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THE WEST BENGAL NATIONAL UNIVERSITY OF JURIDICAL SCIENCES

SMALL SCALE INDUSTRIES


MEANING AND CONCEPT

INDIRECT TAX

PUNEET RATHSHARMA
ID: 211107
5th Year

SMALL SCALE INDUSTRIES: MEANING & CONCEPT

INTRODUCTION
The colonial rule for two hundred years struck a massive blow to the entrepreneur spirit
across small and medium scale business manufacturing and upon independence, it was
decided that small scale industries would be given protection to protect them from sinking
into oblivion.1 Apart from protecting interests, it was also observed that the costs of collecting
revenue from numerous smaller players increased the cost of administration and it made
sense not to tax small scale industries.2 The author in this paper discusses the definition of
Small Scale Industries, the criteria by which eligible SSI units are determined, value of
clearances to be excluded, the debates concerning brand name and clubbing provisions.
SMALL SCALE INDUSTRIES- DEFINITION
Small Scale Industries/ Units (SSI) are not defined under the Central Excise Act, 1944 3 or the
rules framed thereunder. Although the definition given Industries (Development and
Regulation) Act, 1951 is not useful for determining the exemptions available under the
Central Excise Act, 1944, the IDRA 1951 defines Small Scale Unites on the basis of
investment made on the plant and machinery.4 For purposes of Central Excise, the
determination of Small Scale Units is done with regard to the notifications, which lays down
the criteria as the value of clearances made by any units in the previous financial year.
Therefore, the definition that has to be adopted for ascertaining the Small Scale Unites is not
as understood generally by the industry and other sectors like banking, but has to be
ascertained on the basis of the value of clearances.5

1 Amaresh Bagchi R. Kavita Rao, Bulbul Sen , Tax Breaks for the Small Scale Sector: An Appraisal
(National Institute of Public Finance and Policy)
2 Id.
3 Act No. 1 of 1944
4 (j) A small scale industrial undertaking means an industrial undertaking which, in accordance with
the requirements specified under sub-section (1) of section 11B, is entitled to be regarded as a small
scale industrial undertaking for the purposes of this Act;
5 ICAI, Chapter 13, Exemption Based on Value of Clearances.

Excise is a duty on manufacture and hence it is payable even by a small unit manufacturing
goods. At the same time, the government is also responsible for encouraging growth of small
units and it is administratively inconvenient and costly to collect revenue from numerous
small units across the country. The transaction costs of collecting excise from SSI would be
disproportionately high compared to the revenue collected and hence, exemptions are granted
to Small Scale Units.
The government has given concessions to Small Scale Industries vide the Notification
No.8/2003 dated 1st March, 2003. It is imperative to note that SSI Units whose turnover is
less than INR 4 crores are eligible for concessions. If SSI does not avail CENVAT on inputs,
turnover upto INR 150 Lakhs is fully exempt. If SSI units avails CENVAT on inputs, it has to
pay normal duty on all clearances and no SSI exemption is available.
SSI UNITS ELIGIBLE FOR SSI CONCESSION
A manufacturer being an SSI unit is eligible to claim exemptions from payment of excise
duty up to a turnover of INR 150 Lakhs during the current year provided the turnover
(aggregate clearances) in the previous year does not exceed INR 400 Lakhs. Industries,
regardless of the magnitude of their investment or number of employees are eligible for
concession if its annual turnover is less than INR 4 crores. The SSI unit need not be
registered with any authority to gain the benefits conferred under the Central Excise Act,
1944. At the same time, it is important to note that SSI exemption has not been granted to
some articles like Tobacco products, pan masala, watches, matches, sandalwood oil, icecream, tea/coffee, stainless steel and aluminum circles, revolvers/pistols/firearms et cetera are
specifically excluded from SSI exemption. SSI Exemption notification is goods specific and
person claiming the exemption must be eligible in respect of specified goods. The Supreme
Court in Commissioner of Central Excise, Jaipur v. Sri Ganganagar Bottling 6 co relying on
Commission of Central Excise, Chandigarh v Khanna Industries7 notes that noted that What
is required is that a person, who may be a manufacturer, must be eligible for exemption under
the notification in respect of the specified goods.8
6 (2007) 7 SCC 512
7 2006 ( 13 ) SCALE 15
8 Id. at Para 10

VALUE OF CLEARANCES TO BE EXCLUDED


For determining the first clearances upto an aggregate value not exceeding INR 150 Laks
made on or after the 1st Day of April in any financial year, the following clearances shall not
be taken into account9:

Clearances exempt from excise duty under any notification.


Clearances bearing the brand name or trade name of another person.
Clearances of intermediate goods/goods captively consumed in case the final product

is eligible for SSI exemption.


Clearances meant for exports are to be excluded for the purposes of calculating the
limit set by the law.

For the purposes of determining the aggregate value of clearances of all excisable goods for
home consumption i.e. INR 400 lakh, the following clearances shall not be taken into
account:

Clearances of goods to a unit in Free Trade Zone/ Special Economic Zone/ Hundred
percent export oriented undertaking/ Electronic Hardware technology Park or

Software Technology Park / United Nations/ International organization.


Clearances of the specified goods which are used as inputs for further manufacture of

any specified goods within the factory of production of the specified goods.10
Clearances which are exempt from the whole of the excise duty leviable thereon
under specific job work notifications.11
BRAND NAME

The benefit of exemption for clearances is not available to products which bear a brand name
of another person and would attract the normal rate of taxation. It was held in India

9 13.4 ICAI, Available at http://www.icaiknowledgegateway.org/littledms/folder1/30678revised-smfinalnew-idtl-excise-cp13.pdf


10 13.4 ICAI, Available at http://www.icaiknowledgegateway.org/littledms/folder1/30678revised-smfinalnew-idtl-excise-cp13.pdf
11 Notification No. 214/86-C.E, dated 25.03.1986 or No. 83/94-C-E, dated 11.040.1994 or No.84/94C.E. dated 11.04.1994

Rerpographic Systems v. CCE12 that the use of foreign brand name would not permit the SSI
to avail concessions.13
There are certain exceptions to the usage of brand name and the benefit of exemption would
be available in certain cases even if the goods have a brand name of another person. For
example, manufacturers of part of any equipment/machines for use as original equipment in
the factory can avail of the exemption even if they use a brand name. This provision is there
to cater to the needs of ancillary units which manufacture components for big industrial
units.14 Goods which carry the brand name of Khadi, Village Industries Commission or State
Khadi and Village Industry Board or National Small Industries Corporation (NSIC) etc are
also entitled to the benefits. At this juncture, it is also important to note that the Calcutta High
Court in CCE v. ESBI Transmission15 has concluded that Indian company is entitled to
benefits when the brand name belonged to the foreign company, but ownership of the brand
name is assigned to the Indian company. Goods will also be eligible for exemption when
bearing a brand name, when such goods are manufactured in a rural area.16
CLUBBING
Manufacturers often take advantage of the fact that exemption is granted up to 150 Lakhs in
respect of each unit and manufacturers often take advantage of the tax exemptions by
splitting one units into multiple units. Department on the other hand is of the opinion that
there is considerable loss of revenue when deliberate Small Scale Unites are operated with
single managerial control over the units. If the manufacturer has more than one factory, the
turnover of all factories has to be clubbed together for purposes of calculating the exemption
limits concerning SSI. It has been held that if one partnership firm has two units at different
12 1995 (75) ELT 112 (CEGAT)
13 The judgment has also been reiterated in Namtech Systems Ltd. V. CCE 2000 (115) ELT 238
14 13.6 ICAI, See Supra Note 10
15 1997 (91) ELT 292
16
(ii)

Rural Area means the area comprised in a village as defined in the land revenue records,
excluding-The area under any Municipal Committee, Municipal Corporation, Town Area
Committee, Cantonment Board or Notified Area Committee
Any area that may be notified as an urban area by the Central Government or a State Government

locations, their turnover will be clubbed for purpose of SSI exemption. 17 As per the
Honorable Court in AC v. Jayanthilal Balubhai 18, the production in factories will not be
clubbed when a person is an owner of a factory and is a partner in another court. In a
landmark case19 often appreciated by manufacturers, it was noted that factors such as
common location of factories, common expenses, common partners, common trademark,
sharing of machinery usage, mutual financial transaction without interest not enough to club
clearances.20 Although every case is decided on the basis of own merits and facts, it is
important to note that clubbing is done when there is a profit flow back or common finding.
Judicial decisions have always stressed the point that unless there is a flow back of profits
from all the other units to the parent unit in whose hands the turnover of all the units is
clubbed, clubbing clearances would not be possible. Therefore, it would be imperative for the
Department to prove that the other units are sham units and that there is a profit flow back to
the manufacturer who has set up the various units.21
CONCLUSION
Apart from the abovementioned concessions given as to the tax liability, there are certain
procedural concessions given to Small Scale Units. Units availing SSI concession need not
submit monthly ER-1 Return and have to submit a quarterly form. SSI Units are also
subjected to simplified custom procedures and they do not have to prepare ARE-1 form. 22
Further, the compliance costs are significantly reduced by exempting the units from
registration and documentation.23 In addition, excise inspectors and auditors can visit a unit
17 Jaybee Industries v. CCE (2004) 168 ELT 316
18 1978 (2) ELT J 317 (SC)
19 Jagjivan & Co. v. CCE 1985 (19) ELT 441 affirmed by Supreme Court in 1989 (44) ELT A24
20 ICAI 13.9 Exemption Based on Value of Clearances
21 ICAI 13.8
22 Taxation of Small Scale Industries,
http://www.archive.india.gov.in/business/taxation/small_scale.php
23 Id.

with specific approval obtained from Assistant Commissioner and there are relaxations as to
the frequency of audits which varies from once in two years to five years.24

24 Dr. Mohammed Ashraf Ali & Shahid Alam, Indirect Taxes (VK Global publications, 2014)