Denial of excise exemption to Packing Material Makers is illegal

RS Sharma Advocate

 Packing Material Makers face unwarranted litigation after CBEC has decided to withdraw Circular dated 27.10.1994 and has issued directions to Field Officers to deny excise exemption to Packing material Makers and to issue demands to them for the past period alleging that they are using brand name of another person on packing material and thus exemption of Rs 1.5 Crore is not admissible to them.

CBEC vide a communication dated 16th June 2008 has clarified as under:

“Subject: SSI exemption to branded packaging goods, diaries etc.

I am directed to refer of this SSI notification No. 08/2003-CX, dated 01.03.2003 wherein it has been provided that the exemption contained in the notification shall not apply to specified goods bearing a brand name or trade another person. The definition of brand name of trade name has been provided in the explanation to the notification.

2. Similar provision existed in the erstwhile SSI notification No. 01/93-CX, dated 28.02.93. The Supreme Court in the case of M/s Kohinoor Plastic Pvt. Ltd. 2005(188) ELT 3 (SC) has held that the benefit of SSI exemption is not available to the goods bearing a brand name/trade name of the customer manufacture by a SSI unit, as per the orders of the customer, for further use by the customer in the manufacture of final product.

In this case the manufacture was engaged in the manufacture of plastic brand as per the orders of the customers, who were manufacture of the undergarments. As per the orders of the customers the manufacture affixed brand/trade names belonging to the respective customers, on the elastic brand manufacture for that customer. The SSI units claimed exemption under the said notification which was denied to them and subsequently the matter reached the Supreme Court. The Supreme Court has observed that the ‘course of trade’ is between the SSI manufacture and his customer. Whether or not such goods reached the market, in the same form is not relevant for the purpose of ‘course of trade’. It could never be the intention to enable the manufacture who are otherwise not eligible to get their goods or same inputs manufacture from small scale industries, affix their brand/trade name, and still avail of the exemption.

3. The aforesaid judgment of the Supreme Court is being brought to your notice with a request to initiate action to raise protective demand whether warranted. Existing instruction which are at variance with the Supreme Court decision are being withdrawn, but the action for issuing show cause notices may be taken based on the Supreme Court order immediately, without waiting for withdrawal of circulars.”

Vide Circular No. 71/71/94-CX Dated 27/10/94 issued vide F.No.341/45/94-TRU CBEC clarified as under:

Subject : Clarification regarding the brand name provision in the general SSI Scheme under notification No. 1/93.

I am directed to refer to paragraph 4 of the Notification  No 1/93 which provides that under this notification, exemption would not apply if the goods in question bear a brand name or trade name of another person. In this context certain doubts have been raised  regarding the scope of the expression brand name and trade name. In particular, the following examples have been cited and clarifications have been sought whether the benefit of notification No 1/93 would be available under such circumstances.

Illustration I

2. It has been presented that in the case of castings there is a trade practice under which SSI units produce the castings as per the design supplied by the customers and such castings may bear the brand name / design / logo as requred by the users of castings. SUch castings are finally used in the manufacture of other machinery like deisel engines. It has been represented that such castings are not traded as such in the open marketand they are made for use by specific users.  In such cases, the brand name which is put on the castings is the brand name of the machinery manufacturer, and thus putting the brand name is only to suit the manufacturing needs of the customer.  Consequently, in such cases, the bebefit of SSI exemption should not be denied.

Illustration II

3. There are certain SSI units which produce goods on behalf on another person and names of both the manufacturer and the person on whose bahalf the goods are manufactured are reflected in the finished goods. For example, in the case of electricity meter covers, the name of the manufacturer as well as the name of the electric company who suplies such electricity meter covers to the consumers are both indicated. Here also it is represented that the use of the brand name is not in the "course of trade".

4. The matter has been examined. in the Board.  The scope of brand name and trade name has already been clarifiedvide Ministry's letter F.No.B40/12/94-TRU dated 1st September 1994 (Circular No. 52/52/94-CX).

5. As explained in paragraph 3 of the letter, to attract the mischief of the provisions relating to brand name, two conditions have to be satisfied.

(1) Such brand name must indicate a connection between the branded goods and some person using such brand name.

(2) Such connection should be in the course of trade.

6. Consequently, if there is not "trade" of such goods, the brand name provision would not apply.

7. Coming to the first illustration, castings are manufactured as per the specific requirement of the customers and the brand name which the small scale unit puts on such castings is meant for use of the customer only for further manufacture. Castings having such brand name are not sold in the market as castings as such because it will be of no use to another person. It is felt that when such castings are not "traded" but only sold to a particular manufacturer for his own use the embossing of the brand name of the customer on the castings would not amount to using brand name so as to deny the benefit of notification No. 1/93.  Of course, if it is found that such branded castings are traded in the market as such, it will amount to use of such castings in the course of trade and the benefit of exemption will not be available. In other words, so long as the branded castings are being supplied to the customer for further manufacture, and are not otherwise "traded" the benefit of small scale exemption in such cases should not be denied merely on the ground that it contains brand name of another unit. Whether such supply is in the course of trade or not, of course will be a matter of fact and has to be ascertained from the nature of transaction between the small scale unit  and the brand name owner. So long as they are made to order as per the design and specification of a particular manufacturer and sold to that manufacturer for his own use, the benefit of notification no. 1/93 cannot be denied.

8. As regards the second illustration, the Collectors reference held at Chandigarh on 17th June 1994, has already taken a view that in such cases the use of names of the user like electricity boards etc. are embossed on the goods to guard against theft or misuse of public property and are not meant for sale by State Electricity Boards.  Use of brand name in such cases will not attract the mischief of para 4 of notification no. 1/93, and the benefit of notification no. 1/93 cannot be denied under such circumstances.  The Board agrees with the view taken in the conference as here also the element "in the course of trade" is absent.

9. In this context your attention is also invited to the clarification contained in Board's letter FNo.345/35/87-TRU dated the 29th October, 1987.”

The small-scale exemption of Rs 1.5 Crore can not be denied to manufacturers of packing material who are printing the Brand name or Trade name of their buyers on the packing material as the packing material itself cannot be treated as Branded goods within the ambit and scope of the Notification No. 8/2003-CE dated 1.3.2003.As per the definition of “Brand name” or “Trade Name” in the Notification itself; it should be used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark.   In fact the goods which are packed inside the packing material are to be treated as Branded goods.

The ruling of Supreme Court in case of Kohinoor Plastic is clearly distinguished and is not applicable to Card Board Boxes and Packing material makers. The decision of the Ministry is unfortunate and the intention is to play safe by issue of demands as it is a debatable issue for them. The best course available for manufacturers is to file a Petition in High Court for quashing of show cause notices as no tax can be demanded without authority of law There is no point in contesting the demands before the Deputy Commissioners of Central Excise as for them interpretation of CBEC is the ultimate law. The Government may not ultimately get a penny from these demands but such actions ultimately help Advocates who are going to make a fortune by quoting their fees on per hearing basis as at least twenty thousand demand notices are expected on the dicta of the Board.

(The Writer is an Advocate & Consultant based in Delhi. He is advising  several MNCs and Indian Corporates on Indirect Tax issues. He can be mailed at rssharma@gmail.com )

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