Excise duty is a tax which is attracted by the event of manufacture. It is levied only when such activity is a manufacture and is collected at the time of sale. Thus, it is applicable to readymade garments bearing a branded name on it. However, in case where articles are not bearing any branded name, they are exempted from the applicability of excise duty based on the condition that no CENVAT Credit shall be taken.
A brand is a name and may be a symbol that uniquely identifies a seller’s goods or services in the market. By legal definition, it is a trade mark, which may also be called a service mark when such brand is associated with any service. Nielson Media Research lists more than 500,000 brands worldwide in more than 2,000 product categories. Brands enable customers recognize the makers of goods or providers of services. With the passage of time, brands acquire reputations for quality, value, price-level, reliability, and many such characteristics that help consumers choose among competing offerings. They are the most convenient and highly abbreviated tools of communication.
It has been defined under Chapter 61 of Central Excise Tariff Act, 1985 as “brand name” means a brand name, whether registered or not, that is to say, a name or a mark, such as a symbol, monogram, label, signature or invented words or any writing which is used in relation to a product, for the purpose of indicating, or so as to indicate, a connection in the course of trade between the product and some person using such name or mark with or without any indication of the identity of that person. In the case of Royal Hatcheries Pvt. Ltd. v. State of A.P., it was held by the Supreme Court that the term brand name must be understood in the context of the words which follow. It was stated that- “…the words which follow are of wide amplitude and include any word, mark, symbol, monogram or label. Even a signature of an invented word or any writing should be sufficient if it is used in relation to the product for purpose of indicating a connection between the product and the other person/ company…”
It has been observed in the case of Indian Rayon and Industries Ltd. v. The Commissioner of Central Excise that under Section 2(f) of the Central Excise Act, it is not necessary that only the person who carries on the actual process of manufacture is the manufacturer. Even, so called trader can be a manufacturer if he gets the goods manufactured on his account.
In the case of Gabriel India Limited v. Union Of India & Ors.,it was held that mere affixing of a brand name or changing brand name would not amount to manufacture as no new product emerges. So, purchasing goods in bulk and selling them under own brand name cannot be treated as manufacture.
In the case of CCE v. M. Khambatwala, it was held that when the goods were produced on piece rate basis out of raw materials supplied by the person paying wages, the jobbers were the manufacturers and sale or ownership of raw material was not at all relevant.
In the case of Ammonia Supply Co. v. CCE, the Appellate Tribunal held that for applicability of excise duty, one of three conditions is required to be satisfied:- labeling of containers while repacking from bulk to retail packs; re-labeling while repacking from bulk to retail packs; the adoption of any other treatment to render the product marketable to the consumer. In other words, labeling or relabeling, any of the two, must be accompanied either by repacking from bulk packs to retail packs, or the adoption of any other treatment to render the goods marketable.
Where the goods are produced with customer’s brand name under his quality control, it does not mean that the customer is the manufacturer. For example, Bata India Ltd. Procures footwear from job workers & affixes its brand name on it. Here, Bata is not the manufacturer. Therefore, in case of readymade garments and made up articles of textiles manufactured on job-work basis, liability to pay excise duty and comply with the provisions of Central Excise Rules, 2002, is on the merchant manufacturer, that is, person on whose behalf goods are manufactured by job workers, viz. the owner of raw materials as per Rule 4(1A) of CER
Position prior to 2016
In the Budget 2010-11, 10 % excise duty on branded garments was levied by the then finance minister Mr. Pranab Mukherjee. It was further increased to 12 % in Budget 2012-13, with 70 % abatement. However, Mr. P. Chidambaram, removed the levy in Budget 2013-14, to help the clothing industry, hit by slowdown and currency volatility. It was found that as a result the exchequer took a hit of about Rs. 1,300 crore.
However, in the Budget of 2016-17, Excise duty on readymade garments of Rs. 1000 or more has been increased which has been observed as a “negative move” by the industry with regard to the small scale industries who manufacture garments for the big brands.
Position post 2016
Few changes have been made in the Central Excise Act, 1944 as per the Finance Bill, 2016. Finance Minister Mr. Arun Jaitley, in the Budget 2016-17, had proposed to bring in high-end readymade garments under the ambit of excise duty. He proposed to levy 2 % excise duty on all branded readymade garments and made-up articles of textiles of retail sale price of Rs 1,000 or more. However, this will be applicable only for the manufacturers who do not claim input tax credit (ITC), that is, CENVAT, paid on various raw materials. Manufacturers who claim CENVAT Credit, however, will need to pay 12.5 % excise duty. Until now, excise duty was “nil” on such manufacturers without CENVAT claim and 6-12.5% for those who claimed CENVAT.
Changes were included in Chapter 61, 62 and 63 of the Central Excise Act, 1944 where the basic excise duty of 2% (without CENVAT Credit) or 12.5% (with CENVAT Credit) is being imposed on readymade garments and made up articles of textiles falling under these chapters (heading nos. 6309 00 00 and 6310) except those falling under 6309 00 00 and 6310, of retail sale price (RSP) of Rs. 1000 and above when they bear or are solid under a brand name. Moreover, the brand name owner, and not the job-worker, shall be required to register and comply with all the provisions of Central Excise law. However, the brand name owner will be given the option to authorize his job-worker to pay the duty leviable on the goods.
These goods have been divided in two categories: First, where goods having Retail Sale Price of Rs. 1000/- and above when they bear or are sold under a brand name. Both the conditions have to be fulfilled. Second, where readymade garments do not fall under the first category, optional levy of “Nil (without CENVAT Credit) or 6% (with CENVAT Credit)” in case of garments/ articles of cotton, not containing any other textile material and “Nil (without CENVAT Credit) or 12.5% (with CENVAT Credit)” in case of garments/ articles of other composition, as the case maybe, shall continue.
A certain question from examination was also dealt with as to whether packing, labeling, branding amounts to manufacture. It was stated that packing is essentially a process of manufacture as goods, normally, cannot be sold without being packed. But labeling, branding or repacking already packed product would not amount to manufacture. But if such repacking, labeling or branding is undertaken u/s 2(f) (ii) or (iii), such treatment shall be deemed to be manufacture. Hence, in order to come within the ambit of Excise Duty there has to be an event of manufacture which may be of any kind as stated above.
Imposing excise duty on branded readymade garments with the Retail Sale Price of more than Rs.1000 will adversely affect the industry. According to Financial Budget 2016-17, 2% excise duty has been levied on branded readymade garments and made-up articles of textiles of Retail Sale Price of Rs 1,000 or more, though it is made applicable only for those manufacturers who do not claim Input Tax Credit. On the other hand, manufacturers who claim Input Tax Credit, however, will need to pay 12.5% excise duty. Until now, excise duty was “nil” on manufactures without Input Tax Credit claim and 6-12.5% for those who claimed such credit.
According to Arun Ganapathy, CFO, Spykar Lifestyles Pvt. Ltd.:-
“Budget 2016 doesn’t augur well for the apparel retailers. Excise Duty which was withdrawn in Finance Bill, 2013 has again been imposed on Branded Readymade garments with MRP of Rs. 1000 and above under two options- 2% tax without Input Tax Credit and 12.5% with Input Tax Credit. The tariff value has also been changed from 30% of MRP to 60% of MRP. This would be an additional cost on apparel players. Krishi Kalyan cess of 0.5% which will be imposed effective June 1, 2016 is an additional impact for us…”
Hence, prices of such garments are expected to go up by 5%-6%. According to Rahul Mehta, President of the Clothing Manufacturer Association of India:- “the excise duty is on 60% of the MRP. Currently, market is sluggish. With further increase in price, it will be a nail in the coffin.”
Moreover, according to a survey done by the Press Trust of India, the garment industry in Punjab described the levy on excise duty of ready made garments as most deplorable step and said that prices of such garments are likely to rise upto 5%. Condemning the government for the same and for bringing small and medium enterprises engaged in such garment manufacturing under the ambit of indirect tax, this industry questioned the rationale behind such move when the Centre was pushing for bringing Goods and Service Tax from next fiscal. This levy of Excise Duty has been stated as a “negative move” as it is likely to hurt the small and medium size industries which are manufacturing garments for big brands. However, such levy is most likely to hit manufacturers having their own brand as they will want to keep the cost of the products low which could lead to compromise on quality. Customers who mostly purchase garments between price range of Rs. 1000 to Rs. 2500 will also have to face the consequences.
On the other hand, Indian Texpreneurs federation has said that
such levy of excise duty on branded readymade garments of Rs.1000 and above seems to be a move to prepare the sector of GST regime. The excise duty, however, on readymade garments could have been postponed till the integration with GST, covering the entire textile value chain as rather than imposing tax, government should have introduced some liberal steps for the promotion of labour intensive industry and employment generation which is the need of the hour.
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