RENUSAGAR POWER COMPANY LIMITED v. UNION OF INDIA — 1993 DIGILAW 363 (DEL)

Y. K. Sabharwal ( 1 ) UNDER Tariff Item No. 11-E of the First Schedule of the Central Excise and Salt Act, 1944 (hereinafter referred to as the act ) the Central Excise Duty on electricity was imposed with effect from 1st March, 1978. At the same time the Central Government by notification No. 52/78 dated 1st March, 1978 issued by it in exercise of the power conferred by sub rule (1) of Rule 8 of the Central Excise Rules, 1944 (hereinafter referred to as the rules ) exempted the electricity from duty of excise leviable under Tariff Item No. 11-E provided such electricity is used for captive consumption. The exemption Notification reads as under:- GOVERNMENT OF INDIA MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) New Delhi, the 1st March, 1978 10th Phalguna, 1899 (Saka) NOTIFICATION CENTRAL EXCISE GSR. In exercise of the power conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, the Central Government hereby exempts electricity falling under Item No. lle of the First Schedule to the Central Excise and Salt Act, 1944 (1 of 1944), from the whole of the duty of excise leviable thereon: Provided that it is proved to the satisfaction of the Assistant Collector of Central Excise that such electricity is produced by a genernating station, an industrial unit or an establishment (including Railways) and used in such generating station (including its auxiliary plant, if any), industrial unit or other establishment, as the case may be. " ( 2 ). Petitioner No. l- Renusagar Power Company Ltd. (for short renusagar ) a company incorporated under the Companies Act, 1956 is engaged in the business of generating electricity. The electricity so generated is supplied by Renusagar to petitioner No. 2- Hindustan Aluminium Corporation Limited (for short hindalco ). Renusagar is wholly owned subsidiary of Hindalco. All shares of Renusagar are owned by Hindalco. Hindalco is also a company incorporated under the Companies Act and is,inter-alia, carrying on the business of manufacturing aluminium. ( 3 ). The dispute arose between the petitioners and Central Excise authorities on the question whether duty of excise on electricity generated by Renusagar is payable or not. Renusagar and Hindalco were claiming exemption under the aforesaid notification. According to the Central Excise authorities petitioners were not entitled to exemption. ( 3 ). The dispute arose between the petitioners and Central Excise authorities on the question whether duty of excise on electricity generated by Renusagar is payable or not. Renusagar and Hindalco were claiming exemption under the aforesaid notification. According to the Central Excise authorities petitioners were not entitled to exemption. They said that Renusagar and Hindalco are two distinct and separate legal entities and thus the electricity generated by Renusagar and supplied to Hialco cannot be treated as a case of captive consumption. Petitioners say that Renusagar and Hindalco are one and the same concern and Renusagar has no existence independent of Hindalco and in the facts and circumstances pertaining to Renusagar and Hindalco it is erroneous to treat them as separate legal entities and on that ground deny exemption. ( 4 ). The Assistant Collector of Central Excise by order dated 27th May, 1978 has come to the conclusion that a separate corporate body supplying electricity to another corporate body cannot claim exemption in terms of notification No. 52/78 dated 1st March, 1978 whatever may be the business relations, fiscal pattern or managerial adjustment between the two companies. It has been held by the Assistant Collector that Renusagar is liable to pay central excise duty under Tariff Item No. ll-E of the First Schedule of the Act with effect from 1st March, 1978 and Renusagar is not entitled for exemption on electricity supplied to Hindalco. The order of Assistant Collector has been upheld in appeal by the Appellate Collector, Central Excise, who, by order dated 27th June, 1975 dismissed the appeal of the petitioners. The revision petition filed before the Central Government by the petitioners was also dismissed on 4th September 1978. Aggrieved by the said decisions the petitioners have filed the present petition under Articles 226 and 227of the Constitution of India seelking,interalia, quashing of the order dated 4th September 1978 and a declaration that duty of excise is not payable by them on the electricity generated by Renusagar and supplied to Hindalco. ( 5 ). The facts are. more or less admitted. It seems that Renusagar was brought into existence by Hindalco in order to fulfill the conditions of industrial licence granted to Hindalco. Renusagar is 100% wholly owned subsidiary of Hindalco. It is completely controlled by Hindalco in its day to day affairs and has at no point of time indicated any independent volition. The facts are. more or less admitted. It seems that Renusagar was brought into existence by Hindalco in order to fulfill the conditions of industrial licence granted to Hindalco. Renusagar is 100% wholly owned subsidiary of Hindalco. It is completely controlled by Hindalco in its day to day affairs and has at no point of time indicated any independent volition. Renusagar was given sanction to generate electricity on condition that it would supply electricity power only to Hindalco. Renusagar has no separate and independent existence apart from and independent of Hindalco. The case of the petitioners is that the entity generating electricity, namely, Renusagar and entity consuming electricity, namely, Hindalco are the same and should be treated as one concern and the excise authorities and the Central Government by dismissing the revision petition have proceeded on a legal misconception that Renusagar and Hindalco are separate legal entities and in failing to treat the two as one industrial unit or one establishment. The petitioners say that the exemption notification is fully applicable because the electricity generated and consumed is by one and same person. According to petitioners the corporate veil is liable to be lifted and Renusagar and Hindalco are liable to be treated as one concern. ( 6 ). The case of the respondents, on the other hand, is that the petitioners are not entitled to grant of exemption as Renusagar and Hindalco are two separate and distinct legal entities. According to respondents the levy of duty of excise, under the provisions of the Act and the Rules, is on the manufacture of the excisable item and the liability to pay the duty of excise is of manufacturer. The contention is that Renusagar is the manufacturer and by applying the doctrine of lifting of corporate veil the Hindalco cannot become the manufacturer of electricity for the purposes of the Act and the Rules. The respondents have urged that the question whether Hindalco fully owns Renusagar or not is not relevant According to respondents under the Act and the Rules, for determining the question as to who is liable for payment of excise duty the only relevant factor to be seen is as to who is the manufacturer and not as to who is the owner. The respondents say the concept of ownership is absolutely irrelevant for determining the question as to who is the manufacturer. The respondents say the concept of ownership is absolutely irrelevant for determining the question as to who is the manufacturer. In order to appreciate the contention it would be convenient to notice certain provisions of the Act and the Rules. ( 7 ). Section 3 is the charging section. It,inter-alia, provides that there shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than the Salt which are produced or manufactured in India. Theexcisable goods are defined in Section 2 (d) of the Act. Under Section 2 (e) "factory" means any premises including the precints thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on. The term "manufacture" and "manufacturer" are defined in section 2 (f) of the Act The term assessee has not been defined in the Act. The said term, however, has been defined in Rule 2 (ib) to mean any person who is liable for payment of duty assessed and also includes any producer or manufacturer of excisable goods or a licensee of a private warehouse in which excisable goods are stored. Rule 7 provides that every person who produces, cures or manufactures any excisable goods, or who stores such goods in a warehouse, shall pay the duty or duties leviable on such goods, at such time and place and to such person as may be designated, in, or under the authority of these Rules, whether the payment of such duty or duties is secured by bond or otherwise. Rule 43 ,inter-alia, requires that a manufacturer who intends to manufacture excisable goods for the first time shall, before commencing operations, give notice in writing to the Collector and shall specify therein the nature of the raw-materials which he intends to use. Chapter VII-A of the Rules provides for removal of excisable goods on determination of duty by producers, manufacturers or private warehouse licensees. Chapter VII-A of the Rules provides for removal of excisable goods on determination of duty by producers, manufacturers or private warehouse licensees. Rule 173-A, inter-alia, states that except as provided in Rules after Rule 173-A, the provisions of Chapter VII-A shall apply to all such excisable goods as the Central Government may, by notification in the official gazette, specify in this behalf, and in case of conflict, the provisions contained in Chapter VII-A shall prevail. Rule 173-B requires every assesee to file a list of goods for approval of the proper officer in such form a the Collector may direct, inter-alia, showing the full description of all excisable goods produced or manufactured by the assessee and all other goods produced or manufactured by assessee and intended to be removed from factory and also the rate of duty leviable on such excisable goods. Rule 173-C requires every assessee to file price list of goods assessable ad valorem. Rule 173-F provides for removal of excisable goods on payment of duty of excise on self determination by the assessee in terms of this rule. A manufacturer of excisable goods, as provided in Rule 174, is required to take out a licence before conducting business. The Central Government may, however, as provided in Rule 174-A, exempt from the operation of Rule 174 any goods or class of goods which are wholly exempted from the duty of excise leviable thereon either unconditionally or subject to fulfillment of conditions. ( 8 ). The aforesaid provisions show that excisable duty is payable on all excisable goods manufactured in India. The liability to pay duty of excise is that of manufacturer. The manufacturer is required to serve on Collector notice of his intention to manufacture excisable goods before commencing operations and he is also required to specify the rawmaterial which he intends to use. The assessee is required to file classification list and also pay duty of excise as provided in the Rules. The duty is required to be paid before removal of goods. Except where exempted the manufacturer is also required to obtain licence before commencing operation. ( 9 ). Mr. The assessee is required to file classification list and also pay duty of excise as provided in the Rules. The duty is required to be paid before removal of goods. Except where exempted the manufacturer is also required to obtain licence before commencing operation. ( 9 ). Mr. Chandrasekharan, learned counsel for the respondents, submits that as Hindalco never gave notice to the Collector to signify its intention to manufacture electricity; it did not ever file the required classification list; it did not take out licence for manufacture of electricity when admittedly it was manufacturing aluminium, the Hindalco cannot claim to be manufacturer. Mr. Chandrasekharan contends that the duties of excise are imposed on production or on manufacture of goods and are levied upon the manufacturer or producers in accordance with the Act and the Rules and that this is quite independent of the ownership of the goods. Reliance is placed upon Ujagar Prints, Etc Vs. Union of India and others, 1988 (Vol. 38), Excise Law Times 535 (SC ). Reliance is also placed upon the decision of the Supreme Court in Taxmaco Ltd. Vs. Collector of Central Excise, Calcutta, 1991 Supp (2) Supreme Court Cases 305 holding that consideration of ownership of the goods are extraneous to levy of duties of excise which are imposed on manufacture. Mr. Chandrasekharan also relies upon the decision of Patna High Court in Bata India Ltd. Vs. Assistant Collector of Central Excise, Patna, 1978 (Vo. 2) E. L. T. 211, for the proposition that Hindalco cannot be deemed to become manufacturer. Mr. Chandrasekharan further contends that if Hindalco is claiming exemption then first it has to accept its liability to pay the excise duty and then alone the question of the entitlement to exemption or otherwise can be considered. ( 10 ). I have no difficulty in accepting the contention that duties of excise is imposed on manufacture of excisable goods and that the concept of ownership of the factory premises or the ownership of excisable goods is not relevant for determining the liability of payment of excise duty. I have also no hesitation in concluding that Hindalco is not the manufacturer. It has never claimed to be the manufacturer. The electricity comes within the purview of excisable goods. It is being generated/manufactured in the plant/factory of Renusagar. I have also no hesitation in concluding that Hindalco is not the manufacturer. It has never claimed to be the manufacturer. The electricity comes within the purview of excisable goods. It is being generated/manufactured in the plant/factory of Renusagar. The manufacturer of excisable goods, namely, the electricity is Renusagar and who owns the said excisable goods is not relevant for the purposes of the Act and the Rules. In the writ petition the petitioners themselves say that "no duty of excise is payable by the petitioners on the electricity generated by petitioner No. l. Petitioner No. l is Renusagar. Thus, Renusagar admits that it is manufacturing/ generating electricity which is an excisable item. For the purposes of the Act and the Rules the manufacturer of electricity is Renusagar. It would be liable to pay duty of excise on the electricity generated by it if Renusagar is not entitled to the benefit of exemption notification. ( 11 ). The main question for consideration, therefore, is whether Renusagar is entitled to benefit of exemption notification or not. The answer to this question would, in turn, depend upon answer to the question as to who is consuming the electricity. It is the consumption of electricity which would determine whether Renusagar is entitled to the benefit of exemption or not. The benefit of notification would be available on proof of the fact that the electricity generated was being used for captive consumption. Thus the user or consumption of the electricity would determine the eligibility or otherwise of the benefit of exemption under the said notification. According to petitioners Renusagar and Hindalco are one and same though two are separately incorporated Companies which petitioners say is of no effect Mr. Sorabjee strenuously pleads for application of doctrine of lifting of corporate veil for coming to the conclusion that the person generating and consuming energy were the same. The main ground taken in the impugned orders for denying the benefit of exemption notification was that the two companies are separate and distinct legal entities. In the impugned orders the Assistant Collector, Appellate Collector and theCentral Government have all denied the benefit of exemption to petitioners holding that both are limited companies and have separate and distinct legal entities of their own and holding that both the companies are independent of each other. In the impugned orders the Assistant Collector, Appellate Collector and theCentral Government have all denied the benefit of exemption to petitioners holding that both are limited companies and have separate and distinct legal entities of their own and holding that both the companies are independent of each other. A conclusion was reached by the authorities that it does not amount to captive consumption as contemplated in the exemption notification. ( 12 ). Learned counsel for the petitioners, in support of the contention that the corporate veil is liable to be lifted and the consumption of electricity manufactured by Renusagar and consumed by Hindalco is to be treated as a captive consumption in terms of exemption notification, places strong reliance on decision of the Supreme Court in State of Uttar Pradesh and. Ors. Vs. Renusagar Power Co. and others, (1988) 4, Supreme Court Cases 59. It would be useful to first notice in brief the facts of the case and the questions which came up for consideration before the Supreme Court. ( 13 ). With a view to further amend the UP Electricity (Duty)Act, 1952, the UP Ordinance 14 of 1970 was promulgated on 5thaugust, 1976. The Ordinance came into force from 1st September 1970. As a result of promulgation of the Ordinance electricity duty became leviable on the industrial consumption as well as on the energy consumed by any person from his own source of generation. By notification issued on 25th August, 1970 the rate of electricity duty on the energy consumed for industrial purposes was prescribed at one paise per unit on consumption of electricity with effect from lst September l970. Electricity duty became leviable on Renusagar on the energy supplied to Hindalco for industrial purposes. The Ordinance was later on substituted by UP Electricity (Duty) (Amendment) Act, 1970. The request made by Hindalco to State Government to grant exemption for payment of electricity duty supplied by Renusagar to Hindalco for industrial purposes was rejected and a demand for payment of electricity duty was raised on Renusagar. The State Government, it may be noticed, on 17th March, 1973 had granted exemption from payment of electricity duty on the energy consumed by any person from his own source of generation. The State Government, it may be noticed, on 17th March, 1973 had granted exemption from payment of electricity duty on the energy consumed by any person from his own source of generation. One of the questions that came up for consideration before the Supreme Court was whether Renusagar was own source of generation of electricity for the Hindalco in the facts and circumstances of me case, within the meaning of section 3 (l) (c) of the Electricity Duty Act, 1952 and various notifications issued thereunder. The Supreme Court has noticed that Renusagar is a 100% subsidiary of Hindalco and is wholly owned and controlled by Hindalco. Hindalco established the power plant through the agency of Renusagar in order to avoid complications in the case of take over of power plant by the State Board of which there could be a possibility as power generation was generally not permitted in normal conditions in private sector. It was emphasised on behalf of Hindalco before the Supreme Court that the power plants at Renusagar were set up as part and parcel of the aluminium expansion scheme of Hindalco and the only object and purpose of the power plants in Renusagar was to supply power to suite the needs of Hindalco. All steps to set up power plant at Renusagar and its further expansions were taken by Hindalco. Renusagar could supply power only to Hindalco and it generates power to the extent required by Hindalco. Hindalco has complete control over Renusagar including its day to day operations. On behalf of the State of Uttar Pradesh it was strongly urged before the Supreme Court that there was no ground for lifting the corporate veil. It was urged that there was no warrant either in law or in fact to lift the corporate veil and treat Renusagar s plant as Hindalco s own source of generation as neither facts of the case justify such a course nor does it warrant such an approach. It was contended that normally the court has disregarded the separate legal entity of a company only where the company was formed or used to facilitate the evasion of legal obligations. It was contended that normally the court has disregarded the separate legal entity of a company only where the company was formed or used to facilitate the evasion of legal obligations. On consideration of the facts and the circumstances of the case and the legal precedents the Supreme Court came to the conclusion that the corporate veil should be lifted and Hindalco and Renusagar be treated as one concern and Renusagar s power plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. The Supreme Court said:- "in the aforesaid view of the matter we are of the opinion that the corporate veil should be lifted and Hindalco and Renusagar be treated as one concern and Renusagar s power plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. In the premises the consumption of such energy by Hindalco will fall under Section 3 (l) (c) of the Act. The learned Additional Advocate-General for the State relied on several decisions, some of which have been noted. The veil on corporate personality even though not lifted sometimes, is becoming more and more transparent in modem company jurisprudence. The ghost of Salomon case still visits frequently the hounds of Company Law but the veil has been pierced in many cases. Some of these have been noted by Justice P. B. Mukharji in the New Jurisprudence. It appears to us, however, that as mentioned the concept of lifting the corporate veil is a changing concept and is of expanding horizons. We think that the appellant was in error in not treating Renusagar s power plant as the power plant of Hindalco and not treating it as the own source of energy. The respondent is liable to duty on the same and on that footing alone: this is evident in view of the principles enunciated and the doctrine now established by way of decision of this Court in Life Insurance Corporation of India that in the facts of this case Sections 3 (l) (c) and 4 (1) (c)of the Act are to be interpreted accordingly. The persons generating and consuming energy were the same and the corporate veil should be lifted. In the facts of this case Hindalco and Renusagar were inextricably linked up together. The persons generating and consuming energy were the same and the corporate veil should be lifted. In the facts of this case Hindalco and Renusagar were inextricably linked up together. Renusagar had in reality no separate and independent existence apart from and independent of Hindalco. In the aforesaid view of the matter we are of the opinion that consumption of energy by Hindalco is clearly consumption by Hindalco from its own source of generation. Therefore, the rates of duty applicable to own source of generation have to be applied to such consumption, that is to say, 1 paisa per unit for the first two generating sets and nil rate in respect of third and fourth generating sets. It is appropriate to refer that having regard to the conduct of the State the power cuts matter and also the present proceedings the State should not be permitted to treat consumption of Renusagar s energy by Hindalco as anything other than (sic or) different from consumption of energy by Hindalco from its own source of genera- tion. We are,therefore, of the opinion that in the facts of this case the corporate veil must be lifted and Hindalco and Renusagar should be treated as one concern and if that is taken the consumption of energy by Hindalco must be regarded as consumption by Hindalco from its own source of generation. " ( 14 ) MR. SORABJI contends that the controversy in the present case is squarely covered by the aforesaid decision of the Supreme Court and applying the same the impugned orders are liable to be quashed and the petitioners are entitled to declaration that exemption notification is applicable on the electricity generated by Renusagar and consumed by Hindalco andthat no duty of excise is payable on such electricity. ( 15 ) MR. CHANDRASEKHARAN, learned counsel appearing for respondents vehemently contends, that the Supreme Court decision is not relevant for determining the present controversy. Counsel submits that the statutory provisions which came up for consideration before the Supreme Court were different, namely, the provisions of UP Electricity Duty (Amendment)Act, 1970 and various notifications issued under the said statutory provisions which called for determination of the question as to the interpretation of the term ownsource of generation . The argument of Mr. Counsel submits that the statutory provisions which came up for consideration before the Supreme Court were different, namely, the provisions of UP Electricity Duty (Amendment)Act, 1970 and various notifications issued under the said statutory provisions which called for determination of the question as to the interpretation of the term ownsource of generation . The argument of Mr. Chandrasekharan is that as the concept of ownership is alien to the provisions of the Act and the Rules under which the liability is of manufacturer and levy of excise duty is on manufacture of excisable goods and these questions having not come up for consideration before Supreme Court, the decision relied upon has no applicability. ( 16 ) IT is correct that the question of ownership is not relevant for determining as to who is the manufacturer within the meaning of the Act The question in the present case, is also not of applying the concept of lifting of corporate veil to determine as to who is the manufacturer. The question is about applying the said concept for determining as to who is the user so as to find out whether there is captive consumption or not within the meaning of exemption notification. I am not persuaded to accept the contention of Mr. Chandrasekharan that the concept of lifting of corporate veil should not be applied. The concept of lifting of corporate veil which is a changing concept and has expanding horizons, on the facts and circumstances of the present case, would be fully applicable. The Supreme Court says that the persons generating and consuming electricity were the same and the corporate veil should be lifted. The Supreme Court also says that Renusagar had in reality no separate and independent existence apart from and independent of Hindalco. On the facts of this case I am not persuaded to take a different view. The statutory provisions which came up for consideration before Supreme Court may be different and not the Central Excise Act and the Rules. That would,however, not make any substantial difference as, independent of statutory provisions which were being considered and on consideration of facts in regard to Renusagar and Hindalco, Supreme Court came to the conclusion that both the Companies are one by applying concept of lifting of corporate veil. That would,however, not make any substantial difference as, independent of statutory provisions which were being considered and on consideration of facts in regard to Renusagar and Hindalco, Supreme Court came to the conclusion that both the Companies are one by applying concept of lifting of corporate veil. ( 17 ) THE facts and circumstances under which the Renusagar was brought into existence by Hindalco have been noticed in detail in the decision of the Supreme Court. It has been noticed that the model of setting up of power station through the agency of Renusagar was adopted by Hindalco to avoid complication in case of take over of power station by the State or the Electricity Board. All steps in establishing and expanding the power station were taken by Hindalco. As noticed hereinbefore, even day to day affairs of Renusagar are controlled by Hindalco. Renusagar has at no point of time indicated any independent volition. The manner and the circumstances under which the sanction was granted to set up the power plant for the energy requirement of Hindalco to meet the scarcity of electricity power in Uttar Pradesh cannot be brushed aside by contending that the said permissions and sanctions were not granted by Central Excise authorities. Further from me speech of the Finance Minister made at the floor of the Lok Sabha, while presenting the levy of excise duty on electricity, it is clear that the electricity generated for captive consumption was being exempted and with that purpose in view the exemption notification was issued. The benefit of exemption notification cannot now be deprived on the ground that the two companies are separate and distinct legal entities knowing fully the circumstances in which the subsidiary company, namely, Renusagar was incorporated. It is a fit case where concept of lifting of corporate veil should be applied. In the facts and circumstances of the case the respondents committed a manifest error of law in denying to the petitioners the benefit of exemption notification. The petitioners are entitled to the benefit of the said notification and the declaration that under that notification the excise duty is not payable on electricity generated by Renusagar and consumed by Hindalco. ( 18 ) FOR the reasons aforesaid, I would allow the writ petition as prayed and would make the rule absolute. Parties are,however, left to bear their own costs.