COMMISSIONER OF CENTRAL EXCISE, NEW DELHIversusM/S. MODI ALKALIES AND CHEMICALS LTD.

       COMMISSIONER OF CENTRAL EXCISE, NEW DELHI                         A
                                   v.
          M/S. MODI ALKALIES AND CHEMICALS LTD.

                          AUGUST 18, 2004

                                                                         B
            [S.N. VARIAVA AND ARIJIT PASAYAT, JJ.]

     Central Excise Rules, 1994:

      Rules 9(2), 52-A, 173-Q and 209-A-Excise duty-Clubbing of
 units-Interdependence ofunits-Determination of-Assessee manufactured C
caustic soda-Hydrogen gas obtained as a byproduct-Assessee floated
three companies with a share capital of only Rs. 200 each-Subsequently,
 heavy amounts advanced as loans to these companies by assessee-
Assessee also rendered financial assistance to these companies through a
finance company-Cylinders were subleased to the said companies by D
assessee-Assessee piped Hydrogen gas to the said companies at a certain
 rate-The said companies compressed and bottled the same at a much
higher rate-The profit earned was paid to assessee as lease rent for
cylinders-There was common stafffor maintaining records and operation
of the units-Directors of the three companies were employees of the E
assessee-CCE (Adjudication) held the said companies as dummies of the
assessee and that the assessee evaded duty by resorting to undervaluation-
CCE (Adjudication), therefore, imposed duty and penalty on the assessee
by clubbing with the three companies, confiscated the assets, and imposed
penalty on the Directors, of the three companies-Correctness of-Held: F
 Whether there was interdependence of units and whether another unit is
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 showed interdependence were pervasive financial
control and ma_nagement control-Although the three companies were
registered under the sales tax and income tax authorities but when the G
corporate veil is lifted then these companies had no independent existence-
 The three companies are dummies of the assessee and there is clear
suppression offacts-Therefore, extended period of limitation for recovery
ofduty clearly applicable-Hence, CCE (Aqjudication) justified in imposing
duty and penalty on the asses see and penalty on the Directors of the said H
                                   619
    620                  SUPREME COURT REPORTS [2004] SUPP. 3 S.C.R.

A three companies---Central Excise Act, 1944, Ss. JJA and 11---Central
    Excise Tariff Act, 1985, Sub-Heading 2804.90.

         New plea-Assessee did not raise any plea regarding manufacturing
    before CCE (Adjudication)-But Appellate Tribunal held that there was no
B   manufacturing-But assessee claimed exemption as manufacturer-Effect
    of-Held: Under these circumstances. the said plea rejected.

         The assessee-respondent No. 1 was engaged in the manufacture
    of caustic soda of which Hydrogen gas was a byproduct. The assessee
    floated three companies with a share capital of only Rs. 200 and
C   advanced substantially heavy amounts as loans to the said companies.
    The assessee also arranged loan to these companies through finance
    companies. The assessee obtained cylinders on lease and subleased the
    same to these companies and through pipelines sent lfydrogen gas at
    a certain rate to thei;e companies for compressing and bottling the
D   same. These companies, in turn, sold the bottled gas at a much higher
    rate. The said companies paid the entire profit to the assessee as lease
    rent of the cylinders. The assessee and the three companies had
    common staff for maintaining of records and operation of the units.
    The Directors of the three companies were the employees of the
    asses see.
E
         The Commissioner of Central Excise (Adjudication) held the said
    companies as dummies of the assessee and that the assessee had evaded
    duty by resorting to under valuation. Accordingly, the CCE
    (Adjudication) imposed duty and penalty on the assessee by clubbing
F   with the three companies, ordered confiscation of the assets of the
    companies and imposed penalty on their Directors.

       In appeal, the Central Excise and Gold (Control) Appellate
  Tribunal (CEGA T) held that there was no manufacture involved in the
  process and, therefore, question of evasion of duty did not arise. The
G CEGAT further held that there was no interdependence as alleged by
  the Central Excise Authorities and set aside the order of CCE
  (Adjudication). Hence the appeals.

          On behalf of the revenue, it was contended that though the issue
H whether there was manufacture was never agitated before the CCE
           C.C.E. v. MODI ALKALIES & CHEMICALS LTD.                621

(Adjudication), the CEGAT on its own came to hold that there was no A
manufacturing which was not supported on facts and law.

     On behalf of the assessee, it was contended that the three
companies had separate corporate existence, were assessed separately
to sales tax and income tax and had central excise registration and, B
therefore, these companies were not fro~t or dummy companies of the
assessee; that the question of clubbing was not permissible in view of
Circular No. 6/92 dated 29-5-1992; and that the extended period of
limitation was not applicable.

     Allowing the appeals, the Court                                     c
      HELD: 1. Whether there is interdependence 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 interdependence are D
pervasive financial control and management control. In the present
case facts clearly show financial control. [625-G-H; 626-A)

      2. The whole show was controlled, both on financial and
management aspects by the assessee. If these were not sufficient to E
show interdependence probably nothing better would show the same.
The factors, which have weighed with the Central Excise and Gold
(Control) Appellate Tribunal like registration of the three companies
under the sales tax and income tax authorities, have to be considered
in the background of the facts of the case. When the corporate veil is F
lifted what comes into focus is only the shadow and not any substance
about the existence of the three companies independently. [626-F-G)

      3. 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 G
clearly applicable on the facts of the case, as suppression of material
features and factors has been clearly established. [626-G-H; 627-Al

      4. The question whether there was manufacture or not was not
in issue before the Central Excise Commissioner (Adjudication). The H
    622                  SUPREME COURT REPORTS [2004] SUPP. 3 S.C.R.

A 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.
    1193. (627-A-B)

B       CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 7827-
    7834 of 2002.

         From the Judgment and Order dated 22.4.2002 of the Central Excise
    and Gold (Control) Appellate Tribunal, New Delhi in A. No. El237-2441
C   99-D in F.O. No. 134-141 of 2002-D.

        Anoop G. Chaudhary, Sanjay Grover, Mrs. June Chaudhary, P.
    Parmeswaran, Rohit Singh and B. Krishna Prasad for the Appellant.,

          A.K. Jain, Rajesh Kumar and Rajesh Jain for the Respondents.
D
          The Judgment of the Court was delivered by

         ARIJIT PASA YAT, J. : The Custom, Excise and Gold (Control)
    Appellate Tribunal, New Delhi (for short 'CEGAT') by the common
E   impugned judgment held that there was no inter-dependence so far as the
    respondent no. I-company and respondent nos. 2-4 companies are concerned.

          Background facts in a nutshell are as follows:

F         Respondent no. I Mis 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
G   it floated three front companies, namely, respondent nos. 2 to 4 i.e. Mis
    Mahabaleshwar Gas & Chemicals Pvt. Ltd. (for short 'MGCPL'), Shri
    Chamundi Gas and Chemicals Pvt. Ltd. (for short 'SCGCPL') and Mis.
    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
H   happened was that through pipelines Hydrogen gas was sent to the three
    C.C.E. v. MODI ALKALIES & CHEMICALS LID. [PASAYAT, J.] 623

front companies for compressing and bottling the gas. The sole object was A
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 ofMACL and the three front companies on 27.9.1996. It B
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 ofrecords and operation
of the units. The main plant and machinery i.e. cylinders had been supplied C
only by MACL and the total finance was provided by MACL a~ unse~ured
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 D
Gas & Chemicals Sales Depot at Delhi. He was marketing various gases
manufactured by a Modi group concern and was answerable as an
employee ofMACL. 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 Balance-Sheets and other financial statements of the three E
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 F
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 G
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 H
    624                  SUPREME COURT REPORTS [2004] SUPP. 3 S.C.R.

A i.e. 9.5.1995 to 27.9.1996 should not be recovered from it under the
  provisions of Rijle 9(2) of the Central Excise Rules, 1945 (in short the
  'Rules') read wfrh Section 1I 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 1 I of the Act along
B 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 confistated in
  tenns of Rule l 73Q of the Rules. Three officials were asked to show cause
  as to why penalty should not be imposed under Rule 209A of the Rules
C on each of them. On receipt 0f 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
D 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
E 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
F   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. Con_fiscation was directed of land, building, plant &
    machinery of the three companies with option for redemption on payments
G   of fine of Rs. 20 lakhs, Rs.7 lakhs and Rs. 50,000 respectively. Penalty
    of Rs. 1 la!;h 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
H   judgment set aside the order of the Commissioner. It came to hold, inter
    C.C.E. v. MODI ALKALIES & CHEMICALS LTD. [PASAYAT, J.] 625

alia, that (!) there was no manufacture involved in the process and, A
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.

                                                                           B
       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 oflaw. Telltale features which clearly
 prove that the three companies were front companies have been Iightly
 brushed aside by the CEGAT. It even failed to notice that transactions were C
 done by companies with share capital of Rs. 200 each. The CEGA T 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
l~.                                                                        D
     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 E
have central excise registration. They submitted records to the Central
Excise Authorities which were being verified by them. I_n 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. F
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. G

     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 H
    626                   SUPREME COURT REPORTS [2004) SUPP. 3 S.C.R.

A 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
B 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
C . 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 ofMACL. 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
D 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
E 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 sc-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
F 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
G 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 ncit 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
H and did not relate to notification no. 1/93. The extended period oflimitation
    C.C.E. v. MODI ALKALIES & CHEMICALS LTD. [PASAYAT, J.] 627
was clearly applicable on the facts of the case, as suppression of material A
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 B
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, C
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.
                                                                             D
v.s.s.                                                    Appeals allowed.