Citation Codes

Equivalent Citations

citation codes

Case Number

Final Order Nos. 15-16/2009, in Appeal Nos. E/762 and 844/2005

Judges

T.K Jayaraman, Member (T)
M.V Ravindran, Member (J)

Acts

CENTRAL EXCISE ACT 1944
Companies Act/Partnership Act.
Section 4(4)(c)
Sales Tax Act

See more information ...

Smart Summary

Structured Summary of the Tribunal Order (Pronounced 12-1-2009) — Member (J): M.V. Ravindran

Factual and Procedural Background

The appeals arise from challenges by the Revenue to Order-in-Original No. 13/2004 (dated 30-4-2004) and Order-in-Original No. 25/2004 (dated 28-7-2004). The core factual background, as recited in the opinion, is:

On intelligence that M/s. Agarwal Rubber (P) Ltd. (ARPL) and associated units — M/s. T.M. Tyres and Tubes Pvt. Ltd. (TMTTPL), M/s. Maruti Rubbers (MR) and M/s. Robot Engineers (RE) — were evading Central Excise duty on manufacture/clearance of butyl rubber tubes/flaps/moulds, searches were carried out on 6-3-1997 and various records were recovered.
Show cause notices dated 29-3-2000 (and related notices) were issued seeking to club clearances of the four units and demand duty, interest and penalties; the Adjudicating Authority (Commissioner of Customs & Central Excise, Hyderabad-I) issued Order‑in‑Original No.20/2000 (24-11-2000) confirming the demand after finding the units connected and availing SSI notifications fraudulently.
The assessee appealed to the CESTAT. The CESTAT (Final Order No.1367/2001 dated 13-8-2001) remanded the matter to the Adjudicating Authority for reconsideration in light of the Supreme Court decision in Gajanan Fabrics Distributors v. CCE, Pune.
In remand proceedings the Commissioner of Central Excise (H-I) dropped the proceedings (i.e., the show cause proceedings were directed to be dropped). The Revenue appealed that remand result, leading to the present appeals before this Bench.
The Tribunal heard submissions from the Revenue (Senior Departmental Representative) and from the respondents (represented by Shri B. V. Kumar). The Tribunal considered the findings of the Adjudicating Authority and relevant precedent and ultimately rejected the Revenue’s appeals and disposed of the respondents’ cross-objections.

Legal Issues Presented

Whether the clearances of ARPL, TMTTPL, MR and RE should be clubbed together for the purpose of determining SSI exemption limits and imposing Central Excise duty (i.e., whether all the units should be treated as one manufacturer for excise purposes).
Whether the facts presented (interest-free loans/financial accommodation, low rent under lease arrangements, use of a brand name without formal agreement, and representations to banks) establish "interdependence"—in particular pervasive financial control or pervasive management control—sufficient to justify clubbing of clearances under the applicable law and precedents.
Whether the Adjudicating Authority’s factual findings (regarding independent capital, plant and machinery, separate accounts, absence of flow back of funds or profit sharing) should be interfered with by the Tribunal.

Arguments of the Parties

Appellant (Revenue) — Main Submissions

The Revenue argued this is the second round of litigation and submitted that ARPL is the principal company floated/controlled by Shri Deendayal Agarwal and that he is the dominant person behind all four units.
Primary contention: clearances of all units should be clubbed because there is financial accommodation between them (notably substantial interest-free loans), lack of repayment of inter-company loans, and other indicia of financial dependence and mutuality of interest.
Specific factual indicators relied upon: admitted unpaid balances owed by Maruti Rubbers to ARPL as evidence of financial dependence; a letter by Deendayal Agarwal to the State Bank of Hyderabad indicating directors of ARPL were substantially interested in TMTTPL; use of the brand “TM” by ARPL (the brand of TMTTPL) without agreement; low lease rents charged by ARPL for premises used by other units.
The Revenue relied on decisions including Gajanan Fabrics Distributors v. CCE (Supreme Court), Commissioner of Central Excise, New Delhi v. Modi Alkalies & Chemicals Ltd. (Supreme Court), Priya Corporation v. CCE (Tribunal) and other authorities to contend that these facts warrant clubbing the clearances and confirming duty liability against the principal unit.

Respondents (ARPL and associated units) — Main Submissions

The respondents emphasised that there was no proposal to treat other companies as dummy units and that all four entities have independent existence: separate plant and machinery, factories, staff, independent registrations (Companies Act / Partnership Act), distinct accounts and separate assessments under Income Tax and Sales Tax.
They argued that interest-free loans and inter-company commercial transactions are legitimate commercial practices and do not by themselves indicate pervasive control or dummy status; the alleged low rent under lease deeds likewise reflects contractual arrangements between separate parties and is not sufficient to club clearances.
They relied on Board Circular No.6/92 (29-5-1992) under Section 37B, which explains that limited companies are separate entities and each limited company is entitled to a separate exemption limit; similarly the composition and facts relating to partnerships are to be decided on factual matrix.
The respondents further relied on case law (including Commissioner v. Superior Products and other authorities) to submit that absence of mutuality of interest, absence of flow back of funds or profit sharing, and separate accounting negate clubbing of clearances.
They maintained that the Adjudicating Authority’s findings were detailed and supported by documents (balance sheets, ledgers, agreements) and that the Revenue had not produced contrary evidence to overturn those findings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gajanan Fabrics Distributors v. CCE, Pune (Supreme Court)	Illustrates that where units are found to be fictitious/dummies, demand may be confirmed against the main unit; Tribunal’s findings on close relationships and common facilities may justify clubbing in appropriate factual scenarios.	The CESTAT remanded the matter to the Adjudicating Authority to reconsider the issue in light of this Supreme Court decision; the Tribunal noted that Gajanan requires factual determination and applied the need to examine whether units are dummies or genuinely independent.
Priya Corporation v. CCE (Tribunal)	When units have common proprietary interest and interconnections, clearance values may be clubbed for small scale industry benefits (as held by Tribunal in that case).	The Revenue referenced this decision to argue for clubbing; the Tribunal considered it among other authorities but found the facts of the present case distinguishable given independent records and absence of flow back of funds.
Commissioner of Central Excise, New Delhi v. Modi Alkalies & Chemicals Ltd. (Supreme Court)	Clubbing of clearances requires interdependence; no universal rule—two basic features indicating interdependence are pervasive financial control and pervasive management control; factual inquiry required.	The Tribunal applied the principle that pervasive financial or management control must be proven; concluded Revenue had not demonstrated such pervasive control here, and mere financial accommodation did not suffice.
M/s. Cheryl Laboratories v. CCE [1993 (65) E.L.T. 595 (Tribunal)]	Use of godown, common registered office and telephone, or sharing some facilities is not a ground for clubbing clearances in absence of flow back of money or other indicia of a sham.	The Adjudicating Authority relied on this authority to hold that shared office space, godown use or common facilities do not alone justify clubbing; Tribunal endorsed that approach.
Binod Kumar Maheswari v. CCE (Tribunal)	Close relationship and common head office are immaterial in absence of flow back of money; separate factories and separate machinery indicate independent units.	Used to support conclusion that mere proximity/relationships do not mandate clubbing where separate operations and no flow back of funds are shown.
M/s. Alpha Toya Ltd. v. CCE (Tribunal)	Common managerial control, some common directors and advancement of interest-free loans do not make other units dummies when they have independent existence and no profit sharing or money flow back.	Adopted by the Adjudicating Authority to conclude that ARPL’s interest-free loans to others do not by themselves justify clubbing; Tribunal agreed with this reasoning.
M/s. Prima Controls (P) Ltd. v. CCE, Pune (Tribunal)	Holding of shares by common directors and a project report (for bank support) are not sufficient reasons for clubbing units.	The Adjudicating Authority cited the case to reject the bank-letter/project-report as determinative evidence of control; Tribunal accepted that such documents lack conclusive evidentiary value for clubbing.
CCE v. Poly Printers (case cited in OIO)	Concept of "related person" under erstwhile Section 4(4)(c) is not applicable for clubbing where partners are not common; routine inter-unit transactions (including interest-free loans recorded in books) may be treated as business transactions.	Adjudicating Authority relied on this principle to hold that routine commercial inter-company transactions, properly recorded, do not amount to clubbing; Tribunal endorsed that view.
Commissioner of Central Excise, New Delhi v. Superior Products (Supreme Court)	Findings that units have separate accounts, separate capital, separate premises, machinery and labour are factual findings that should not be interfered with; such independence supports refusal to club.	The Tribunal relied on Superior Products as directly applicable: where units have separate accounts/capital/plant and machinery the Supreme Court confirmed non-interference; Tribunal applied that to uphold the Adjudicating Authority.
Commissioner of Central Excise, Jaipur v. Electro Mechanical Engg. Corpn. (Supreme Court)	(Cited by Respondent) Supports the proposition that absence of mutuality or flow back of funds militates against clubbing.	The respondent cited this authority to buttress the argument that separate accounting/activities preclude clubbing; the Tribunal considered it among other supporting authorities.
CCE v. Sushil Chemicals (Tri. - Bangalore)	Mutuality of interest among family members or units does not by itself justify clubbing; recognition that family members may form separate proprietary/partnership concerns.	The Tribunal considered this Tribunal decision and reproduced its findings, adopting the reasoning that mutuality and family links are not sufficient to club clearances absent proof of dummy status or flow back of funds.
Supreme Engineering Works v. CCE, Pune (Tribunal)	(Relied upon by Revenue) Cited as an authority supporting clubbing in appropriate circumstances.	Revenue cited it in support of its contention; however, the Adjudicating Authority and the Tribunal found the present facts distinguishable and did not adopt it to justify clubbing here.
CBEC Circular No. 6/92 dated 29-5-1992 (Direction under Section 37B)	Explains that limited companies are separate entities distinct from shareholders for exemption limits; treatment of partnerships vs. companies depends on facts such as composition, factory existence, licence, nature of goods; different firms with some partners in common are generally entitled to separate exemption limits.	The Tribunal explicitly relied on this Circular to support the position that limited companies are distinct manufacturers and entitled to separate exemption limits; the Circular was treated as directly supportive of the respondents' position.

Court's Reasoning and Analysis

The Tribunal’s analysis proceeded from the specific factual findings recorded by the Adjudicating Authority in the remand proceedings and applied the relevant legal principles from precedent and Board guidance. The reasoning, in sequential steps as reflected in the opinion, is summarized below:

Identification of the key factual allegations relied on by Revenue: (i) substantial interest-free loans/financial accommodation and non‑repayment; (ii) ab initio low rent charged by ARPL to other units; and (iii) use of brand name without formal agreement and the bank letter indicating common interest.
The Adjudicating Authority considered each allegation in detail:
- On brand use: distinction was drawn between brand names actually used on products (e.g., "MARUTI G9" vs "MARUTI" with ARPL logo) and the lack of evidence that use of a brand alone proves dummy status.
- On lease/rent: the Adjudicating Authority found no objective yardstick or evidence that the rents were abnormally low, and held that contractual lease terms between independent parties do not, by themselves, indicate that separate units are one and the same.
- On interest-free loans and inter-company debt: while ARPL had extended interest-free loans to MR and there were cycles of loan advances and repayments (with certain repayments recorded), such transactions were reflected in audited accounts. The Authority observed that interest-free loans can be common trade practice and that there was no evidence of flow back of funds to ARPL or profit-sharing in favour of ARPL.
- On outstanding receivables/payables: the Authority noted substantial outstanding debtors in ARPL’s books (e.g., large amounts owed by third parties) and held that such outstanding balances are common in trade and not conclusive of mutuality of financial interest among the four units.
- On the bank letter/project report: these documents were viewed as produced for securing bank finance and not as conclusive evidence of control; such documents alone did not establish that other units were dummies or that ARPL exercised pervasive control.
The Authority and then the Tribunal applied established legal principles:
- Authorities such as Cheryl Laboratories, Alpha Toya and Prima Controls establish that shared facilities, common directors, and even interest-free loans are not determinative; the crucial factual indicators are flow back of funds, profit sharing, pervasive managerial control or dummy/fictitious nature of subsidiary units.
- CBEC Circular No.6/92 and the Supreme Court’s decision in Superior Products emphasize that limited companies are separate entities and that factual findings showing separate accounts, capital, premises, machinery and labour are findings of fact not to be disturbed lightly.
Having reviewed the documentary material (balance sheets, ledgers, agreements) and the Adjudicating Authority’s detailed findings, the Tribunal found that Revenue had not produced evidence to controvert those findings on re‑examination. In particular, there was no convincing proof of pervasive financial or managerial control, no evidence of flow back of funds or sharing of profits, and no finding (by the Adjudicating Authority) that the three units were mere dummies supporting a principal unit.
Consequently, applying the principles in Modi Alkalies (that pervasive interdependence must be shown) and Superior Products (that factual findings of separateness are binding absent contrary evidence), the Tribunal concluded that the Adjudicating Authority’s decision to drop proceedings was correct and should be upheld.

Holding and Implications

Holding:

The appeals filed by the Revenue are rejected. The Tribunal held that the impugned orders of the Adjudicating Authority (which dropped the show cause proceedings and refused to club the clearances) are legal, proper and correct and do not require interference. The cross-objections filed by the respondents were disposed of.

Implications:

Direct effect on the parties: The proceedings initiated by the Show Cause Notice were held to be not sustainable on the record; the Adjudicating Authority’s order dropping the proceedings was upheld, relieving the respondents from the asserted duty/penalty liability based on clubbing of clearances.
On precedent and broader law: The Tribunal applied existing Supreme Court and Tribunal precedents and a CBEC Circular to resolve the question on the particular facts; the decision rests on application of established principles (e.g., requirement of pervasive financial/managerial control or evidence of flow back of funds) rather than announcing new legal principles. The opinion indicates that no general rule of universal application exists and that factual determination is decisive.
The Tribunal explicitly relied on precedents (including Superior Products and Modi Alkalies) to reaffirm that mutuality of interest and family relationships, without more, do not justify clubbing; therefore, the order does not purport to lay down a novel precedent beyond the applied authorities.

Pronouncement: Order pronounced in open Court on 12-1-2009.

Show full summary ...

Commissioner Of C. Ex., Hyderabad-I v. Agarwal Rubber Pvt. Ltd.

[Order per : M.V. Ravindran, Member (J)]. - These two appeals are filed by the revenue against Order-in-Original No. 13/2004 dated 30-4-2004 and Order-in-Original No. 25/2004 dated 28-7-2004. Since the issues in these appeals are common, we take up the same for disposal by a common order.

2. The relevant fact that arises for consideration are that on intelligence that M/s. Agarwal Rubber (P) Ltd., Plot No. C-8 and C-9, Industrial Estate, Patancheru, Medak District (hereinafter referred to as the “ARPL”) and its associate manufacturing units viz., M/s. T.M. Tyres and Tubes Pvt. Ltd., Medak District (hereinafter referred to as the TMTTPL), M/s. Maruti Rubbers, Medak District (declarant - hereinafter referred to as the MR) and M/s. Robot Engineers, Medak District (declarant - hereinafter referred to as the RE) who are the manufacturers of Butyl Rubber Tubes/Rubber flaps and moulds/special engineering goods (hereinafter referred to as the “the said goods”) are evading payment of Central Excise duty. Simultaneous searches were conducted on ARPL and other premises on 6-3-1997 and recovered various records under various panchanamas.

2.1 Consequent to the investigation and recording of the statements, show cause notices were issued to ARPL, TMTTPL, MR and RE, Shri Deendayal Agarwal, M.D. of ARPL, TMTTPL and Shri Ashok Kumar Agarwal, Director of ARPL directing them to show cause notice as to why the clearances made by all the units be not clubbed together and duty be not demanded from them and why penalties be imposed on them. The said show cause notice was contested by the respondent and culminated in Order-in-Original No. 20/2000 dated 24-11-2000 wherein the learned Commissioner of Customs and Central Excise (Hyderabad-I) after considering the facts of the case and the defence put forth, came to the conclusion that apart from having common management and directors, sharing of office premises and other facilities and common utilization of services of personnel was noticed among all units. He also held that it was proved irrefutably that all the units are connected and are availing SSI Notification fraudulently and have been done with the knowledge of the Shri Deendayal Agarwal and Shri Ashok Kumar Agarwal. Coming to such a conclusion, the learned Commissioner vide Order-in-Original dated 24-11-2000 upheld the allegation and consequently, confirmed demand of the duty, penalty and interest.

2.2 Aggrieved by such an order, the assessee filed an appeal before CESTAT. The Hon’ble CESTAT in its Final Order No. 1367/2001, dated 13-8-2001 [ (Tri. - Chennai)] remanded the matter back to the Adjudicating Authority for re-consideration of the issue in light of the law as settled by the Supreme Court in the case of Gajanan Fabrics Distributors v. CCE, Pune [ (S.C.)].

2.3 The learned Commissioner of Central Excise (H-I) in remand proceedings after considering the entire issue came to the conclusion that the proceedings initiated by Show Cause Notice dated 29-3-2000 needs to be dropped. Aggrieved by such an order, the revenue is in appeal.

3. The learned SDR would submit that this is the second round of litigation. It is her submission that the respondent in this case, ARPL is a unit floated by Shri Deendayal Agarwal and he is the main person beyond all the four units. It is her submission that the clearances made by all the units need to be clubbed, as there is financial accommodation between them, there is no repayment of loans made between inter companies and the loans were given by ARPL to other people and were not repaid. She reads out the grounds of appeal.

2. In the case of Shree Gajanan Fabrics Distributors v. CCE, Pune - 1992 (43) ECR 172 (1) it was held by the Tribunal that close relationship among the proprietors, partners, etc the use of common premises and availing common facilities justified clubbing of value of clearances. On the appeal filed by the party in Supreme Court, the court did not set aside the above findings of the Tribunal. Supreme Court only observed that in such a case the demand ought to have been confirmed against main unit on facts of the case in which the units were found fictitious and remanded the case for de novo decision afresh. But facts in the instant case under consideration are that the units were in existence and functioning separately. However, in view of the existence of facts such as the units being controlled by the same set of members of the family having major shareholding in each unit, mutuality of interest in the business between the units, financial interdependence as evidenced by the frequent flow of funds in the form of interest free loans for the functional activities of the other units without any stipulation for the repayments and huge outstanding amounts in the books of accounts without repayments, supervisory control over marketing and production of the other units without any consideration etc., the clearances are required to be clubbed to determine the eligibility limit of each unit up to which the SSI exemption calculated on the basis of the aggregate value of clearances of the units could be availed by the units in terms of the SSI Notification No. 1/93 CE, 8/98 CE, 8/99 CE etc. In Priya Corporation v. CCE - (T) the Tribunal held that when the units were having common proprietary interest controlled by only one person with interconnection in various respects within the units, the value of clearances are liable to be clubbed for the purpose of small scale industry benefits.

3.1 It is her submission that the matter was remanded back to the Original Authority to consider the issue in light of the Supreme Court in the case of Gajanan Fabrics Distributors v. CCE, Pune. She would submit that the main contention of the revenue is that in this case, the main company ARPL has been extending interest free loans for meeting working capital requirements of Maruti Rubber, as Maruti Rubber was facing severe financial constraints. It is her submission that it was admitted that the balance amount payable by Maruti Rubber was not recovered and the said amount would be recovered from partners of Maruti Rubber who are none other than Deendayal Agarwai, MD of ARPL, Ashok Kumar Agarwal and Shyam Sunder Agarwal, Directors of ARPL. It is her submission that in normal commercial, business transactions, it is not even conceivable to expect one unit financing second unit to share the working capital amounting to Rs. 90/- lakh that too interest free. It is her submission that this clearly expresses the financial dependence between various units.

3.2 It is her submission that Deendayal Agarwal, MD of ARPL in a letter addressed to Assistant General Manager, State Bank of Hyderabad represented that the Directors of ARPL are substantially interested in TMTTPL and Directors are also holding substantial amount of Director’s loan. It is her submission that this would be a direct indication, that Deendayal Agarwal has interest in Private Limited company i.e., TMTTPL. This would go to show that both companies are having financial arrangements as well as special interest in the business of each other and are being managed by the same management under the close control and supervision of Deendayal Agarwal.

3.3 It is her submission that M/s. ARPL were Exporting and Manufacturing 2-wheelers Butyl tubes under the brand name “TM” which is brand name of TMTTPL without any agreement. It is also her submission that the land the place given for the functioning of other units were at a very paltry sum of lease, hence, it would also indicate that there was a common understanding.

3.4 She would submit that the decision of the Supreme Court in the case of Commissioner of Central Excise, New Delhi v. Modi Alkalies & Chemicals Ltd. - (S.C.) would cover the issue and is applicable to this case. This “clubbing of clearances” - pervasive financial and management control are prima facie indicators of interdependence. She would also rely upon the decision of the Tribunal in the case of Priya Corporation v. CCE - 1994 (48) E.L.T. 28 (Tribunal) and Supreme Engineering Works v. CCE, Pune - (Tribunal) for the proposition that impugned order be set aside and all the clearances be clubbed together for arriving at the duty liability.

4. The learned advocate Shri B. V. Kumar appearing on behalf of the respondents would submit that there is no proposal to treat other companies as dummy units. It is his submission that there cannot be a case for clubbing in these cases, as it is accepted and admitted that all the four units have got their own machineries and manufacturing plants. It is his submission that the lease deed between the main company ARPL and others as regards the rent fixed being very low, it is the submission that the lease deed between two companies cannot be a question or a bone of contention, for clubbing the clearances. It is his submission that the finding of the Adjudicating Authority on this issue is very clear and revenue has not adduced any evidence. It is his submission that the interest free loans, which were given by the main assessee ARPL to other companies is a question of a commercial transaction and which is not proved to be incorrect. It is his submission that the composition of the companies are as under.

4.1 ARPL is a private limited company manufacturing all types of rubber tubes and flaps for all vehicles and is registered with the Department of Industries as a private limited company. It has got 18 employees and the Central Excise registration is granted to them by the authorities as early as 1987. It is his submission that Shri Agarwal is the Managing Director of the said Company.

4.2 As regards the TMTTPL, it is his submission that TMTTPL is also a private limited company and registered with the Department of Industries as a private limited company. It is his submission that the said company is engaged in the manufacture of butyl tyres and tubes and flaps.

4.3 As regards the composition of the M/s. Robot Engineering, he would submit that the list of partners is as under.

(i) Shri Deen Dayal Agarwal, Partner

(ii) Shri Shyam Sundar Agarwal, Partner

(iii) Shri C. S. Dass Roberts, Partner

(iv) Shri Ramesh Kumar Agarwal, Partner.

4.4 As regards the partners of M/s. Maruti Rubbers, he would submit that the partners are as under.

(i) Shri Deen Dayal Agarwal, Partner

(ii) Shri Shyam Sundar Agarwal, Partner

(iii) Shri Ashok Kumar Agarwal, Partner

(iv) Smt. Prema Agarwal, Partner

(v) Smt. Sunita Kumari Agarwal, Partner.

4.5 He would rely on the Circular of the Board wherein it has been very clearly held that the private limited companies cannot be equated to the partnership firm and there cannot be any clubbing of clearances and is clearly applicable to this case. It is his submission that the said Circular No. 6/92 dated 29-5-1992 is a direction issued under Section 37B and is applicable in all squares to this case.

4.6 He would submit that the case laws relied upon by the learned SDR is not applicable to this case. On the contrary, he would rely upon the decision of the Hon’ble Supreme Court in the case of Commissioner of Central Excise, New Delhi v. Superior Products - (S.C.) and Commissioner of Central Excise, Jaipur v. Electro Mechanical Engg. Corpn. - 2008 (229) E.L.T 321 (S.C.) to submit that absence of mutuality of interest or flow back of funds from one unit to another and when the units are having accounts separately, there cannot be any clubbing of clearances. He would also reply upon the recent decision of this Bench in the case of CCE, Mangalore v. Sushil Chemicals as reported at (Tri.-Bang.) to submit that mutuality of interest among two units or several units of a group of family members cannot be reason for clubbing the clearances.

4.7 He would also submit that the Adjudicating Authority has clearly given detailed findings which are not contraverted by the revenue by giving contrary evidence.

5. We have considered the submissions made at length by both sides and perused the records. It is undisputed in this case that this is a second round of litigation. It is also undisputed that the entire case of revenue revolves around only on the three following allegations for clubbing of the clearances.

(i) That there is lot of financial accommodation in form of interest free loans, sale of goods, none repaid.

(ii) Rent charged by ARPL from others is ab initio low.

(iii) Use of brand name without any agreement and that letter addressed by the Managing Director Deendayal Agarwal to State Bank of Hyderabad seeking term loan for TMTTPL.

5.1 We find that the Adjudicating Authority while dealing with all the above allegations has held as follows :

20. In yet another allegation of utilisation of Brand name/Logo of ARPL and TMTTPL, the noticees pleaded that the Brand name and Logo of ARPL and TMTTPL are different. The Brand name of TMTTPL was used only for the purpose of manufacturing and exporting such two-wheeler Butyl Tubes bearing Brand name of TMTTPL and that TM is not a registered Brand name of TMTTPL and that by itself does not indicate that both the units are having mutual interest in each other or can lead to a conclusion that one of this is a dummy of another. ARPL was started in the year 1984 utilized the concessional rate of duty under SSI exemption Notification No. 1/93 and in the year 1997-98 and subsequent year ARPL did not avail SSI exemption. They further pleaded that under the circumstances even if they had manufactured and exported two-wheeler Butyl Tubes under the Brand name of TM, the same will not effect the rate of duty paid by ARPL as they were paying full duty payable. The assessees have submitted that the brand name used by the noticees on their products is “MARUTI G9”, whereas, the brand name used by ARPL on their product is “MARUTI”, with logo of ARPL, which is a registered brand name. In support of their claim, the noticees’ have shown the rubber flaps with the respective brand names at the time of personal hearing.

21. I have gone through the lease agreement and the case laws cited by the noticees. I observe that there is no yardstick to decide the said rent is abnormally low nor any evidence to this effect was placed on file. It is the agreement entered between ARPL and MR, ARPL and RE that decide the amount of rent. The parties i.e. ARPL, MR and RE entered into agreements in their individual capacity. I feel that even the amount of rent fixed in two cases is low, use of godown, table space, and some marketing staff without any commercial consideration, it will not be a factor to draw an inference that all the units are one and the same, without establishing other elements like the financial flow back, control of the unit etc. In this connection I rely on the case law of M/s. Cheryl Laboratories v. CCE [1993 (65) E.L.T. 595 (T)] and Binod Kumar Maheswari v CCE [ (T)] in which it was held that the clearances of factories of proprietary concern and the two limited companies units having separate machinery owned through bank loan, separate electric meter, maintaining records, obtaining orders and selling goods separately should not be clubbed together on mere fact of close relationship and the fact that head office located in same building and same room are immaterial in absence of any flow back of money. In the case of M/s. Cheryl Laboratories v. CCE it was held that the use of godown of one by the other, use of common registered office and telephone would not be factors for clubbing of the clearances of the units.

22. ARPL have extended interest free loans to MR as is evident from the Balance Sheets of ARPL. The Noticees’ contention is that the interest free loans are not uncommon. From the records it is observed that ARPL has been extending interest free loans by almost all the years from 1995-96 to 1998-99 and during this period MR cleared certain amount of loans in every year. Availing loan from ARPL and payment of certain portion and again availing loan is a cycle. During this period MR cleared certain amounts of loans viz. Rs. 3.26 lakhs in 1995-96, Rs. 1.72 lakhs in 1996-97, Rs. 3.72 lakhs in 97-98 and Rs. 31.42 lakhs in 1998-99. It is common trade practice to avail interest free loans from known trade links and pay back subsequently. It was held by the Hon’ble Tribunal in the case of M/s. Alpha Toya Ltd. v. CCE that common managerial control, a few common directors and advancing of interest free loans by main unit to other units are not sufficient to make other units as dummies, when they are having independent existence and independent transactions without any profit sharing or money flow hack to the main unit, clearances of those units are not clubbable. Hence, I feel lending interest free loans to other companies/firms by ARPL, which were reflected in their respective books of accounts, cannot alone be a ground for clubbing of the value of clearance of all the units. There is no evidence placed on record to prove that money was flown back to ARPL, the main unit, or any profit sharing by ARPL from the profit of other units i.e. MR/RE/TMTPL. There is no allegation to that effect made in the SCN.

23. On perusal of the Balance Sheet of ARPL and of TMTTPL it is observed at there are so many Creditors/Debtor where outstanding amounts are more than the outstanding amounts of TMTTPL or RE or MR. Form the debtors list of ARPL as on 31-3-2000, it is observed that the outstanding amounts of Cherry Motive was Rs. 110.90 lakhs; J.K. Banmore was Rs. 104.03 lakhs; J.K. - Kankroli was Rs. 189.27 lakhs. It is general trade instances of having outstanding amounts for the work done or the sales or purchase made with the other business counterparts. The Noticees have submitted the gist of transactions between ARPL and TMTTPL, ARPL and MR, ARPL and RE. It is observed from the said transactions that the outstanding amount of TMTTPL represents payment towards job work charges and for purchase of butyl rubber only; in respect of MR and RE the outstanding amounts represents the business transactions and certain amounts of interest free loans and the said transactions were reflected in their respective books of account and in the audited balance sheets of the said companies. An amount of Rs. 133 lakhs payable by TMTTPL as on 31-3-99 was not a very big amount to conclude that without realization of this ARPL could not manage the affairs. In fact there were total outstandings i.e. Debtors as on 31-3-99 amounting to Rs. 614.25 lakhs in the books of ARPL. It is common in the course of business to have outstanding amounts of Debtor/Creditors and the same shall not be conclusive evidence to infer that there is a mutuality of financial interests.

24. A copy of the letter dated 19-12-99 of Deendayal Agarwal, M.D., ARPL, addressed to the AGM, SBH, seeking a term loan for TMTTPL, was placed as an evidence to allege mutuality of financial interest and to substantiate that TMTTPL is controlled by ARPL. In the said letter it was represented and confessed that the Directors of ARPL are substantially interested in TMTTPL; that ARPL and TMTTPL belong to the same family. The Noticees’ contention is that the said letter was addressed to the Bank in the context of obtaining a term loan for TMTTPL and the Directors of ARPL have not given any loans as Directors to TMTTPL. They contended that the said letter does not have any evidentiary value as the same was written to the Bank only to obtain financial assistance. Similarly the Project Report cum Application for financial assistance to TMTTPL cannot be taken as relevance to this case since it was prepared purely for the purpose of getting financial assistance from Banks. Even if it is mentioned in the said Project Report that the Goodwill and marketing resources of ARPL along with the good offices of Shri Deendayal Agarwal would be used for propping up TMTTPL, no inference can be drawn that TMTTPL is dummy and could not stand on their own in the echelons of financial institutions and commercial market. I do not find any thing wrong in making efforts by Shri Deendayal Agarwal, M.D. of ARPL in the management, marketing and getting financial assistance to TMTTPL. In fact Shri Deendayal Agarwal is also M.D. to TMTTPL. Hence, I feel that placing the project Report-cum-Application for financial assistance as an evidence is not relevant and does not have any evidentiary value. I rely on the decision of the Hon’ble Tribunal in the case of M/s. Prima Controls (P) Ltd. v. CCE, Pune [ (T)] wherein it was held that holding of share by common directors and the alleged project report cannot be the reason for clubbing the units.

25 ...............

26. On merits, as discussed in the above para, the case is not sustainable. The issue of clubbing clearances was dealt in various cases by the Hon’ble Supreme Court and various Appellate Tribunals. The Hon’ble Supreme Court in the case of CCE. v Poly Printers [] held that the concept of related person under erstwhile Section 4(4)(c) is not applicable for the purpose of clubbing clearances when partners of all the firms were not common inter se financial transactions, related to interest free loans, duly entered in account books are to be regarded as perfect routine business transaction. Further, all units were registered independently and none of the units was described in show cause notice as dummy or supporting unit of another. Also there was no evidence of flow back of funds or sharing of profits to hold clubbing of clearances valid. In the present case all the four units have their independent capital, plant and machinery, labour, factory, staff and electricity and production activities of each unit is managed by different persons. Moreover each unit was registered under Companies Act/Partnership Act. Merely because of evidences viz, interest free loans, which is common trade practice, lease agreement which facilitates low rent, use of office space and staff, common shareholders and contents of letter/project report intended to obtain Bank loans, in the absence of any evidences to prove flow back of funds or sharing of profit and managerial control of other three units by ARPL, are not sufficient evidences to infer that all the units are controlled by ARPL or by Shri Deendayal Agarwal and thereby clubbing of clearances of all the four units.

5.2 It can be seen from the above reproduced paragraphs of the Order-in-Original, that the Adjudicating Authority has gone into details of each and every allegation made by the revenue in the Show Cause Notice. After considering the entire facts of the case, the Adjudicating Authority dropped the proceedings. We may note here that as against the above said findings, the grounds of appeal do not bring on record any evidences which would controvert the findings of the Adjudicating Authority. On the contrary, we find that in the grounds of appeal at Para -3, the revenue has clearly admitted as under.

3. Though the four units are independent legal entities having their own manufacturing units, plant and machinery, labour force and are assessed separately under the Income Tax and Sales Tax Act with separate legal safeguards/registration with various statutory authorities, it is crystal clear that all these legal safeguards are for public consumption as the fact is that these four units are controlled directly and indirectly by the family of Sri Deendayal Agarwal and their blood relations and the three units TMTTPL, MR and RE have been formed to supplement to main unit, ARPL, in all aspects. When all the units are having common interest and mutual benefits surreptitiously all these legal safeguards do not make any difference. Sale among the units, supply of raw material for job work purpose, common accounts, common control of production and special financial relationship not on principal to principal basis have been provide beyond doubt.

5.3 It can be noticed that there is a clear cut acceptance of the fact that all the four units are independent legal entities and having manufacturing units, plant and machineries, labour force and are assessed separately under income-tax and Sales Tax. This would indicate that the four units are maintaining their records independently. Given these facts, we find that the Adjudicating Authority’s conclusion seems to be correct, legal and proper.

5.4 We find that the Hon’ble Supreme Court in the case of CCE v. Superior Products (supra) in an identical situation held as under :

5. Tribunal in its order has recorded a finding that accounts of both the units are managed separately. That they have separate capital, premises, machinery and labour and carrying out separate operations. That they are separate units. These findings are findings of fact which cannot be interfered with and, therefore, the same are confirmed.

5.5 We find that in the case before us, it is admitted by revenue that all the four units are having different and independent activity which in itself would squarely be covered by the law as has as been laid down by the Hon’ble Supreme Court in the case of CCE v. Superior Products (supra).

5.6 We find that the decision of this Tribunal in the case of CCE v. Sushil Chemicals (supra) would also apply. We may reproduce the said finding.

6.1 The above observations do not mean that we are allowing Revenue’s appeal. We have to examine the findings of the Commissioner from Paragraph 61 to 82. In the above Paragraphs, the Commissioner has cited several instances where one unit pumped funds for financing another unit. The partners of the nine units are all family members. Therefore, mutual interest is not at all ruled out. In the normal course, there can be definitely mutual interest but sometimes there may be rivalry and bitter animosity between the different units of the same family. Both are possible. It so happens that in the present case, there is some sort of synergy among the various units. This is evident from the observations of the Adjudicating Authority. In Para 78, he has stated “in reality I find that by virtue of the transactions discussed above all the units are closely bound together as a group which is rare in business transactions between units with genuine separate identities.” All the transactions enumerated by the Adjudicating Authority are available in the ledger accounts of the concerned units. It is also on record that the transactions have been reflected in the Income Tax Returns and accepted by the Income Tax Authorities. The proposal in the Show Cause Notice is for clubbing of the clearances of all the units for duty purposes. In that case the combined clearances would exceed Rs. 1 crore and there would be duty liability. But this can be done only when there is a principal unit and all the others are dummies or sham. Here we have nine units A1, A2 to A9. It is the burden of the Revenue to show that A1 is the real unit and A2 to A9 exits only in paper. Unless such a finding is there, the clearances cannot be clubbed at all. All the transactions which are cited by the learned Adjudicating Authority are within the framework of law. For example, in Para 61 it has been stated that M/s. PG Plywood Company through the money lending concern M/s. Dhirajlal Vithalji Co., pumped enormous funds during 85-86 and 86-87 for financing the new small scale unit in the name of the sons who branched out of M/s. PG Plywood Company. The question to be asked is “which Central Excise Law does the above transaction violate?” The answer is obvious that no Central Excise Law has been violated. If any other law has been violated, then it is none of the concern of the Central Excise authority. This is the crux of the problem. To put it differently, mutuality of interest among two units or several units of a group of family members cannot be a reason for clubbing the clearances. Moreover, the law does not prohibit family members from establishing different proprietary and partnership concerns. No law can prevent the units of a group working for the common benefit of the group. The group itself is not a legal entity. When such is the case, legally also a demand cannot be slapped on a group which has no legal existence. We have already extracted the Commissioner’s finding in Paras 95, 96 & 97. In the light of those findings, the Commissioner’s decision to drop the proceedings is correct. We do not find any merit in the Revenue’s appeal and therefore, the same is dismissed.

5.7 It is also to be noted that in this case the revenue is seeking to club the clearances of two private limited companies and two partnership companies, it is on record and it can be seen that the partners of both the partnership firms are different, though there may be common partners. It is the allegation of the revenue that the Directors of the private limited companies are common and the partners are common. We find that the CBEC vide its Circular No. 6/92 dated 29-5-1992 had clearly given a direction, under Section 37B which is read.

Sub : - The text of the Direction issued under Section 37B is as follows :-

“In exercise of the powers conferred under Section 37B of the Central Excise Act, 1944, for the purpose of ensuring uniformity of levy of duties of excise the Central Board of Excise & Customs has ordered that the following general principles will be applicable to Notification No. 175/86-C.E. :-

(i) The question whether different partnerships having common partners are treatable as separate manufacturers or the same manufacturer, would be a question of fact in each case to be determined on the basis of such factors among other, like composition of the partnership, existence of the factory, licence, nature of goods manufactured etc.

(ii) Different firms will be treated as different manufacturers for the purpose of exemption limit. But if a firm consisting of certain partners say A, B & C, has got more than one factory, all these factories should of course be combined. Limited companies whether public or private are separate entities distinct from the shareholders composing it. Hence each limited company is a manufacturer by itself and will be entitled to a separate exemption limit.

(iii) If there are two firms with only some of the partners in common, each firm is entitled to separate exemption limit and hence the question of distributing the exemption may not arise. If one firm or individual owns several factories, he or it gets exemption only in respect of one individual owns several factories, he or it gets exemption only in respect of one lot and the manufacturer being only one entity there will be no question of distributing the exemption.

(iv) Whether or not in the expression ‘by or on behalf of a manufacturer, the expression ‘from one or more factories’ is added, the effect would be the same if the manufacturer is also the same. The expression ‘one or more factories’ only further clarifies that whether the factory is one or more, it is the clearances by or on behalf of the same manufacturer which is to be taken into consideration for purposes of interpreting the exemption notification’.

It can be noted from the above said reproduced direction that clause (i), (ii), and (iii) squarely covers the issue in favour of the respondents.

5.8 As regards the case laws relied upon by the SDR, we do agree that the Hon’ble Supreme Court in the case of CCE v. Modi Alkalies & Chemicals Ltd. (supra) had clearly laid down that clubbing of clearances has to be done, when there is an interdependence. It is also seen that in that case, the Hon’ble Supreme Court has very clearly laid down the law that there cannot be “any generalization or rule of universal application”. Two basic features which prima facie show “interdependence are pervasive financial control and management control”. They have also further said that this has to be seen from the facts and circumstances of each case. It can be noticed in this case before us that the revenue has not been able to prove that there was a pervasive financial or management control of all the units by one person. Mere financial accommodation in form of loans, would not by itself be construed as pervasive financial control exercised by one company over other. In any case, reasons given by the Adjudicating Authority after considering all the aspects and the records, like balance sheet and other evidence produced before him seems to be uncontraverted by the revenue, as they have not adduced any contrary evidence to these records which were produced before the Adjudicating Authority.

5.9 Accordingly, in view of the above reasoning and the law as settled by the higher judicial fora, we find that the impugned orders are legal, proper and correct and do not require any interference. The appeals filed by the revenue are rejected and the cross-objection filed by the respondents are also disposed of.

(Pronounced in open Court on 12-1-2009)

Commissioner Of C. Ex., Hyderabad-I v. Agarwal Rubber Pvt. Ltd.

Structured Summary of the Tribunal Order (Pronounced 12-1-2009) — Member (J): M.V. Ravindran

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue) — Main Submissions

Respondents (ARPL and associated units) — Main Submissions

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of C. Ex., Hyderabad-I v. Agarwal Rubber Pvt. Ltd.

Comments