reliance will have to be placed to the Valuation Rules. The circumstance of Section 4(1)(a)(iii) cannot be brought in for that reason. No case in our view has been made out for invoking the provisions of Section 4(1)(a)(iii) in the present case. The price sold by M/s. MICO for the goods manufactured by the appellants was higher by 11% to 25%. This price cannot be taken to be in any way high taking into consideration the nature of the goods involved and the marketing conditions prevailing. In any case, mutuality of interest cannot be read from this factor. The appeal is therefore allowed with the above observations."

From the reading of the facts of this judgment, it is clear that the issues raised in the present appeal are identical and the finding arrived at the department is that the price has to be determined on the basis of goods sold by the appellants (Beaver Automotive Pvt. Ltd.) to the MICO and not the cost at which it is sold. For the purpose of understanding the issue, the entire judgment is extracted above.

17. As can be seen from both the judgments, the issue is substantially answered and on the basis of both the judgments in the appellant’s own case, the matter stands concluded and the appeals are required to be allowed. However, we would like to further dwell on the matter and give our finding also in some of the observations made by the Commissioner. The ld. Commissioner in the impugned order has repeatedly proceeded to hold that the MICO are the real manufacturers on a legal fiction on the ground that the job workers are the ancillaries have ceded and abdicated the right to determine their own profit level and hence the price of MICO is required to be accepted. He has held as noted earlier that the basic indicator of control is the independence which any management have in detemining their own profit level and the price whatever be the constitution of the enterprise. His observation that this fundamental right of the enterprise is abdicated as the enterprise ceased to be an independent organisation. His further observation is that profit making is the fundamental objective of any business enterprise and generating more profit, its constant endeavour. Strictly when these ancillary units contend that they are independent, that independency should have been demonstrated by their sovereignty in determining their own price. He has held that these ancillary units prepare a cost estimate and the purchaser (or the buyer) runs counter to the concept of principal to principal dealing and the purchaser, i.e. MICO reserve the right to fix the price. He has held that the concept of determination of price by MICO is not attribute of principal to principal relationship therefore, the arrangement of this type cannot be regarded as a case of sale of goods at which they are ordinarily sold in the course of wholesale trade.

18. In this regard, he has referred to the statements of Managing Directors, Accountant, Managing partner, Manager, Purchase etc. of individual units to draw this inference. We are totally in disagreement with this finding on the simple ground that the department does not dispute the aspect of the unit being independent and having been independently established by setting up of the units with their own funds and taking their own policy decisions in the matter. The mere fact that the price are negotiated and that the units work out cost as per inputs involved and submit their request for price fixation/revision enclosing their justification does not by itself give room for conclusion or a premise that there is abdication of the right to negotiate the price. All the statements of the persons which are quoted in the Commissioner’s order clearly indicate that they submit revised cost estimates, discussions and negotiations and the price consist of net cost of components, added by labour, overhead and price is negotiated. It has been stated by the parties that as and when prices of components have changed, they make an appeal to compensate the increase in the cost. Thus the price arrived at have been after due negotiation and entering into an agreement. This factor is not denied by the Commissioner. He only draws inference that as MICO fixes the price and the ancillary units preparing cost estimate, therefore his final conclusion is justified. We are not in a position to accept his inference of such statements. The fact that the price is negotiated itself indicates that there is a bargain and that the parties have not suo motu allowed themselves affected by undue influence and such other factors so as to make the agreement one sided and void. It is not within the ambit and sphere of the department to question the nature of the agreement or about the sanctity of the agreement as so long as the agreement has been arrived at after due negotiation with mutual consent and entered into with clear mind. Therefore the factor influencing the mind of the Commissioner is not legally tenable in the light of his own findings that the units are independent units and also that there is no challenge about the independent functioning of the units. His finding that units are like paid employees and like a hired labour and that the manufacturer then compute the cost of price, supply to MICO and leave the decision to MICO is totally unsubstantiated. The fact that there is a negotiation for price clearly indicates that the agreement has been arrived at with mutual consent and after negotiation. There are various factors which have been underlined in the agreement to show that the agreement can be enforced in the Court of law. Therefore his inference drawn from the agreement and the statements recorded by department are totally incorrect and without any basis. We are unable to appreciate the reasoning given by the Commissioner in the light of the factors that the appellants are independent manufacturers and in the course of the business the appellants have entered into an agreement on aspect pertaining to providing of technical know-how, manufacturing data, leasing of machinery and use of brand name are all factors which have time and again been held to be factors which cannot be denied in the benefit of notification. The only ground on which the appellants can be denied the benefit is when they have been set up as dummy units. Dummy unit being a unit which is not in existence, but being only on paper, as held in the case of Alpha Toyo Ltd. v. C.C.E. as reported in (Tribunal). It has been held therein in para 4, which is reproduced as under :-

“We have carefully considered the submissions made by both the sides, and have perused the record, and the findings and citations relied before us. The department had proceeded on the basis of the annual report of M/s. Alpha Toyo Ltd. It is noted therefrom about the interest free loans given by them to other four units and have come to the conclusion that they are related persons and that the four units are dummy ones, and as there is a common managerial control, hence the benefit of exemption under Notification No. 175/86-C.E. dated 1-3-1986 is denied to them. Therefore, the clearances of all the five units have been clubbed. We have considered the grounds and the finding given by the ld. Collector. We are not satisfied with the said findings as Managerial control is different from money flow back, management control and profit sharing. A dummy unit is a unit, which is not in existence in reality, but it is merely created on paper only. In other words, the physical existence of such a unit is not to be found in terms of investment of capital, machinery and labour. The unit which creates such a dummy unit, utilise the dummy unit for the purpose of tax evasion. Therefore, the courts have clearly distinguished on facts each of the cases and have now settled the issue by holding that mere evidence of Directors being common or utilisation of telephone, labour or machinery by itself is not a ground to consider an unit as a dummy unit of the other. It has been held that even if a unit is in existence, but if it is totally controlled in terms of money flow back, profit sharing, management control, and it had been created with a view to evade taxes by a series of acts of omission and commission, by manipulation of accounts and records then in such an eventuality, the clearances of a dummy unit can be clubbed. As rightly pointed out by the ld. Senior Advocate there is no definition of the term ”dummy unit", but what flows from the judgments cited by him is that a dummy unit is a unit, created by the main unit with a view to evade taxes and that the first main unit totally controls its activity in terms of profit sharing, management control, decision making, and acts of such nature. The dummy unit would be a mere facade one and in reality it is one and the same with the main unit. In this particular case, there is no such evidence at all, to show that such an arrangement is in existence. The mere fact of management control and a few directors being common and also by the fact that interest free loans are being given to the other units by the first unit, these factors, by itself, is no ground for holding them as dummy units and for ordering clubbing of all their clearances, and to deny the benefit of the exemption Notification. There is no dispute in all these cases that all the four units are independent in existence, with independent transactions, without any profit sharing, management control or money flow back to the main unit. Each unit is having independent bank transactions, loans, sales, purchase and Tax registrations. Therefore, on the facts and circumstances of this case, the ground taken by the department is not sustainable. The concept of related persons, as envisaged under Section 4 of the Central Excises and Salt Act, 1944 is for the purpose of valuation. This is a independent concept by itself. It has no relationship with the concept of dummy units and units set up as a facade to evade taxes. As pointed out by the ld. Senior Advocate, the ld. Collector has confused this aspect of the matter with the aspect of creation of dummy units. The ground taken by the Revenue in this case is already answered against them in the case of Jagjivan Das & Co., Bhagwan Das Kanodia and Others, Prabhat Dyes and Chemicals, Bapalal & Co. and Prima Control referred before us. The other judgments cited before us also deals on the same aspect of the matter. Applying the ratio of these rulings, we have to hold that the mere fact of management control or of grant of interest free loans is not sufficient to hold the four units as dummy units of M/s. Alpha Toyo Ltd., in the absence of any money flow back, profit sharing and total control on other four units by M/s. Alpha Toyo Ltd. In the result the appellants succeed in all these appeals. The impugned order is set aside and appeals allowed."

This matter was further clarified in the case of Binod Kumar Maheswari v. C.C.E. as reported in (Tribunal), para 5.2, the 3-Member Bench of the Tribunal analysed the function of Section 2(f) of Central Excises & Salt Act and thereafter analysed all the judgments which were there in existence and concluded that the clearance of three independent units cannot be clubbed together as there was no evidence of flow back of money. It held that mere fact of close relationship and the fact that the Head office is located in the same building and same room and there are some isolated transactions among the three are not by themselves sufficient to hold that the two companies are dummy companies. It further held that Oxford “English Dictionary” defines dummy as an imaginary player whose hand is exposed and played by his partner, one who is mere tool of another. Earlier on, the Tribunal in the same judgment in para 7 observed as under :-

“The main thrust of the orders is that in order to hold that the appellant in fact is the manufacturer and the two other companies are dummy companies, it must be shown that the purpose for which the two companies are alleged to have been floated by the appellant is served. That purpose obviously would be profit in the form of flow back of funds. There is no evidence in the case before us that the profits earned by the two companies which are alleged to have been floated by the appellant have flown back to the appellant as such. Nor is there evidence that seed-money for total share holding came only from the appellant. Other factors could be that two companies are dummies in the sense that physically these did not exist and they are shown on paper. This could be proved through circumstantial evidence such as non-existence of machinery, or machinery so grossly inadequate as to be incapable of producing the goods or that goods in fact were not produced by them, which in fact had been created on paper to indicate the existence of the firms and that goods were in fact produced only by the appellant. No such evidence, however, has been produced. The mere fact that offices of the three companies are situated in same building and same room cannot go to prove that three companies are in fact not independent, neither can the fact that the appellant is a shareholder in two other companies, which has other share holders besides him. The fact of proprietor and directors of two companies being close relatives, is not by itself determinative of the issue. We are not dealing here with the concept of ”related person". Such considerations could enter into our consideration in determining valuation where concept of related person acquires substantial importance. This is not the case here. The basic question is whether the appellant is a manufacturer in his own right or brings into existence goods through instrumentality of hired labour in form of two other companies. There is no evidence that the profit earned from such goods manufactured by other companies has flown back to him. An individual cannot be equated with “family” nor can an individual be held to be synonymous with a “relative”, however close that relation may be."

19. The Commissioner has rejected the independency of the ancillary units on the ground that they have not demonstrated their sovereignty in determining their own price and that they are merely as ancillary units prepare a cost estimate and the purchaser (or buyer) MICO fixes the price. And this runs counter to the concept of principal to principal dealing also. He has further held that the concept of determination of price by MICO is not an attribute of principal to principal relationship and the arrangement of this type cannot be regarded as sale of goods at which they are ordinarily sold in the wholesale trade. This is the concept which has kept on analysing the statements and agreements to draw the conclusion that the monetary consideration for the transaction were determined by MICO. In para 37 of the impugned order, the Commissioner goes on to state that by extension of even the profit level of the ancillary company is determined by MICO; actually that ought to have been the exclusive preserve of the management incharge of ancillary companies. All these ancillary units have ceded one vital managerial function to MICO, i.e. determining the level of profit they should make. Therefore, the Commissioner wonders that in such circumstances, who is really running these enterprises. He holds that the managerial control is not demonstrated by having separate sales tax, income tax, excise, ESI, P.F. and other registrations, but in his view, it is demonstrated by the right to determine its price and profit level. Those who are managing these enterprises can be said to be in control if they had demonstrated their sovereignty in deciding the price they want to charge for selling of the goods they manufacture and the quantum of profit they want to make while selling such goods. He has held that they, like a paid employee, manufacture, then compute the cost data, supply it to MICO and leave the decision to MICO. He has held that although the ancillaries state that they are happy with the profit they are making (or getting) but the sharing of cost data with the buyer militates against the doctrine of “Indoor Management”. He has held that determination of price or the profit level (or loss) should be the policy decision of the Management in-charge of the company. In such a policy matter, if determined by somebody else, it demonstrate that such somebody is incharge of the management. He states that this is precisely what the show cause notice alleges, i.e. the goods are manufactured under the management, direction and control of MICO. Thus the show cause notice is substantially correct when it alleged that the goods are manufactured under the management, direction or control of MICO.

20. With due respect, we are unable to agree with this conclusion of ld. Commissioner. This is not a new concept which the Commissioner or the department has tried to bring out in the order. But this has been gone into again and again by several courts and they laid down what managerial control means and in these cases it has been well laid down that managerial control should be such as to lead to the flow back of the profits to Principal manufacturer. In this particular case, admittedly the ancillaries prepare the cost estimate and that is being negotiated and where there is an escalation of price, the same is also negotiated and re-fixation of price is arrived at. In any contract of this type there is always a price and that price is a negotiated price with offer and acceptance and that there is free will in determining the price. In this case the Commissioner has not demonstrated and shown that there is no free determination of price by negotiation. The data relied by Commissioner itself disclose that there is negotiation and the price is arrived at thereafter. The ancillary units are making profit and it is not as though no profit is made by them. The MICO is determining the market and it is they who are marketing the goods and as the market player, it has to keep its price in terms of the market fluctuations. Therefore, being aware of the market situations, it negotiates the price to maintain the business. Such fixation of price by MICO with its ancillary units cannot be said to be a control as to make the ancillary units a hired labour, which is different concept; wherein a hired labour has no role to play except to receive his wages and the contract is that of employer and employee and the hired labour services can be terminated and that he can seek reinstatement or sue for compensation or for enforcement of the contract obligation. While in the present case, the relationship is not of a hired labour as admitted facts are that the ancillaries have come up on their own, with their own finances, functioning independently with their own constitution and incorporations. The loss or the profit is not taken over by MICO and MICO cannot be held responsible for all the actions of the ancillary units. The determination of price, so long as it is independent and not influenced by any factors of under valuation as laid down under Section 4 of the Central Excise Act, then such negotiated price is required to be accepted. Section 4 of the Central Excise Act, deals with the aspect pertaining to the related persons, and even in such cases, the price of a related person cannot be rejected so long as the price is a mutually arrived at one and not fixed by any consideration and that there is no flow back in any form. When the price of related persons is the same as that of other dealers and in such circumstances also the price is required to be accepted. In the present case, the department is not proceeding on the basis of ancillary units being related persons but as Commissioner has analysed, they have proceeded on the basis that the goods are manufactured under the management, direction and control of MICO. All units being ancillaries manufacture goods according to design and specifications, therefore, MICO getting such goods manufactured as per their specification does not make MICO as the manufacturers in terms of Section 2(f) of Central Excises and Salt Act. This has been further analysed by the Hon’ble Supreme Court in the case of C.C.E. v. M.M. Khambhatwala as reported in (S.C.) where goods produced by household ladies in their own premises out of the raw material supplied by the respondents who paid wages on the basis of number of pieces manufactured and there was no supervision over the manufacturing of the goods by the respondents, and the goods sold from the premises of such household ladies, but sale proceeds sent to the respondents. Such household ladies, the Hon’ble Supreme Court held, are to be treated as “manufacturers” of the goods and not as “hired labourers”. In this regard Hon’ble Supreme Court relied on its earlier judgment in the case of Ujagar Prints v. Union of India as reported in (S.C.) and that of Empire Industries v. Union of India as reported in (S.C.). In the case of Santha Industrials v. C.C.E. as reported in (Tribunal), the Tribunal held that owner of the brand name getting the goods manufactured, the ancillary is certainly concerned about its make, quality, standard and market reputation. The Tribunal held that there is no bar in the notification that the brand name holder to get his products manufactured through other independent units on principal to principal basis, on supply of raw materials and by quality control. The Tribunal held that this will not make the other units dummy.

21. This citation refers to large number of judgments of the Tribunal. In the case of Cheryl Laboratories v. C.C.E. as reported in (Tribunal) in a similar circumstances the 3-Member Bench held that a buyer cannot be considered as a manufacturer and two persons cannot be held to be manufacturers of the same product. The Bench cited the Supreme Court judgment in the case of Union of India v. Cibatul Ltd. as reported in (S.C.). Hon’ble Supreme Court in para 6 and 7 answered the question whether the goods are manufactured by the seller or are manufactured by the seller on behalf of the buyer. The Hon’ble Supreme Court noted the relevant provisions of the agreement and other materials on record which showed that the manufacturing programme is drawn up jointly by the buyer and seller and not merely by the buyer, and that the buyer is obliged to purchase the manufactured product from the seller only if it conforms to the buyer’s standard. For this purpose, the buyer is entitled to test a sample of each batch of the manufactured product and it is only on approval by him that the product is released for sale by the seller to the buyer. On other words, the buyer has the right to reject the goods if he does not approve of them. If the manufactured goods are not in accordance with the buyer’s standard, they are either reprocessed to bring them up to the requisite quality, or if that is not possible, the goods are sold to the buyer for a different purpose if they are compatible with the specifications of some other product and provided that the buyer has a need for that product, or the goods are sold to others in the market as sub-standard goods at a lower price or the goods are destroyed. It is significant to note that the buyer is not obliged to purchase the goods manufactured by the seller regardless of their quality and that in the event of rejection by the buyer the alternatives present before the seller extend to the sale of the manufactured goods to others or even to the very destruction of the goods. It is apparent that the seller cannot be said to manufacture the goods on behalf of the buyer. Further the Supreme Court observed in para 7 that the appellant relies on the circumstances that under the agreements the seller is required to affix the trade-marks of the buyer on the manufactured goods and, it is said, that indicates that the goods belong to the buyer. The Supreme Court observed that it seems to them clear from the record that the trade-marks of the buyer are to be affixed on those goods only which are found to conform to the specifications or standard stipulated by the buyers. All goods not approved by the buyer cannot bear those trade-marks and are disposed of by the sellers without the advantage of those trademarks. The trade-marks are affixed only after the goods have been approved by the buyer for sale by the seller to the buyer. The seller owns the plant and machinery, the raw material and the labour and manufactures the goods and under the agreements, affixes the trade-marks on the goods. The goods are manufactured by the seller on its own account and the seller sells the goods with the trade-marks affixed on them to the buyer. This ruling of the Hon’ble Supreme Court is clearly applicable to the facts of this case and answers the points raised by the ld. Commissioner in his order.

22. In view of the findings given by us, the appeals succeed and the impugned order is set aside and appeals allowed.

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