By TIOL News Service

MUMBAI, AUG 14, 2018: CLEARANCES of the appellants, a proprietary concern and a private limited company, were clubbed for the purpose of SSI exemption and the demand was confirmed along with penalty.

As the Commissioner(A) upheld the order of Assistant Commissioner, the appellant is before the CESTAT. The appeal was filed in the year 2007.

Incidentally, the matter was listed almost 15 times but none appeared on behalf of the appellant and, therefore, the appeal was heard recently.

In the appeal filed, it is contended that both the plants were located at different locations and had separate factory, separate workers, separate telephone connection, separate registration of Service Tax, Sale Tax etc. and since independent units, their clearances cannot be clubbed; that the fact that M/s Sanj Pharma Engineering Pvt. Ltd. had loaned money to M/s Pharma Chem Services for development and construction of factory premises is of no consequence as the said loan was repaid. Furthermore, Commissioner (Appeals) has erred in not accepting the contention of the appellant that the show-cause notice has treated the appellant as dummy unit in the year 2000-01 and 2002-03, but not considered the unit as a dummy unit for the year 2001-02.

The AR supported the impugned order by relying on the Apex Court decision in the case of Calcutta Chromotype Ltd. - 2002-TIOL-370-SC-CX.

The Member (Technical) adverted to the apex court decision cited by the AR and after extracting paragraphs 12 to 14 of the same observed thus -

"5.3 In the instant case, it is seen that the appellants raised claim of small scale exemption and have created a fresh legal entity in order to avail the additional benefit of the SSI exemption. The entire funding of new unit was done by the old unit although on loan basis. While in normal course, existence of common Directors/partner is not sufficient to sustain the charge of clubbing, however, in the present circumstances, there is evidence otherwise also which suggest that separate legal entity has been artificially created for the purpose of availing SSI exemption from the funds of the first entity. Mrs. Reema Madhavan holding 99% shares in M/s Sanj Pharma receives loan to create a new legal entity, a proprietorship in her own (100%) viz. Pharma Chem Services. It is obviously with intent to avail the benefit of SSI by a colourable device."

In fine, the Member (T) held that the appeals are required to be dismissed.

The Member (Judicial) had a differing view.

Taking a view that the apex court ruling relied upon by the Member(T) is not appropriate to the facts on hand since it dealt with an altogether different issue, the Member (J) further observed -

+ I note that the said issue of clubbing of clearances of two units have been the subject matter of umpteen numbers of precedent decisions of the Tribunal as also of various High Courts and it is a settled law that as long as two units are capable of manufacturing the final product on their own, the clearances of one unit cannot be clubbed with the clearances of the other unit.

+ The law does not prohibit floating of various manufacturing units under different constitutions of the same, in which case different units would be entitled to separate small scale exemption notifications.

+ It is not the Revenue's case that either of the unit was not self-sufficient to manufacture the final product and the goods were being manufactured in one unit and were being cleared from the other unit. Especially when one unit is a proprietary unit and the other is a limited company, I really fail to understand as to how the Revenue can club the clearances of both the units irrespective of the fact that the limited company might have given loan to the proprietor unit for floating the same.

+ It is also seen that both the units had independent places of manufacture, separate workers, managers, electricity and telephone connections and are operating separately from two distinct locations. The two are separately registered with Income Tax, Sales Tax and Directorate of Industries and there is no allegation or evidence of control of one unit over the other. Legal position as regards the entitlement of various units, in such circumstances to SSI Notification stand declared in favour of the assessee in various decisions.

+ Further the fact that one unit is a proprietary unit and the other is a private limited company are also relevant factors. The grant of loan by the private limited company to one of its share holders for creating the proprietary unit, which loan also stands admittedly paid back in subsequent years, can have no aspersions on the Revenue's allegation that the two units were indulging in financial inter-twining.

+ Merely because Mrs. Reema Madhavan was share holder in M/s Sanj Pharma Chem Engineering Pvt. Ltd., cannot be made a ground for limiting her rights to create another proprietary unit out of the funds made available by the private limited company. Such factor, in my views, cannot lead to the clubbing of clearances of both the units as every individual has a right to do the business according to her capabilities and dreams.

+ As already observed, in the present case one unit is a proprietary of Mrs. Reema Madhavan and the other unit is a private limited company. Even though the shares of private limited company are held by Mrs. Reema Madhavan to the extent of 99% but in the absence of any allegation or evidence to the effect that the goods were being manufactured only in one factory and were being cleared under the guise of the other factory's name, their clearances cannot be clubbed.

Concluding that the the impugned orders were liable to be set aside, the appeals were allowed.

And, therefore, in view of the difference in opinion, the matter was referred to the President.

(See 2018-TIOL-2520-CESTAT-MUM)