ORDER
Moheb Ali M., Member (T)
1. These appeals by the Revenue are directed against the order of Commissioner of Central Excise Ahmedabad. The Commissioner in the impugned order dropped all proceedings initiated against the respondents in the Show Cause Notice F. No. V/22/15-18 DA 94 dated 24-2-94.
2. The facts briefly stated are as follows.
M/s. Limca Flavours and Fragrances Ltd. (LFFL) is a limited company. It manufactures soft drink flavours with what they call, code names, namely G-44T, L-33A, T-11PC, T-11P, R-66M, K-55T and L-22L. During the period 89-90 to 93-94 it availed of the benefit of Notifications 175/86 & 1/93 (SSI exemption). It is a holding company of M/s. Parle Exports Ltd. (PEL). Its (LFFL) Directors S/Shri R. Chauhan, P. Chauhan, R.N. Mungale and S.K. Motani It sells its product to PEL, Parle International Ltd. (PIL) and franchises of M/s. PEL.
3. M/s. PEL is a Ltd. Company. It uses the products sold by M/s. LFFL to manufacture Non alcoholic Beverages Base (NABB). S/Shri R. Chauhan, P. Chauhan, R.N. Mungale, R.B. Verma and Mrs. Zainab Chauhan (Wife of Shri R.J. Chauhan) are its Directors. In addition NABB it manufactures flavours as LFFL does. Duirng the same period mentioned above it enjoyed the benefit of Notification No. 175/86 and 1/93 for the year 92-93 and 93-94. (Oct. 93)
4. M/s. PIL is a limited company, a subsidiary of LFFL Its Directors are S/Shri R. Chauhan, R.N. Mungale, S.B. Shah and K. Shankar. It also manufactures NABB and flavours. It does not avail of SSI exemption.
5. The flavours named above are researched and developed by PEL, but were allowed to be manufactured by LFFL with the code names given by PEL. The users of these flavours (PEL, PIL and Franchise holders) know them their code names. They are used in the manufacture of gold spot, Limca, Rimzim etc.
6. As could be seen there are common directors in all the three Companies. Shri R. Chauhan is the over all control of all the three companies. Shri R.B. Verma, the Director of PEL supervisor the manufacture of flavours by LFFL, and also determines the price at which they should be sold. Shri R. Chauhan determines how much profit LFFL should make on its products. It has come out during the course of investigation that Shri Chauhan fixed 2% to 3% as profit to be earned by LFFL on the flavours and the sale price thereof. It is also revealed that he decides the quantity to be produced by LFFL. The expenses incurred for the manufacture, testing and sale of flavours of LFFL were borne either by PEL or PIL. Raw material procured by PEL is some times used by LFFL to manufacture flavours.
7. It is revealed that M/s. PEL advanced interest free loan of Rs. 1 crore to LFFL, which was used for purchase of raw material by the latter (As evidenced from the balance sheet). M/s. PEL paid Rs. 1.50 lakhs towards instalment of advance tax on benefit of LFFL. In addition M/s. PEL a subsidiary of M/s. LFFL incurred expenditure on advertising the product “Citra” owned by LFFL. It is further brought out that even though the Director (Verma) and R & D Staff were being paid by M/s. PEL their services are kept at the disposal of LFFL thereby rendering financial assistance to the latter. There are a host of other details which indicate that M/s. PEL and M/s. LFFL, apart from the fact that the flavour is a subsidiary of the latter, are dependent on one another.
8. On the above basis it is alleged that the affairs of M/s. LFFL including financial, legal tax affairs, accounting matters managerial responsibility, sales, testing, approval and procurement of raw material etc. are being managed and controlled by the executives of PEL or PIL.
9. It is also alleged that M/s. PEL & PIL have deliberately fragmented the manufacture into falvours and NABB to avail of SSI exemption under Notification No. 175/86 and 1/93 as the case may be. These fragmentations also facilitated the buyers of flavours made by LFFL to avail or higher notional credit. The show cause notice therefore seeks to deny SSI exemption (175/86 and 1/93) to LFFL and PEL during the material period 89-90 to 93-94 (All Oct. 93). It may be mentioned that LFFL enjoyed the benefit of SSI exemption through these period but PEL availed of this benefit only in 92-93 and part of 93-94.
10. It is revealed that the flavours being manufactured at LFFL were developed by PEL at their R & D Lab at Bombay. They were at one point of time were manufactured by M/s. PEL and admittedly owned by them. These flavours were known by their code names. Such code names were given by PEL, Each Code name is used for making a particular type of NABB which is further used for the manufacture of a particular type of soft drinks. PEL assigned these code names for the purpose of secrecy. The fact that these products were owned by PEL is evident from the know-how agreement entered into PEL with M/s. the Coco-Cola Company by a deed dated 11-11-93 agreeing to transfer assign date and convey irrevocably to TCCC the know how of the beverage base used in the manufacture of beverage bearing the trade mark, Thumps up, Gold Spot, Limca, Kismet, Bixi Rim Zim for a consideration of 7.5 million dollars. Before this transfer of LFFL were selling the flavours only under the code names to the franchise holders, PEL etc. as evidenced from the invoices and the purchase orders. During the same time M/s. LFFL also sold the brand ‘CITRA’ along with the flavour needed for making this soft drink to M/s. Coco Cola for a consideration. The allegation that M/s. LFFL was manufacturing products with a brand name belonging to another person is based on these revelations.
11. Another allegations is that the prices at which the flavours were sold by LFFL did not represent the correct value as they have been arbitrarily fixed by Shri Chauhan. It is needed that LFFL sold their products only at 2% to 3% profit. The Departments’ contention is that 2% to 3% profit is not the normal profit earned by a manufacturer. The prices have been fixed without taking into account the overheads, which were met by PEL; that advertisement expenses, R & D expenses and establishment cost (wages and salaries of some officers) was not taken into account while fixing the prices. It was also alleged that duty paid on the raw material was not taken into consideration while arriving the prices of the flavours. The allegation is that if the value of the flavours was correctly arrived at M/s. LFFL would not be eligible for SSI exemption.
12. The show cause notice proposes to deny PEL the benefit of Notification No. 175/86 for the year 92-93 as PEL was not found eligible for the benefit when its value of clearances and notification of LFFL were clubbed for the previous year i.e. 91-92 (value of clearance exceeded Rs. 150 lakhs in 91-92), On this account a sum of Rs. 8,62,500/- was demanded being the differential duty payable on NABB removed from PEL’s factory. It is contended in the notice that Notification No. 175/86 and 1/93 require that aggregate value of clearances of all excisable goods from a factory by one or more manufacturer should not exceed Rs. 150 lakhs/Rs. 200 lakhs in the preceding financial year. We may summaries the allegation in the show cause notice.
(a) In so far as LFFL is concerned the allegations are three-fold
(i) They used the brand name belonging to another person who is not entitled to the benefit of Notification No. 175/86 and 1/93 and are therefore not eligible for the benefit of these notifications on their clearances during the year 1989 to October 1993.
(ii) Their clearances during this period should be clubbed with the clearances of PEL and PIL and as a result, they are not entitled to the benefit of the above said Notifications,
(iii) That LFFL under valued the flavours cleared during the said years. Thus they are liable to pay differential duty of Rs. 3,13,08,896/- on account of wrong availment of SSI exemption and on account of wrong assessable value adopted.
13. As regards to PEL the allegations are summarised
(i) An amount of Rs. 8,62,500/- is recoverable denying the benefit of SSI exemption for the year 92-93 on account of clubbing of their clearances with those of LFFL during the previous year.
14. As regards to PIL no duty is demand, as they did not claim SSI exemption during the period 89-93 Oct.
15. The Commissioner while adjudicating the case dropped the proceedings initiated on the above lines on the following grounds.
(a) The clearances of the three units in question are not to be clubbed, as they are independent manufacturers. He held that the Department failed to establish that there is a financial flow back and profit sharing among these three units.
(b) A bare reading or visual inspection of the code names does not convey anything. The sale or transfer of the flavours with the code-names/markings would not attract the mischief of para 7 read with the Explanation VIII of the SSI exemption Notification No. 175/86 and 1/93. He followed the ratio of Madras High Court’s decision in the case of BHEL v. CCE . The Hon’ble High Court dealing with a case where a manufacturer affixed the mark belonging to another person on certain components manufactured by him for the other person who uses them as a component in his goods, held that mere finding of symbol, monogram etc. on the such goods would not bring such goods within the mischief of Explanation VIII and clause 7 of the said notification unless it is shown that the markings have been used in relation to the specified goods indicating a connection in the course of trade between such specified goods and BHEL.
(c) In regard to valuation he contended that the Department failed to bring out the number of days/weeks etc. for which the personnel of another company worked for M/s. LFFL. He held that it is not possible to quantify the extent of undervaluation in the absence of such data. He rejected the department’s contention that the final products value should include the duty paid on the raw material when mod-vat credit is taken. He followed the decision of the Tribunal in the case of CCE v. Incab Industries while holding so.
(d) On the issue that PEL/PIL incurred advertisement expenses on the product ‘CITRA’ owned by LFFL and therefore this expenses should be considered while arriving at the value of this product, he contended that the advertisement expenses incurred by PEL/PIL for advertising the brand name need not be included in the value of the product, (para 117 of Order-in-Original is referred to for details).
(e) As regards to the allegation that in order to remain within the exemption limit the assessable value of the flavours, LFFL were artificially fixing low profit of 2% to 3% as against the profit of 25 to 30% which M/s. PEL/PIL earned on NABB manufactured out of these flavours, the Commissioner found that this contention that profit of 2% to 5% was artificially low was not substantiated with cogent evidence. In para 111 of the Order-in-original, the Commissioner also held that profit of flavour making unit cannot be compared with the profit of an unit making concentrates because the profits of different units are normally based on different factors.
(f) In regard to duty demand of Rs. 8,62,500/- on M/s. PEL Commissioner observed that since the three units namely PEL, PIL and LFFL are independent of each other their clearances cannot be clubbed. He dropped the demand for this amount on PEL for the year 92-93 in which PEL claimed the benefit of SSI exemption.
16. The Commissioner thus dropped the demand of Rs. 3,13,08,896.86 on LFFL and Rs. 8,62,500/- against M/s. PEL and consequent penal action proposed in the notice and discharged the show cause notice.
17. Revenue is in appeal before us against this order.
18. Heard both sides.
19. The issue for considerations are enumerated hereunder :
(a) Whether in terms of Notification No. 175/86 and 1/93 PEL, PIL, and LFFL can be treated as one manufacturer and their clearances be clubbed together to determine their eligibility to the said notifications during the years 89-90 to 93-94 (Oct. 93);
(b) Whether the code names for various flavours used by LFFL represented the brand names of the products belonging to another person who is not entitled to the benefit of SSI exemption ;
(c) Whether the value of flavours manufactured by LFFL on which duty was paid represented the correct value of the said goods.
(d) Whether M/s. PEL is entitled for the benefit of Notification No. 175/86 for the year 92-93 as claimed by them.
20. We now proceed to examine each of the above issues in their order.
21. Undisputedly, Shri RJ. Chauhan the one who controls the affairs of the three limited Companies (PEL, PIL and LFFL) being the Director in all the three LFFL, is the holding company and the other two are its subsidiaries. Shri R.B. Verma a Director in PEL looks after the production of flavours at LFFL. As narrated in Para 2 to 6 of this order the interrelationship and interdependence of the three units is established and therefore value of clearances of the three units are liable to be clubbed and the Notification No. 175/86-C.E. and 1/93 denied. Having said that we observe that production and clearance of Ltd. Companies are not to be clubbed as per Boards Circular CER 8(5) – Central Excise dated 1-3-56 and Circular No. 6/92 dated 28-5-92. The Supreme Court in the case of Supreme Washers (P) Ltd. v. Commissioner of Central Excise, Pune took notice of the circular mentioned above and remanded the matter after holding that the three companies in the case before them were inter related in the light of the evidence brought out. The Apex Court remanded the matter to the Tribunal to examine the applicability of the said circular. The same issue (Circular 6/92) cropped up again in the case of Modi Alkalies & Chemicals Ltd, [2004 (171) E.L.T. 155 (S.C.)] before the Supreme Court. The Hon’ble Court held that the said circular is applicable to the period when Notification No. 175/86 was current but is not applicable after the issue of Notification No. 1/93. In the light of this decision of the Apex Court the three units being Ltd. company have to be treated as independent manufacturers during the currency of this notification (175/86). The position however is different after 1/93-C.E., dated 28-2-93 made effective from 1-4-1993 in view of what the Hon’ble Supreme Court held in Modi Alkalies & Chemicals Ltd. (supra).
22. We are concerned with both the periods prior and after 1-4-93. In spite of evidence on record suggesting interdependence and interrelationship of the three companies in question, their clearances cannot be clubbed for the period 88-89 to 92-93 (up to 31-3-93). For the balance period 1-4-93 to October 1993 clearances of all the three companies can be clubbed and benefit of Notification No. 1 /93 can be denied as the value of clearances of the three companies put to gether is more than Rs. 200 lakhs a permissible limit stated in para 3 of the said notification. Commissioner’s finding that the clearances of the three companies cannot be clubbed is rejected in so far as the period 1-4-93 to Oct. 93 is covered.
23. The next question we address ourselves to is whether or not the code names of the flavours manufactured by LFFL are brand names belonging to another person. There is no gainsaying the fact that these flavours are developed, researched and concocted by M/s. PEL in their research labs. It is equally true that M/s. PEL have given the brand names to the flavours and allowed them to be manufactured by LFFL, their holding company. The trade, i.e. M/s. PEL, PIL and the franchise holders know these flavours by their brand name. In November 93 when the rights in the flavours were sold away to M/s. The Coca Cola Company it is PIL who transferred the right of all the codes except the code name of ‘CITRA’ to M/s. Coco Cola Company. These facts clearly demonstrate that M/s. PEL owned these products (except Citra flavour).
24. Explanation VIII of Notification No. 175/86 as well as Notification No. 1 /93 reads as follows :
Explanation VIII–“Brand name” or “trade name” shall mean a brand name or trade name, whether registered or not, that is to say a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person.
25. In view of the language of the explanation quoted above it is necessary to see whether the code names on the flavours indicate a connection in the course of trade between the specified goods and such person using such name or mark. It is revealed during the course of investigation that the flavours in question were earlier manufactured by PEL and supplied to the franchise holders. The same flavours were later on allowed to be made by LFFL. The franchise holders thereupon were buying the very same flavours from LFFL and were placing their orders by mentioning the same code name, as is evident from their purchase orders. The users of the flavours i.e. PEL PIL and specified bottlers are all interconnected. The specified bottlers are franchisees of PEL. Being the franchisees of PEL they are aware that the flavours belonged to PEL with the code names. Thus the code name indicated a connection in the cours’e of trade between such specified goods and same person using such name or mark. The defence that the code number has been given only for identification of the product cannot therefore be accepted. Commissioner reliance on the decision of Madras High Court’s decision in BHEL is no more goods law in view of the Supreme Court’s decision in the case of Kohinoor Elastics Pvt. Ltd. 2005 (188) E.L.T. 3 (S.C.). Following the guidelines/principles laid down by Supreme Court in the case of Commissioner of Central Excise v. Rukmani Pakkwell Traders we hold that M/s. LFFL will not be entitled to the benefit of Notification No. 175/86 and 1/93 for the products with code names G-44T, L-33A, T-IIPC, T-IIP, R-66M and K-55T which belonged to M/s PEL. However we observe that this findings is only in respect of the years 89-90, 90-91 91-92 and 93-94 (Oct 93) and not for the year 92-93 because in 92-93 the brand owner (M/s. PEL) of these flavours himself was entitled to the benefit of Notification No. 175/86 as held by us in para 27 of this order.
26. During the years under dispute M/s. LFFL also manufactured a flavours with a code name L-22L with which a soft drink known as LIMCA is made. There is a considerable confusion as to whether this code name/brand name, is owned by M/s. PEL or M/s. LFFL. Investigation brings out that this flavour was developed by M/s. PEL but was given away to M/s. LFFL making them the owner of the product. This is also evident from the fact that ultimately when the right to use this flavour was transferred to M/s. Coco Cola Company in November 1993, the beneficiary was M/s. LFFL and not M/s. PEL. This indicates that L-22L belonged to M/s. LFFL only. The clearances of this flavours (L-22L) during the disputed period are not hit by para 7 of Notification No. 175/86 and 1/93. The value of clearances of this flavours therefore needs to be considered as eligible for the benefit of these notifications.
27. We now consider the allegation that M/s. PEL was not eligible for SSI exemption in the year 92-93. This is based on the charge that when the value of clearances of all the three units are clubbed, the value of clearances of PEL in the previous year i.e. 91-92 cross Rs. 200 lakhs and consequently they are not entitled to the benefit of Notification No. 175/86. The Commissioner reeked the allegation that the units belonged to the same manufacturer. A demand for Rs. 8,62,500/- was made in the show cause notice on M/s. PEL on this count after denying the SSI exemption for 92-93. Since we hold that clubbing of clearances of factories owned by Ltd. Companies is not permissible as per Board’s instruction/clarification contained in Circular 6/92 dated 29-5-92 and also as per the decision of the Supreme Court cited supra we uphold the finding of the Commissioner that M/s. PEL is eligible for SSI exemption during the year 92-93.
28. We now come to the issue of valuation of flavours cleared by M/s. LFFL. The allegation is that M/s. PEL influenced the price at which the flavours were sold by LFFL (a) By artificially restricting the margin of profit on flavours to 2% to 3%; (b) By advancing interest free loans; (c) By spending nearly a crore and a half rupees on advertising the product ‘Limca’; (d) By providing the services of its own R & D Staff and the services of one of its Directors to M/s. LFFL; (e) By procuring raw material required for manufacture of flavours and sharing it with M/S. LFFL as and when the need arose; (f) By artificially keeping the price at which flavours are sold by LFFL low so as to derive the benefit of availing of higher notional credit on the flavours supplied by LFFL and by paying advance tax on behalf of LFFL.
29. The Commissioner dealt with this aspect and rejected the allegation that the price at which the flavours were sold by LFFL need to be re-determined. His findings are that the credit taken on the inputs need not form part of the value of the final product ((Incab cited supra) that it is not necessary that the margin of profit earned by LFFL should be on par with that of either PEL or PIL who manufacture NABB; that the Department did not come out with quantifiable data to indicate the extent to which the price was depressed because of the man power, R & D facilities etc. supplied/provided by PEL; that there is no evidence to suggest any financial flow back either from PEL, PIL or any other franchise holder who purchased the flavours from LFFL and that charge of under valuation is based on surmise that the price was kept low so that higher notional credit can be taken by the user.
30. We have considered the submissions made by both sides carefully. We agree with the Commissioners findings. The Department’s attempt to compare the margin of profit earned by the other two (PEL & PIL) with that of LFFL is misplaced. Further, the Department cannot determine the extent to which a business concern should earn his profit. The Commissioner has rightly pointed out that there is no requirement to add the Modvat credit taken on the inputs to the value of the final product. We agree with his finding that the investigation did not reveal the extent to which the manpower belonging to another company was working for LFFL. Above all, we observe that the price at which the flavours were sold by LFFL was not sought to be revised in any accepted and recognized principles of costing. The whole exercise smacks of arbitrariness. For this and the reasons given by the Commissioner we hold that the Department failed to prove under valuation of the products. This charge thus fails,
31. The following position emerges then :
(1) The value of clearances of LFFL, PEL and PIL cannot be clubbed together for determining the eligibility to SSI exemption during the years 89-90 to 92-93. Each one of them is a manufacturer in his own right in view of Board’s Circular 6/92.
(2) Code names G-44T, L-33A, T-IIPC and T-IIP, R-66M, K-55T given to the various by PEL represented a ‘writing’ belonging to another person who was not eligible for SSI exemption during the period 89-90, 90-91, 91-92 and 93-94 and therefore the clearances of these flavours for the above period are not covered by exemption Notification No. 175/86 and Notification No. 1/93.
(3) Code name L-22L (CITRA) is a brand name belonging to LFFL and therefore the bar contained in para 7 read with Explanation VIII of Notification 175/86 or 1/93 does not apply.
(4) M/s. PEL is entitled to the benefit of Notification No. 175/86 as claimed by them for the year 92-93.
(5) Sufficient ground does not exist to hold that M/s. LFFL has undervalued its goods.
32. For the reasons given by us above Revenue’s appeal against the impugned order is partly allowed in the following terms.
(1) Value of clearances of the three units in question can be clubbed for the year 93-94 (till October 1993) only.
(2) Code name G-44T, L-33A, T-IIPC and T-IIP R-66M and K-55T represented brand names belonging to another who is not entitled to SSI exemption for the year 89-90 to 91-92 and 93-94 (till Oct. 93) consequently M/s. LFFL are not entitled to the benefit of the said notification for the above years.
33. The differential duty on the above basis be calculated and communicated to the respondents for their comments and criticism and thereafter the issue be decided after giving an opportunity to the respondents of being heard. The question of penalty to be imposed if any will also be determined during such de novo proceedings. Except the above two issues all other contentions of the revenue are rejected.
34. The appeals are decided by way of remand on the above terms.