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1. Area Based Exemptions

Exemptions from Central Excise Duty is available to Units located in specified States/Areas. A list of such Exemptions is as under:

1. Exemption to North-East States from excise duty and additional excise duty to goods cleared from a unit located in the Growth Centre or Integrated Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estates or Industrial Area or Commercial Estates or Scheme Area.

[Notification No. 32/99-C.E., dated 8-7-1999.]

2. Exemption to specified goods of factories in North East (Assam, Tripura, Meghalaya, Mizoram, Manipur, Nagaland or Arunachal Pradesh.)

[Notification No. 33/99-C.E., dated 8-7-1999.]

3. Exemption to all goods (except cigarettes, cigars, tobacco and its products and soft drinks and their concentrates) produced in Jammu & Kashmir by units located in Industrial Growth Centre, Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area.

[Notification No. 56/02 –C.E., dated 14-11-2002]

4. Exemption to specified goods produced by Units in Jammu and Kashmir

[Notification No. 57/ 02 – CE dt. 14-11-2002]

5. Exemption to specified goods cleared from new units in Uttaranchal and Himachal Pradesh

[Notification No 49/03-C.E., dated 10-6-2003.]

6. Exemption to goods other than specified goods cleared from units located in the Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area of Uttaranchal and Himachal Pradesh
   
   [Notification No. 50/03-C.E., dated 10-6-2003.]

7. Exemption to specified goods cleared from new units in Sikkim

[Notification No. 56/03-C.E. dated 25-6-2003.]

8. Exemption to all goods (except tobacoo, tobacco products; branded aerated beverages; or pollution causing paper and paper products) cleared from specified areas of Sikkim by unit in Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area, from excise duty other than duty paid on account of Cenvat Credit.

[Notification No. 71/03 C.E. dated 9-9-2003.]

For detailed conditions reference should be made to the relevant Notifications Presently, the general rate of Central Excise Duty, is 16% [Plus Ed Cess]. Hence, from a business view point, setting up a unit in a Excise Free Zone would have significant business advantage barring other compelling factors. Hence, in the context of setting up of New Business Entity, the aspect of Central Excise Exemption would require consideration.

2. Clubbing of clearances

2.1 Introduction

Presently SSI Exemption Scheme (up to Clearances value of Rs. 100 lakhs) is governed by Notification No. 8/2003-CE dt. 1-3-2003 (as amended) [EN] and conditions specified thereunder.

In order to determine the entitlement to benefit of SSI EN the following clearances are to be clubbed:

• Clearances of a single manufacturer from one or more factories.

• Clearances of one or more manufacturer from the same factory.

The Central Excise Dept and the manufacturers have from time to time raised various doubts, issues, and disputes as to the eligibility and entitlement to SSI EN in case of multiple units owned/controlled by a person / his relatives.

2.2 Different types of entities generally settled position as regards Clubbing

1. Proprietary concerns

So far as the sole proprietary concerns owning more than one factory are concerned, all the factories are to be treated of the same manufacturer as the ownership of the different factories in such cases rests with one person only. But if a person owns factories and is also a partner in other partnership firm, the clearances attributable to the partnership firm cannot be said to be his clearances. Therefore, the clearances of his factories and the factory belonging to the partnership firm cannot be clubbed together. [ACCE vs. J.C. Shah 2 ELT (J 317) SC].

2. Partnership firms

As regards partnership concerns, the different partnership are to be treated as different manufacturers even though some of the partners or all partners may be common between the two partnership firms. Similarly, every partner of a firm is to be treated different from the firm and cannot be termed as the same manufacturer because the partner has an independent and distinct existence from the partnership firm and the factories owned by the partnership firm cannot be said to be belonging to the partner.

[CBEC has accepted the above legal position in its Circular letter No. 5, dated 10-8-1956 which has subsequently been confirmed by Government of India in their letter F. No. 350/57/77/TRU, dated 20-1-1978.]

In a recent Supreme Court decision viz., CIT vs. G. Partha Sarthy Naidu & Other 236 ITR 350 (SC), a question came up for consideration as to whether in a case where there are 2 partnership firms with same partners, the 2 firms should be treated as one firm for the purposes of Income Tax.

The Apex Court held as under:

Each partnership agreement may constitute a distinct and separate partnership and therefore distinct and separate firms depending upon the intention of the persons constituting the partnerships which shall be determined with reference to the terms of the agreement and all surrounding circumstances including evidence as to interlocking of management, finance and other incidents of the respective businesses.

In the light of the facts found recorded by the Full Bench of the High Court, the 2 firms were held as separate and distinct firms.

3. HUF & Private Family Trust

A HUF has a distinct legal entity from the members constituting it. Hence, members of HUF would be eligible for exemption independent of HUF [Kapurchand Sahrimal vs. TRO 72 ITR 623 (SC)].

In Suwalal Anandilal Jain vs. CIT 91 Taxman 337 (SC) it has been was held that an individual can be partner in two different capacities in a partnership firm – one as individual and another as Karta of HUF.
Similarly a Private Family Trust will be separately entitled to exemption independent of members composing, the same.

4. Companies registered under the Companies Act

• The companies registered under the Companies Act, 1956 whether Public or Private, have separate entities, distinct from the shareholders composing them and therefore would be eligible to exemption separately. [Refer CBEC Letter F.No. 5/20/56 CXIII dt. 7-12-1956 and Dept. of Revenue letter No. 350 /57/77/TRU dt. 20-1-1978].
   

• If some shareholders are common in two such companies, they cannot be treated as one and the same and their clearances cannot be clubbed together.
   

• Even if a director of a company is a partner in the partnership firm the two are separately eligible for exemption.
   

• Merely because a company is a 100 per cent subsidiary company, it does not lose its independent identity for the purpose of availing separate exemption.
   

• The following observations of the Tribunal in Meteor Satellite vs. Collector 22 ELT 271 (T) merit attention:

“Courts and Tribunals are certainly entitled to lift the mark of corporate entity if the conception is used for tax-evasion or to circumvent tax obligation or perpetrating fraud, but such an exercise is to be resorted only in exceptional cases. In other words merely because the manufacturer is a registered company it does not mean that its value of clearances cannot be clubbed together with any other unit.”

5. Extracts from CBEC Circular No. 6/92 dt. 29-5-1992

“In exercise of the powers conferred under section 37-B of the Central Excise Act, 1944, for the purpose of ensuring uniformity of levy of duties of excise the Central Board of Excise & Customs has ordered that the following general principles will be applicable to Notification No. 175/86-CE:–

1. The question whether different partnerships having common partners are treatable as separate manufacturers or the same manufacture, would be a question of fact in each case to be determined on the basis of such factors among other, like composition of the partnership, existence of the factory, licence, nature of goods manufactured etc.
    

2. Different firms will be treated as different manufacturers for the purpose of exemption limit. But if a firm consisting of certain partners say A, B & C, has got more than one factory, all these factories should of course be combined. Limited companies whether public or private are separate entities distinct from the shareholders composing it. Hence each limited company is a manufacturer by itself and will be entitled to a separate exemption limit.
    

3. If there are two firms with only some of the partners in common, each firm is entitled to separate exemption limit and hence the question of distributing the exemption may not arise. If one firm or individual owns several factories, he or it gets exemption only in respect of one individual owns several factories, he or it gets exemption only in respect of one lot and the manufacturer being only one entity there will be no question of distributing the exemption.
    

4. Whether or not in the expression ‘by or on behalf of a manufacturer’ the expression ‘from one or more factories’ is added, the effect would be the same if the manufacturer is also the same. The expression ‘one or more factories’ only further clarifies that whether the factory is one or more, it is the clearances by or on behalf of the same manufacturer which is to be taken into consideration for purposes of interpreting the exemption notification’.

2.3 Factors considered while clubbing value of clearances

On an analysis of various judgments are as regards clubbing of clearances in case of multiple units the factors usually considered by Central Excise Dept are as under.

• Common management
   

• Common partners
   

• Control through relatives
   

• Common work force
   

• Common manufacturing facilities
   

• Common power connections
   

• Common telephone & other communication facilities
   

• Common administration & accounting set up
   

• Common material procurement arrangements
   

• Common selling arrangements
   

• Financial transactions between units
   

• Common storage facilities.
   

• Registration with Govt. authorities viz, Income Tax. Sales Tax etc.
   

• Business dealings/transactions between the units.
  An analysis of judicial rulings on Clubbing of Clearances would reveal that the 2 important tests usually employed by the Central Excise authorities to ascertain whether or not 2 units are independent for entitlement to SSI EN are:
   

• Financial flow back between the units
   

• Common Ownership & Control of Units

2.4 Summation

Discussion in Paras 2.1 to 2.3 above indicates that, despite the broad parameters relating to independence of business entities, there cannot be any hard and fast guidelines/rules for clubbing of clearances inasmuch as:

• Merely because partners are common it is no basis for clubbing of clearances in absence of financial flow back etc.
   

• Merely because there are separate entities, with separate Income Tax / Sales Tax Reg. etc., does not necessarily mean that their clearances cannot be clubbed. If circumstances warrant Central Excise Authorities can apply Mcdowell principle.
   

• Merely because units are distinct legal entities i.e., companies, does not necessarily mean that their clearances cannot be clubbed.

2.5 New entities

In the context of setting of new business entities having common partners, directors, relatives etc. for manufacturing activities, the following factors, in particular:

• Selection as to type of entity

• Common Ownership & Control

[Shareholding pattern etc]

• Common Management
  should be borne in mind from Central Excise point of view.

3. Location of a unit in a rural area

Under the present SSI Exemption Scheme, there is a specific condition under EN to the effect that, the benefit of Excise Duty Exemption up to Rs. 100 lakhs would not be available in cases where the specified goods manufactured by a manufacturer bears a brand name or trade name, whether registered or not of another person.

This is a very important condition under EN.

However, under the EN, the above restriction of brand name or trade name has been relaxed in the following cases:

Para 4 of EN

………….

2. Where the specified goods bear a brand name or trade name of –

1. the Khadi and Village Industries Commission; or

2. a State Khadi and Village Industry Board; or

3. the National Small Industries Corporation; or

4. a State Small Industries Development Corporation; or

5. a State Small Industries Corporation;

3. Where the specified goods are manufactured in a factory located in a “rural area”.

The term “Rural Area” has been defined as under:

Explanation to EN

8. “rural area” means the area comprised in a village as defined in the land revenue records, excluding –

1. the area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee, or
    

2. any area that may be notified as an urban area by the Central Government or a State Government.
   
   In the context of planning of location for setting up of New Business Entities, in applicable cases, location in a “Rural Area” under EN should be considered from Central Excise point of view.

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