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Electro Mechanical Engg. Corpn. v. Commissioner Of C. Ex., Jaipur
Structured Summary of the Provided Legal Opinion
Factual and Procedural Background
The appeals arise against a common order-in-original dated 2-2-2001 by which the Commissioner affirmed duty and penalties as particularised in that order. The principal appellant (appellant no. 1) is M/s Electro Mechanical Engg. Corpn. (“M/s. EMEC”), engaged in manufacture of iron and steel structures. Information led to surprise raids at three inter-connected firms: M/s. EMEC (appellant no. 1), M/s. Cold Steel Corpn. (“M/s. CSC”, appellant no. 2) and M/s. Super Steel Corpn. (“M/s. SSC”, appellant no. 3). Investigations revealed common or inter-connected premises, a common office and office equipment, closely related partners and common employees. Appellant no. 4 was proprietor of EMEC and a partner in CSC and SSC and was alleged to be managing all three firms. It was alleged that benefits of SSI Exemption Notification No. 1/93-C.E. (dated 28-2-1993) had been fraudulently availed, resulting in a duty shortfall of Rs. 22,36,534/-. Show cause notices were issued; duty demand was raised from EMEC (appellant no. 1) while penalties were proposed against the other appellants. The appellants contested the show cause notices; the Commissioner confirmed duty and penalties in the impugned order, leading to these appeals.
Legal Issues Presented
- Whether the three firms could be treated as a single entity (i.e., whether the clearances of appellants no. 2 and 3 could be clubbed with appellant no. 1) on the ground that the two were dummy or front units of appellant no. 1.
- Whether there was sufficient evidence of financial flow back or mutuality of business interest required to justify clubbing of clearances.
- Whether the Department could invoke the extended period of limitation (beyond six months and up to five years) for the duty demand.
- Whether penalty under Section 11-AC of the Central Excise Act could be imposed for periods prior to the insertion of that Section (i.e., whether Section 11-AC operates retrospectively or prospectively).
Arguments of the Parties
Appellants' Arguments
- The three firms were independent entities with separate Central Excise licences; there was no “flow back” of money between the firms.
- Each firm conducted its business and purchased raw materials independently; no mutual financial interest existed to justify clubbing.
- The existence of related partners or a common person managing affairs (appellant no. 4) did not, by itself, warrant treating the firms as one unit.
- The fact that duty was confirmed against all three firms indicates that the adjudicating authority had treated them as independent units; the impugned order rests on surmise and conjecture and should be set aside.
Respondent's (Department's) Arguments
- The learned Departmental Representative reiterated the correctness of the impugned order as passed by the Commissioner.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Indian Metal Indus. v. CCE, Bhuvaneshwar (Tribunal) | Requirement of evidence showing financial flow back between units before clubbing clearances. | Relied upon to support the proposition that tangible evidence of financial flow back is essential and was lacking in the present record. |
| CCE, Rajkot v. Amar Plast Indus. (Tribunal) | Use of common premises, telephone, electric generator or machines is insufficient, without evidence of financial flow back, to club clearances. | Applied to reject the Commissioner's reliance on common facilities and employees as adequate to club clearances in absence of financial flow back. |
| Renu Tandon v. UOI (Rajasthan High Court) | Proximity of relationship, common situation of units or common employees alone do not justify clubbing absent financial flow back. | Used to reinforce the requirement of mutuality of business interest and financial flow back before clubbing. |
| SKN Gas Appliances v. CCE, New Delhi (Tribunal) | Sale of plant/machinery between units, shared telephone, common head office and some common employees are insufficient by themselves to treat one unit as façade of another. | Relied on to show that similar factual indicia in present case do not suffice to club clearances. |
| Rang Udyog v. CCE, Ahmedabad (Tribunal) — (Apex Court citation: 1999 (106) E.L.T. A-66) | Related partners, common workers, common machinery and one person managing both firms are insufficient without evidence of funding of each other's expenses or flow back of profits/money. | Applied to hold that allegations of relationship, common machinery and management were not conclusive in absence of evidence of financial flow back. |
| CCE, Ahmedabad v. Ambica Scale Mfg. Works (Tribunal) | Similar principle that mere commonality of employees, premises or management does not prove dummy units without financial flow back. | Cited as part of a line of authority supporting the court's conclusion against clubbing. |
| Binod Kumar Maheswari v. CCE, Calcutta (Tribunal) | Reiterates the need for evidence of financial flow back before clubbing. | Relied upon to support the decision not to club clearances in present facts. |
| Prabhat Dyes & Chemicals v. CCE (Tribunal) | Relationship between persons of different firms, combined purchase of raw material, and interest-free loans are insufficient to club clearances when units are separately registered with tax authorities. | Applied to show that the presence of inter-personal relationships and certain inter-firm transactions did not justify clubbing where separate registrations existed. |
| G.D. Indus. Engineers, Faridabad v. CCE, Chandigarh (Tribunal) | Supports the view that separate registration and absence of flow back defeats clubbing arguments. | Used to buttress tribunal jurisprudence relied on in declining to club clearances. |
| CCE v. Champhar Drugs & Liniments (Supreme Court) | To invoke extended period under section 11A, something positive beyond mere inaction or failure is required; where the Department had full knowledge, extended period is not invocable. | Applied to hold that the Department could not invoke extended limitation because material facts about the firms were disclosed at registration and the Department knew them. |
| Asoka Wafers v. CCE (Tribunal) | Supports the principle that extended period cannot be invoked where Department had knowledge of material facts. | Cited in support of the limitation analysis that the extended period did not apply. |
| CCE, Coimbatore v. Elgi Equipments Ltd. (Supreme Court) | Section 11-AC of the Central Excise Act is prospective in operation and not retrospective. | Applied to hold that penalties under Section 11-AC could not be imposed for periods prior to the Section's insertion on 28-9-1996. |
Court's Reasoning and Analysis
The court considered the factual matrix and the specific findings relied upon by the Commissioner for clubbing the three firms. The Commissioner had noted (a) short-term intra-group loans during Jan–Mar 1997 (EMEC borrowing Rs. 13 lakhs from SSC and lending a roughly equal amount to CSC without interest); (b) a common accountant paid by EMEC; (c) a pressing machine belonging to CSC being installed at EMEC premises; (d) CSC lacking certain machinery; (e) subcontracting or orders procured by EMEC and executed by SSC; and (f) appellant no. 4 running all three firms with EMEC paying his travel and telephone expenses.
Against these factual indicia, the court observed that the firms were established in different years (EMEC in 1985, CSC in November 1990, SSC in July 1996) and each had separate registrations (Central Excise, DIC, Sales Tax and Income-tax). The court emphasised that there was no tangible evidence of financial flow back between the firms — a threshold requirement, according to the line of authorities cited, for clubbing clearances.
Relying on precedent, the court explained that proximity of relationship, common premises, shared employees or equipment, and even intra-group transfers or loans without more, are insufficient to treat separate units as a single economic entity for the purpose of clubbing clearances unless there is evidence of mutuality of business interest demonstrated by flow back of profits or funding of each other's expenses. The court applied these principles to the facts and found the Commissioner's reliance on the enumerated indicia inadequate.
Further, the court analysed the limitation issue. The duty period in question ran from 1-5-1995 to 31-3-2000, but the show cause notice was served only on 1-6-2000. The Commissioner had invoked the extended period on the ground of deliberate suppression by the appellants regarding their inter-relationship. The court, however, found that material facts about constitution and functioning had been disclosed at the time of registration and that the Department was aware of those facts; thus the Champhar Drugs & Liniments principle applied and the extended period could not be invoked.
On penalty under Section 11-AC, the court noted the Supreme Court's ruling that Section 11-AC is prospective (inserted into the statute on 28-9-1996). Consequently, penalties under Section 11-AC could not be imposed for periods prior to that insertion.
Finally, the court observed a procedural inconsistency: the show cause notice had demanded duty only from EMEC, but the Commissioner confirmed duty against all three firms — an action the court considered to undermine the Department's allegation that CSC and SSC were dummies of EMEC.
Holding and Implications
The impugned order of the Commissioner is set aside and all appeals of the appellants are allowed.
Implications for the Parties
- The clubbing of clearances of the three firms (appellants no. 1 to 3) was not sustained due to absence of tangible evidence of financial flow back or mutuality of business interest.
- The extended period of limitation invoked by the Department could not be applied because the Department had knowledge of material facts from registration; therefore the duty demand was barred by limitation to the extent argued in the opinion.
- No penalty under Section 11-AC could be imposed for periods prior to the Section's insertion on 28-9-1996; therefore such penalties for earlier periods were invalid.
- Consequential reliefs permissible under law are to follow from the appellate allowance.
Precedential Effect
While the court applied and reiterated established principles from earlier decisions concerning (a) the necessity of evidence of financial flow back before clubbing, (b) the requirements to invoke extended limitation, and (c) the prospective operation of Section 11-AC, the opinion does not purport to lay down novel legal doctrine beyond these applications. The direct effect is to reverse the Commissioner's order and grant relief to the appellants in this set of appeals.
End of summary — prepared strictly from the content of the provided opinion, without addition or inference beyond that text.
[Order per : P.S. Bajaj, Member (J)]. - The above captioned appeals have been preferred by the appellants against the common order-in-original dated 2-2-2001 vide which the Commissioner has affirmed the duty and penalty as detailed therein against the appellants.
2. The firm, appellants no. 1, M/s Electro Mechanical Engg. Corpn. (hereinafter referred to as M/s. ‘EMEC’) is engaged in the manufacture of Iron and Steel Structure etc. On receipt of information that this firm had floated two front units, namely, M/s. Cold Steel Corpn. (hereinafter referred to as ‘M/s. CSC’) [appellants no. 2] and M/s. Super Steel Corpn. (hereinafter referred to as ‘M/s. SSC’) [appellants no. 3] in order to fraudulently avail the benefit of SSI Exemption Notification No. 1/93-C.E., dated 28-2-1993, surprise raid was carried out on the premises of all these firms. During investigation, it revealed that all these firms were situated in the inter-connected premises, had common office, office equipments closely related partners and common employees. It also revealed that appellants no. 4 was proprietor of the firm, appellants no. 1, and partner in the other two firms, appellants no. 2 and 3, and was managing the affairs of all the three firms and fraudulently availed benefit of SSI Exemption Notification resulting in short payment of duty amounting to Rs. 22,36,534/-. Show cause notices were issued to all these firms vide which duty demand was raised from the firm, appellants no. 1, while on other appellants, the penalty was proposed to be imposed.
3. The appellants contested the correctness of the show cause notice and alleged that all the three firms were independent and there was no flow back of money from one firm to another. They were carrying on their business independently and purchasing the raw material also independently. No mutual finance interest was involved between these firms and as such the firms, appellants no. 2 and 3 could not be treated as dummy units of the firm, appellants no. 1. They also averred that the work was being looked after by Shri Rajwansh Bedi, appellants no. 4, as he was partner in the two firms and proprietor of the third but each firm was purchasing the raw material with its own money. The Commissioner, however, did not accept the version of the appellants and confirmed the duty and the penalties against the appellants as detailed in the impugned order.
4. The learned Counsel has contended that there is no material evidence on the record to prove that the firms appellants No. 2 and 3 were dummy units of firm, appellants no. 1. All the firms were having independent Central Excise licences and there was no flow back of money from one firm to another. The correlationship of the partners of all the firms could not be taken as sufficient ground for clubbing their clearances. The counsel has also contended that since the duty has been confirmed on all the three firms, it shows that they all had been acknowledged as independent units by the adjudicating authority. The impugned order of the Commissioner is based on surmises and conjuctures and as such deserves to be set aside.
5. On the other hand, the learned DR, has simply reiterated the correctness of the impugned order.
6. We have heard both sides and gone through the facts on record. The bare perusal of the impugned order shows that the learned Commissioner has ordered the clubbing of the above referred three firms (appellants no. 1 to 3) on the ground that the firm, appellants no. 1 during the Period January, 1997 to March, 1997 borrowed Rs. 13 lakhs from the firm, appellants no. 3 and also lent almost an equal amount to the firm, appellants no. 2 without charging interest; that all the three firms had a common accountant who was drawing salary from the firm, appellants no. 1; that one pressing machine belong to the firm, appellants no. 2 was found installed in the premises of the firm, appellants no. 1; that firm, appellants no. 2, had no facility of shearing machine, press machine and roll forming machine; that few orders were procured by the firm, appellants no. 1 and the same were later on executed by the firm appellants no. 3; that all the three firms were being run by Shri Rajwansh Bedi, appellants no. 4, who was the proprietor of the appellants no. 1 and partner of the firms, appellants no. 2 and 3; that travelling expenses of appellants no. 4 were borne by firm, appellants no. 1 and his telephone bills were also paid by that firm, (appellants no. 1). But from the record, we find that all these firms were established in different years. The firm, appellants no. 1, started production in the year 1985 and firm, appellants no. 2, in November, 1990, while the firm, appellants no. 3, in July, 1996. The appellants no. 1 is a proprietorship concern of appellant no. 4, while the other two firms are partnership concerns in which, appellant no. 4 is one of the partners. All the firms have got separate independent Central Excise Registration, DIC Registration, Sales Tax Registration and Income-tax Registration.
7. There is no tangible evidence on the record to prove the financial flow back from one firm to another which is most essential for clubbing the clearances of the units. In this context, reference may be made to the case of Indian Metal Indus. v. CCE, Bhuvaneshwar, (T), wherein it has been so ruled. Similarly, in the case of CCE, Rajkot v. Amar Plast Indus., (T), it has been held that use of common premises, telephone, common electric generator and cutting/mixing machines are not enough for clubbing the clearances of the units in the absence of evidence of financial flow back from one unit to another.
8. On the strength of proximity of relationship or the situation of the units or because there were some common employees, the value of clearance of two units cannot be clubbed unless there is evidence to prove that there was mutuality of the business interest and the units were having financial flow back. In this context, reference may be made to the case of Renu Tandon v. UOI, (Raj.), wherein it has been so ruled by the Rajasthan High Court. The Tribunal has also in the case of SKN Gas Appliances v. CCE, New Delhi, (T), has taken the view that sale of plant and machinery by one unit to another, use of telephone of one unit by another, the situation of Head Office of both the units in the same premises, some of the employees being common, were insufficient to hold that one unit was merely fecade of the other. Similarly, in the case of Rang Udyog v. CCE, Ahmedabad, (T), it has been observed that the allegations that the partners in the two partnership firms were related to each other or common, that there were common workers, common machineries, and that the same person was looking after the affairs of both the firms, were not sufficient for ordering the clubbing of the clearances of both the firms in the absence of the evidence that the firms were funding the expenses of each other or that there was flow back of the profit or money from one firm to another. This judgment of the Tribunal had been even upheld by the Apex Court as reported in 1999 (106) E.L.T. A-66. This very view has been reiterated in the case of CCE, Ahmedabad v. Ambica Scale Mfg. Works, (T) and Binod Kumar Maheswari v. CCE, Calcutta, (T).
9. In the case of Prabhat Dyes & Chemicals v. CCE, (T), it has been held by the Tribunal that relationship between the persons of one firm and proprietor of another firm, combined purchase of raw material, interest free loan by one to the other were insufficient to club the value of the clearances of both the firms, when they both were separately registered as SSI units and also with the Income-tax and Sales Tax authorities. This very view has been taken by the Tribunal in the case of G.D. Indus. Engineers, Faridabad v. CCE, Chandigarh, (Tribunal).
10. Therefore, keeping in view the ratio of the law laid down in the above referred cases the circumstances relied upon by the Commissioner, could not be said to be conclusive for clubbing the value of the clearances of three firms (appellants no. 1 to 3). Moreover, even the Commissioner himself has confirmed the duty demand against all the three firms and this fact itself is enough to hold that the Commissioner accepted all the firms as independent units. The learned Commissioner has even travelled beyond the show cause notice in so doing as in the show cause notice duty had been demanded only from firm, appellants no. 1. The confirmation of duty against all the three firms itself is enough to belie the allegations of the Department that the firms, appellants no. 2 and 3, were dummy of the firm, appellants no. 1. Therefore, the impugned order of the Commissioner cannot be sustained.
11. Besides this, the duty demand is also hit by bar of limitation. The duty period involved is from 1-5-1995 to 31-3-2000 whereas show cause notice was served on the appellants only on 1-6-2000. The extended period has been invoked on the ground that the appellants deliberately and wilfully suppressed the facts regarding relationship with the firms of their partners and functioning of all the three units a single entity in inter-connected premises, with having common office, etc. But it is evident from the record that all the three firms started production in different years. The firm, appellants no. 1, came into existence in the year 1985 and firm, appellants no. 2 in November, 1990 while appellants no. 3, in the year July, 1996. They all got themselves registered with the Central Excise Department. At the time of getting registration, they all disclosed their constitution, place of work, goods to be manufactured by them, etc. The Excise Department, therefore, very well knew from the date of their registration, all the material facts regarding the constitution and functioning of the firms. Therefore, it could not be said that any material facts were suppressed by them from the Excise Department. That being so, extended period of limitation could not be invoked. In the case of CCE v. Champhar Drugs & Liniments, (S.C.), the Apex Court has observed that in order to make a demand under section 11A of the Central Excise Act for beyond a period of six months and upto a period of five years, something positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or deliberate withholding of information is required to be established. Where Department had full knowledge about the facts, the extended period of limitation could not be made applicable. Similar view has been taken by the Tribunal in the case of Asoka Wafers v. CCE, (T).
12. Regarding imposition of penalty under Section 11-AC of the Act, the impugned order of the Commissioner also cannot be sustained. The provisions of this Section had been held to be prospective in operation and not retrospective, by the Apex Court in the case of CCE, Coimbatore v. Elgi Equipments Ltd., (S.C.). Therefore, no penalty under this Section could be imposed for the period prior to the insertion of this Section in the Excise Act. This Section was brought on the Statute on 28-9-1996.
Therefore, no penalty under this Section for the period prior to this date could be legally imposed on the appellants.
13. In view of the discussion made above, the impugned order of the Commissioner against all the appellants is set aside. All the appeals of the appellants are allowed with consequential relief, permissible under the law.
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