MARCH 23, 2012

SSI Exemption in jeopardy for persons liable to duty under Rule 12AA

By R. Nambirajan, Advocate & Gajendra Jain, Advocate

1. RULE 12AA(1) of Central Excise Rules, 2002 after amendment by Budget 2012 reads as under:

(1) Notwithstanding any thing contained in these rules, every person (not being an export-oriented unit or a unit located in special economic zone) who gets article of jewellery or other articles of precious metals falling under heading 7113 or 7114 as the case may be of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) (hereinafter referred to as the Tariff Act), produced or manufactured on his behalf, on job work basis , (hereinafter referred to as “the said person”) shall obtain registration, maintain accounts, pay duty leviable on such goods and comply with all the relevant provisions of these rules, as if he is an assessee. (emphasis supplied)

2. Rule 12AA makes a person other than a job worker [who is manufacturer under central excise law, generally referred as karigar (artisan) in jewellery trade parlance] as a person liable to pay duty and deems such a person as an assessee.

3. The legal significance of deeming such a person as an assessee & not as “manufacturer”, has been lost in the maze of confusion created due to amendments introduced by Budget 2012. This article is an attempt to interpret the legal significance & the consequences thereof. The consequences are put for debate in the public domain so that meaningful consensus can emerge.

Consequence no. 1

A.1 SSI Exemption Notification No. 8/2003-CE grants exemption to a manufacturer. Where excise duty liability is not on manufacturer but any other person, SSI exemption is amended to extend the benefit to such a person. For e.g., when Budget 2011, in case of garment industry, sought to collect tax from a person other than manufacturer, SSI exemption was extended to such a person by way of Explanation I which is reproduced below:

(I) For the purpose of goods falling under Chapter 61, 62 or 63 of the said First Schedule, the expression “manufacturer” shall include a person who is liable to pay the duty of excise leviable on such goods under sub-rule (1A) of rule 4 of the Central Excise Rules, 2002.

A.2 Rule 4(1A) is reproduced for sake of completion:

(1A) Notwithstanding anything contained in sub-rule (1), every person who gets the goods, falling under Chapter 61 or 62 or 63 of the First Schedule to the Tariff Act, produced or manufactured on his account on job work, shall pay the duty leviable on such goods, at such time and in such manner as is provided under these rules, as if such goods have been manufactured by such person :

Provided that where any person had, instead of paying duty, authorized job worker to pay the duty leviable on goods manufactured in his behalf under the provisions of sub-rule (1A) as it stood prior to the publication of this notification, he shall be allowed to obtain registration and comply with the provisions of these rules within a period of thirty days from the date of publication of this notification in the Official Gazette.

A.3 As comparison of Rule 4(1A) and Rule 12AA(1) would show that, although not identical, they are pari materia provisions.

A.4 Budget 2012 does not link the SSI exemption to person liable to duty under Rule 12AA as it did in the case of garment industry in Budget 2011 by way of Explanation I. Hence, this gap in legislation would inadvertently make traders – who purchase gold & get jewellery manufactured on their behalf from a job worker (karigar) – liable to pay duty & still not entitled to SSI exemption.

A.5 From whatever information is available in public domain, the intention of the Government seems to grant SSI exemption to traders liable to pay duty under Rule 12AA, but such intention is not getting reflected in the language of the SSI exemption Notification.

Consequence no. 2

B. This consequence is fallout of what is discussed in para A supra. Not only traders, every individual consumer who takes gold to the trader for getting it converted into jewellery, would be liable to pay excise duty with no SSI exemption. Just imagine, lakhs of individual consumers across the country would be persons liable to pay duty for even small amount of Rs.100. The result would be very absurd.

Consequence no. 3

C.1 What is the effect of deeming trader as an assessee & not as a “manufacturer” in Rule 12AA? This only means that the liability of a trader is co-terminus with that of actual manufacturer (karigar). In other words, such traders would be liable to pay if duty is otherwise payable in law by the actual manufacturer i.e., karigar. A “manufacturer” under excise law continues to be job worker (karigar) who alone is entitled to SSI exemption and once the karigar is entitled to SSI exemption, there is no excise duty implication upto SSI limit. Once there is no excise duty implication on goods so manufactured by karigar, such traders can argue that they are not liable to pay duty on them even though they have been deemed to be assessee under Rule 12AA(1).

C.2 For illustration, assume a situation where a trader purchases gold and gives to a karigar-1 who does work exclusively for this trader & nobody else. This karigar-1 is eligible to SSI exemption upto Rs.5 crores of sale value of this trader. The trader can engage such five different exclusive karigars to get exemption upto Rs.25 crores of his sale value.

Conclusion

4. There are many issues in this sector which have been left unanswered by Budget 2012 amendments. This article presents only one dispute area based on law as it exists today.