By TIOL News Service

NEW DELHI, FEB 12, 2014: THE appellant is engaged in weaving and processing of man-made fabrics. The factory was leased out by them to M/s PGO Processors Pvt. Ltd., vide agreement dated June 1997 and from whom the appellant was getting the fabrics processed and M/s PGO Processors were discharging duty liability on the same in terms of the formula laid down by the Supreme Court in the case of M/s Ujagar Prints.

As per the revenue, the creation of M/s PGO Processors Pvt. Ltd. is a facade and in fact the said unit is an extended limb of the appellant inasmuch as the entire finances and control of M/s PGO Processors Pvt. Ltd. is done by appellant. Accordingly, revenue was of the view that the duty is required to be paid on the processed fabrics at the price at which the appellant sells the goods in the market.

Against the order of confirmation of the demand and imposition of penalties, the appellant is before the CESTAT with a Stay application and submits that M/s PGO Processors is a company duly incorporated under the Companies Act and as such is a distinct legal entity; agreement entered into between M/s PGO Processors and M/s Suzuki Textiles is in terms of commercial arrangement and admittedly it is M/s PGO Processors who is processing the goods and is the actual processor; they have their own separate plant and machinery and separate finances and, therefore, cannot be held to be extension of M/s Suzuki Textiles. It is further submitted that M/s PGO Processors has been given a separate registration by the department itself; that same dispute was raised by the Revenue earlier in December, 1998 when the provision of Section 3A of the CEA was made applicable to processing of fabrics and duty was required to be paid based on the annual production capacity of a unit; that the revenue refused to accept M/s PGO Processors as an independent processing unit and forced them to clear the goods after paying the duty on the sale price adopted by the appellant; that the said M/s PGO Processors filed Writ petition before the Rajasthan High Court, Jodhpur and which was allowed.

The Member (Judicial) took note of this decision and observed –

+ For the purposes of stay we take into consideration the said decision of the Hon'ble Rajasthan High Court, Jodhpur vide which they have observed that since the company has been given separate registration certificate for the purpose of curing, producing, manufacturing, carrying on wholesale Trade/Business/Business as Broker or commission agent or for otherwise dealing in excisable goods for special industrial purpose, the same would shows that the petitioner's unit has been recognized as a manufacturer/processor of fabrics.

+ Inasmuch as the petitioner is a company duly registered under the Companies Act, 1956 and is distinct and separate juristic person by virtue of Section 34 of the Companies Act, 1956. Hence, the registration certificate granted to the petitioner company will have to be taken as valid recognition of its status as distinct and separate manufacturer or processor irrespective of the activities of its members or shareholders, so long as it is not revoked or suspended under Sub Rule 11 of the Rule 174.

The Bench was informed that the registration certificate granted to M/s PGO Processors stands revoked only on 30.03.2012 and the period involved in the matter is prior to the said date.

Holding that in view of the Rajasthan HC decision and the decision in Rajasthan Spg. & Wvg. Mills Ltd. wherein under more or less similar circumstances, the autonomous character of the assessee was upheld, the Member (J) held that the appellant had made out a prima facie case in favour and accordingly granted stay in the matter.

The Member (T) recorded a separate order and concluded that the findings of the Commissioner that M/s PGO Processors is not an independent unit has considerable force and that the Rajasthan High Court had allowed clearance of goods by M/s PGO Processors on provisional basis on payment of duty as per sub-clause (ii) of clause 1 of Notification No. 36/1998 till the question of applicability of the Notification to M/s PGO Processors Pvt. Ltd was determined; that the Commissioner had decided the matter finally vide Order No. 26/2012 dated 30.3.2012 holding that the provisions of Notification No. 36/1998 and No. 42/1998 are not applicable to M/s PGO Processors Pvt. Ltd. and, therefore, the applicant did not have a prima facie case in favour. So, the Member (T) held that the applicant needs to make a pre-deposit of Rs. 5 Crores for obtaining stay.

The matter, therefore, got referred to the Third Member.

The third Member (T) began his findings by making the following observations (and this ruffled a few feathers) -

"18. While both the members have recorded factual aspects, none has recorded the consideration on which interim order should base. While prima facie case is one of the considerations, irreparable injury that may be caused by an interim order is a vital consideration. So also balance of convenience cannot be brushed aside to consider interim prayer. No doubt, pre-deposit is rule and waiver thereof is an exception. Interest of Revenue weighs equal importance while undue hardship is considerable."

In the matter of the issue referred, the Member (J) observed that the SCN did not throw light on any allegation of the proprietary interest of appellant on PGO Processors Pvt. Ltd. and manner of control over its affairs including influence, if any, on valuation of goods cleared.

The Third Member (J) concluded –

"21. Prima facie, it appears that the matter in controversy warrant extensive examination from various angles testing evidence rigorously. When PGO Processors is stated to have paid duty on the goods claimed, valuation issue depends on several factors including the terms of the aforesaid notifications to be tested by an elaborate hearing. Prima facie, appreciating whim and caprice are alien to justice, and noticing that balance of convenience tilts in favour of the assessee, dispensation of pre-deposit till disposal of appeal would serve interest of justice. Revenue may seek expeditious disposal of appeal to resolve the dispute. Reference is answered accordingly."

As mentioned, the referring Members were not pleased with the observations made by the Third Member and, therefore, recorded the following observations before passing the final order of unconditionally allowing the Stay Petitions.

"23. …, we would like to observe that learned third Member, in para 18 of his order has observed that both the Members have recorded factual aspects but none has recorded consideration on which the interim order should pass. Both the Members feel that such type of comments by the third Member are not appropriate and proper inasmuch as the third Member is not deciding the matter in an appellate capacity and as such, is not in a position to comment upon the orders recorded by his co-brothers. Even otherwise both the Members feel that they have passed a detailed order and have also recorded the reasons for arriving at the views, for their respective interim orders."

In passing : Time for the President to intervene?

(See 2014-TIOL-218-CESTAT-DEL)