The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has disposed of a batch of ten appeals arising from a long-running Central Excise dispute concerning the alleged leasing of a textile processing unit and the determination of the actual manufacturer of processed fabrics.

 The bench of Somesh Arora (Judicial Member) and Sanjiv Srivastava (Technical Member) confirmed a Central Excise duty demand of ₹1,19,35,974 while substantially reducing the penalties imposed on the individual appellants to ₹1,000 each. 

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The dispute traces back to the operations of a textile processing house at Village Gudda, Bhilwara, Rajasthan. Suzuki Textiles Ltd., through its processing unit then known as Suzuki Processors, was carrying out weaving and processing activities at the premises. The processing house had substantial infrastructure, including plant and machinery, a workforce of more than 400 persons and a processing capacity of approximately 1.8 million metres per month. 

In 1997, a separate company, PGO Processors Pvt. Ltd., was incorporated. The record shows that the company remained inactive until 1997 and subsequently entered into lease and job-work arrangements concerning the processing house. The arrangement resulted in Suzuki’s processing registration being amended to exclude processing activities, while PGO obtained registration for the same premises. 

The Department subsequently investigated whether PGO was genuinely operating as an independent processor or whether the arrangement was effectively being used to alter the basis on which Central Excise duty was payable.

A significant issue was the valuation of processed fabrics. On Suzuki’s own goods, duty had been paid on the sale price under Section 4(1)(a) of the Central Excise Act, whereas goods belonging to outside parties were processed on a cost-plus-job-charges basis. 

Department alleged that lease arrangement was only a facade

The Department’s case was based on the continued involvement of Suzuki in the functioning of the process house even after the formal lease arrangement.

The investigation recorded that the process house continued receiving coal from Suzuki’s linkage, electricity through a sub-meter connected to Suzuki’s electricity connection and diesel from Suzuki’s quota. Dyes and chemicals valued at approximately ₹37 lakh were also transferred without sale invoices. The workforce continued without termination or fresh appointments, while working capital requirements were allegedly funded by Suzuki. A 500 KVA diesel generator was also installed after the lease without corresponding consideration under the agreement. 

According to the adjudicating authority’s findings reproduced in the Tribunal order, PGO did not independently bring in funds for operating the process house. Salaries, wages, power, fuel, coal, raw materials and freight were stated to have been financed by Suzuki. The authority therefore concluded that Suzuki continued to exercise financial control over the process house. 

On that basis, the Department treated Suzuki as the manufacturer within the meaning of Section 2(f) of the Central Excise Act, 1944, and alleged that the separate PGO structure had resulted in suppression and mis-declaration with the objective of reducing excise liability. 

Large excise demands raised through multiple show cause notices

The proceedings involved a number of show cause notices issued between 1998 and 2001.

One major notice dated January 15, 1999 proposed recovery of ₹2.25 crore from Suzuki on the allegation that it had floated PGO as a dummy unit and continued to be the actual manufacturer of the fabrics processed in the unit. 

Separate notices were also issued to PGO concerning alleged short-payment of Central Excise duty on processed man-made fabrics. Four notices covering the period from February 26, 1998 to December 15, 1998 proposed demands of ₹28.93 lakh, ₹52.19 lakh, ₹64.08 lakh and ₹44.35 lakh respectively. 

Further proceedings concerned 15 show cause notices involving duty demands aggregating to ₹19.79 crore, comprising Basic Excise Duty and Additional Excise Duty. 

The original adjudication orders passed in 2012 were subsequently challenged before the CESTAT.

Earlier CESTAT order had remanded the matter

In an earlier round, CESTAT had considered whether the commercial arrangement between the parties could be regarded as a facade designed to evade Central Excise duty.

The appellants had relied upon the Tribunal’s earlier decision in Rajasthan Spinning & Weaving Mills Ltd., where the Tribunal had held that a lease between separate legal entities could not be treated as sham merely because the companies belonged to the same group. The earlier decision also emphasised that the commercial wisdom behind a transaction was not ordinarily open to questioning by tax authorities and that the genuineness of the transaction had to be examined by looking at whether it actually took place and who benefited from it. 

In 2017, CESTAT found similarities between that precedent and the present dispute but also noted factual differences. It therefore set aside the earlier adjudication orders and remanded the matter for reconsideration by the jurisdictional Commissioner, directing consideration of the Tribunal and Supreme Court decisions and providing an opportunity of hearing to the parties. 

The present batch of appeals arose from the adjudication undertaken following that remand.

Arguments raised by the appellants

Before the present Bench, the appellants argued, among other things, that proceedings against Suzuki Textiles Ltd. had been settled under a resolution plan approved by the NCLT on January 18, 2023. They contended that the proceedings against the concerned appellant therefore stood settled and the appeal was liable to abate under Rule 22 of the CESTAT Procedure Rules, 1982, relying upon the Supreme Court’s decision in Ghanshyam Mishra. 

PGO also argued that it could not be subjected to the duty demands because the adjudicating order itself had held that PGO was not the manufacturer under Section 2(f) of the Central Excise Act.

The appellants further challenged the valuation adopted by the Department and contended that deductions relating to grading expenses, cartage, handling charges, brokerage and interest on stock should be permitted where the duty was otherwise payable. 

Another important contention concerned penalties imposed upon the directors and other individuals under Rule 209A of the Central Excise Rules, 1944. The appellants argued that Rule 209A could apply only where the excisable goods were liable to confiscation and that the necessary finding was absent. They relied upon a series of judicial decisions in support of the plea. 

Revenue defended the demand by pointing to continuing control

The Revenue argued that there was effectively no substantial change in the operation of the process house after the lease arrangement.

According to the Department’s submissions, before and after the arrangement, the same plant, approximately 400 workers, boiler, electricity connection, generators, dyes and chemicals and production activity continued at the premises. The Department therefore highlighted that the principal change was the name appearing above the door and the manner in which the excise duty was calculated. 

The Revenue also disputed reliance on the Rajasthan Spinning & Weaving Mills precedent, contending that the factual circumstances in that case were materially different, particularly concerning the financial independence of the lessees and their responsibility for running the processing house. 

Tribunal’s treatment of individual penalties

One of the significant aspects of the present order concerns the penalties imposed on the directors, managers and other individuals.

The original adjudication order had imposed penalties of ₹2 lakh each on several individuals, including G.S. Sankhla and O.P. Nawal, both directors of PGO Processors. Other individuals had also been subjected to penalties ranging from ₹50,000 to ₹2 lakh under Rule 209A. 

The Tribunal, however, recorded that it did not find much merit in the penalties imposed under Rule 209A. At the same time, considering its finding that the individuals had played a part in the acts leading to the duty evasion, it held that a general penalty of ₹1,000 under Rule 210 of the Central Excise Rules, 1944 was imposable upon each concerned individual. 

Thus, the penalty exposure of the individual appellants was substantially reduced from the amounts originally imposed.

Final findings and relief

The Tribunal ultimately summarised its conclusions in a tabulated form.

The Tribunal ordered that the appeals be disposed of in these terms, confirming the duty demands indicated in the table along with applicable interest and penalties. 

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