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Legal Decisions Vs Departmental Circular in Central Excise

In the Indirect Tax Bracket net, there would be plethora of case laws passed by various Tribunals, High Courts and Supreme Court.  Further, the CBEC also clarifies the issues to the Industry by way of Circular, Trade Instructions.  There may be a scenario, where there would be contradictory view between the Legal Decisions and Departmental Circular.  In such a case, which will prevail whether departmental circular or the legal decision. 

Illustration - Background

a. As per the Small Scale Exemption notification (now 08/2003 as amended), there would be exemption available for the manufacturer upto the clearance of Rs.150 lakhs in the financial year.

b. One of the condition in the notification, is the manufacturer should not use the brand name of other person.

c. The intention of this condition is to not to allow the SSI exemption for the manufacturer who are using the brand name of the others as there is a connection between such finished goods and owner of the brand name. 

d. Some manufacturers who are using the brand name only as per customer requirements, say Packaging Industry, manufacturers of parts which would be used by buyer as a parts in their final product were in a confusion for whether are eligible to claim the exemption or not. 

e. Meanwhile department issued various circulars clarifying this aspect which is as follows. 

i. Letter F.No. 345/35/87-TRU, dated 29-10-87 (Point 1 at paragraph 2):  it has been clarified that names/logos of the brand name owner printed on metal labels, crown corks, P.P. caps and collapsible tubes are not brand name by themselves and as long as these metal labels are not affixed on the goods in the trade of which the name/logo printed on such metal labels etc. serves as branded name (within the definition of Explanation VII) they are not hit by the mischief of para 7 of the notification and clarified SSI exemption is available in such a case.

ii. F. No. 213/28/87-CX.6, dated 27-11-1987 which clarifies that the clarification provided in the Letter F.No. 345/35/87 TRU is also applicable to the Packing materials.

iii. Circular No. 71 /71/94-CX., dated 27-10-94 which clarifies that the SSI exemption would not lost for the manufacturers who are manufacturing Castings affixing the name of the customer.

f. Due to the above circulars, many Small Scale Units are claiming the exemption and they are also affixing the brand name of customer as clarified in the circular. 

g. The Apex court in the decision of Kohinoor Elastics Pvt Ltd Vs Commissioner of Central Excise, Indore held that the SSI exemption is not available for the manufacturer who is manufacturing elastics and affixing the brand name of his customer.  The decision of the Apex court in this case is against to the various circulars issued by the department.

h. As there is a conflicting views between departmental circulars and apex court decision, the Apex court in the apex court has referred the matter to larger bench to clarify this.

Commissioner of C. Ex. Bolpur Vs Ratan Melting & Wire Industries 2008(231)ELT 22 (SC)

In this case, the Apex Court has examined the validity of Departmental Clarifications vis-à-vis Court decisions.  The summary of the decision is as follows.

a. Circulars and instructions issued by C.B.E & C binding on authorities under respective statute.

b. Clarifications and circulars issued by central and state governments representing merely their understanding of statutory provisions and are not bonding on the court.

c. Court to declare that what particular provision of statue says and not the executive. 

d. Circulars contray to statutory provisions having no existence in law.

Amendment in the notification 08/2003 CE

After this the department has amended the notification 08/2003 CE and excludes packing material which would be used in packaging of the customer from the condition of using the brand name of others.   Further the circulars as explained above has been withdrawn. 

New Departmental Circular

Circular 332/12/2011 TRU dated 04-Sep-2011 clarifies goods which exclusively bear the name or logo of companies, products, etc which are for free distribution, publicity or promotion of some other goods, do not get treated as branded goods for the purpose of SSI exemption as long as they do not bear any brand name.   Further this circular illustrated that a ball point pen bearing the name of a pharmaceutical company or product alone and not bearing any brand name of its own (brand name of the pen itself) would continue to be unbranded product.  Such manufacturers can therefore claim benefit of exemption notification 08/2003 CE for such unbranded goods. 

Circular No. 947/08/2011 dated 21-06-2011 (issued in the context of garment industry for claiming exemption), clarifies that affixing the brand name, logo of a school, companies, hotels, airlines etc on uniforms or made up articles like quilt, towels, linen etc would not merit treatment as “branded goods”.

Again circulars issued by the department are contradictory to the decision of the Supreme Court.  The manufacturers after claiming exemption by following the above circular may face problems in the future. 

To conclude the legal decisions would prevail over the circulars issued by the department as the circulars are issued by the executive officers and it can’t go beyond the law.  Hence, for each and every circular, the assessee requires to examine whether circular is within the ambit of law or not.  If the circulars are within the ambit of law, the same can be followed else the assessee requires to think twice before following such circular which is not as per the provisions of law.    

CA Sriharsha KM

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(Chartered Accountant, CS (Final))
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