Clubbing of clearances :
As per section 2(f) of the Central Excise Act, 1944 a manufacturer means not only a person who employs hired labour but also person who engages in production or manufacture on his own account. The words “on his own account” have caused considerable litigation. The question regarding who is a manufacturer has been often invoked to deny the benefit of exemption notifications.
The Department normally denies the benefit of the exemption notification on the ground that one manufacturer wants to split up one unit into various units to take advantage of Nil duty clearances upto ` 150 lakh in respect of each unit. It is the contention of the Department that there is considerable revenue loss when the manufacturer deliberately plans his affairs in this manner while continuing to exercise managerial control over all the units. Therefore, the Department denies the benefit of the exemption notification when they find common directors or common shareholders or common employees or common usage of facilities including funds.
The main aspects which lead to clubbing of clearances are as under:
a. reason to start is due to customers not willing to pay the excise duty;
b. beneficial financial interest in new unit which indicates financial flow back;
c. working in tandem and as one unit;
d. common procurement or sale (common products and sales force);
e. insufficient production/managerial capability;
f. common stock usage;
g. free processing facility;
The reasons for commencing investigation are same/adjoining location, same product, sharing of customers, same partners (beneficial interest), interest free advances, shared facilities, sharing of expenses and incomes etc.
On the other hand, judicial decisions have always stressed the point that unless there is a flow back of profits from all the other units to the parent unit in whose hands the turnover of all the units is clubbed, clubbing clearances would not be possible. Therefore, it would be imperative for the Department to prove that the other units are sham units and that there is a profit flow back to the manufacturer who has set up the various units. In fact, the Supreme Court in Calcutta Chromotype Ltd. v. CCE 1998 (99) E.L.T. 202 held that the principle that a company is a separate entity is not of universal application and in fit circumstances, the veil of incorporation can be lifted to see who is behind the actual operations. Though this decision pertains to who is a related person under section 4, the principles enunciated could well be applied here also.
A perusal of the case laws available on the subject clearly shows that the Tribunal has been reluctant to accept departmental view unless there is a profit flow back or common funding. However, no other generalisation can be made since each matter is to be decided based on the facts of the case.