1994 (7) TMI 91 - HC - Central Excise

SSI Exemption - Brand name - Discriminatory Legislation - Fundamental rights - Discrimination - Strictures against Excise Department

Summary

Issues Involved:
1. Classification of Small Scale Industries (SSIs) under Notification No. 223/87-Central Excise.
2. Eligibility for excise duty exemption for SSIs.
3. Rationality and legality of the classification under Article 14 of the Constitution of India.

Issue-Wise Detailed Analysis:

1. Classification of Small Scale Industries (SSIs) under Notification No. 223/87-Central Excise:
The Petitioners, SSIs manufacturing various goods including electrical appliances under an agreement with Big Industrial Units, challenged Notification No. 223/87-Central Excise, dated 22-9-1987. The Notification classified SSIs into two classes: (1) SSIs that manufacture goods and sell them either in the market or directly to Big Industrial Houses, which affix their brand name on the goods, and (2) SSIs that manufacture goods and affix the brand name of the purchaser, a Big Industrial House. The first class is exempted from excise duty for goods up to Rs. 20,00,000/- under the Notification dated 1-3-1986, whereas the second class is not eligible for such exemption.

2. Eligibility for Excise Duty Exemption for SSIs:
The object of both Notifications (dated 1-3-1986 and 22-9-1987) was threefold: to grant exemption to manufacturers selling goods worth Rs. 20,00,000/-, to ensure Big Industrial Houses do not avoid excise duty, and to give SSIs a market advantage over Big Industrial Houses. The Petitioners argued that the excise duty is levied on the manufacturing of goods and not on whether the brand name of the purchaser is affixed. The Supreme Court in M/s. R.C. Industries v. Union of India and subsequent cases (M/s. Sidhosons and Another v. Union of India, M/s. Kulwant Electrical Industries, Delhi v. Union of India) held that the assessable value of goods should be the wholesale price at which the SSIs sold the goods to wholesale dealers, not the price at which the brand name owners sold the goods.

3. Rationality and Legality of the Classification under Article 14 of the Constitution of India:
The Calcutta High Court in Banner and Company v. Union of India observed that putting a brand name on specified goods does not change the goods and cannot amount to manufacture. The distinction between SSIs based on whether they affix their own brand name or the purchaser's brand name was deemed irrelevant for excise duty purposes. The classification under the impugned Notification was not justified as it did not align with the objectives of protecting SSIs from competition with large-scale units. The Allahabad High Court concurred, stating that the classification had no rational basis and violated the equality clause under Article 14 of the Constitution.

Conclusion:
The Allahabad High Court concluded that the classification under Notification No. 223/87-Central Excise was discriminatory and arbitrary. The Court held that SSIs affixing the brand name of the purchaser should also be entitled to the exemption under Notification No. 175/86-C.E., dated 1-3-1986. Consequently, the writ petition succeeded, and a writ of mandamus was issued, commanding the authorities to accord the Petitioners the benefit of Notification No. 175/86-C.E. The Court's interim order directing the Petitioners to furnish a bank guarantee for the excise duty payable was discharged.