ORDER
V.P. Gulati, Member (T)
1. These appeals are against the order of the CCE, Bangalore. Under the impugned order, the learned CCE has held Indian Aluminium Company (hereinafter referred to as Indal) liable to pay duty of Rs. 11,44/016 in respect of the goods manufactured and cleared at the premises of M/s. Light Metal Extrusions Pvt. Ltd. (hereinafter referred to as LME). He has levied penalty of Rs. 2,00,000 (Rs. two lakh) on Indal and Rs. 1,00,000 (Rs. one lakh) on LME under the provisions of the Central Excise Rules, 1944. A redemption of Rs. 15,000/- has also been levied in respect of the goods seized and allowed to be redeemed on payment of fine.
2. The issue that falls for consideration in the appeals’ is whether in the facts and circumstances of the case the relationship between Indal and LME can be taken to be on principal to principal basis and whether LME cannot be taken to be an independent manufacturer for excise purposes.
3. The learned Counsel for the appellants explained the relationship between the two appellants and stated that Indal supplied Aluminium rods to LME for manufacture of extrusions of various specifications on job work basis. He pleaded that rods were supplied by Indal. On a query from the Bench he clarified that the material supplied by Indal was not related to any specific order for the manufacture of extrusions but taking into consideration the average quantity of material that was required for manufacture of extrusions Indal supplied about 40 MTs. per month. This material was transferred to the unit of LME on the basis of continuous flow of raw material supplied on stock account. He pleaded that apart from charging Rs. 6 per kg. by LME, for conversion of Aluminium rods into extrusions, Indal paid packing charges @ Re. 1 or Rs. 2/- per kg. depending on whether packing was done in gunny bags or wooden crates in respect of the goods. The goods which are manufactured by LME were cleared on gate pass issued in the name of Indal and the supplies “were directly made to the customers of Indal. He pleaded that Indal has office in the premises of LME and stock position was regularly reported by LME to Indal. He pleaded that LME was a separate legal entity and Indal did not have any control over the production process carried out in the premises of LME on job work basis. Further, LME was not an agent of Indal and there was no clause in the agreement between the two parties prohibiting LME from taking outside the job of manufacture on their own account. He in this connection referred us to the memorandum of agreement for the job work which is at Annexure Dl of the paper book filed. This memorandum of understanding is annexed to this order for reference. He also took us through the various terms in the memorandum of understanding. He pleaded that in this memorandum of understanding (MOU) LME has been referred to as the contractor and Indal as the owner. He pleaded that LME in terms of Para 7, Clause (c), the appellant LME is bound to keep the percentage of scrap rejections etc. to the minimum level as mutually agreed upon and LME will also adhere to the schedule given by the other appellants i.e. Indal, for the supply of goods. He pleaded that in terms of this MOU, Indal was authorised to depute persons to LME’s factory. He pleaded that a reading of the terms of the MOU as a whole would show that LME was not either an agent nor in any way it was under the control of the Indal and was functioning independently. In this connection it was pointed out to the learned Counsel that it appears mat there was no liability attached to LME in terms of this MOU in case there was any loss of material by LME or for any other reason nor any specific provision for accountal of the material supplied by Indal and that LME appeared to be functioning more like Indal’s Branch as the materials were being supplied without any correlation to any particular order and certain quantities were stored in the premises of LME and the flow of material was on continuous basis and it was not order based and what was done was only a stock transfer and stock position was obtained from LME. It was also pointed out to the learned Counsel that so far as the payment is concerned fixing of conversion charge as per Para 4 of the MOU was done by Indal without any relationship with the type of the extrusions and LME in addition to fixing the charge for conversion was being paid Re. 1/- or Rs. 2/ as packing charges. In this connection he was asked as to how the relationship can be considered as principal to principal basis. It was also pointed out that there was no specific mention in the memorandum of understanding about any liability on LME in regard to damage to the material supplied and charges for normal wastages during the course of manufacture. There was also no stipulation as to what is to be the percentage of the return out of the raw materials by way of production of extrusions after the job work was done. He in this connection referred us to Para 7(c) of the MOU and mentioned that it has been stipulated that scrap and rejections shall be kept to the minimum as mutually agreed upon and this stipulation was sufficient to hold that LME was acting as an independent entity. He in this connection cited the following judgments in support of his plea that LME was an independent entity.
(1) 1991 (55) E.L.T. 203,
(2) 1987 (30) E.L.T. 745,
(3) 1994 (71) E.L.T. 156,
(4) 1996 (81) E.L.T. 284,
(5) 1996 (82) E.L.T. 260.
3. The learned DR for the department pleaded that the nature of the relationship and the mode of transaction between Indal and LME was such that LME could not be considered as an independent entity. He pleaded that Indal has been supplying raw material to LME without any relationship to any particular order. What appears is that Indal was keeping certain stock of the material in the premises of LME to be drawn depending on the order position with them for manufacture of extrusions. He pleaded that the goods manufactured in the premises of LME were removed under delivery challans and gate passes were-issued in the name of Indal. He pleaded that there was an office for Indal in the premises of LME. He pleaded that there was no provision in the MOU for any liability on LME to inform about the loss of materials and it was Indal who were taking responsibility for everything. Indal was exercising quality control in the premises of LME and insurance in respect of the goods was paid by Indal. He pleaded that LME was merely doing the labour work and therefore, the learned lower authority has rightly demanded duty from Indal.
4. The learned Counsel in reply pleaded that the demand has been made from their Bangalore office and their Headquarters is not in Bangalore and they have merely a sales office there.
5. We have considered the pleas made by both the sides. We observe that in the present case it is pertinent to refer to the MOU and the transactions between Indal and LME before arriving at any conclusion based on reading of the MOU between the two parties. The learned lower authority has taken note of the averments made by various persons working on LME and Indal. It is observed that raw materials viz. aluminium rods were supplied for conversion into extrusions and these raw materials were being supplied by Indal by way of transfer on an average of 40 MTs a month. This stock transfer was without any specific relationship to any order for conversion into extrusions. LME was entitled to receive conversion charge of Rs. 6 per kg. without any reference to the nature of extrusions to be manufactured. The goods after manufacture were being supplied under delivery challan of Indal and under gate passes on payment of duty under value fixed by Indal, Bangalore to their godowns at Bangalore which was situated within the premises of LME. These goods were despatched to various customers of Indal under invoice of Indal which were prepared by LME. It was further found that the godown of LME in which goods were shown to have been transferred did not exist at all at LME premises even though sales have been shown from the godown at LME address. Blank challans signed by the officers of Indal were also recovered and so also blank pre-signed invoices and blank and unsigned delivery challans of Indal. There was also no storage facility for storage of goods for Indal. Shri Unni, Senior Manager of LME stated that Officers from Indal, Bangalore visited the LME premises and supervised the despatch operations in case of large consignments while for small consignments, Indal used to send blank invoices and vouchers through some persons and they were filling the particulars in the blank invoices which were sent to them and the goods were being despatched by LME. Fortnightly statements of stock position was also given by them to Indal whose officers also visited LME to verify the stock and that raw materials were received by them on a stock transfer basis from the Alupuram Unit of Indal based on which duty being paid was arrived at the normal rate prevailing in the market for the goods and also by the price agreed to at the tripartite meeting of Indal and LME. Another statement was also recorded from Shri Aabraham G. Stephanos, Senior Sales Development Engineer of Indal who stated that no rent had been paid to LME for the godown at LME premises and on few occasions Indal, Bangalore had handed over the purchase orders and correspondence made with their customers to LME to keep the latter apprised of the customers’ requirements. He clarified that payment for warehousing and insurance paid by LME was being reimbursed by Indal, Bangalore. Absence of any records at the godown at the premises of LME was explained by Indal in the following term “Since no stock was carried in their godown at the premises of LME no records were maintained there and no name board indicating the location of their godown had been displayed anywhere in the premises and the same was intended to be done after all the works relating to the godown were completed.” Shri Unni inter alia stated as under as mentioned in ld. lower authority’s order. In this connection, the statement of Shri. K.G. Unni, Senior Manager of M/s. LME., was recorded on 26-8-1992, wherein he stated that the raw materials were received by M/s. LME, under the cover of GP. 1 from M/s. Indal, Alupuram, on the account of M/s. Indal, Bangalore, for being converted into Aluminium Extrusions; that M/s. LME, were paid Rs. 6/ per kg. as conversion charges; that there was no purchase of raw material by M/s. LME; that the Aluminium scrap and the finished goods were despatched to the godown of M/s. Indal, Belgaum, on payment of the Central Excise duty on the Invoice Value fixed by M/s. Indal, Bangalore; that the godown of M/s. Indal, Belgaum was situated within the premises of M/s. LME, and the finished goods were despatched to the various customers of M/s. Indal, Bangalore under the cover of M/s. Indal’s Invoice (Bangalore) which were prepared by them (M/s. LME) by way of rendering free Secretarial service. Shri Unni, also stated that a Memorandum of Understanding (MOU) had been reached with M/s. Indal, Bangalore on 9-12-1991 for the purpose of the conversion of the raw materials supplied by them into Aluminium Extrusions and supplying the same to their customers.
5. In his further statement dated 4-9-1992, Shri Unni, stated that whenever large quantum of goods were to be despatched, the Officers from M/s. Indal, Bangalore, visited their unit to supervise the shipping operations, but when small quantities of the goods were to be despatched; the vouchers/documents were sent from Bangalore to them through some person; that the blank invoices were being sent to them because the exact weight of the goods to be despatched was not known before hand; that even though M/s. Indal, Bel-gaum, had registered their godown at the factory premises of M/s. LME, actually there was no complete/finished godown; that the goods were directly despatched to the customers of M/s. Indal, Bangalore on the latter’s Instructions that fortnightly statement of stock of materials were given by them to M/s. Indal, Bangalore whose Officials also visited M/s. LME, to verify the stocks at frequent intervals; that the existence of the godown of M/s. Indal, Belgaum, in their premises was not communicated to the department since no materials were stored therein; that from 29-10-1991 onwards the raw materials were received by them on a stock transfer basis from the Alupuram Unit of M/s. Indal; that in respect of the finished goods even though they raised the Invoice and the GP1 on M/s. Indal, Bangalore, the goods would directly go to Indal’s customers from the premises of M/s. LME, under the cover of M/s. Indal’s Invoice prepared by M/s. LME, Shri Unni, has also stated that M/s. LME, has adopted invoice price for the purposes of payment of Central Excise duty and that the invoice price was arrived at on the basis of normal rates prevailing in the market for the goods and also by the price agreed to at tripartite Meeting of M/s. Indal, Bangalore the customers of M/s. Indal, Bangalore and M/s. LME.
6. The question therefore to be considered in the above background and in terms of the provisions of the MOU between the two parties, whether Indal have to be considered as the manufacturer of extrusions or the LME on principal to principal basis and LME have to be considered as an independent entity for excise purpose. We observe from the narration of facts above and from the reading of the MOU between the two parties, that LME were functioning more like a branch of the Indal and they have been functioning like a hired labour and being paid at Rs. 6/- per extrusion manufactured with the addition of packing charges. It is pertinent to note that LME were carrying no specific order book for the raw material supplied by Indal and the raw material supplied and kept at the premises of LME were as would be stored by Indal in their own Branch Office to be drawn as and when required depending on the order given for manufacture and supply of extrusions. Control over the production & despatch was being exercised by Indal and Indal were reimbursing the money for warehousing and also for insurance of the goods. There is no specific clause in the MOU stating that any particular percentage of extrusions was expected from LME and what the MOU talks about is that scrap and wastage should be kept to the minimum as mutually agreed upon by the two parties. We had specifically asked the learned Counsel whether any such percentage was fixed and whether there was any penalty clause in case this percentage was not achieved, he could not say that this was in fact arrived at any meeting. There was also no specific clause in the MOU regarding reimbursement of any loss that might occur in respect of raw material at the premises of LME or the final product. Indal had been shown to have been maintaining a godown at the premises of LME but no rent etc. was charged for the same. It is observed that there is no built in clause for price variation about the job work charges which is rather unusual. It is further seen that after the manufacture of the goods despatch operations were carried out at the behest of Indal including the price charged in the invoice. Further Indal was supervising the despatches in case of large quantity of extrusions while in case of smaller quantities, LME were performing secretarial function for Indal for despatch and documentation. It is seen from the MOU that the cost of conversion to be charged is in respect of the following two items :
“(a) cost of unloading and receiving the raw materials, storage, loading and related manufacturing/conversion job.
(b) cost of cutting the materials to the final length required and/or winding it up.”
But for the secretarial functions there are no additional charges recovered by LME. Conversion charges it is seen were not to include the following as per clause of the MOU :
(1) Cost of bobbins.
(2) Cost of labelling & packing, including packing materials.
(3) Transportation costs of raw material, finished goods, packing materials, scrap and bobbins.
(4) All insurance cost including transit insurance.
(5) All testing charges.
(6) Cost of any work to be done outside the factory of the contractor.
(7) Sales tax, turnover tax and any other tax, difference in Central Excise duties, levy, surcharge and/or duty to the extent applicable.
There is nothing on record to show as to how these charges were fixed for recovery by LME and what was the arrangement for payment of the same. A compendious reading of the modalities of the operation and the facts as brought out above clearly shows that LME were being paid more in the nature of fixed service charges for allowing the use of the facilities at their premises by Indal. They were functioning more like a branch office of Indal rather than independent manufacturer. The facts in the case laws cited by the appellants are different from those here. Those case laws do not apply to the facts of the present case. In the above circumstances, we hold that Indal has been rightly held to be manufacturer for the purpose of excise duty. The duty demand therefore, has to be held to have been correctly made in respect of scrap and extrusions.
Taking into consideration therefore, the facts and circumstances of the case, we hold that the appellants are liable to penalty. We hold that ends of justice would be served if the penalty on Indal is reduced to Rs. 1.00 lakh (Rupees One lakh) and on LME to Rs. 50,000/- (Rupees Fifty thousand). Except for the above modifications, the appeals ape otherwise dismissed.
