Full Judgment Text
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CASE NO.:
Appeal (civil) 7827-7834 of 2002
PETITIONER:
Commissioner of Central Excise, New Delhi
RESPONDENT:
M/s Modi Alkalies & Chemicals Ltd. & Ors.
DATE OF JUDGMENT: 18/08/2004
BENCH:
S.N. VARIAVA & ARIJIT PASAYAT
JUDGMENT:
J U D G M E N T
ARIJIT PASAYAT, J
The Custom, Excise and Gold (Control) Appellate Tribunal, New Delhi
(for short ’CEGAT’) by the common impugned judgment held that there was no
inter-dependence so far as the respondent no.1-company and respondent nos.
2-4 companies are concerned.
Background facts in a nutshell are as follows:
Respondent no.1- M/s Modi Alkalies & Chemicals Ltd. (in short ’MACL’)
is engaged in the manufacture of caustic soda of which Hydrogen gas is a by-
product. The Central Excise Authorities noticed that in reality MACL was
engaged in the manufacture of Hydrogen gas falling under sub-heading 2804.90
of the schedule of the Central Excise Tariff Act, 1988 (in short ’Tariff
Act’). But with a view to evade payment of excise duty it floated three
front companies, namely, respondent nos. 2 to 4 i.e. M/s Mahabaleshwar Gas &
Chemicals Pvt. Ltd. (for short ’MGCPL’), Shri Chamundi Gas and Chemicals
Pvt. Ltd. (for short ’SCGCPL’) and M/s. Nippon Gas and Chemicals Pvt. Ltd.
(for short ’NGCPL’). All the three front companies were in vicinity of the
factory of MACL. What in reality happened was that through pipelines
Hydrogen gas was sent to the three front companies for compressing and
bottling the gas. The sole object was to avail benefit of exemption given to
small scale industries under the Central Excise Notification No.1/93 dated
28.2.1993 and thereby evade payment of central excise duty. With a view to
unravel the truth, Director General of Anti-Evasion (for short ’DGAE’)
searched the factory and office premises of MACL and the three front
companies on 27.9.1996. It was found that all the three bottling units were
located in one single shed and were separated from each other by small brick
walls of about 4 ft. height. The Directors of the three front companies
were employees of either MACL or other Modi Group of companies and they were
frequently changed. They had common staff for maintenance of records, and
operation of the units. The main plant and machinery i.e. cylinders had
been supplied only by MACL and the total finance was provided by MACL as
unsecured loans or had been arranged by finance companies whose whereabouts
were not even known to the Directors of the three front companies.
Marketing of the products was done by one Ritesh Beotra, a so-called
Director of SCGCPL who was working as Deputy Manager (Marketing) in M/s Modi
Gas & Chemicals Sales Depot at Delhi. He was marketing various gases
manufactured by a Modi group concern and was answerable as an employee of
MACL. It was, therefore, concluded that MACL had control over Hydrogen gas
even after the stage of bottling till it was sold to the customers. The
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Balance-Sheets and other financial statements of the three units revealed
that whatever income they earned had gone to MACL in the form of lease rent
of cylinders. One Mr. Sita Ram Goswami, Accountant of MACL and Mr. Ashok
Kumar, Chief Operating Officer of MACL admitted that some amount of cash was
also collected by MACL over and above the invoice prices of Hydrogen gas
supplied by three companies. It was noted that while front companies were
being supplied gas by MACL @ 0.50 per unit, till August 1996, the same gas
was sold by the three companies @ Rs.5/- per unit. Keeping in view all
these factors the authorities were of the view that MACL had created the
three companies with the fraudulent intention to avail benefit of exemption
granted under Central Excise Notification No.1/93 dated 28.2.1993 and has
mis-declared the assessable value in the invoices with the intention to
evade central excise duty.
Show-cause notice was issued requiring MACL to show-cause as to why
the central excise duty of Rs.20,58,732.65 for the concerned period i.e.
9.5.1995 to 27.9.1996 should not be recovered from it under the provisions
of Rule 9(2) of the Central Excise Rules, 1945 (in short the ’Rules’) read
with Section 11 of the Central Excise Act, 1944 (in short the ’Act’) by
invoking the extended period of limitation. Further, penalty in terms of
Rule 52A and 173Q of the Rules and Section 11 of the Act along with interest
to be determined under Section 11 A(2) was to be levied. It was also
required to show cause as to why the land, building, plant and machinery
installed in the three front units were not to be confiscated in terms of
Rule 173Q of the Rules. Three officials were asked to show cause as to why
penalty should not be imposed under Rule 209A of the Rules on each of them.
On receipt of the show-cause, MACL replied that the three companies were
independent entities with corporate existence and were using their own
machinery. The loans have been returned and on the cylinders lease rent had
also been paid. Merely because MACL had taken the cylinders on lease and
had supplied to the three companies, no adverse inference was to be drawn.
Even if common staff maintained the records and operated units that would
not prove that the companies did not exist or that MACL was the company
having manufacturing activities in their premises. Similar replies were
filed by the three companies who denied that they were fake units or front
companies. It was pointed out that all requisites of central excise laws
were followed. There was nothing suspicious in the transactions entered
into by them with MACL.
After consideration the show-cause reply, the Commissioner of Central
Excise (Adjudication), Delhi (for short the ’Commissioner’) analysed the
factual position and found that this is a clear case where the three
companies were dummies of MACL. Documents have been created to show
existence of the bottling companies, whereas in reality MACL was in full
control over the units and, therefore, MACL was treated to have evaded duty
by resorting to under valuation. Duty and penalty as proposed were imposed.
Confiscation was directed of land, building, plant & machinery of the three
companies with option for redemption on payments of fine of Rs.20 lakhs,
Rs.7 lakhs and Rs.50,000/- respectively. Penalty of Rs.1 lakh was imposed
on each of the three companies and Rs.50,000/- on each of the three
employees and the Director of the Company.
Eight appeals were filed before the CEGAT, which by the common
judgment set aside the order of the Commissioner. It came to hold, inter
alia, that (1) there was no manufacture involved in the process and,
therefore, question of evasion of duty did not arise; (2) there was no
inter-dependence as alleged by the Central Excise Authorities. Three
companies had independent existence and the factual position did not
indicate that they were front companies as alleged by the authorities.
In support of the appeals, learned counsel for the appellant submitted
that the CEGAT has fallen into grave error both while analyzing factual
position and the applicable principles of law. Telltale features which
clearly prove that the three companies were front companies have been
lightly brushed aside by the CEGAT. It even failed to notice that
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transactions were done by companies with share capital of Rs.200 each. The
CEGAT has also recorded wrong findings as regards the management and
marketing. Though the issue as to whether there was manufacture was never
agitated before the Commissioner, the CEGAT on its own came to hold that
there was no manufacturing. The conclusion is not supportable on facts and
in law.
In response, learned counsel for the respondents submitted that the
CEGAT has rightly analysed the factual background and came to the right
conclusions. It was submitted that the three companies have separate
corporate existence, are assessed separately to sales tax and income tax and
have central excise registration. They submitted records to the Central
Excise Authorities which were being verified by them. In any event, the
question of any clubbing was not permissible in view of circular no.6/92
dated 25.5.1992 issued by the Government of India, Ministry of Finance,
Department of Revenue, Central Board of Excise and Customs, New Delhi. The
same was, in fact, continuation of the notification No. CER 8(5) Central
Excise dated 1.3.1956. It was pointed out that there was no suppression or
evasion for applying extended period of limitation. The show-cause notice
was issued on 26.6.1997 and the order was passed on 23.10.1998 relating to
the period from 9.5.1992 to 27.9.1996. The whole proceedings were,
therefore, beyond the prescribed period of limitation.
Whether there is inter-dependence and whether another unit is, in
fact, a dummy has to be adjudicated on the facts of each case. There cannot
be any generalization or rule of universal application. Two basic features
which prima facie show inter-dependence are pervasive financial control and
management control. In the present case facts clearly show financial
control. Undisputedly, the share capital of each of the three companies was
Rs.200/-. Though it was claimed that financial assistance was availed from
the financial companies, it is on record that the unsecured loans advanced
by MACL to the three companies were substantially heavy amounts as on
1.4.1998. NGCPL received an amount of Rs.1.55 crores. About 14 lakhs
appeared to have been paid after the issue of show cause notice. Loans
advanced to NGCPL was about Rs.52 lakhs while to SCGCPL it was about Rs.65
lakhs. The finding of the Commissioner that the financial assistance from
the financial institutions were availed with the aid and assistance of MACL
has not been seriously disputed. Apart from that, the cylinders were
brought on lease by MACL from another concern and were sub-leased to the
three companies. The cylinders bore the name of MACL. If the three
companies had separate standing as contended it could not be explained why
they could not get the cylinders directly from the lessors on lease basis
and the need for introducing MACL as the lessee and then the three companies
becoming sub-lessees. As noted by the Commissioner, entire receipts were
paid as lease amount to MACL. Here again, the under-valuation aspect
assumes importance. While the supply by MACL to three companies was Rs.0.50
per unit, the sale price by the three companies was Rs.5 per unit. It is on
record that accounts were kept by common staff and marketing was done under
the supervision of a person who belongs to the same group of concerns. The
amounts have been collected by an employee of MACL. The so-called Directors
of the companies were undisputedly employees of MACL. Almost the entire
financial resources were made by MACL. The financial position clearly shows
that MACL had more than ordinary interest in the financial arrangements for
companies. The statements of the employees/Directors show that the whole
show was controlled, both on financial and management aspects by MACL. If
these are not sufficient to show inter-dependence probably nothing better
would show the same. The factors which have weighed with CEGAT like
registration of three companies under the sales tax and income tax
authorities have to be considered in the background of factual position
noted above. When the corporate veil is lifted what comes into focus is
only the shadow and not any substance about the existence of the three
companies independently. The circular no.6/92 dated 29.5.1992 has no
relevance because it related to notification no.175/86-CE dated 1.3.1986 and
did not relate to notification no.1/93. The extended period of limitation
was clearly applicable on the facts of the case, as suppression of material
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features and factors has been clearly established. If in reality the three
companies are front companies then the price per unit to be assessed in the
hands of MACL is Rs.5 and not Rs.0.50 as disclosed. The question whether
there was manufacture or not was not in issue before the Commissioner. The
plea that there was no manufacture has also to be rejected in view of the
fact that exemption was claimed by the three companies as manufacturers to
avail the benefit of Central Excise Notification no.1/93.
The inevitable conclusion is that CEGAT’s judgment is indefensible.
Accordingly, the same is set aside and that of the Commissioner is restored,
so far as it relates on the peculiar facts of the case, to levy of duty,
penalty and interest on MACL are concerned.
The appeals are accordingly allowed with no order as to costs.