M J Antony: 'Lifting the corporate veil'

OUT OF COURT

Two judgements delivered by the Supreme Court this month touched upon the perennial problem of "lifting the corporate veil" to find out the substance behind it. Both were suspected cases of evasion of excise duty and the facts of each case led to different results.

In Rollatainers Ltd vs Commissioner of Central Excise, the company won the appeal against the decision of the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT), whereas in the commissioner's appeal against Modi Alkalies & Chemicals Ltd, the company received severe drubbing for floating three dummy units to evade duty.

In the first case, the companies had several units out of which one produced paper board and another manufactured speciality paper. They were separately registered for central excise. The government issued a notification in 2000 regarding paper, paper board and related articles. The company claimed concessions under the notification for each of the factories. The department, however, issued show cause notices to the company for demanding the benefit for each unit.

It maintained that both the factories were in the common premises, the balance sheet was common and the owners were the same. CEGAT dismissed the company's petition and upheld the contention of the department. So the company appealed to the Supreme Court.

Allowing the appeal, the Supreme Court said: "Simply because both the factories are in the same premises, that does not lead to the inference that both the factories are one and the same. In the present case, from the facts it is apparent that there is no commonality of purpose, both factories have separate entrance, they are not complimentary to each other nor are they subsidiary to each other. The end product is also different, one manufactures duplex board and the other manufactures paper. They are separately registered with the department. There is no commonality between the two factories, both are separate establishment run by separate managers, though at the apex level, it is maintained by the appellant company."

The case of Modi Alkalies (MACL) was in contrast to this. It was engaged in producing caustic soda of which hydrogen is a by-product. The authorities noticed that in reality MACL was engaged in the manufacture of hydrogen.

But with a view to evade payment of excise, and get the benefit given to small-scale industries, it floated three front companies near the main factory. Gas was sent to the dummy companies through pipelines and they compressed and bottled it. On inspection, it was found that all the three bottling units were located in one single shed and were separated from each other by a small brick wall.

The directors of the three companies were employees of the Modi group. MACL arranged unsecured loans for the dummies that had only Rs 200 as share capital. These factors prompted the department to send show cause notice to MACL.

The company maintained that the three companies were separate entities. However, the department imposed duty and penalty. The company moved CEGAT, which quashed the order. So the commissioner appealed to the Supreme Court. It accepted the contention of the department.

"When the corporate veil is lifted, what comes into focus is only the shadow and not any substance about the existence of the three companies independently," the judgement observed, adding that "suppression of material features and factors has been clearly established."

The statements of the directors showed that the whole show was controlled, both on financial and management aspects by MACL. "If these are not sufficient to show interdependence, probably nothing better would show the same," the Supreme Court remarked, describing the CEGAT judgement indefensible.

The task of lifting the corporate veil is an exercise the court had been actively called upon to undertake since the Constitution bench judgement in Telco vs State of Bihar in 1965. The ordeal has become more onerous with the liberalisation and growing complexity of laws.

The above cases dealt with excise matters. But it is a common theme in several aspects of business. Therefore, the regulators in each field have to be vigilant about the tricks of the trade.