Excise

I

Introduction to Indirect tax

History:

“Tax” had its genesis from 300 B.C in Kautilya’s Arthasastra, where King used to levy taxes on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service. There was a belief that “King collects taxes, just as sun draws moisture from earth to give it back a thousand fold”. The State not only collected a part of the agricultural produce but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals etc. Salt tax was an important source of revenue and it was collected at the place of its extraction The revenues collected in this manner were spent on social services such as laying of roads, setting up of educational institutions, setting up of new villages and such other activities beneficial to the community and also for protection, Law and order [Also, for distributing free color TV’s, Washing machines, laptops, free rice!!!].

Present:

Tax is a fee charged by a government on an income, a product or activity. There are two types of tax viz., Direct Taxes and Indirect Taxes. If tax is levied directly on the income or wealth of a person, then it is a direct tax. If tax is levied on the price of a good or a service, then it is called an indirect tax. In the case of indirect taxes, the person paying the tax passes on the burden to another person.

Future:

Goods and Services Tax (GST) which eliminates the present excise, service and sales tax. Customs will be retained. India is a federal republic, and the GST will thus be implemented concurrently by the central and state governments as the Central GST and the State GST respectively.

Indian Constitution w.r.to taxes:

In its current state, the Constitution of India does not provide concurrent powers of taxation to the Union and the States. The 115th Constitution Amendment Bill, 2011 (“BILL”) proposes to amend the Constitution to empower the Union and States to frame laws for levying GST on transactions involving the supply of goods and services. Article 265 of constitution of India prohibits arbitrary collection of tax. It read as “No tax shall be levied or collected except by authority of law”. The power to Levy and collect tax is derived from Constitution.

Taxes

Direct taxes

Income taxWealth

Tax

Indirect taxes

Excise Duty

Customs Duty

Service taxSales

tax/VAT

II

President of India is the head of the state and the state has 3 organs Legislative organ – Parliament – Enact the Laws Executive organ – Council of Ministers headed by PM – Implement the Laws Judicial organ – Supreme Court – Interpret the Laws (Of course the Fourth Organ or Fourth Estate is “NEWS PAPER”)

How an Act comes into Existence?

Recognition of Issue Appointment of Committee Recommendations by committee Preparation of Bill Presentation to parliament Discussion in both the houses Bill passed with majority Sent to president for assent Bill becomes Act on the date of assent by president. For every Act, there will be Rules, notifications, circulars, judicial pronouncement. Why? -- In order to support the Act.

Act – Contains the detailed provisions which are to be complied with as a Citizen of India Rules – Are meant only for the purpose of carrying out the purposes of the provisions of the Act and it should be read in such a way as to make it in accordance with the main object contained in the Act. Notifications – It is not practicable to approach parliament and seek its approval for every minor change. Therefore, parliament delegates some powers to other authorities to issue notifications for those changes and also every change should be notified. A notification has to be published in official Gazette, which is then made available to public. The notification comes into effect on the day it is published in official Gazette. Trade circulars/Trade notices – Are issued to clarify the views of the government in respect of any Act, rules or notifications. They do not have any legal force.

Authorities cannot take different stand in different states and that trade notice issued by customs house will bind all customs authorities.

Board circulars are not binding on the Supreme Court or high court or tribunal. In the same way, departmental clarifications are not binding on the assessee.

If departmental circulars are favorable to assessee, they bind revenue even if they are contrary to the interpretation of law by Supreme Court. This is not true if circulars are against assessees, who are bound by provisions of law.

The board is not empowered to issue circulars contrary to tribunal decisions and instead has to take up the matter in appeal.

Orders – Orders with respect to tax may be issued either by CBEC or by Central government. Orders have been issued by the CBEC from time to time to define jurisdiction of officers.

Any Act, Rule, Notification or order which is not according to constitution is Void and illegal.

Sources of any law

Act Rules NotificationsCirculars or

Office lettersTrade

NoticesOrders

III

Administration of Tax – By Executive Organ:

Central Board of Excise & Customs (CBE&C) is the central authority to regulate Central Excise, Service tax and Customs matters.

The following diagram illustrates the levy of Indirect taxes in India:

Ministry of Finance

Department of Revenue

Central Board of Direct taxes (CBDT)

To control in respect of all matters related to Direct tax including levy and

collection of tax

Central Board of Excise & Customs (CBE&C)

To control in respect of all matters related to Indirect tax including levy

and collection of tax

IV

Seventh schedule to the Constitution, contains 3 Lists

List I - “Union List” List II – “State List” List III – “Concurrent List”

Entry No. 82: Tax on income other than agricultural income

Entry No. 46: Taxes on agricultural income

Where both Central and state government can make laws. It includes

Entry No. 83: Duties of customs incl. export duties

Entry No. 51: Excise duty on alcoholic liquors, Opium, narcotics

Entries like Criminal law Trust and trustees

Entry No. 84: Duties of excise on tobacco and other goods manufactured or produced except alcoholic liquors, Opium, narcotic drugs

Entry No. 52: Tax on entry of goods into a local area for consumption, use or sale there in. (usually called Octroi)

Civil procedures Price control Factories etc.

Entry No. 85: Corporation tax Entry No. 54: Tax on sale or purchase of goods other than newspapers, within the state

Entry No. 92A: Tax on sale or purchase of goods other than newspapers, which take place in the course of interstate trade or commerce.

Entry No. 92B: Taxes on consignment of goods where consignment takes place in the course of interstate trade or commerce

Entry No. 92C: Tax on services (passed but not made effective)

Entry No. 97: Residual powers

INDIRECT

TAX LAWS

CENTRAL

EXCISE ACT,

1944

Taxable Event Rate of duty Valuation CENVAT credit Exemptions Procedures

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CA Final INDIRECT TAX LAWS

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Table of Contents

Nil rated goods Vs. Non excisable goods: ..................................................................................... 8

Excisable goods Vs. Exempted Goods: .......................................................................................... 8

Issues in Taxable Event: ........................................................................................................................ 9

1. “Goods” under Central Excise: ...................................................................................................... 10

Issues in „Goods‟: ................................................................................................................................ 11

Recent Cases on “Plant and machinery assembled at site”: .......................................................... 14

2. “Excisable Goods” under Excise: ................................................................................................... 17

3. “Manufacture” under Excise: ......................................................................................................... 17

FAQ‟s on Manufacture: ................................................................................................................... 18

Case laws on Manufacture: ............................................................................................................. 21

Manufacturer: .................................................................................................................................. 22

FAQ‟s on Manufacturer: ................................................................................................................. 23

General Rule: ........................................................................................................................................ 23

Exceptions: ........................................................................................................................................... 23

4. Scope and Coverage of Excise Act, 1944: ....................................................................................... 25

Dutiability in case of EOU: ......................................................................................................... 25

Various Schedules under CETA: ......................................................................................................... 26

Features of CETA: ............................................................................................................................... 26

Harmonised System of Nomenclature:................................................................................................. 27

Classification under CETA: ................................................................................................................. 28

An Extract from CETA: .................................................................................................................... 28

Steps in classification: ..................................................................................................................... 28

Trade parlance Theory: ................................................................................................................... 28

General Interpretative rules (GIR) or Rules for Interpretation of Tariff: ........................................... 29

Classification of accessories: .......................................................................................................... 31

Classification of parts and components:.......................................................................................... 31

Case laws on Classification: ................................................................................................................ 32

Circulars on Classification: ................................................................................................................. 34

Various Types of duties under Excise: ................................................................................................. 35

Provisions relating clean energy Cess: (Notifications 1-6/2010 and 28-29/2010): .................... 35

1. Specific duty ..................................................................................................................................... 37

2. Tariff Value ...................................................................................................................................... 37

3. Duty based on production capacity [Sec. 3A] ................................................................................. 37

4. MRP based valuation ....................................................................................................................... 38

FAQ‟s on MRP based valuation: ..................................................................................................... 38


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Retail Selling Price (Determination) Rules, 2008: .......................................................................... 40

5. Compounded Levy scheme: .............................................................................................................. 41

6. Transaction Value ............................................................................................................................ 41

FAQ‟s on the definition of TRANSACTION VALUE: .................................................................. 42

Computation of Transaction Value:..................................................................................................... 45

Valuation Rules:................................................................................................................................... 47

Case laws on Valuation and Valuation Rules: ................................................................................ 49

Circulars on Valuation and Valuation Rules: ................................................................................. 51

Definition of Inputs: ............................................................................................................................. 53

FAQ‟s on inputs ............................................................................................................................... 53

Recent cases on Inputs: .................................................................................................................... 56

Definition of Input Service: .................................................................................................................. 57

FAQ‟s on Input service: ............................................................................................................... 58

Definition of Capital goods: ................................................................................................................ 61

FAQ‟s on capital goods. .............................................................................................................. 62

Input Service Distributor: .................................................................................................................... 63

Manner of distribution of credit (Rule 7) ..................................................................................... 64

Duties/taxes that can be taken as credit: ............................................................................................. 65

Restriction on Utilization:.................................................................................................................... 66

What are “Exempted goods” and “Exempted services”? ................................................................... 66

FAQ‟s on Exempted goods and Exempted Services: ....................................................................... 66

Definition of output service: ................................................................................................................ 67

Removal of Inputs or Capital goods: ................................................................................................... 67

FAQ „s on Removal of Inputs, Capital goods: ............................................................................. 68

Recent Circulars .................................................................................................................................. 69

Other miscellaneous provisions in Rule 3 ................................................................................... 70

Availement of CENVAT credit: ............................................................................................................ 72

FAQ’s on Rule 4: ........................................................................................................................... 73

Goods Sent on Job work: ..................................................................................................................... 73

FAQ‟s on Rule 4(5) and Rule 4(6):.................................................................................................. 74

CENVAT credit w.r.to Exports: ........................................................................................................... 75

FAQ‟s on Rule 5: ......................................................................................................................... 76

Refund of CENVAT credit to units in Specified areas – Rule 5A: ................................................... 76

Inputs/Input services used in Exempted goods/services:[Rule 6] ........................................................ 77

Common inputs used for BOTH EXEMPTED AND DUTIABLE GOODS (AND) services: ............... 77

FAQ‟s on Rule 6: ......................................................................................................................... 80

Explanation to above chart:............................................................................................................. 81


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Capital goods used for exempted as well as dutiable goods/services: ................................................ 83

Documents on the basis of which credit can be taken: ........................................................................ 84

FAQ‟s on documents ........................................................................................................................ 84

If dutiable goods turn out to be exempted goods: ................................................................................ 85

Miscellaneous procedural CENVAT credit rules ................................................................................ 86

Procedures & Records for CENVAT .................................................................................................. 86

Transfer of CENVAT credit [Rule 10 & Rule 10A] ............................................................................. 87

Confiscation and Penalty [Rule 15] .................................................................................................... 88

Notifications issued by the central government to be laid before parliament [Sec. 38] ..................... 89

Power to grant exemption from duty [Sec. 5A of CE Act] ................................................................... 89

Various Exemptions under Excise: ...................................................................................................... 90

1. Exemptions to SSI: ........................................................................................................................... 90

Case laws on SSI Exemption: .......................................................................................................... 94

Circulars & Notifications on SSI Exemption: ...................................................................................... 96

Clubbing of clearances: ................................................................................................................... 97

Case laws in this regard: ............................................................................................................. 97

2. Exports under Excise – Rule 18 and Rule 19 of Central Excise Rules, 2002 .................................. 98

FAQ‟s on Rule 18 (Rebate of duty): .............................................................................................. 103

3. Clearance of goods to an Export Oriented Unit (EOU) – Notification No. 22/2003 .................... 113

4. Clearance of Excisable goods from a DTA unit to Special Economic Zone (SEZ) ........................... 114

5. Notification No. 1/2011 – CE......................................................................................................... 114

6. Removal of goods at concessional rate of duty for manufacture of excisable goods: ................... 115

7. Exemptions to new units located in backward area: ..................................................................... 116

Organization hierarchy of Excise Department .................................................................................. 118

Registration [Sec. 6 of Central Excise Act along with Rule 9 of Central Excise rules] .................... 118

Application for registration by LTU – Notification No. 17/2011 ...................................................... 121

Exemption to other units of manufacturers of recorded smart cards when premises from where centralised billing done is registered – Notification No. 14/2011.................................................... 121

Storage and accounting the Final Products: ..................................................................................... 121

Invoice [Rule 11 of Central Excise Rules]: ....................................................................................... 122

Payment of Duty [Rule 8 of Central Excise Rules]: .......................................................................... 123

Form and maintenance of Personal Ledger Account (PLA): ............................................................ 124

Returns under Excise (Rule 12 of Central Excise Rules): ................................................................. 124

Assessment under Excise: .................................................................................................................. 125

Procedure for Self assessment: ...................................................................................................... 126

FAQ‟s on scrutiny of returns and assessment: .............................................................................. 126

Procedure for provisional assessment: .......................................................................................... 127



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FAQ‟s on provisional assessment:................................................................................................. 128

Goods brought for Repairs, remaking and reconditioning [Rule 16]: .............................................. 129

The provisions as contained in Rule 16 are as follows: .................................................................. 129

FAQ‟s on Rule 16: ......................................................................................................................... 130

Clearance of goods for carrying out tests or other process (Rule 16C): .......................................... 130

Jobwork in jewellery (Rule 12AA): .................................................................................................... 131

Procedure and facilities for Large tax payer Unit (Rule 12BB): ...................................................... 131

Procedure for maintenance of records and payment of duty by the independent weaver of

unprocessed fabrics (Rule 12C): ....................................................................................................... 132

Warehousing of goods (Rule 20): ...................................................................................................... 132

FAQ‟s on warehousing of goods: .................................................................................................. 133

Remission of duty (Rule 21): .............................................................................................................. 133

Bonds under Excise: .......................................................................................................................... 134

Withdrawal of facilities and imposition of restrictions on certain assessees by central government

[Rule 12AAA of CENVAT credit Rules, 2004 & Rule 12CCC of Excise Rules, 2002] – Notification 3

to 5/2012 ............................................................................................................................................ 134

Audit under Central Excise:............................................................................................................... 136


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Central Excise Act, 1944/ CENVAT – An Introduction

For every Act, there will be Rules, notifications, circulars, judicial pronouncement. Why? In order to support the Act.

It includes the following: 1. Central Excise Valuation Rules, 2000 To Determine the Value 2. Central Excise Tariff Act (CETA), 1985 Contains rate of duty and only goods mentioned here are taxable

goods 3. Central Excise Rules, 2002. Procedure to pay duty 4. CENVAT credit Rules, 2004

Main purpose of Central excise Act,1944

Govt. will impose the duty, the power to levy duty is derived from the constitution and reference is List-I of the

seventh schedule of the constitution – Entry 84 – Duties of excise on tobacco and other products manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

Tax payable = Rate of duty x Value So, in order to arrive at excise duty payable 4 things are to be determined

1. When to pay the duty i.e., Taxable event 2. Rate of Duty. 3. Value on which the rate has to be applied. 4. Exemptions 5. Procedure for payment of duty

The Central Excise Act should be read to cover all the above 5 sequentially and systematically.

Taxable Event Sec. 3 of Central Excise Act, 1944 – “Excisable goods manufactured or Produced in India”

Rate of Duty As mentioned in Central Excise tariff Act (CETA), 1985

Valuation Sec. 3(2) – Tariff Value Sec. 3A – Duty based on Production capacity Sec. 4A – MRP based Valuation Sec. 4(1) – Transaction Value Central Excise (Determination of value) Rules, 2000

Exemptions Sec. 5A and various exemption notifications by the Board in the official Gazette.

Procedures Contained in Central Excise Rules, 2002

Levy of excise duty

Why? - To raise revenue

When? - Taxable event

How? - Rate of duty, How to pay etc.,



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Taxable Event under Excise

1. Levy i.e. Taxable Event

Governed by sec. 3 of the Central Excise Act, 1944

The EVENT on happening of which the duty liability is attracted is known as Taxable event. In excise the taxable event is Manufacture (or) production of excisable goods in India 4 conditions must be satisfied to attract excise duty liability

(i) There must be goods (ii) The goods must be excisable (iii) Goods must be manufactured (or) produced (iv) Such manufacture (or) production takes place in India

2. Point of payment of Duty

Rule 4 and 5 of Central Excise Rules, 2002

Even though, the duty liability arises as and when the goods are manufactured but it is to be paid at the “time of removal” of goods from the factory or warehouse. (The provision is so constructed because of administrative convenience)

The relevant date for determining the rate of duty and tariff valuation shall be the date of actual removal of goods from the factory or warehouse.

3. Collection of Duty

Rule 8 of Central Excise Rules, 2002

Note: For the Month of March and Quarter ending March the due date shall be MARCH 31st An assessee who has paid total duty of `10 lakh or more either in cash or by utilizing CENVAT credit or both in the preceding financial year shall deposit the duty electronically through internet banking (www.aces.gov.in/epayment) The duty liability shall be deemed to have been discharged only if the amount payable is credited to the account of Central Government.

When tax should be paid ?

Normal Assessee

Normal Payment

5th of the month following, every

month

E - Payment


month

SSI Units

Normal Payment

5th of the month following the

quarter

E - Payment


quarter

What is taxable event under excise? Issues in taxable Event Goods Issues in Goods Excisable Goods Manufacture Issues in Manufacture Manufacturer Scope and coverage of Excise Act, 1944

http://www.aces.gov.in/epayment


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Non-Excisable goods Non-dutiable goods Goods exempt from duty Goods carrying nil rate of duty

If goods are not listed in CETA (or) If goods are listed in CETA but no rate is specified (i.e. not nil rate or the rate column is left blank)

They are excisable goods but not liable to duty because of:

a) NIL rate has been specified b) on account of 100%

exemption c) On account of any other

reason like, not manufactured or not marketable.

These are excisable goods But are exempted by a notification in official gazette.

These are excisable goods But are not liable to duty as the rate mentioned in CETA will be ‘NIL’ Goods where rate is blank is excisable goods – Geetanjali Woolens V. CCE (2007) (CESTAT)

Examples: Flowers, Ready to eat meals, broken glazed tiles

Examples: live animals, newspaper and maps, rice, wheat, soya bean, cotton seed.

Examples: Iron and steel ingots etc.,

“Non duty paid goods” are those, which are removed clandestinely (i.e. illegally without paying duty), without an invoice where the intention is to evade duty.

Nil rated goods Vs. Non excisable goods:

Nil rated Goods Non Excisable Goods

Meaning Goods which are mentioned in CETA, but the rate of duty being ‘nil’. These are excisable goods.

When goods are not mentioned in CETA

Whether taxable event triggered?

Yes No

Reason? As all the 4 conditions are satisfied i.e. Goods, excisable goods, manufacture in India.

As one of the 4 conditions not satisfied i.e. these are not excisable goods.

Whether duty liability attached?

Yes No

Reason? As and when taxable event is triggered, the duty liability is attached.

As and when taxable event is not triggered, the duty liability is not attached.

Whether duty payable? No No

Reason? The rate of duty being 0% There is no tax liability

Excisable goods Vs. Exempted Goods:

Excisable Goods Exempted Goods

Meaning Goods which are mentioned in CETA. Goods which are mentioned in CETA but exempted by an exemption notification. These are also excisable goods.

Whether taxable event triggered?

Yes Yes

Reason? As all the 4 conditions are satisfied i.e. Goods, excisable goods, manufacture in India.

As all the 4 conditions are satisfied i.e. Goods, excisable goods, manufacture in India.

Whether duty liability attached?

Yes Yes

Reason? As and when taxable event is triggered, the duty liability is attached.

As and when taxable event is triggered, the duty liability is attached.

Whether duty payable? Yes No

Reason? Tax liability is attached, so tax payable at the time of removal.

Though the tax liability is attached, but it is exempted by a notification.



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Issues in Taxable Event:

Issue – 1: In the following cases goods are not sold and money not received. Whether excise duty is payable?

(i) If consumed within the factory. (ii) If given as free samples

(iii) If Goods captively consumed means goods are consumed for further manufacture, ex: Consumption of cloth for readymade garments

(iv) If Goods are distributed as replacement

In all the above issues, excise duty is levied, since the taxable event (i.e) manufacturing of goods taken place.

Issue – 2: Take a look at the following situations and decide whether excise duty is payable?

Situation On the date of manufacture On the date of removal Whether duty payable

(i) NIL 16% (ii) Not excisable 16% (iii) Exempted Exemption with drawn (iv) No special levy Special levy introduced

Situation (i): Rate of duty as relevant on the date of removal – Wallance Floor Mills Co. Ltd. v. CCE. Facts of the case:

Goods were fully manufactured and packed when goods were exempt from duty. These were cleared after the exemption was withdrawn and goods became liable to duty. Held that the duty is payable.

Situation (ii): If a particular good is not excisable on the date of manufacture and subsequently made

excisable, then there is no duty liability.

Situation (iii): Exempted goods do not mean the goods are non-excisable.

Situation (iv): No special levy applicable as there is no special levy on the date of manufacture – CCE. v. Vazir Sulthan Tobacco Ltd.

Facts of the case: The company was engaged in manufacture of cigarettes. Levy of special Excise duty on cigarettes were removed between 1.3.1978 and 12.3.1978. Cigarettes were manufactured during that period i.e., Prior to 12.3.1978 Held that the duty is on manufacture and not upon removal. When the goods were manufactured,

there was no levy of special duty so it cannot be attached at the stage of removal.

Issue – 3: If goods were seized by excise authorities and released later and in meanwhile if excise exemption is withdrawn, what is the position of the assessee?

Assessee will not be entitled to exemption, as the exemption notification was not in force on the date of removal from the factory – Kuil Fire Works v. CCE.

Issue – 4: Indian railways, which is a department of central government has manufactured certain goods falling under CETA, 1985. Whether duty can be levied on government undertaking?

The supreme court vide Karya palak engineer V. State of Rajasthan has observed the articles 285 and 289 of constitution and held that, excise duty can be levied on goods manufactured by state or central government undertakings.


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1. “Goods” under Central Excise:

Goods are not defined under Central Excise Act. But Goods under sale of goods Act is “Every kind of movable property other than actionable claims and money; and includes shares, grass and things attached to and forming part of land which are agreed to be served before sale or under contract of sale”.

Based on the Sale of Goods Act,

If a particular article (or) commodity is movable, then it is a good.

Based on the case UOI v. DCM, If a particular article (or) commodity is marketable,

then it is a good.

Combing the above. 1. It must be movable 2. It must be marketable (includes

Deemed Marketability)

Concept of Marketability:

Marketable – Capable of being bought or sold (Actual sale not necessary) “Marketability or vendibility test.” The goods manufactured must be known to the market. Existence of an open market is not a pre condition. There may or may not be an actual market. The fact that the product in question is generally not being bought and sold or has no demand in the

market would be irrelevant. (As capable of being bought or sold is sufficient) Usage in captive consumption is not determinative of whether the article is capable of being sold in the

market. Even if goods are available from only one source or from a specified market, it makes no difference so long

as they are available for purchasers. The test of marketability is that the product which is made liable to duty must be marketable in the

condition in which it emerges.

Deemed Marketability:

As per the explanation to sec. 2(d) ‘Goods’ includes any article material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.

UOI vs. Delhi Cloth Mills Case:

The company was engaged in the manufacture of “vanaspathi”. Ground nut oil and til oil was the raw material.

An intermediate product called ‘Refined oil’ was obtained during the process and which was further processed to obtain the final product.

Excise authorities have demanded duty on final product.

Court held that, refined oil produced by the company was deodorized before being used for hydrogenation to produce final product.

The duty of excise can be levied on intermediate product though it is not going to be sold in the market unlike final product, as the duty is on manufacture but not on sale.

However, the relevant test is whether the substance produced is “known to the market”.



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Case laws on “Marketability”:

Case Judgment

1. Union Carbide India Ltd. V. UOI

Goods must be marketable and known in the market as such, in order to be exigible to duty.

2. Flex Engineering Ltd. V. CCE (2012) (SC)

Manufacture is intrinsically integrated with marketability.

3. Gujrat Narmada valley Fertilizer Co. Ltd. V. CCE (2005) (SC)

Simply because certain articles fall within the schedule (i.e. mentioning in tariff) does not make them marketable.

4. Cipla Ltd. V. CCE (2010) (SC)

Marketability is essential. Mere mention in Chemical weekly drug directory as intermediate product does not mean that product is marketable.

5. Bata India Ltd. V. CCE (2010) (SC)

The mere theoretical possibility of the product being sold is not sufficient but there should be commercial capability of being sold. Theory and practice will not go together when one examine the marketability of a product.

6. CCE V. Ambalal Sarabhai Enterprises (1989) (SC)

Goods with unstable character can be theoretically marketable if there was a market for such transient types of articles. Highly unstable goods like starch hydrolysate being transient in nature not capable of being marketed and therefore not goods.

7. Nicholas Piramal India Ltd. V. CCE (2010) (SC)

1. Short shelf-life could not be equated with no shelf-life and would not mean that it could not be marketed.

2. A shelf-life of 2 to 3 days was sufficiently long enough for a product to be commercially marketed.

3. Shelf-life of a product would not be a relevant factor to test the marketability of a product unless it was shown that the product had absolutely no shelf-life or the shelf-life of the product was such that it was not capable of being brought or sold during that shelf-life.

4. Hence, product with the shelf life of 2 to 3 days was marketable and hence,

excisable

8. CCE V. Umesh Pencil Processors P. Ltd. (2011) (SC)

The fact that the assessee was availing the exemption doesn’t prove that the goods were marketable. In deciding the marketability of a product, mere specification in the dictionary, excise tariff and drawback schedule is of no consequence.

9. Medley Pharmaceuticals Ltd. V. CCE (2011) (SC)

Even though Drugs and Cosmetics Act, 1940 bars the sale of physician’s samples, however, excisability of a product is not dependent on its saleability. Excise duty is a levy on production or manufacture and is payable whether or not the goods are sold. Further, such prohibitions on sale of physician’s samples under Drugs Act doesnot affect the marketability of such samples. Restrictions under Drugs Act cannot affect imposition of excise duty under the Central Excise Act thereby causing loss of revenue. Therefore, physician’s samples are liable to excise duty.

10. Hindalco Industries Ltd. V. UOI (2009) (HC) & Circular No. 904/24/09

In view of explanation to sec. 2(d), the bagasse, aluminium/zinc dross and other such products termed as waste, residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would be excisable goods and chargeable to payment of excise duty. [This has reversed the SC judgement in CCE V. Indian Aluminum Co Ltd. (2006) (SC)]

In case of goods which are manufactured and sold for a consideration, the DEEMED marketability test is satisfied and the goods are said to be marketable and hence excise duty shall be levied [Remember!!! The deemed marketability test is applied only when marketability test is not satisfied]. But for the goods, which are manufactured and captively consumed the DEEMED MARKETABILITY TEST CANNOT BE APPLIED (as goods are not sold) and only MARKETABILITY TEST should be applied.

Issues in ‘Goods’:

Issue – 1 Dutiability of Waste & Scrap

Issue – 2 Plant and Machinery assembled at site

Issue – 3 Dutiability of Steel and concrete structures


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Issue – 4 Sub standard goods & By-products

Issue – 5 Intermediate goods captively consumed

Issue – 6 Software

Issue 1: Dutiability of Waste & Scrap

Circular No: 904/24/2009 has clarified that waste like dross, skimmings, bagasse, residues, refuse etc., will be subject to excise duty w.e.f 10-5-2008.

Waste and scrap to be dutiable must be

- Marketable (including deemed marketability)

- Movable

- Manufactured and

- Mentioned in Tariff.

Question of law involved: Marketability

Recent Cases on “Dutiability of waste & Scrap”:

Grasim Industires Ltd. V UOI (2011) (SC)

Generation of metal scrap or waste during the repair of the worn out machineries/parts of cement manufacturing plant does not amount to manufacture.

FAQ’s on “Dutiability of Waste & Scrap”:

1. What is the meaning of Waste and scrap? ‘A small piece or amount of something especially one that is left over after the greater part has been

used or material, especially metal discarded after processing’ – Baby Varghese V. State of Kerala ‘If finished product is rejected at testing stage, it is to be classified as scrap’ – Durgapur steel plant V.

CCE ‘Defective products unusable have to be taken as scrap and waste’ – Panchmahal steels Ltd. V. CCE

2. Is Waste and scrap a ‘good’ under Excise? Yes, CETA has specific headings ‘Brass Dross’, ‘Aluminium Dross’, and ‘Slag/dross from manufacture of iron and steel’.

3. Whether all waste & scrap is a good (i.e.) whether it has market (or) not? No, It was held that ‘Scrap would be liable to duty, if it is known in commercial parlance by that name and has an established market’- Khandewal Metal & Engg. Works V. UOI

But now, in view of explanation to section 2(d), if waste or scrap which arise during course of manufacture and capable of being sold for consideration would be excisable goods and chargeable to payment of excise duty.

4. Whether scrap aroused out of manufacture is goods (or) scrap as such is good? It has been held that waste will be dutiable only if there is ‘Manufacture’- Markfed Vanaspati V. CCE Facts of the case:

The company used activated clay for deodoring, bleaching and decolouring of oil. These are not manufacturing processes.

Spent earth which is the residue arises after activity clay loses its absorbent charater.

It was held that it is not a manufactured product and it remains earth even after processing.

No duty is payable even if it is marketable and even it is specified in tariff.

5. Some waste has arised during dismantling of machine, whether that waste is good?



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Waste and scrap arising during cutting and dismantling of old and damaged machinery is not manufacture - ACC Ltd. V. CCE.

Waste and Scrap generated out of replacement of worn out and deteriorated parts of machinery are not generated due to mechanical working in the factory. It is not dutiable – CCE V. Sanjivani SSK

6. If waste (or) scrap is not mentioned in CETA, whether the duty is payable (or) not? It was observed that if the waste in question is not specified in the tariff, it is not excisable goods and therefore not liable to excise duty – Arihant cotsyn Ltd. V. CCE & CCE V. J K Industries Ltd.

7. If waste and scrap arises out of manufacture of a product, which is exempted. Will it be dutiable? No, the waste, Scrap and pairings produced while manufacturing an exclusively exempted product are fully exempted from duty. – Notification 89/95.

8. Assessee manufactures both excisable and exempted goods, whether waste & Scrap arising out of such products is dutiable? If assessee is manufacturing both exempt and dutiable products, the waste and scrap arising while manufacturing exempted final product will not exempt i.e. Duty will be payable – TTK pharma V. CCE

9. Waste and scrap didn’t arise during manufacture but aroused during maintenance and repairs. Whether it is dutiable? Waste like Scrap, borings generated during maintenance and repairs work is not excisable when assessee is not involved in manufacture of iron and steel – Prism Cement V. CCE

10. Containers in which inputs were received are cleared and assessee. Department claimed duty as these amounts to waste. Is department correct? Containers in which inputs are received cannot be treated to be waste arising out of manufacturing process and therefore no duty is leviable on such containers at the time of clearance from factory – CCE V. West coast Industrial gases Ltd.

11. An electricity company was engaged in the production of steam, which is then used in manufacturing process. Coal was used as fuel to produce steam. After coal was burnt, ‘cinder’ was left. Whether cinder is dutiable? As production of steam is an ancillary process, waste arising in ancillary process is not manufacture – UOI V. Ahmedabad Electricity Co.

Issue 2: Plant and machinery assembled at site:

The Board vide its sec. 37B order No. 58/1/2002-CX has clarified the issue relating to plant and machinery assembled at site as under: For goods manufactured at site to be dutiable

Must have a new identity, character and use, distinct from the inputs/components. Should be specified in CETA as excisable goods. Should be marketable. Should not be an immovable property

Question of law involved: Movable Vs. Immovable

Thumb Rule to determine the dutiability:

Where the plant and machinery comes into existence and is capable of being removed from one place to another, without causing damage to it and can be re-assembled (i.e. removed in completely knocked down condition or semi knocked down condition) – Plant and machinery is movable.

Where the plant and machinery can be removed only by dismantling and causing substantial damage to it and thus cannot be re-assembled – Plant and machinery is immovable.

Where the plant and machinery is capable of working but attached to prevent vibration free or wobble free operation – Plant and machinery is movable.

Where the plant and machinery comes into working condition only after carrying out civil construction or civil works – Plant and machinery is immovable.


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Recent Cases on “Plant and machinery assembled at site”:

Case Judgment

1. CCE V. Globus Stores (2011) (SC)

Refrigeration/ Air conditioning plant assembled at site is not excisable goods.

2. Craft Interiors P. Ltd. (2006) (SC) [Same view held in CCE V. Mehta & Co. (2011) (SC)]

Storage cabins, Kitchen counters etc., erected at site on the customer, is immovable and hence not dutiable

3. Larsen & Turbo Ltd. V. UOI (2009) (HC)

When a property comes into existence and starts functions, only after embedding different parts in the civil works, such property is not movable property.

4. CCE V. Solid and correct Engineering works (2010) (SC)

The expression “attached to the earth” has three distinct dimensions, viz. (a) rooted in the earth as in the case of trees and shrubs (b) Imbedded in the earth as in the case of walls or buildings or (c) Attached to what is imbedded for the permanent beneficial enjoyment of that to which it is attached.

If machine is attached 1½ feet deep, intended to provide stability to the working of the plant and prevent vibration or wobble free operation does not qualify for being described as attached to earth under any of the three clauses above and hence not an immovable property

FAQ’s on “Plant and machinery assembled at site”:

1. By processing inputs, it results in a new product with distinct name, identity and use. It will be immediately

assimilated in the structure or other immovable property, thereby it is not dutiable on the grounds of immovability. What is the tax treatment? Excise duty will be chargeable on the goods immediately upon their change of identity and before their assimilation. Hence, when change of identity of inputs takes place in the course of construction or erection of a structure which is an immovable property, then there would be no manufacture of ‘goods’ and no excise duty is leviable.

2. A group of machines assembled at site and fixed to earth for the purpose of ensuring vibration free movement (eg. Paper machinery). Is it dutiable?

Yes it is dutiable, provided a new machine comes into existence which has own identity/marketability.

3. If items assembled or erected at site and attached to foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then will it be dutiable? The items are considered not movable and hence not excisable goods. If goods installed at site are capable of being sold or shifted as such after removal from base and without dismantling, the goods will be considered as movable and hence excisable. The guiding factor is “Capable of being marketed in the original form”

4. Whether the intention of the party is considered or not? The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are moveable or immovable.

5. Whether Turnkey projects like steel plants, cement plants, power plants etc. will be considered as excisable goods?

No, but their components would be dutiable.

6. Lifts and escalators are specifically mentioned in subheading 8428.10, those which are installed in buildings and permanently fitted into the civil structure. Whether they are dutiable? These are not considered to be excisable goods – Otis Elevators India Co. Ltd.; CCE V. Kone elevators India Ltd.



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However if lift and escalator is fabricated as whole and is movable in nature, it will be dutiable even if temporarily installed at construction site or exhibition.

7. Refrigeration/Air conditioning Plants: Though each component is dutiable, the refrigeration/air conditioning system as a whole cannot be considered to be excisable goods. Air conditioning units, however, would continue to remain dutiable as per the Central Excise Tariff.

8. Huge tanks made of metal for storage of petroleum products: In oil refineries or installations tanks, though not embedded in the earth, are erected at site, stage by stage, and after completion they cannot be physically moved. On sale/disposal they have necessarily to be dismantled and sold as metal sheets/scrap. It is not possible to assemble the tank all over again. Such tanks are therefore not moveable and cannot be considered as excisable goods – CCE Chandigarh V. Bhagwanpura Sugar Mills

Issue 3: Dutiability of Steel and concrete structures:

In Mahindra & Mahindra Ltd. V. CCE (2005), CESTAT held that

- Immovable iron and steel structures are not goods

- Structures and parts like bridges, lock gates, towers, trusses, columns, frames etc., in their movable state will be subject to excise duty, even if latter they get permanently fixed in the structures

- Plates, rods, angles, sections, tubes and the like, prepared for use in the structures will also be excisable goods subject to duty in their pre-assembled or dis-assembled state.

[Followed in CCE V. Telemats India (2001) (CESTAT)]

“Manufacture” Vs. “Service”: In Neo Structo Construction V. CCE (2010), CESTAT held that, fabrication of structure at site is ‘manufacture’ and hence not a service.

Issue 4: Sub – Standard goods and By - Product:

Sub standard goods sold are still goods. They cannot be classified as Scrap as commercially understood – Tisco V. CCE

By-Product will be goods. By product means something of value produced in making main product or a substance obtained in the course of a specific process but not its primary object – Markfed Vanaspati V. CCE

Issue 5: Intermediate goods captively consumed:

Captive consumption means consumption of goods manufactured by one division or unit by another division or unit of same organization or related undertaking for manufacturing other products. Rule 4 Read with Rule 5 of Central Excise Rules, 2002: Duty is payable on removal of goods, the rate of duty being the rate in force on the date of such removal (Rule 4) Concept of DEEMED REMOVAL, provided that in case of excisable goods used within factory, the date of issue of such goods for such use shall be the date of removal thereof (Explanation to Rule 5) Are all intermediate products captively consumed dutiable? No, Only those articles captively consumed and satisfies the following conditions are dutiable

(i) Articles must be movable (ii) Articles must be marketable (iii) Articles must be mentioned in Tariff

Articles in crude and elementary form are not dutiable, as they are merely intermediate products, not marketable in that condition. – Union carbide India Ltd. V. UOI; Moti laminates P. Ltd. V. CCE Exemption notification in Force: As per notification No. 67/95, if finished good is exempted, duty liability is attracted on intermediate


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product that intermediate product is movable and marketable and it should be mentioned in CETA & such good should be consumed within the factory.

If finished good is not exempted, there is no duty liability on intermediate product.

Analytical table on captive consumption:

Situation Intermediate Product Finished Product Whether duty payable on intermediate product

(i) The 4 conditions i.e. Goods, Excisable goods, Manufacture or production, in India has been satisfied and hence ‘Taxable’

The 4 conditions i.e. Goods, Excisable goods, Manufacture or production, in India has been satisfied and hence ‘Taxable’

Duty is not required to be paid on intermediate product as the exemption Notification No. 67/95 specifies that, if finished product is taxable then intermediate product is exempted. Hence, No duty payable.

(ii) All or any of the 4 conditions out of Goods, Excisable goods, Manufacture or production, in India are not satisfied and hence ‘Not Taxable’

The 4 conditions i.e. Goods, Excisable goods, Manufacture or production, in India has been satisfied and hence ‘Taxable’

As Intermediate product is not taxable there won’t be a question of duty payable.

Hence, No duty payable.

(iii) The 4 conditions i.e. Goods, Excisable goods, Manufacture or production, in India has been satisfied and hence ‘Taxable’

All or any of the 4 conditions out of Goods, Excisable goods, Manufacture or production, in India are not satisfied and hence ‘Not Taxable’

Duty is required to be paid on intermediate product as the exemption Notification No. 67/95 specifies that, if finished product is exempted then duty shall be payable on intermediate product.

Hence, Duty payable.

(iv) All or any of the 4 conditions out of Goods, Excisable goods, Manufacture or production, in India are not satisfied and hence ‘Not Taxable’

All or any of the 4 conditions out of Goods, Excisable goods, Manufacture or production, in India are not satisfied and hence ‘Not Taxable’

As both the products are not taxable, there won’t be question of duty payable

Hence, No duty payable.

Issue 6: Software:

Software falls under heading 8523 80 20 of CETA, 1985. However, all software except canned software is exempt. Packaged or Canned software means software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf. Duty on packaged software is 10% and there is no excise duty on tailor made i.e. customized software.

Summary of taxability of Information Technology Software:

Category of Software

Excise duty (In case of manufacture in India)

Customs duty (in case of Imports)

Service tax VAT/CST

1. Packaged software with MRP

Yes [MRP based valuation under sec. 4A]

No basic customs duty but CVD payable [CVD computed in line with MRP based valuation]

No Yes

2. Packaged software where MRP not required

Excise duty on cost of media [Transaction value under sec. 4]

No basic customs duty but CVD payable [CVD computed in line with Transaction value i.e. cost of media]

Service tax on transfer of right to use software. [To this extent it is not taxable

Yes



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under excise]

3. Tailor made software

No No Yes Yes

4. Paper licence of software and PUK cards.

No No Yes Yes

5. Software downloaded on internet from out of India

No No Yes, as import of service

Not applicable to person downloading the software.

(Source: Commentary on Central Excise by V.S. Datey)

2. “Excisable Goods” under Excise:

The second condition to be satisfied to attract excise duty liability is that the goods must be excisable. Section 2(d) defines excisable goods to be “goods which are specified in the tariff as being subject to duty

of excise and includes salt” Burden of proof that goods are excisable is on the department. Mere mention in tariff will not attract duty, unless test of movability and marketability is satisfied.

3. “Manufacture” under Excise:

Production Manufacture

A natural process by which a product is brought into existence Eg: Production of tobacco Production of Sugarcane

Artificial Process which adds some more utility to that product Eg: Manufacture of cigarettes Manufacture of sugar

Every production is not manufacture

Every manufacture is production

Production is a broader term which includes manufacture

Manufacture is a restricted term

Process Manufacture

A single operation/ a part in manufacture

A series of process is called manufacture

The output of a process may (or) may not be finished product

The output of manufacture is finished product

Every process is not a manufacture

Every manufacture is a process

Sec 2(f) - “manufacture” includes any process, - i) incidental or ancillary to the completion of a manufactured product; ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; or

iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,

CIT V. N C Budharaja and co. & CIT V. Tara Agencies ‘Production’ has a wider connotation than the word manufacture. Every ‘manufacture’ can be characterized as ‘production’, but every ‘production need not amount to manufacture. When the word ‘produced’ or ‘production’ is used in juxtaposition with the word ‘manufacture’, it takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes all by-products, intermediate products and residual products, which emerge in the course of manufacture of goods. UOI V. DCM co. Ltd. (1963) (SC) ‘Manufacture’ means bringing into existence a new substance. Manufacture is the end result of one or more processes, through which original commodity passes. Thus, manufacture implies a change but every change is not manufacture. A new and different article must emerge having a distinctive name, character or use.


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FAQ’s on Manufacture:

1. In the opinion of some persons, a process has been carried out and a new product came into existence but for others there is no new commodity. Whose opinion has to be considered?

Case Law: UOI V. J.G. Glass Industries.

Facts: Decoration & printing was done on glass bottles & the Dept. contended that the activity amounts to manufacture

Decision:

A process will amount to manufacture if the commodity which was already in existence will serve no purpose or will be of no commercial use but for the process.

Even before printing glass bottle was commercial commodity and could be sold even without printing.

It was held that printing of bottles with ceramic color and decoration is not manufacture.

Case Law: Sterling foods V. State of Karnataka. (The case was related to Central Sales Tax but the judgment is relevant here too)

Facts: The appellants in the course of their business, purchase shrimps, prawns and lobsters locally for the purpose of complying with orders for export and they cut the heads and tails of the shrimps, prawns and lobsters purchased by them, peel, devein and clean them and after freezing and packing them in cartons, they export them to foreign buyers outside India under prior contracts of sale. The CTO contended that the goods were changed from its original purchase and demanded duty.

Decision:

The decision to be applied is whether the commodity subject to processing retains its original character and identity or whether the processed commodity is regarded in the trade by those who deal in it, as distinct identity from original commodity.

The change or series of change take commodity to a point where commercially it is recognized as a new and distinct commodity, then it can be said that new commodity has come into being

Case Law: ALEMBIC GLASS INDUSTRIES (2010) (SC)

Decision:

By the process of printing names or logos on the bottles, the basic character of the commodity does not change. They continue to be bottles and, therefore, it cannot be said that but for the process of printing, the bottles will serve no purpose or are of no commercial use.

The distinction between J.G. Glass Industries case and Alembic glass Industries case, is in case of former the activity of manufacturing and printing/decoration is carried out in the same factory. But in the present case the two process are carried in separate units of same assessee.

Therefore in the present case, the value of the printing will not be includible while determining the assessable value of the excisable goods for computing the excise duty.

Manufacture - Sec. 2(f)

Process - Incidental/ ancilliary for the

completion of main product

Land Mark Case

- UOI V. DCM

Deemed Manufacture

Any process amounting to

manufacture as specified in section

notes/ chapter notes

Labelling (or) Re-labelling, Packing/ repacking from bulk

packs to retail packs and adoption of any other process to make Schedule III products

marketable and saleable



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Case Law: CCE V. TARPAULIN INTERNATIONAL (2010) (SC)

Decision:

The process of stitching and fixing eyelets would not amount to manufacturing process, since tarpaulin after stitching and eyeleting continues to be only cotton fabrics. The purpose of fixing eyelets is not to change the fabrics, even though there is value addition.

To sum up, the conversion of Tarpaulin into Tarpaulin made-ups would not amount to manufacture. Therefore, there can be no levy of Central Excise duty on the tarpaulin made-ups.

2. What are the process which amounts to manufacture as per CETA? a. Body building of vehicles b. Cutting, sizing, perforation, of photographic plates, films shall amount to manufacture. c. Galvonizing of articles of iron and steel., d. Audio video recording in tapes e. Conversion of powder into tablets f. Adding or mixing cardamom, copra, menthol, spices, sweetning agents or such ingredients, other

than lime or tobacco to betelnut in any form shall amount to manufacture. g. Refining of edible oils h. The process of cutting or sawing or sizing or polishing or any other process, for converting of

stone blocks into slabs or tiles, shall amount to manufacture. i. The process of drawing or redrawing shall amount to manufacture. j. Labelling (or) rebelling of containers (or) repacking from bulk packs to retail packs (or) adoption

of any other treatment to render the product marketable of (a) Dairy products like milk, butter, cheese (b) Preparations of meat, fish (c) Panmasala, yeast, soup, sauce, extracts of tea (or) coffee (d) In organic chemicals (e) Readymade garments. (f) Coffee, tea and spices (g) Starches (h) Vegetable oils and margarine (i) Natural or artificial mineral waters

Note: Emergence of new product is not relevant, in case of Deemed manufacture

3. Who has to prove that manufacture has taken place? The burden of proving the fact is entirely on the Revenue. Department has to prove that a new and distinct product has come into existence – Metlex P. Ltd. V. CCE

4. When it is said that manufacture has taken place (not deemed manufacture)?

5. When a particular product is manufactured and some of the components are purchased, uniting these two to form a finished good, does it amount to manufacture (i.e.) does assembly amounts to manufacture?

Case Law: Triveni Engg. Co. Ltd. V. CCE

Facts: The co. purchased load cells & plat forms from the open market & manufactured an indicating system these 3 items were assembled together and end product was a ‘weight bridge’. The assessee contended that assembly does not amount to manufacture.

2 tests should be satisfied

Identity Test

A new commercially identifiable product should

come into existance.

Utility Test

The Finished product should serve a different purpose than

that of the Input


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Decision: Assembly of the items results in new identifiable product and it amounts to manufacture.

Case Law: BPL India Ltd. V. CCE (2002) (SC)

Facts: If the assembly of duty paid parts or components does not result in the emergence of an entirely new and distinct article having a different characteristic, it will not result into manufacture



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Case laws on Manufacture:

Case Judgment

1. CCE V. Sony Music Entertainment (I) P. Ltd. (2010) (HC)

the activity of packing imported Compact discs in a jewel box along with inlay card would not amount to manufacture under Section 2(f) of the Central Excise Act, 1944

2. CCE V. Kapri International (p) Ltd. (2002) (SC)

If manufacture takes place, the commodity is dutiable even if the raw material and resultant product fall under the same tariff heading. The mere fact that the material, from which the new goods are manufactured, has suffered a duty under a particular tariff item does not exclude the finished product from being exigible to fresh duty if tariff Act provides so. Multiple levy under the same tariff entry is permissible if the manufacture is involved.

3. Bemcee Ltd. (2010) (SC)

Slitting/shearing of steel coils does not amount to manufacture as the description as flat rolled products was continuing even when tariff sub-heading changed following width of product. Since the identity of the product remained unchanged even with change of classification, activity causing such a change does not amount to manufacture.

4. Tikitar Industries (2010) (SC)

The process of converting straight grade bitumen into blown grade bitumen through Oxidation, known as blowing process, does not amount to manufacture and therefore, exempted from payment of Excise duty.

5. Orissa Bridge & Construction Corporation Ltd. V. CCE (2011) (SC)

Fabrication of cutting edge, shuttering plates, vertical props from steel angles, MS plates, MS sheets and pipes is manufacture as the materials get transformed into various products which are having a distinct name, character and use.

6. CIT V. Oracle Software India (2010) (SC)

Transforming blank CD into software based disc is ‘manufacture’ as duplicating process changes basic character of blank compact disc.

7. Air Liquide North India P. Ltd. V. CCE (2011) (SC)

When gas cylinders are not sold as such but were sold only after certain tests or process as specified by the customers of the assessee, the analysis and tests resulted into categorization of the gas and fixation of prices accordingly. This process amount to “any other process in order to make the product marketable” in terms of sec. 2(f) for the purpose of deemed manufacture.

8. Usha Rectifier Corp. (I) Ltd. V. CCE (2011) (SC)

Testing equipments manufactured instead of importing the same and used captively, amount to manufacture and liable to excise duty.

9. CCE V. Onsar Chemical P. Ltd. (2012) (SC)

The process of mixing and additives to heated bitumen, which results in emergence of Polymer Bitumen (PMB) and crumbled Rubber Modified Bitumen (CRMB) does not amount to manufacture, as the said process did not result in transformation of bitumen into new product having different identity, characteristic and end use. The end use also remained the same viz. mixing of aggregates for constructing roads.

10. CCE V. GTC Industries Ltd. (2011) (HC)

Cutting and embossing aluminium foil with the words “PULL” did not transform aluminium foil into distinct and identifiable commodity

The said process did not render any marketable value, and only made it usable for packing.

There were no records to prove that these are distinct marketable commodities. Only the process which produces distinct and identifiable commodity and renders

marketable value can be called manufacture. 11. CCE V. Pushpadeep Enterprises (2011) (HC)

Cutting aluminium sheets/angles/plates into required size and grooving and drilling them in order to fix it to the main frame and sealing amounts to manufacture, even though the resulting panel was also classifiable under the same tariff heading as the original sheets/plates. Change in tariff heading is not a pre-condition for manufacture.

12. CCE V. Elecon Engineering Co. Ltd. (2012) (SC)

Cutting, drilling, punching and welding do not result in transformation. The products resulting out of these processes are merely structural shapes; and assembling them for constructing building or shed is ‘fabrication’ and not manufacture, as no new article different in name, character or use emerges. [Mere fabrication is not manufacture]


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13. CCE V. Johnson and Johnson Ltd. (2005) (SC)

Merely packing for being marketed is not sufficient. The repacking would have to be from bulk packs to retail packs so as to render the product marketable directly to consumer.

14. Metalite Industries V. CST (2012) (HC)

Bending, punching and carrying out various process with respect to iron plates and making them perforated type cable trays and channel shaped trays amounts to manufacture as these are sold in the market to meet different mechanical and engineering needs as distinct from plain or chequered plates. The plates undergo transformation into cable trays and the process involved is manufacture.

15. Circular No. 927/17/2010

Mere undertaking the process of oiling and pickling as preparatory steps do not amount to manufacture as no new product emerges as a result of these process. The process of pickling is only a chemical cleaning process to remove scales and dirt from the metal by immersion on chemical solution.

16. CCE V. Hindustan Coca cola beverages P. Ltd. (2011) (SC)

Facts: 6. The assessee is a manufacturer of aerated beverages, had water treatment plants

for purifying and treating water which was captively consumed in the manufacture of aerated waters.

7. Some quantity of treated water was supplied to few retail outlets selling beverages such as cocacola, thumps up through vending machines.

8. Note 5 to chapter 22: In relation to waters, including natural or artificial mineral waters of heading 2201 and waters, including mineral waters of heading 2201 processes, such as filteration, purification of any other process ot any one or more of these processes, labelling or relabelling of containers or repacking from bulk packs to retail packs or adoption of any other treatment to render the product marketable to consumer shall amount to manufacture.

9. “Consumer” refers to the one who purchases the product for consumption by him, as distinct from a purchaser who trades in it.

Decision:

- Treatment of borewell water/municipal water, does not amount to bringing into existence a new and commercially different commodity. Hence, it does not amount to manufacture in normal sense.

- The water in its original form itself i.e. prior to carrying out the above process was marketable and therefore it cannot be said that assessee gave the attribute of marketability to water which was not earlier present.

- The treated water was being used only for business purposes by retail outlets that do not fall within the definition of “Consumer”

- Therefore, since the treatment of water did not render the same marketable to consumer, hence, it did not amount to deemed manufacture.

Manufacturer:

As per Sec. 2(f), the term manufacturer includes not only a person who employs hired labour in the production and manufacture of excisable goods but also a person who engages in their production or manufacture on his own account.

As per the natural meaning Manufacturer is a person who actually manufactures or produces excisable goods i.e. one who actually brings into existence new and identifiable product.

Manufacturer is a person who employs hired labour for the purpose of manufacture (or) production (or) who carries, on his own account. Ownership is not relevant, but manufacture (or) production is relevant. A brand owner is not a manufacturer. Ex: Bata, Bajaj Fans, Kingfisher, Cocacola & Pepsi

Generally Raw material supplier is not manufacturer. But, relationship between manufacturer & supplier, if it is agency (or) master (or) servant relationship, then the raw material supplier is the manufacturer.



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FAQ’s on Manufacturer:

1. What is the meaning of word “ON HIS OWN ACCOUNT”? ‘On his own account has to be interpreted to mean as ‘Under his direction and control’ – Philips India V. UOI As per this phrase, a person though not owning a factory or not himself doing the manufacturing process, can be considered to be manufacturer if, (a) Those who own the factory are dummy (or) (b) If he gets the goods manufactured by then under HIS DIRECTION AND CONTROL.

2. Can a Brand owner who get his goods manufactured through others, be termed as manufacturer? A Brand name owner (i.e. Bata, Bajaj Fans, Kingfisher) is not manufacturer, they may even supply

the design or control the quality. If goods are produced with customer’s brand name under his quality control, it does not mean

that the customer is the manufacturer Brand name owner will not be manufacturer even if he supplies raw material – Philips India Ltd. V.

UOI Goods manufactured under franchisee agreement, the franchisee provider is not manufacturer.

(Eg. Coco-cola and Pepsi)

3. Raw materials are sent to job work for manufacture and then returned. Who is the manufacturer? Raw material supplier is not manufacturer. Excise duty is on manufacture and production of goods and liability to pay duty is not dependent

upon whether the manufacturer is owner or not – Ujagar Prints V. UOI The household ladies to whom the raw material is sent are the manufacturers and not the raw

material supplier. The ladies cannot be termed as hired labour – CCE V. MM Khambatwala. If any bogus units are created to evade tax, then the raw material supplier is the manufacturer and

not the job worker.

4. What is the acid test to determine, who is manufacturer? Two tests should be satisfied: 1) Relationship Test: If the relationship between raw material supplier and job worker is on principal to principal basis, then JOB WORKER is the manufacturer 2) Profit Test: If the entire profit is enjoyed and retained by raw material supplier, then the RAW MATERIAL SUPPLIER will be the manufacturer

General Rule: Excise duty is payable by the manufacturer or producer of excisable goods.

Exceptions: But, in the following cases the duty liability will be on the person other than manufacturer or producer.

1. Goods stored in a warehouse: When goods are stored in a warehouse without payment of duty, then the duty liability is on the person who stores the goods.

2. Molasses produced in khandsari sugar factory: The duty liability is of the procurer (i.e. purchaser of such molasses)

3. Job work: Job worker is the actual manufacturer and he is liable to pay excise duty. But if raw material supplier undertakes to make payment of excise duty under notification No. 214/86, then duty liability is on the raw material supplier.

4. Textile Articles: In respect of textile products falling under heading 61, 62 or 63, person who is getting the goods manufactured on job work basis (i.e. Merchant manufacturer and Not job worker) will be liable to pay excise duty under Rule 4(1A) of Central Excise Rules. (w.e.f 1-3-2011). Such person (i.e. who is getting goods manufactured) will be ‘manufacturer’ and eligible for SSI exemption under SSI exemption Notification No. 18/2003.


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Job Work Notification No. 214/86 Vs. Duty on person getting goods manufactured under Rule 4(1A)

Situation (i) A Ltd. supplies raw materials to Mr. B (a job worker) for getting the goods manufactured on independent job work basis. Who is the manufacturer?

Situation (ii) A Ltd. Supplies raw materials to Mr. B (a job worker) and gets the goods manufactured according to his designs and specifications. Who is the manufacturer?

Situation (iii) Bata Ltd. supplies raw materials to Razor & Co. (a small scale industry in foot wear) and gets the goods manufactured with the brand name of Bata. Who is the manufacturer?

Situation (iv) A Ltd. supplies raw material to B Ltd. and exercises full control, supervision over the job worker for getting the goods manufactured. Who is the manufacturer?

Situation (v) Where the job worker is a dummy unit of raw material supplier, who is the manufacturer?

Situation (i) As Mr. B is carrying out the manufacture on independent and standalone basis, he is the ‘Manufacturer’. As per the relationship test if raw material supplier does not have control over job worker but has control over process, then job worker shall be the ‘manufacturer’ under excise. Hence, Mr. B is the manufacturer.

Situation (ii) As per the relationship test if raw material supplier does not have control over job worker but has control over process, then job worker shall be the ‘manufacturer’ under excise. In the present situation raw material supplier has control over process but not on job worker as raw material supplier requires the job worker to manufacture the product as per his designs and specifications. Hence, Mr. B is the manufacturer.

Situation (iii) Brand name owner is not the Manufacturer as laid down in various cases. Even he may supply raw material to job worker too.

Goods under Central Excise Tariff Act (CETA) manufactured through job work

Chapter 61 - Articles of apparel and clothing accessories, knitted or crocheted

Chapter 62 - Articles of apparel and clothing accessories, not knitted or crocheted

Chapter 63 - Other madeup textile articles, sets, worn clothing and worn textile articles, rags

Duty Liability cast on

Person getting goods manufactured on jobwork basis (i.e.

Rawmaterial supplier/Brand

owner) as per Rule 4(1A) of Excise Rules,

1994

Exemption:

There is no exemption to raw

material supplier in this case.

Goods other than those falling under chapter 61,62,63.

Duty liability cast on

Job Worker, being the actual manufacturer as

per Sec. 3 of Central Excise Act, 1944

Exemption:

If rawmaterial suppier undertakes

to pay duty, then duty liability is on

rawmaterial supplier



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Hence, Razor & Co is the manufacturer.

Situation (iv) As per the relationship test if raw material supplier has control over job worker, then raw material supplier shall be the ‘manufacturer’ under excise. Hence, A ltd. is the manufacturer.

Situation (v) If the job worker is dummy unit of the raw material supplier, then the relationship is so construed in order to evade tax. Therefore, Raw material supplier shall be the manufacturer.

4. Scope and Coverage of Excise Act, 1944:

The fourth condition is that the manufacture or production must take place in India. The following points clarify the meaning of India.

The CEA extends to the whole of India including the state of Jammu and Kashmir. Therefore goods manufactured in the state of Jammu and Kashmir are liable to excise duty

Goods manufactured in India by, or on behalf of, Central/ State government are dutiable. Any goods produced or manufactured within (a) The territorial waters of India and (b) The designated

areas of the continental shelf or Exclusive economic zone, which are treated as part of India, shall be leviable to excise duty.

Dutiability in case of EOU:

The goods manufactured by a 100% EOU but sold in Domestic Tariff Area (a.k.a DTA clearances by 100% EOU) are liable to excise duty, which is equal to the customs duty leviable on goods, as if such goods are imported into India.

Where, in respect of any such like goods, any duty of customs is leviable at different rates, then such duty shall be deemed to be leviable at the highest of those rates.

The value of such goods will be determined in accordance with the provisions of Customs Act, 1962 if the duty to be levied is advalorem.

As per the Notification no. 23/2003, DTA clearances by 100% EOU are exempt from – a) 50% of basic customs duty leviable there on; b) Additional customs duty under sec. 3(5) of Customs Tariff Act, 1975. Exemption from additional duty is available only if the goods so removed are not exempt from payment of sales tax/VAT in India.

Scope of Excise Act

Land

Inside India except SEZ

J&K, EOU, EHTP, STP, BTP, DTA

CE Act, 1944 applicable

SEZ

CE Act, 1944 NOT applicable (Though

Inside India but excluded from levy)

Water

Upto 200 NM i.e. upto Exclusive economic zone

Designated areas in the continental

shelf and exclusive economic zone (EEZ) of India

CE Act, 1944 applicable

Beyond 200 NM i.e. High seas

CE Act, 1944 NOT applicable


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Determination of Rate of Duty The rate of duty is found out by classifying the product in its appropriate heading under Central Excise Tariff Act (CETA)

Various Schedules under CETA:

Features of CETA:

The central excise tariff system in India is governed by CETA, 1985. The features are as follows. HSN (Harmonized system of nomenclature) commodity description.

It refers to internationally accepted product coding System for categorization and classification of commodities for the purpose of fixation of rates for levying duties of excise.

It has Eight digit classification - The first 4 digits are for the purpose of “headings” -- Further 2 digits for sub classification – ‘Subheadings’ --- Further 2 digits for sub – sub classification– “tariff item”.

Coding of dashes.

Type Denoted by Meaning

Single dash - Indicates a group of articles Covered by the heading

Double dash -- It is the sub classification of preceding article which has single dash (-)

Triple dash/ quadruple dash

--- ----

Indicate sub classification of immediately preceding description of article having single (or) double dash.

Section, chapters and headings in Tariff.

- Section divided in chapters and chapters in sub – chapter. A ‘Section’ grouping of number of chapters which codify a particular class of goods. Each of the section is divided to a broader class of goods.

CETA

First Schedule

Basic Excise duty (CENVAT) leviable on

various products

Second Schedule

List of items on which Special Excise Duty is

payable

At present it is Exempt

Third Schedule

List of items covered under MRP valuation and

'Deemed manufacture' provisions.

Various schedules under CETA Features of CETA Harmonized system of Nomenclature Classification under CETA General Interpretative Rules Classification of accessories Classification of parts or components Case laws and circulars Various types of duties under excise.



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- Each section is divided into various chapters and each chapter contains goods of one class. Some chapters are divided into sub chapters.

- Section notes are given at the beginning of each section which govern entries in that section. These notes are applicable to all chapters in that section.

- Chapter notes are given at the beginning of each chapter, which govern entries in that chapter.

Eg: Section IX – textile and textile articles. Eg: Chapter 72 (Iron and steel) is divided into

Chapter 50 – Silk Chapter 51 - Wool Chapter 52 – cotton.

I – Primary materials II - Iron and Non – alloy metal III - Stainless steel.

- Each chapter and sub – chapter is further divided into various headings depending upon different types of goods belonging to same class of products. Eg: Chapter 50 relating to silk is divided into 5 headings.

5001 - Silk worm cocoons 5002 - Raw silk

- Central Excise tariff is divided into 20 sections and 96 chapters. There are over 1,000 tariff headings and 2,000 subheadings.

Are both Central Excise Act, 1944 and Central Excise tariff Act, 1985 linked together?

- Yes, Sec. 3(1) of Central Excise Act, 1944 specifies that duty shall be levied and collected on all excisable goods which are produced or manufactured in India, as and at the rates set forth in the schedule to CETA.

- Sec. 2 of CETA, 1985 states that rate at which duties of excise shall be levied under Central Excise Act, 1944 are as specified in Schedule to CETA.

- Hence, both the Acts are linked to each other.

Harmonised System of Nomenclature:

Background of the Tariff

- As international trade increased, need was felt to have universal standard system of classification of goods to facilitate trade flow and analysis of trade statistics.

- Hence, International Convention of Harmonised system of Nomenclature (HSN), called Harmonised commodity Description and coding system, was developed by World customs organisation (WCO) (That time called customs cooperation council, Brussels)

Explanatory Notes to HSN

- These are official notes issued by World Customs Organisation

- They explain and clarify the scope and extent of each and every heading of the HSN, on the basis of which Present CETA has been patterned.

- They do not have legal backing but can be used as an aid to classification of goods when there is ambiguity as to the scope of entry.

G.M pens International Case

- The Larger bench of tribunal held that

- HSN notes can be brought into picture only when there is doubt or ambiguity about scope of any tariff entry and if tariff entry is clear,

- No external aid is necessary or permissible for determining its scope.

- Explanatory notes in should be invoked only if there is ambiguity in tariff items in CETA. Will notes to HSN prevail over CETA for classification?

- Nowhere in CETA it has been stated that Notes in HSN will be applicable for interpreting the tariff.

- In case of difficulty in understanding the scope of the headings/ subheadings, reference should be made to supplementary texts like Explanatory notes to HS – Department opinion

- If entries in HSN and Tariff are not aligned, reliance CANNOT be placed on HSN for the purpose of classification of goods – Camlin Ltd. V. CCE (2008) (S.C)


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Classification under CETA:

While classifying goods, the foremost consideration is the statutory definition In the absence of statutory definition, check the guideline provided by HS explanatory notes In the absence of guideline, the cardinal principle would be the way goods are known in the common

parlance.

An Extract from CETA:

Section II – Vegetable Products (Chapters 7 to 14) Section Note In this section, the expression, ‘unit container’ means a container, whether large or small designed to hold a quantity.

Chapter 9 Coffee, Tea and Spices

Chapter Notes 1. In Heading No. 0901, ‘Coffee’ means the seed of the coffee tree (coffee), but does not include the seed

while still attached to tree. 2. In case of tea or tea waste blending, sorting, packing or re-packing into smaller containers shall amount to

‘manufacture’.

Tariff Item Description Unit Basic rate of duty

0901 - Coffee, whether or not roasted or decaffeinated

0901 11 -- Not decaffeinated

--- Arabica plantation

0901 11 11 ---- A Grade Kg 16%

0901 11 12 ---- B Grade Kg

--- Arabica cherry

0901 11 21 ---- AB Grade Kg 16%

0901 11 22 ---- BB Grade Kg 16%

0901 12 00 -- Decaffeinated kg 16%

Steps in classification:

Step 1: Refer the heading and sub – heading, Read corresponding Section Notes and Chapter Notes. If there is no ambiguity, (or) confusion, the classification is final. Step 2: If meaning of word is not clear, refer to the trade practice Step 3: If trade understanding of a product cannot be established, find technical (or) Dictionary meaning of the term used in tariff. Step 4: If classification cannot be done as above, apply general Interpretative rules sequentially.

Trade parlance Theory:

- Applicable only when classification rules does not provide conclusive answer. - Based on popular sense. ‘Popular sense’ means that which people are conversant with the subject matter with

which the statute is dealing. - Classification based on customer use and identity of product. - Examples: (i) Carbon paper cannot be classified as papers. (ii) Mineral water cannot be classified as Beverages.

(iii) Lal Dhant manjan (tooth powder) cannot be classified as medicines (iv) Mirror cannot be clarified as glass article.



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General Interpretative rules (GIR) or Rules for Interpretation of

Tariff:

? As there are many articles mentioned in CETA, how to study these and how to interpret this.

RULE 1: The titles of sections, chapters & sub-chapters are provided for reference only. For legal purposes, classification shall be determined according to the terms of the headings & any relative section (or) chapter notes. Rule 1 gives precedence to section notes/ chapter notes while classifying a product.

Rule 1 - The titles of sections and chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such headings or notes do not otherwise require, according to the provisions hereinafter contained.

AN EXTRACT FROM CETA Section II – Vegetable Products (Chapters 7 to 14) Section Note Chapter 9 Coffee, Tea and Spices Chapter Notes

Tariff Item Description Unit Basic rate of duty

0901 - Coffee, whether or not roasted or decaffeinated

0901 11 -- Not decaffeinated

--- Arabica plantation

0901 11 11 ---- A Grade Kg 16%

0901 11 12 ---- B Grade Kg

RULE 2(a): Complete goods = Incomplete or unfinished goods

Rule 2(a) - Any reference in a heading to goods shall be taken to include a reference to those goods incomplete or unfinished, provided that, the incomplete or unfinished goods have the essential character of the complete or finished goods. It shall also be taken to include a reference to those goods complete or finished (or falling to be classified as complete or finished by virtue of this rule), removed unassembled or disassembled.

First Part Any reference to complete goods also includes incomplete (or) unfinished gods, if such incomplete (or) unfinished goods have essential character of finished goods. Eg: car not yet fitted with wheels or tyres will be classified under motor vehicles Second Part The heading will also include finished goods removed un-assembled (or) disassembled in SKD (or) CKD packs. Eg: machineries dismantled for transportation will be classifiable as machinery only and not individually based on its parts.

ESSENTIAL CHARACTER - The functional test for essential character is that the incomplete goods are able to functions as finished goods.

RULE 2(b): Material = combination of that material with other

Rule 2(b) – Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles contained in Rule 3.

Not

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Any reference in heading to material (or) substance will also include the reference to mixture (or) combination of that material (or) substance. Eg: Article of gold will include an article which is made partly of Gold and partly of silver.

If a particular good can be classifiable under two (or) more headings, then classification shall be as per Rule 3(a) (or) Rule 3(b) (or) Rule 3(c)

RULE 3(a): When there is a specific description and a general description? Rule 3(a): The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.

The heading, which provides the most specific description, shall be preferred to headings providing a more general description. Example – 1: Heading 8215 covers spoons, forks, ladles, skimmers, fish-knives etc., while heading 7323 covers table, kitchen or other house hold articles of iron and steel. In order to classify steel forks, heading 8215 is preferred to heading 7323 Example – 2:

Electric shaving machine can be classified under heading 85.10 as it is specific over heading 85.09 which is general

RULE 3(b): If a particular good is a mixture and composite of goods containing different materials? Rule 3(b): Mixtures, composite goods consisting of different material or made up of different components, and goods put up in sets, which cannot be classified by reference to (a), shall be classified as if they consisted of material or component which gives them their essential character, in so far as this criterion is applicable.

Mixtures, composite goods consisting of different material or made up of different components and goods put up in sets for retail sale, shall be classified as if they consisted of the material or component which gives them their essential character. Example – 1: If a pack contains drawings instruments (90.17)

Pencils (96.09) Pencil sharpner (82.14) Put up in a leather case (4201.90) The set will be classifiable under drawing instrument.

Example – 2: Hair dressing sets consisting of a pair of electric hair clippers (8510)

a comb (9615) a pair of scissors (8213) a brush (9603) a towel (6304)

The set will be classifiable under hair dressing set.

RULE 3(c): If both the headings are specific?

Rule 3(a): When goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in the numerical order among those which equally merit consideration.

HEADING 85.09 Electro-mechanical domestic appliances with self-contained electric motor

HEADING 85.10 Shavers and hair clippers with self-contained electronic motor



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If two or more headings seem equally possible and the dispute cannot be resolved by any of the aforesaid rules, the heading which occurs last in numerical order is to be preferred (i.e. latter the better). Eg: Electrical insulating self adhesive tape can be classified as self adhesive tape under 39.19 and electrical insulator under 85.46. Hence, later serial number i.e. 85.46 will prevail. RULE 4: Akin Goods If the classification is not possible by any of the aforesaid rules 1, 2 and 3, then it should be classified under the heading appropriate to goods to which they are most akin. Example: Plastic films used to filter or remove the glare of the sunlight, pasted on car glass windows, window panes etc., shall be classified under heading 3925 30 00 as builders ware of plastics not elsewhere specified – shutters, blinds. RULE 5: Classification of packing containers & packing materials These will be classified along with that of main article which are sold. Eg:boxes designed to keep jewellery. Note: this rule is not applicable for containers of repetitive use.

RULE 6: Goods can be compared at the same level only Sub-Headings can be compared only at the same level. However, sub-heading under one heading cannot be compared with sub-heading under a different heading. Summary of rules for interpretation of tariff:

Rule – 1 The titles of sections, chapters & sub-chapters are provided for reference only.

Rule – 2 (a) Any reference to complete goods also includes incomplete or unfinished goods i.e. Complete goods = Incomplete or unfinished goods

Rule – 2(b) Any reference to a material includes combination of that material with other material i.e. Material = combination of that material with other

Rule – 3(a) Specific description shall be preferred to heading providing general description. i.e. Prefer SPECIFIC over GENERAL

Rule – 3(b) Classification shall be as per ESSENTIAL CHARACTER if a particular good is mixture or composite of goods containing different materials

Rule – 3(c) If both the headings are specific, then LATTER THE BETTER

Rule – 4 AKIN GOODS – Last rule of classification where in goods under question can be classified under that heading which is most related to the said goods.

Rule – 5 Packing containers and packing materials can be classified along with the main articles, which are sold.

Rule – 6 Goods can be compared for classification at SAME LEVEL ONLY

Classification of accessories:

Accessories cannot be characterized as component or integral part of an article, and therefore, they cannot be classified as an article to which they are attached. [i.e. Accessories cannot be classified along with the main product]

Accessories are by themselves, article and will be classified as such because “accessories” are not necessarily confined to particular machine, which they serve as an aid, and the same item may be an accessory of more than one kind of instrument. [i.e. Accessories are classified as such]

They only add to the convenience, beauty or effectiveness of the main product.

Classification of parts and components:

‘Part’ is a component whose absence will disable a machine or appliance. It must be regarded as an essential ingredient or part of that machine – Electrosteel Castings V. CCE

A part is an essential component of the whole without which whole cannot function. Accessory is something supplementary or subordinate in nature and need not be essential for actual functioning of the product. – CCE V. Insulation Electricals (Judgment given to distinguish between part and accessory).


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Based on various case laws, the conclusion is as follows:

Various judgments on classification of parts: 1. Joints, washers and articles of vulcanized rubber (other than hard rubber) are to be classified according to

constituent material and not as ‘parts’ or ‘accessories’- CCE V. Gold seal Engg. 2. Part of cycle tyre is part of cycle. So part of part is part of whole – CCE V. MP Ltd. 3. ‘Component’ is the genus while spare part is the species. Spare part though fitted subsequent to

manufacture is a ‘component part’ – Hindustan sanitary ware V. CC 4. Scope of interference of SC in classification of disputes – Classification of goods involves technical and

scientific evaluation and analysis. It is therefore important that unless something patently wrong is demonstrated while classifying a particular product, SC should not interfere – LML Ltd. V. CC (2010)(SC).

Case laws on Classification:

Case Judgment

Pleasantime Products V. CCE (2009) (SC)

The Court opined that “Scrabble” was not a puzzle/crossword. The difference between a “game” and a “puzzle” is brought out by three distinct

features, viz., outcome, clue-chance and skill. In a puzzle, the outcome is fixed or pre-determined which is not there in “Scrabble”.

In a “Scrabble” there are no clues whereas in crossword puzzle, as stated above, words are written according to clues.

Hence, the essential characteristic of crossword to lay down clues and having a solution is absent from “Scrabble”.

Thus, “Scrabble” would not fall in the category or class mentioned in sub-heading 9503.00, namely, “puzzles of all kinds”.

As per the dictionary meaning, “Scrabble” is a board game in which players use lettered tiles to create words in a crossword fashion.

Applying the dictionary meaning, the Apex Court held that “Scrabble” was a board game. It was not a puzzle. In the circumstances, it would fall under heading 95.04 and not under sub-heading 9503.00 of the CETA.

Parts of

General use

Should be classified in their specific heads

Eg: Bolt used in a vehicle will be classified as "Bolt" and not as "Vehicle part"

Specific use

If seperate heading is available for that part

Should be classified under that particular heading.

In Bharat Fritz werner P. Ltd. V. CCE it was held that if certain goods are

specifically mentioned in any particular heading, these will be

classified under that heading, even if they are parts and accessories

suitable for use of a machine in a particular heading.

If seperate heading is not available for that part

Should be classified along with the main

article.



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CCE V. Funskool (I) Ltd. (2009) (SC)

In classification of an item as a ‘game’, ‘puzzle’ or ‘toy’, the age of the palyer is not a relevant test. Hence, snake and ladder and monopoly were classifiable as ‘games’; they were not toys even if the children play them.

Xerox India Ltd. V. CCE (2010) (SC)

Rule 3(a) of GIR – Prefer Specific heading over general.

Rule 3(b) of GIR – In case of composite items, classify as per ESSENTIAL

CHARACTER

While observing the multi functional machines, the major portion of manufacturing

cost as well as parts and components are allocated to printing function.

This clearly shows that the printing function emerges as the principal function and

it gives the essential character to multi functional machines.

Therefore, multi functional machines should be classified under heading 8471.60

The multi functional machines serves as both input device (i.e. Scanner) and output

device (i.e. Printer) of an Automatic data processing machine.

CCE V. Vicco Laboratories

The burden of proof that a product is classifiable under a particular tariff heading is on the department

CCEx. vs. Insulation Electrical (P) Ltd. 2008 (SC).

Facts: The assessee is a manufacturer of rail assembly; front seat adjuster/assembly slider

and rear back lock assembly for car seats. With the help of these items, seats can slide back and forth which enables the

driver or the passenger to adjust the position of the seat to suit his comfort and convenience.

The company is classifying its products under chapter heading 8708.00 as “Parts and accessories of the motor vehicle.”

However, the Department contends that the product manufactured by M/s. Comfort Seats (P) Ltd. should be classified under chapter heading 9401.00 as “Seats whether or not convertible into beds and parts thereof.”

Decision: The goods under question would not be classified under sub-heading 9401.00 as it

only covered parts of seats and not accessories thereof. The Supreme Court held that the said goods would rightly be classified under sub-

heading 8408.00 as it covered both parts and accessories.

Guljag Industries Ltd. v. Union of India (HC)

Erroneous claim made by the assessee earlier did not preclude him from subsequently making a claim for correct classification.

LML Ltd. V. CC (2010) (SC)

Drawings and designs contained in a CD ROM’s is neither “Printed matter” nor “Information technology software” not either “Bare CD ROM” and hence, classifiable as “Recorded CD ROM” under 8524.39

CC V. NI systems (I) P. Ltd. (2010) (SC)

Controllers/Adaptors meant for use as measuring and controlling equipments are not classifiable as ‘Computers/data processing machines” under chapter 84 and are classifiable under Chapter 90 as “Measuring and checking instruments”.

CCE V. Sund-strand Forms P. Ltd. (2011) (SC)

Carbonless paper is a chemically treated paper used for producing impression of the writing or manuscript of the original paper on the other paper sheet. Carbonless paper emerging at intermediate stage during continuous process of manufacturing of carbon-less stationary is classifiable under Tariff heading 48.16 as ‘self copying paper, other copying or transfer papers’. The same could not be regarded as ‘Registers and other stationary items’ under heading 48.20 or ‘Printer matter’ under heading 49.01

CCE V. Wockhardt Life sciences Ltd. (2012) (SC)

Facts: Assessee was a manufacturer of Povidone Iodine Cleansing Solution USP

(PICSU) and Wokadine surgical scrub (WSS). The assessee contended that the said products were ‘Medicaments’ under Tariff

heading 3003 as it was used for surgical cleaning, while the department contended that they were detergent under Tariff heading 3402.90

Decision: The products were medicaments in view of the three important tests for classification -


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Composition test, Use test and common parlance test, as discussed below: (i) Composition Test: The PICSU and WSS was made of 330 Kg. of medicines in 1000 litres of water. The quantity of medicines used in particular product is not relevant because, normally, extent of use of medical ingredients is very low, as larger use may be harmful to the body. Therefore, as per composition test, the products were medicament. (ii) Use Test: The products in question were primarily used by surgeons for cleaning or de-germing their hands and scrubbing surface of skin of patients before operation. Merely because they were used in detergents as cleansing agents would not affect the classification. Therefore, as per primary use test, the products were medicaments. (iii) Common Parlance Test: The products in question were understood as medicaments in common parlance and trade. Therefore, merely because of alternative used in making detergents, they could not be classified as ‘detergents’.

CCE V. Minwool Rock Fibers Ltd. (2012) (SC)

Facts: Assessee was a manufacturer of slag wool/rock wool containing more than 25%

by weight ‘blast furnace slag’. Classified that said goods under tariff heading 6807.10, while the department sought classification under tariff heading 6803.

6803: slag wool, rock wool and similar wools (Rate of duty 18%); 6807.10: Goods in which more than 25% by weight of ___ blast furnance slag ___ is used (Rate of duty 8%)

Decision: Classification beneficial to assessee to be classified: In classification dispute, in case of two competent tariff entries, any entry which is beneficial to the assessee should be applied. Therefore, the products in question were classifiable under heading 6807.10

Circulars on Classification:

903/23/2009 It is clarified that these products will be classified under heading 9404.

Explanatory Notes to Harmonized System of Nomenclature to Chapter Heading

5811 also states that the heading does not cover made up goods of this Section

(Section Note 7) and articles of bedding or similar furnishing of Chapter 94

which are padded or internally fitted. Thus, the articles of bedding and

furnishing fall in Chapter 94.

890/10/2009 If coconut oil is packed in packages which are generally meant for sale in retail as hair oil, it would be classified as hair oil under heading 3305 (Chapter 33 of CETA), even though few consumers may use it as edible oil. If the same coconut oil is packed in say 1 liter or 2 liter packages, which are generally used by consumers for edible purposes (even though some customers may use it as hair oil), it would be classified as edible oil under chapter 15.

929/19/2009 It has been clarified that polyester staple fibre manufactured out of PET scrap and waste bottles is nothing but a textile material and hence will be classified as textile material under heading 55032000 under Section XI and not as article of plastic in Chapter 39.

52/2011 - Cus TV tuners used with Computer/Automatic data processing machines receives TV signals and as the basis of such principal function, it is classifiable as “Reception apparatus for television” under heading 8528 71 00. It cannot be regarded as ‘part’ of the computer/ADP even if it is connected with motherboard.

3/2012 - Cus Fused silica is classifiable under tariff item 3207 40 00 as “glass frit and other glass, in the form of powder, granules or flakes”. Fused silica in tube form, rods or tubes, un worked, is classifiable under tariff item 7002 31 00 as “Glass in balls, rods or tubes, unworked”.



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Various Types of duties under Excise:

Type of Duty Leviable under Leviable on Rate of Duty

a) Basic Excise Duty (BED)

First schedule to CETA, 1985

All goods

b) Special Excise Duty Second schedule to CETA, 1985

Goods specified under that schedule

At present exempt

c) Additional duty of excise (goods of special Importance)

Excise (goods of special Importance) Act, 1957

Goods specified in the Act

At present Exempt

d) Additional Excise Duty

Clause 85 of Finance Act, 2005

Pan masala and tobacco products

10% of excise duties

e) National Calamity and contingent Duty (NCCD)

Sec 136 of Finance Act, 2001

- PFY, motor vehicles, cars, multi utility vehicles and two wheelers - Domestic crude oil - Mobile phones

1%

Rs. 50 per ton 1%

f) Clean Energy Cess Sec. 83 of Finance Act, 2010

Gross quantity of raw coal, lignite and peat raised and dispatched from a coal mine in India

Tariff rate Rs. 100 but effective rate is Rs. 50 per ton. EC and SHEC not applicable

Provisions relating clean energy Cess: (Notifications 1-6/2010 and 28-29/2010):

Exemption has been granted in respect of goods produced or extracted as per traditional and customary rights enjoyed by local tribals in Meghalaya without any license or lease.

The procedures relating to exemption, registration, recovery, demand, interest, refund, offences, penalty etc. in respect of such cess are being governed by the provisions as applicable under the Central Excise Act, 1944 in regard to like matters.

All coal producers would have to register with the designated officer within 30 days and pay cess on the removal of the produce from their mines. The new levy will be paid on the basis of self assessment. The cess should be shown separately in the invoice or bill issued by the producers.

Section 3 of CETA: The central government can increase the duties of excise by amendment of first schedule and

second schedule, by notification in the official gazette, in the following manner If Rate of duty specified in First and second schedule is NIL – Increase can be upto 50% advalorem. If in any other case – Increase can be upto a rate of duty not exceeding twice the rate of duty specified in

respect of such goods in First schedule and second schedule as in force immediately before issue of the said notification.

However, the Central govt. shall not issue any notification for substituting the rate of duty in respect of any goods as specified by an earlier notification before such earlier notification has been approved by parliament with or without modifications.


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Valuation under Excise



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1. Specific duty It is the duty payable on the basis of certain

unit like weight, length, volume, thickness etc. However, the disadvantage is that even if

selling price of the product increases, revenue earned by Government does not increase correspondingly.

Frequent revisions of rates have to be done, which is a slow and time consuming process. Hence, now most of the goods are covered under ‘Ad valorem’ duty.

Presently, specific rates have been announced for – a) Cigarettes (length basis), b) Matches (per 100 boxes/ packs), c) Sugar (per quintal basis), d) Marble slabs and tiles (Square meter basis), e) Colour TV when MRP is not marked on the package or when MRP is not the sole consideration

(based on screen size in cm), f) Cement clinke (per tonne basis), g) Molasses resulting from extraction of sugar (Per ton basis).

As long as variation is within maximum permissible error as per weights and measurements Act, duty is payable on the basis of weight as shown on package. – CCE V. Sagar cements Ltd.

2. Tariff Value

It is fixed by Government from time to time. It is a “Notional Value”. Once ‘tariff value’ for a commodity is fixed, duty is payable as percentage of this ‘tariff value’ Government can fix different tariff values for different classes of goods or goods manufactured by different

classes or sold to different classes of buyers The tariff value may be fixed on basis of wholesale price or average price of various manufacturers as the

Government may consider appropriate. Such tariff value can be fixed only for few selected commodities like - (a) Pan masala packed in retail packs of upto 10 gm per pack

(b) Tariff value for readymade garments has been prescribed as 30% of the retail sale price as specified on the package.

3. Duty based on production capacity [Sec. 3A]

Some products (ex: Pan Masala, rolled steel products) are prone to duty evasion. For that reason Central Govt. issued a notification specifying that duty shall be levied based on production capacity. 1. Annual capacity will be determined by an officer not below the rank of Assistant Commissioner of Central

Excise. 2. Factors relevant to determine production capacity will be specified by Central Govt. 3. Annual capacity fixed shall be deemed to be annual production of goods from the factory (i.e) whether the

production is below (or) more than annual capacity fixed.

Situation Adjustment

1. If factory is not working for part of year Annual production will be calculated on proportionate basis

2. If factory does not work for a continuous period of 15 days (or) more in a month

Duty calculated will be proportionately reduced

3. If factors determining production capacity has been changed during the year

Annual capacity will be re-determined

Specific Duty method Tariff Value Duty based on Production capacity MRP based Valuation RSP determination Rules, 2008 Compounded levy scheme Transaction Value Computation of transaction value Valuation Rules, 2000 Cases and circulars


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Products covered: Pan masala containing more than 15% betel nut, pan masala containing tobacco (i.e. gutkha), Unmanufactured tobacco bearing a brand name Chewing Tobacco Jarda scented tobacco manufactured with the aid of packing machine and packed pouches.

Special Points: The declaration of retail sale price is mandatory in case of such notified goods. The duty is fixed per month per packing machine based on retail sale price of the pouches. The amount of duty specified in the notification is inclusive of EC & SHEC. Note: The above provisions are not applicable for EOU

4. MRP based valuation

Sec. 4A empowers C. Govt to specify goods on which duty will be payable on retail sale price. The provisions are as follows:

a) The goods should be covered under provisions of Legal metrology Act, 2009 or the rules made there under b) Central government will specify the commodities to which MRP based valuation is applicable, by a

notification in official gazette c) It also specifies the abatement available from the ‘Retail Sale price’ Valuation Methodology:

Retail Sale Price (RSP) declared on such goods XXX Less: Notified amount of abatement from retail price allowed by central government.

(XXX)

Assessable Value for the purpose of levy of excise duty XXX

FAQ’s on MRP based valuation:

(a) Who has to declare the abatement? – Central Government

(b) For what kind of goods does this provision apply? – For goods covered under the provisions of Legal

Metrology Act, 2009.

(c) Whether this provision applies to all goods covered under the provisions of standards of weights and measurements Act? – The central Government by notification will specify from time to time the commodities covered.

(d) What is the meaning of ‘Retail Sale price’? – It is the maximum price at which excisable goods in packaged

forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commission payable to dealers and all charges towards advertisement, delivery, packing, forwarding charges etc.,

(e) If there is more than one MRP on the same product? – Whichever is higher should be considered (f) Different MRP’s on different packages for sale in different areas? – Each such price shall be MRP which

has to be valued separately Ex:

Brooke Bond(for sale to hotels) Rs. 40

Brooke Bond Rs. 60



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Beautiful Hair Ltd. Manufactures shampoo at its factory in Kanpur. The following maximum Retail Price (MRP) are printed on the packet:

MRP in Bihar - ` 150 MRP in West Bengal - ` 148 MRP in other places - ` 145

What is the AV of shampoo cleared for sale in the state of AP as per Section 4A of the CE Act, 1944? Give Reasons for your answer?

It was held in Mount Everest Mineral water Ltd. V. CCE that where the assessee had marked different sale prices on its mineral water bottles for sale in different region, he did not satisfy the requirement under sec. 4A that marking of different prices must be on DIFFERENT PACKAGES. Thus, the highest price declared in the package is to be taken into account for valuation. Hence, MRP of ` 150 will be taken for assessment purpose. AV per packet = ` 150 – Abatement.

(g) Goods are covered under MRP provisions. But MRP hasn’t entered on to it (or) wrong MRP (or)

tampering of MRP? – It is an offense & goods are liable for confiscation. (h) When MRP based valuation does not apply

When goods are packed in bulk (or) whole sale

(i) If goods are sold partly in wholesale and partly in retail Wholesale (No MRP based valuation) Retail (MRP based valuation)

(j) A person crossing higher MRP to show lower MRP Scored / crossed out MRP has no relevance. The price which is visible has to be considered for the purpose of valuation.

(k) If goods are given as free gifts/ samples? – In case of free samples, the value should be calculated as per

Rule 4 of Valuation Rules, 2000 which is “the value at the nearest time of removal”. Circular No. 915/5/2010 has clarified that in case of goods notified under Sec. 4A is given away by way of free samples/ gifts/ donations, the value under Rule 4 for payment of excise duty shall be the value determined under Sec. 4A for the similar goods (subject to adjustment for size and pack etc.,).

(Source: Cadila Pharmaceuticals V. CCE (2008)(CESTAT), CBEC Circular No. 915/05/2010)

Note: If value of similar goods not available – Valuation should be on the basis of cost of production + 10%, in the absence of any other mode available for valuation.

(l) Coca cola supplied aerated water in packed condition to buyer who will be distributing them for free

later. How the valuation shall be made? – Since product is covered under MRP, duty is payable on basis of MRP, even if later buyer is going to distribute the same as free gift.- CCE V. Hindustan Coca Cola.

(m) Whether MRP based valuation applicable to export goods? – MRP provisions so not apply to goods under

export (even export to Nepal or Bhutan). In such cases, valuation is required to be as per provisions of section 4. Such goods are not liable for confiscation if MRP is not printed on such goods – Gillete India Ltd. V. CCE

Valuation of free samples when product is covered under MRP provisions

If MRP is marked on the samples

Valuation under sec. 4A

AV = MRP (-) abatement

If MRP is not marked on the samples

Valuation under Rule 4

AV = Price at which similar goods sold in the market


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(n) If at the time of removal lower MRP, after removal (or) clearance higher MRP? – Higher MRP shall be taken into account

(o) When certain expenses are charged separately in the invoice and collected from the dealers, how the

valuation u/s 4A shall be made? – In Gujarat Gold coin Ceramics V. CCE, it was held that any amount collected from dealers, is not required to be added when valuation is on basis of MRP.

(p) If goods are covered under MRP based valuation, will any other valuation scheme applicable (i.e.

Transaction value u/s 4(1))? – Sec. 4A uses the words ‘notwithstanding section 4’. Hence when section 4A is applicable, provisions of section 4 for determination of AV are not applicable.

(q) When M.R.P based valuation not applicable?

When goods are not covered under the provisions of Sec. 4A

When goods are packed in bulk – Titan Industries V. CCE

Provisions do not apply to packages or commodities of more than 25 kg or 25 litre. In case of cement and fertilizers the provisions apply upto 50 kg.

Packaged commodities for Industrial or institutional customers. The following are the exclusions irrespective of weight or volume of package Small packages of 10gm/ 10ml or less. Fast food items packed by restaurants/ hotels Scheduled drugs and formulations Agricultural farm produce Bidis for retail sale Domestic LPG gas

(r) Who are Institutional customers and Industrial customers?

‘Institutional customer’ means Customers those who buy packaged commodities directly from the manufacturers/ packers for service industry like transportation, hotel or any other similar service industry.

‘Industrial customer’ means those consumers who buy packaged commodities directly from the manufacturers/ packers for using the product in their industry for production.

(s) Products covered under MRP valuation.

Chocolates in any form – Abatement 35% Biscuits manufactured with aid of power – Abatement 35% Waffles & Wafer – Abatement 35% Aerated waters – Abatement 42.5% Toothpaste – Abatement 35% Footwear – Abatement 37% Printers, ink cartridges – Abatement 25% Computers – Abatement 22.5% Input or output units for computers – printers, monitors, keyboard, scanner, mouse etc. –

Abatement 25% Modems – Abatement 25% TV Receivers including Video monitors and video projectors – Abatement 35%. Photographic cameras – Abatement 35% Toothbrush – Abatement 28.5% Vacuum Flasks – Abatement 40%. Automobile parts, components and assemblies – Abatement 33.5%

Retail Selling Price (Determination) Rules, 2008:

If retail price is not declared on the package at the time of removal, or retail price is declared which is not the retail price as required to be declared as per provisions of Excise law or any other law, the goods are liable for confiscation – Sec. 4A(4).



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Goods are liable to confiscation in the following cases: Removing excisable goods without M.R.P Removing goods with wrong M.R.P Tampering, altering, removing M.R.P

Mode of ascertainment of MRP if MRP not declared or incorrectly declared or obliterated. – Central Excise (Determination of Retail Sale Price) Rules, 2008 In the following cases, the Central Excise (Determination of Retail sale price of Excisable goods) Rules, 2008 shall apply

Clearing goods without declaring RSP By declaring RSP, which is not the RSP required to be declared By declaring RSP but obliterates the same after their removal

Consequences: 1. Such goods are liable for confiscation. 2. RSP shall be determined as per the said rules. Determination of RSP:

Rule 4(i): When goods are removed without RSP or wrong RSP or obliteration of RSP, RSP of identical goods sold within one month prior or later of the goods in question shall be considered. [If more than one RSP is ascertained, highest RSP is taken into account]

Rule 4(ii): When RSP cannot be ascertained as per above rule, enquires in retail market should be conducted to ascertain RSP.

Rule 5: When RSP is tampered/ altered after removal, such increased RSP shall be taken as RSP of all goods removed during one month prior and after

5. Compounded Levy scheme:

Normal excise procedures and controls are not practicable when there are numerous small manufacturers Rule 15 of Central Excise Rules provides that CG may, by notification, specify the goods in respect of which

the scheme shall be applicable Central Government can specify procedure for payment, abatement allowable, interest and penalty

payable etc. The abatement if any may be allowed on account of closure of a factory during any period, or because of

any other matter. This is termed as ‘compounded levy scheme’. It is devised for administrative convenience. It is an optional scheme. The advantage of this scheme is that it frees the manufacturer from observing day to day central excise

formalities and maintenance of detailed accounts after making the lump sum periodic payment. Thus, small manufacturers generally benefit from this scheme. Under compound levy scheme, the manufacturer has to pay prescribed duty for specified period on the

basis of certain factors relevant to production, like size of equipment employed etc. Applicability of scheme - The scheme is presently applicable to stainless steel pattas/patties, Aluminium

circles.

6. Transaction Value

Section 4(3)(d) defines ‘transaction value’ as follows – ‘Transaction value’ means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of sale or at any other time, including, but not limited to, any amount charged for, or to make provision for,

advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.


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The analysis of the definition is as follows: The payment should be ‘by reason of, or in connection with the sale’. The amount may be payable at the time of sale or at any other time. Such time may be before or after sale. Any amount charged for, or to make provision for, advertising or publicity, marketing and selling

organization expenses, storage, outward handling, servicing, warranty, commission or any other matter is includable.

However, the above are includable only when aforesaid conditions are satisfied i.e. (a) The amount should be paid or payable to assessee or on behalf of assessee and (b) Payment should be by reason of sale or in connection with sale.

When Assessable Value shall be Transaction Value? As per Section 4(1)(a), excise duty is payable on basis of ‘transaction value’, if the following conditions are satisfied -

The goods should be sold at the time and place of removal. Buyer and assessee should not be related Price should be the sole consideration for the sale. Each removal will be treated as a separate transaction and 'value' for each removal will be separately fixed.

If these requirements are not satisfied, valuation will be done as per Valuation Rules,2000. - Section 4(1)(b)

FAQ’s on the definition of TRANSACTION VALUE:

1. What is the meaning of PLACE OF REMOVAL and time of removal?

‘Place of removal’ MEANS – (i) a factory or any other place or premises of production or manufacture of the excisable goods from where such goods are removed, (ii) A warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty from where such goods are removed, (iii) A depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from factory; from where such goods are removed. [Section 4(3)(c)].

Thus – (i) If excisable goods are removed for sale from factory of manufacture or place of production, that will be ‘place of removal’. If there is no ‘sale’ at factory gate, it is not the place of removal. (ii) If goods are cleared for sale from warehouse where goods were allowed to be kept without payment of duty, which will be the ‘place of removal’. (iii) If goods are cleared from factory to depot or branch or place of consignment agent, then such depot/ branch/place of consignment agent will be ‘place of removal’. (iv) Where goods are ‘sold’ at destination and not at factory gate (this may be the case in case of CIF contract but not necessarily), such place or premises will be ‘place of removal’.

Place of removal is significant for duty liability which is as follows:

Place of Removal

Removed to Duty Liability Duty on

(a) Factory Customer/ Buyer under a sale

Warehouse

Depot/ Consignment premises

Yes

No

Yes

Ex-Factory Price

N.A

Ex-Depot Value (Rule 7)

(b) Warehouse

Customer/ Buyer under a sale

Depot/ Consignment premises

Yes

Yes

Ex-Warehouse Value

Ex-Depot Value (Rule 7)

(c) Depot Customer/ Buyer under a sale

No

N.A (Since already paid)



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2. How TIME OF REMOVAL can be determined if goods are removed to depot or premises of consignment agent?

As per section 4(3)(cc), in case of sale from depot/place of consignment agent, ‘time of removal’ shall be deemed to be the time at which the goods are cleared from the factory.

3. When goods are said to be not sold at the time and place of removal?

Transfer to depot/branch Goods sent on jobwork. Free samples or supply under warranty claims Hypothecation Free on Road (FOR) destination delivery (sale is concluded only when goods are

delivered to buyer) In case of export, property in goods passes to buyer at the port when goods are

handed over to airlines/shipping Company. Hence, valuation on basis of transaction value is not permissible in these cases.

4. What is the meaning of related person and who are said to be related?

As per Section 4(3)(b) of Central Excise Act, persons SHALL BE DEEMED TO BE ‘RELATED’ IF (i) They are inter-connected undertakings (ii) They are relatives (iii) Amongst them, buyer is a relative and a distributor of assessee, or a sub-distributor of such distributor or (iv) They are so associated that they have interest, directly or indirectly, in the business of each other.

5. What is the meaning of ‘Inter-connected undertakings’? (w.e.f. 1/4/2012)

One undertaking Nature of relationship Other undertaking

One undertaking Owns/controls/both are owned or controlled by the same person or same group

Other undertaking

Owned by firm Common partners Owned by firm

Owned by body corporate Manages/exercises control/subsidiary

Owned by body corporate

Owned by body corporate Under the same management

Owned by body corporate

Owned by body corporate Partners in the firm hold directly/indirectly ≥ 51% of equity or preference of body corporate

Owned by firm

Owned by body corporate Partners in the firm exercise control directly/indirectly in body corporate, as director/otherwise.

Owned by firm

Owned by body corporate Same management Owned by firm, having body corporate as its partners

Apart from the above, if one undertaking is connected with the other either directly or through any number of undertakings which are inter-connected undertakings falling above. For example, Undertaking B is interconnected with undertaking A (i.e. B A) and undertaking C is interconnected with undertaking A (i.e. C A). Therefore, undertaking C is interconnected with undertaking B (i.e. C B). Further, if undertaking D is interconnected with undertaking C, then undertaking D is interconnected with undertaking B and consequently with undertaking A (i.e. If D C, then D B, D A)

6. What is the meaning of ‘same management’ for the purpose of the

Two body corporates will be deemed to be under the same management if any of the following is satisfied. (i) If one controls other or both are controlled by same group or any of the constituent

of the same group.


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definition of inter-connected undertakings?

(ii) If both have common managing director or manager (iii) If one controls at least 25% equity shares of other or not less than 25% directorships of

other. (iv) If atleast 25% of number of directors are common, or were common any time during

last 6 months. (v) If same individual, group or part of group holds atleast 25% or more shares in both the

body corporates (vi) If one or moe body corporate in a group together with subsidiaries, if any, hold 25% or

more shares of both the body corporates. (vii) If atleast 25% voting power of both the corporate is controlled by one individual

(together with his relatives or on his own), or by same body corporate with its subsidiaries.

(viii) If atleast 25% voting power of both the body corporate is controlled by same group or same company belonging to a group or jointly with individuals and one ore more of such body corporate.

(ix) If directors of one body corporate are accustomed to act as per instructions of one or more directors of another body corporate or directors of both body corporate are accustomed to act as per instructions of another individual, whether belonging to a group or not.

7. What is the meaning of “relative”

6. What is the meaning of ‘Interest in the business of each other’?

Not defined in the Act, but can be understood based on the case laws. “It is not enough if only buyer has interest in seller or seller has interest in buyer. Both

must have interest directly or indirectly in each other” – Atic Industries Ltd. V. UOI “Mere holding shares of a public company does not mean that shareholder has an

interest in the business of the public company” – Alembic Glass Industries V. CCE “Interest in the business of each other does not mean a mere business connection

between two parties. This interest has to be financial or managerial Interest” – Automotive Axles V. CCE

7. What is the meaning of ‘Price must be the sole consideration’?

Price is the consideration given for purchase of a thing. Consideration MEANS reasonable, equivalent or other valuable benefit passed on by the promisor to the promise or by transferor to transferee. Some illustrations will clarify:

Buyer supplies some material to be used in manufacture of product and manufacturer i.e. seller charges lower price for the goods, price is obviously not the ‘sole consideration’ for sale of goods

If the purchaser agrees to pay advance along with order and manufacturer agrees to sell goods at lower price, then price is not the sole consideration.

If buyer agrees to incur some advertisement expenditure of the goods manufactured by the manufacturer and manufacturer agrees to give extra discount over normal price. Here also, price charged by manufacturer cannot be treated as ‘sole consideration’.

Brother Sister



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Computation of Transaction Value:

Any payment charged separately or made provision separately will be included in the Transaction value along with invoice price if the following 2 conditions are satisfied:

1. Buyer is liable to pay to assessee or to a third party on behalf of assessee. 2. The payment or provision made is by reason of sale or in connection with sale.

An extract of the definition: Section 4(3)(d) defines ‘transaction value’ as follows –

‘Transaction value’ means -------, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of sale or at any other time, including, ----------.

Transaction value includes the Invoice price plus the following: 1) Amount paid by buyer to seller by reason of sale, at the time of sale. 2) Amount paid by buyer to seller by reason of sale, before the sale. 3) Amount paid by buyer to seller by reason of sale, after the sale. 4) Amount paid by buyer to seller in connection with sale, at the time of sale. 5) Amount paid by buyer to seller in connection with sale, before the sale. 6) Amount paid by buyer to seller in connection with sale, after the sale. 7) Amount paid by buyer to third party by reason of sale, at the time of sale. 8) Amount paid by buyer to third party by reason of sale, before the sale. 9) Amount paid by buyer to third party by reason of sale, after the sale. 10) Amount paid by buyer to third party in connection with sale, at the time of sale. 11) Amount paid by buyer to third party in connection with sale, before the sale. 12) Amount paid by buyer to third party in connection with sale, after the sale.

What is the difference between “By reason of sale” and “In connection with sale”?

By reason of Sale In connection with sale

Dictionary Meaning

‘Reason’ means motive or cause. This indicates a cause and effect relationship.

‘Connection’ means the state of being connected or joined.

Interpretation It has a liberal interpretation It has a stricter interpretation

Explanation When a buyer pays certain amount to seller or third party because this sale has been concluded, then such payment is by reason of sale. Here ‘sale’ is the cause and payment is the ‘effect’. Here the relation can be remote and doubtful.

The term connected with means that connection must be direct and clear as between cause and effect and not remote and doubtful. It implies a substantial or direct connection and not a fanciful or highly problematical connection

Example A manufacturer has 2 products ‘X’ and ‘Y’, X is an excisable product and Y is non excisable. A buyer needs both X and Y. The manufacturer charges a lesser price for excisable product and a higher price for non excisable product. In this case the excess amount paid is “in reason of sale”.

A manufacturer charged design, engineering charges separately in invoice. The buyer paid both invoice price and design charges. As design charges are necessary and are “in connection with sale”. So includible.

Invoice price (or) Sales value xxxx

Add: If the following are not included in the above:

a) Packing (primary, secondary (or) special) – It is in connection with sale xxxx

b) Packing supplied by buyer – Circular No. 354/81/2000 xxxx

c) Durable & returnable packing (only amortised value if any, is includable) xxxx

Note: Packing charges recovered from buyer will be included only if it is in relation to sale of


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goods – Grasim Industries V. CCE

d) Design & engineering charges (as they are essential for the purpose of manufacture) – It is in connection with sale

xxxx

Note: Engineering charges not connected to goods or sale should not be included

e) Consultancy charges (as these are incurred in relation to pre-installation planning, layout design, etc.,) – It is by reason of sale

xxxx

f) Warranty charges – It is in connection with sale xxxx

Note: It will be includable even if they are charged separately

In case of optional warranty, if buyer does not opt for warranty, and does not pay amount then it is not included

g) Testing charges (recovered by the assessee from the buyer in terms of contract) xxxx

h) Loading and unloading within the factory (as it is a cost of production) – It is by reason of sale

xxxx

Note: Loading & unloading charges incurred by a buyer of the assessee on his own account and not on behalf of seller is not includable

i) After sale service (in the same lines of warranty charges)

xxxx

j) Commission to selling agents for the services rendered by them xxxx

k) Bought out items without which the excisable goods cannot function (as they are supplied with excisable goods & are essential “parts” of goods which enrich its value)

xxxx

Note: Bought out items supplied under trading activity is not includable

l) Pre-delivery inspection (PDI)

Note: i) Cost can be incurred at any time & just before removal also xxxx

ii) If PDI is not part of contract of sale & is incurred by the buyer, then it is not includable

(See recent case law below)

m) Dharmada charges (it is amount collected by the seller & spent for charitable purpose) xxxx

Note: i) Statutory provisions – not included

ii) No statutory requirement – includable

n) Free supply during warranty period xxxx

o) Transportation and insurance xxxx

i) Cost incurred from factory gate to the place of removal is includable in transaction value

ii) Profit an transportation cost charged to the buyer, thereby indirectly collecting a higher price for the goods sold is also includable

Note: Cost incurred from place of removal to place of delivery is not includable

xxxxx

EXCLUSIONS

Less: If the following are included in the Invoice Price

p) Excise duty on finished products xxxx

q) Sales tax, turnover tax, additional sales tax, surcharge on sales tax, octroi

xxxx

r) Trade discount (discount of any description given on any normal price payable for any transaction will not form part of transaction value)

xxxx

s) Regional discount

Condition: It should be in the course of normal business practice xxxx

t) Outward handling charges (cost of transportation from place of removal to place of delivery & the condition there is it should be shown separately in the invoice)

xxxx

u) Post removal expenses xxxx

v) Bank charges included in price of goods, such inclusion is on account of outstation checks xxxx

w) Interest on delayed payment xxxx

Conditions:



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i) Interest is chargeable only if buyer does not make payment within the credit period allowed to him

ii) Interest charges are clearly distinguishable from the price of goods

iii) Financing agreement is made in writing

x) Interest on advances from customers xxxx

Conditions: Advances should not have any nexus relation with the price charged (i.e) the customer paying the advance & the customer not paying the advance should not be charged different prices

y)

Operating software (or) system software (cost of operating software & other operational software should not be included in assessable value of computer since software & computer are two different goods in CETA)

xxx

z)

Profits made by dealer

Conditions: There shouldn’t be any flow back of profits from the dealer to the manufacturer

xxxx

Transaction value (or) assessable value

xxxx

Valuation Rules:

As per section 4(1)(a), Assessable value shall be the transaction value as defined under section 4(3)(d), if the following conditions are satisfied:

1. Goods must be SOLD at the TIME OF REMOVAL/ Goods must be SOLD at the PLACE of REMOVAL

2. PRICE must be the SOLE CONSIDERATION for sale

3. Buyer and seller must NOT BE RELATED

4. Each REMOVAL shall be valued SEPERATELY. If any of the above condition or all the conditions are not satisfied then Central Excise (Determination of price

of Excisable goods) Rules, 2000 shall be applicable (i.e. Valuation Rules).

Rule 4: Value nearest to time of removal if goods not sold

If goods are not sold at the time of removal, then value will be based on the value of such goods sold by assessee at any other time nearest to the time of removal, subject to reasonable adjustments. Examples: removal of free samples or supply under warranty claims. It was held in Bharat petroleum corporation Ltd. V. CCE (2009), that when there

were reciprocal agreements between buyer and seller, where seller charges a lesser price to such buyer than to independent buyers, such price cannot be accepted for valuation. In such case valuation shall be under Rule 4. Hence, different prices based on reciprocal agreement not valid and valuation will be on the basis of Rule 4.

‘Such goods’ means other goods of same class of same manufacturer. If a manufacturer manufactures refrigerator of a particular brand and capacity, each of these refrigerators will fall in category of such goods. However, refrigerator of same capacity under different brand name by same manufacturer will not be such goods. – Departmental clarification

Rule 5: Goods sold at a place other than the place of removal (i.e) delivery at buyer’s premises.

Value = Transaction Value (-) Cost of transportation from the place of removal to place of delivery. Cost of transportation can be either on actual basis or on equalized basis.

It should be calculated as per CAS-5 issued by ICWAI It is not required to show cost of transport separately in invoice for availing

deduction If assessee recovers an amount from the buyer towards the cost of return fare of


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empty vehicle, this amount is includible in the transaction value Cost of transportation includes

a) Actual cost of transportation (or) b) Equalized freight

Equalized freight is the average of freight charges allowed to be deducted uniformly for all sales to different destination. This is possible when the sale is from factory.

Rule 6: When price is not the sole consideration

Assessable value = Sale price + money value of additional consideration received

Rule 7: Sale at depot / consignment agent

Value shall be the Price prevailing at the depot at the time of removal from factory shall be the assessable value

Time of removal - time at which the goods are cleared from factory. Place of removal - depot/place of consignment agent

Rule 8: Valuation in case of captive consumption

Value = Cost of production + 10%. (Cost of production calculated as per CAS - 4)

Rule 9: Sale to Related person – Other than Inter connected undertakings (including Holding -subsidiary)

The value shall be the normal TV at which such goods (i.e. same, similar or identical) are sold by related person to an unrelated buyer on the same date (i.e. on the date when goods are sold to related buyer)

Special Points:

1. If the goods are sold to a related retail buyer by the related person on the same date Price at which goods are sold to related buyer shall be considered as “Value”

2. If the goods are sold to related wholesale buyer by the related person on the same date Value determined as per Rule 11 (i.e. to the best judgment of assessing officer)

3. If the goods are not sold by the related person on the same date other valuation rules shall be applicable, if not Rule 11 is the last resort.

Rule 10: Sale to Related Person – Inter connected undertakings (other than Holding – subsidiary)

Valuation shall be made as if they are not related persons



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Rule 10A: Valuation in case of Job work

The various situations and the value in each situation are as follows:

(i) Where goods are sold by principal manufacturer from the job worker’s factory

The VALUE shall be the price charged by principal manufacturer to his customer.

(ii) Where goods are sold by principal manufacturer from the job worker’s factory and the principal manufacturer, buyer are related

The VALUE shall be determined as per Rule 9 or Rule 10.

(iv) Where goods are cleared from job worker’s factory to principal manufacturers factory

The VALUE shall be the price prevailing at factory at the time of removal from the job worker’s factory.

(v) Where goods are cleared from job worker’s factory to principal manufacturer’s depot or place of consignment agent of principal manufacturer

The VALUE shall be the price prevailing at depot or place of consignment agent at the time of removal from the job worker’s factory.

(vi) Where the goods are given as free samples by the principal manufacturer from job worker’s premises

The VALUE shall be determined as per Rule 4 i.e. Price nearest to the time of removal

(vii) Where the goods are captively consumed by the job worker for further processing

The VALUE shall be determined as per Rule 8 i.e. Cost of production + 10%

(viii) Where the goods are sold for delivery at the buyers premises from the factory of job worker

The VALUE shall be determined as per Rule 5 i.e. Price at buyers premises – Cost of transportation from job worker’s factory to buyers premises.

(ix) For any other situation Other Valuation rules mutatis and mutandis shall be applicable.

Case laws on Valuation and Valuation Rules:

Case Judgment

1. CCE V. Xerogrpahic

Ltd. (2010) (SC)

Merely because two parties are related persons, the transaction value cannot be rejected.

In order to reject transaction value between related persons, it should be shown that the

price at which the goods were sold to related persons was not the normal price at which

the goods were sold to other distributors/dealers, or was less than the market price at

which it was being sold in the market, or, that there was any extra commercial

consideration in fixing the price to such related persons. IN absence, thereof, the price

discharged from the related persons shall be acceptable.

2. CCE V. Cadbury

India Ltd. (2006) (SC)

Advertising, insurance and other expenses of the final products shall not be added to

determine the value of intermediate goods.

3. CCE V. Makson Confectionary (2010) (SC)

Facts & Issue involved: Whether Chocolates/Toffes packed liable for MRP based valuation? Though chocolates are covered under MRP provisions as per Sec. 4A, but as it is packed MRP is not printed. Will the penal provisions and confiscation as per Sec. 4A, applicable in this case? Decision:

• As per the standards of weight and measure rules,

• A package containing 10 or more than 10 retail units is defined as ‘Whole sale

package’ and there is no need to declare sale price on a whole sale package.


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• The packs/jars of Eclairs are not intended for sale to retail customers

• Therefore there is no need to declare RSP on the packs and these were assessable

as per sec. 4 and not as per sec. 4A.

4. Royal Enfield V. CCE (2011) (SC)

Facts & issue involved: Whether the packing charges incurred to avoid scratch and breakage to motor cycles form part of Assessable value? Will the position be same if the said expenditure is separately collected from the buyer? Decision:

Any Expenditure incurred upto the place of removal and any amount paid by the

buyer by reason of sale or in connection with sale shall be included in the value of

taxable service. Packing charges shall be included if it is necessary in the ordinary

course of trade. (My Opinion)

In case of motor cycles cleared in packed condition from the factory to the depot,

the packing charges incurred to avoid scratch and breakage to motor cycles form

part of the AV because such packing is necessary for putting the excisable goods

(i.e. Motor cycles) in saleable condition.

Even though such packing charges are separately reimbursed by the buyer, the

same are includible in the value for the purpose of payment of excise duty.

5. Electronics and Controls Power system P. Ltd. V. CCE (2011) (SC)

Facts & Issue involved: Whether the value of bought out batteries supplied along with uninterrupted power supply system (UPSS) as an option item should be included in the Value of UPS system for the purpose of charging excise duty as these batteries are part of UPS system? Decision:

Even if UPS cannot function without battery for conditioning power, but battery is

the essential pre-requisite.

The source of power to the UPS system is the battery which is an essential and

integral part.

Hence, the value of bought out batteries is includible in the value of UPS system.

Conclusion: Battery is not an accessory but an essential part, which needs to be

included in the value of Final product (i.e. UPS system). However, the

manufacturer can take the excise duty paid on the batteries as CENVAT credit for

the purpose of payment of excise duty on UPS system as the amended definition

of “Inputs”.

6. MARUTI SUZUKI INDIA

LTD. V. CCE 2010 (TRI. –

LB)

Cost of after sale service and PDI charges incurred by dealer during warranty period is includible. There need not be direct flow back of consideration to assessee. Even indirect benefit is includible in assessable value.

7. Electronics &

Controls power

systems P. Ltd. V. CCE

(2011) (SC)

Facts:

Assessee, a manufacturer of UPS system supplied bought out batteries as an

optional item along with UPS system.

Department contended that the value of batteries was includible in the value of

UPS systmen for the purpose of charge of excise duty on the ground that battery

was part of the UPS system.

Assessee denied such inclusion of the value of batteries in the value of UPS

system.

Decision:

Even f UPS system can function without battery for conditioning power, however, battery is an essential pre-requisite, if UPS system is to provide uninterrupted



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power supply. In such a case, the source of power is the battery.

So far as the UPS system with battery supplied to the buyers are concerned, UPS

system is an integral system of which battery is an essential and integral part.

Hence, the value of bought out batteries is includible in value of UPS system.

8. Essel propack Ltd.

V. CCE (2011) (SC)

Facts:

Assessee, a manufacturer of plastic tubes.

It was receiving supply of plastic caps from its customers and after fitting them

onto the plastic tubes, it was supplying the cap-fitted tubes to the customers.

The assessee was paying duty on the value of plastic tubes, while the department

includes the value of caps in the value of tubes and demanded duty accordingly.

Decision:

If caps are manufactured separately and not in the same factory in which the

tubes are being manufactured, the caps cannot form integral part of the

assessable value of the tubes, manufactured and cleared from the factory, such

caps are merely accessory.

Since, in the present case, the caps are not manufactured in the factory of the

assessee but are being supplied by the customers of the assessee, the value of

caps will not form part of the assessable value of the tubes manufactured by the

assessee.

[Note: Caps is not packing material supplied by the customers]

Circulars on Valuation and Valuation Rules:

Circular No. 923/13/2010 Cost of return fare of vehicles is not required to be added for determining value. This clarification has been issued in view of the Tribunal’s decisions in case of DCW Ltd. v. CCE 2007 and Haldia Petrochemicals Limited v. CCEx. Haldia 2009

Circular No. 938/28/2010 Quantity discounts, bonuses etc., are applicable for the valuation of goods under section

4 and not in case of goods valued under sec. 4A.


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CENVAT CREDIT RULES

Cloth Manufacturer Garment Manufacturer

Assume that 1 garment requires 2 meters of cloth

Invoice issued by cloth manufacturer for 2 meters of cloth

Invoice issued by garment manufacturer for 1 garment

Invoice Invoice

2 meters of cloth @ `100 per meter

`200 Readymade Garment (Brand : Ruby : Size : S)

Add: Excise duty @ 10% `20 Raw material (Net cost) CENVAT credit = `20

`200

Add: Education cess @ 2% on `20

`0.4 (+) Processing charges `100

Add: SAH Education cess @ 1% `0.2 (+) Profit `50

Bill Amount (Rounded off) `221 `350

Add: Excise duty @ 10% `35

Add: Education cess @ 2% on ` `35

`0.7

Add: SAH Education cess @ 1% on `35

`0.35

Bill Amount (Rounded off) `386

By observing the above two invoices, it is clear that the raw material (i.e. cloth) is taxable to excise duty in the hands of cloth manufacturer i.e. `21 and again, it is taxable in the hands of garment manufacturer. This particular raw material is taxable for two times and this is known as cascading effect of tax. In order to avoid this cascading effect, the system of VAT has been adopted and is applied in case of excise duty, which is known as “CENVAT CREDIT”. Though the cloth manufacturer paid ` 21 as excise duty, it is passed on to garment manufacturer, i.e. `21 is actually paid by garment manufacturer. The modus operandi of CENVAT credit is that the excise duty paid by garment manufacturer for purchase of raw materials (i.e. cloth) is available as credit and can be set off with excise duty payable on finished goods (i.e. readymade garments).

Net duty payable by = (35 + 0.7 + 0.35) – (21)

Garment manufacturer Excise duty on FG Excise duty on RM = ` 15

Input Process Output

Raw material Process Finished goods

Thread (RM)

ProcessedCloth

(FG)

Cloth

(RM)Processed

Ready Made

garments (FG)



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Deep into the point For manufacturing any good (or) for providing any service, it requires inputs (Raw materials), capital goods (machineries), input services (consultancy, etc.,)

The duties (or) taxes (or) cess paid on inputs, capital goods, input services are available as credit and can be set off (utilized) for payment of duties (or) taxes (or) cess on finished goods and output service.

The excise duty paid on Inputs and capital goods and service tax paid on input services is available as credit, which can be utilised (i.e. Setoff) for payment of Excise duty on finished goods and Service tax on output services. The concept is so simple. But ……….

Definition of Inputs:

Rule 2(k) “input” means - (i) All goods used in the factory by the manufacturer of the final product; or (ii) Any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or (iii) All goods used for generation of electricity or steam for captive use; or

(iv) All goods used for providing any output service; But excludes - (A) Light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol; (B) Any goods used for-

(a) Construction or execution of works contract of a building or a civil structure or a part thereof; or (b) Laying of foundation or making of structures for support of capital goods,

except for the provision of service portion in the execution of works contract or construction service as listed under clause (b) of section 66E of Finance Act, 1994 (C) Capital goods except when used as parts or components in the manufacture of a final product; (D) Motor vehicles; (E) Any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and (F) Any goods which have no relationship whatsoever with the manufacture of a final product.

Explanation – For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer.

FAQ’s on inputs

(i) There is a condition that, in order to qualify as input under Rule 2(k) it should be used in the factory by the

manufacturer of final product. Will that condition be applicable for output service provider also? From the analysis of the definition, the condition of use of goods in the factory is not applicable to service provider. He is entitled to credit on inputs if such inputs are used in providing output service.

Inputs

ProcessCapital goods

Process

Finished goods

Output serviceInput

service

Process


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(ii) In the definition, the capital goods are specifically excluded. If certain goods which does not fall under the definition of capital goods but used in manufacture of finished goods (or) used in provision of services, can it be classified as inputs and can the credit be availed? The definition reads “Capital goods”, so only those goods defined as “capital goods” under CENVAT credit rules will be excluded from the definition of inputs. The definition of capital goods is restrictive whereas the definition of inputs is inclusive. Therefore, other capital goods, if used in factory, should be eligible as “Inputs”. Fork lift trucks, lifting tackles, trolleys, conveyors and measuring instruments are inputs used in or in relation to manufacture of final products. Thus, unless they are excluded by an exclusion clause, they will be eligible as ‘inputs’ – CCE V. Tata Engineering & Locomotives co Ltd.

(iii) Sec. 2(k)(C) of the definition reads “Capital goods except when used as parts or components in the manufacture of a final product”. So will all the parts and components of any capital goods treated as inputs or will the parts and components of capital goods defined under Rule 2(a) treated as inputs?

The definition of ‘Capital goods’ covers parts, components and accessories of capital goods. If such

parts or components are used in manufacture of final product, these will be eligible as inputs (Here the word mentioned is USED in manufacture, which means there is no finished product if such input is not used).

If a manufacturer of automobile uses parts and components to manufacture an automobile, these parts and components will be eligible for CENVAT credit as ‘input’, even if these are covered in the definition of capital goods as per Rule 2(a).

The definition of capital goods do not cover certain spares and accessories but they are the components, spares and accessories of capital goods as defined under rule 2(a). These will be eligible as ‘inputs’ as these are used ‘in or in relation to manufacture’.

(iv) Rule 2(k)(iii) reads “All goods used for generation of electricity or steam for captive use”. Boilers are used for generation of electricity and CENVAT credit available on them as Inputs. But whether CENVAT credit available on the components of boiler system?

CBEC vide circular No. 964/07/2012 clarified that those structural components which are to be used essentially as a part of boiler system would be classifiable as parts of boiler. It further clarified that since these structural components are nothing but the parts and accessories of boiler, they would be covered under the definition of Inputs.

Parts, components and accessories of capital goods.

Parts, comonents which are mentioned in the definiton of capital goods under Rule 2(a)

USED in manufacture of final products

Credit eligible as "Inputs"

Not USED in the manufacture of final products but used in

the factory

Credit eligible as "Capital goods"

Parts, components which are not mentioned in the definition but related to capital goods defined

under Rule 2(a)

Credit eligible as "Inputs" as these are uded in or in relation

to manufacture of final products



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(v) The exclusion list in the definition reads “Any goods which have no relationship whatsoever with the manufacture of a final product”. How the no relationship whatsoever with the manufacture of final product can be determined. Will the expression exclude the inputs used in or in relation to manufacture of final products from taking CENVAT credit? The meaning can be understood from the analysis of definition which reads “Rule 2(k)(i) - All goods used in

the factory by the manufacturer of the final product” and “Rule 2(K)(F) - Any goods which have no relationship whatsoever with the manufacture of a final product are excluded”.

The expression must be interpreted and applied strictly and not loosely. The expression does not include any goods used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not. Only credit of goods used in factory but having absolutely no relationship with the manufacture of final product is not allowed. – Departments Circular No. 943/04/2011.

Hence, Goods such as furniture and stationary used in an office within the factory are goods used in the factory and are used in relation to manufacturing business. Therefore, the credit of same is allowed – Example mentioned in the circular.

(vi) In the previous definition there was a requirement that goods must be used in or in relation to manufacture

of final products, whether directly or indirectly and whether contained in the final product or not. Is that requirement applicable in the new definition? The said requirement has been removed and hence all goods used in the factory by the manufacturer of final product, except those specified in the negative list and goods having no relationship with whatsoever with the manufacture of final product, would qualify for treatment as “Inputs” – Departments Clarification No. 334/3/2011.

(vii) What is the meaning of the phrase and when inputs are said to be used in or in relation to manufacture?

In the manufacture In relation to the manufacture

The ‘Input’ is actually used in the manufacture of finished product, either directly or indirectly.

The ‘Input’ has been used during a process while manufacturing the product.

‘Input’ may be present in the final product in same or similar or identifiable form (or) may have undergone change during the process

‘Input’ need not form part of final product

‘In the manufacture’ is a specific and exhaustive term

‘In relation to manufacture’ is a broad expression which covers all inputs which have direct nexus with the manufacturing process.

Eg: Wood, Nails and paints are used ‘In the manufacture’ of table.

Eg: Sand paper for polishing is used ‘In relation to the manufacture’ of table.

(viii) If inputs are used to generate electricity (or) stream, whether credit is available ?

Any goods used for generation of steam or electricity for captive use are eligible as inputs. However HSD, LDO and Petrol have been specifically excluded from the definition of inputs. So, if HSD, LDO and petrol are used for generation of steam or electricity for captive use, Credit not available.

The words “captive use” is not defined, but it means “For use within the factory of production or premises of output service provider”. However, Captive use shall not include electricity or steam sold for a price to grid/others and used in residential premises/complex.

It has been held that CENVAT credit is not available in respect of fuel used for generation of electricity, which has been sold outside to sister units, vendors etc., – Maruti Suzuki Ltd. V. CCE (2009)

Electricity captively generated was cleared to State Electricity Board and simultaneously equal quantity was received from Board, as electricity generated in plant was fluctuating type. It was held that CENVAT credit of furnace oil used for captive plant is available. – Jindal Stainless V. CCE

(ix) If the inputs are not directly identifiable with the finished goods, will the credit be available?

Yes, in the definition the words “in relation to” connotes a wider meaning for inputs. Input need not be physically present in the final products nor it should be completely consumed in order to avail CENVAT credit.

For, inputs used after manufacture of finished goods but before removal from the factory gate, the credit can be availed. - Union Carbide India v. CCE


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“Inputs burnt up or consumed in manufacture process and not retaining identity in the end product will be eligible for CENVAT credit” – Eastern Electro Chemical Industries V. CCE

(x) Bhajrang Decoratives and suppliers P. Ltd has supplied decoration items and appliances to Shadi Mubarak, wedding planners. Bhajrang decorative and suppliers P. Ltd are taxable and are required to pay service tax under the head ‘Supply of tangible goods for use’. They purchased equipment and appliances for providing the service and took the excise portion on equipment and appliances as CENVAT credit. But the excise authorities denied this. Comment? The CBE&C letter clarified that the machinery, equipment, appliance, vehicles, aircrafts, vessels etc. supplied during course of providing taxable service of ‘Supply of tangible goods for use’ is input for providing the taxable service. Hence excise duty/CVD paid on such machinery, equipment, appliance, vehicles, aircrafts, vessels etc. will be eligible for CENVAT credit as ‘Input’.

(xi) Rule 2(k)(E), the exclusion clause reads “Any goods, such as food items----------”. As the word used is “SUCH AS”, are the food articles consumed excluded or all articles excluded? The use of the words ‘Such as’ shows that the application of this sub clause shall not be limited to food items. It covers all goods used in a guest house, residential colony, club or a recreation facility and clinical establishment.

But “such goods” are used Primarily (Which means indirect use not covered i.e. employee purchases and employer reimburses it) For personal use or consumption (Articles for official use are not covered) Of any employee (What if, the assessee makes employee as a service provider???)

(xii) Inputs are purchased for use in finished goods, but before using some of the input are destroyed (or)

pilfered from store room. The credit is not available, as it cannot be said that they are used in or in relation to manufacture. If the manufacturer has already taken the credit, then he has to reverse it back (i.e. cancel the credit). The following table will clarify the issue.

Case Whether CENVAT credit available

1. If inputs are issued for production and there is a process loss (or) handling loss

Credit is available as inputs are used in the manufacture of final product – Multimetals Ltd. v. CCE.

Note: Exact mathematical equation between raw material purchased and raw material found in finished product is not possible, and should not be looked for – UOI V. Indian aluminium Co. Ltd. (SC)

2. Inputs used in trial production, which turned into scrap or waste

Credit available as inputs, are used in or in relation to manufacture.- Fertilizer corporation of India V. CCE

3. If shortage occurs during storage due to natural causes

credit will be available – CCE V. BOC India

4. If inputs are lost in fire before issue to production

CENVAT credit not available and should be reversed – Asian paints V. CCE

5. If inputs are stolen or loss in transit Credit not available – CCE V. Royal containers. But if such loss in transit is due to natural causes then credit on inputs available – CCE V. Bhuwalka steel Industries (2010)

Recent cases on Inputs:

In case of combo-pack of bought out tooth brush sold along with tooth paste manufactured by assessee; is tooth brush eligible as input under the CENVAT Credit Rules, 2004? CCE. v. Prime Health Care Products 2011 (Guj)

Issue Involved:

The assessee was engaged in the manufacture of tooth paste. It was sold as a combo pack of tooth paste and a bought out tooth brush. The assessee availed CENVAT credit of central excise duty paid on the tooth brush.

Revenue contended that the tooth brush was not an input for the manufacture of the tooth paste and the cost of tooth brush was not added in the M.R.P. of the combo pack and hence, the assessee had availed



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CENVAT credit of duty paid on tooth brush in contravention of the provisions of the CENVAT Credit Rules, 2004.

HC Decision of the Case:

The process of packing and re-packing the input, that was, toothbrush and tooth paste in a unit container would fall within the ambit of “manufacture” [as per section 2(f)(iii) of the Central Excise Act, 1944].

Further, the word “input” was defined in rule 2(k) of the CENVAT Credit Rules, 2004 which also included accessories of the final products cleared along with final product.

There was no dispute about the fact that on tooth brush, excise duty had been paid. The toothbrush was put in the packet along with the tooth paste and no extra amount was recovered from the consumer on the toothbrush.

Considering the definition given in the rules of “input” and the provisions contained in rule 3, the High Court upheld the Tribunal’s decision that the credit was admissible in the case of the assessee.

Whether CENVAT credit can be denied on the ground that the weight of the inputs recorded on receipt in the premises of the manufacturer of the final products shows a shortage as compared to the weight recorded in the relevant invoice? CCE v. Bhuwalka Steel Industries Ltd. 2010 (Tri-LB)

Tribunal held that each case had to be decided according to merit and no hard and fast rule can be laid down for dealing with different kinds of shortages. Various factors have been laid to decide the denial. Whether the goods under question –

Have been diverted to other place or received and used in the factor

Are hygroscopic (i.e. absorbs but will not evaporate) or prone to evaporation

Are countable in terms of packages or pieces and have been received and accounted

Differs in weight on account of different scales and dispatch and receiving ends. Tolerances in respect of hygroscopic, volatile and such other cargo has to be allowed as per industry norms excluding, however, unreasonable and exorbitant claims. Similarly, minor variations arising due to weighment by different machines will also have to be ignored if such variations are within tolerance limits.

Definition of Input Service:

Rule 2(l) - “input service” (w.e.f 1.4.2011) means any service, - (i) Used by a provider of output service for providing an output service; or (ii) Used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory,

premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; But excludes - (A) Following services, if they are used for construction or execution of works contract of a building or a civil structure or a part thereof; or laying of foundation or making of structures for support of capital goods:-

(i) Service portion in the execution of a works contract (ii) Construction service as listed under section 66E(b) of the Act.

However, if works contract services are used for provision of construction services, or vice versa, they shall be eligible as input services. (B) Services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not capital goods; or (BA) Service of general insurance business, servicing, repair and maintenance, in so far as they relate to motor vehicle which is not capital goods, except when used by –

(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by him; or (b) an insurance company in respect of motor vehicle insured or reinsured by such person.


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(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;

FAQ’s on Input service:

(i) The second part (i.e. Inclusive part) of the definition provided list of some services which reads “services

used in relation to modernization, renovation or repairs ………”. Are those services covered in the definition are input services or any service related to business is Input service?

The inclusive part of the definition covers input services used ‘in relation to’ various activities. Scope of inclusive part of the definition of input service is further widened by use of the term ‘in relation to’.

In a SC judgment, SC held that “In relation to” are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not the words of restrictive content.

The activities listed are random without any logic or grouping or sequence. Input services relating to five M’s (i.e. Men, Material, Machines, Money and Minutes) which are essential for manufacture or provision of service would be eligible as Input service unless specifically excluded.

(ii) Moto Gene TVS are dealers in TVS sales and service in Chennai. They have paid service tax with respect to GTA service for inward transportation of new TVS bikes and spares. The said dealers availed credit of service tax paid for GTA service and utilized for payment of service tax on servicing of old TVS bikes. The department argued that there were no nexus with GTA service and servicing of bikes, as GTA service is w.r.to new and servicing is w.r.to old ones. As a consultant comment on this? The facts are similar to the case of CCE V. Shariff Motors, where assessee was dealer in two wheelers and was also providing service to old vehicles as authorized service station. It was held that the definition of input service is wide enough to cover input service availed by assessee.

Form the judgment it is clear that in case of input services which have only remote or no nexus with output services or manufacture of goods can get covered so long as these are related to activities of business.

(iii) In the definition the word “Place of Removal” is mentioned, what is the place of removal? Is it applicable

to output service provider? The concept of place of removal applicable only to manufacturer but not for service provider. ‘Place of removal’ is as defined under Sec. 4(3)(c) of Central Excise Act.

(iv) In case of Inputs and capital goods, CENVAT credit is eligible to manufacturer only if these are received in

the factory. Is there such requirement in case of Input service?

In Case of manufacturer In case of service provider

Input services need not be received in the factory of manufacturer for availing credit on such input services. Note: Inputs, capital goods must be received in order to avail credit

Inputs, Input services, capital goods need not be received in the premises of service provider for availing CENVAT credit

(v) Tarang Interior decorators provided service to Yuvraj singh and billed 1,00,000 plus service tax. They

utilized the services of a transport agency and paid freight which is not included in the said bill charged but has availed the credit with respect to freight paid. Department denied the availement of CENVAT credit on the ground that the freight was not included in the value of taxable service. Is department’s contention correct?

The tribunal has held in many cases that valuation and CENVAT credit are independent of each other.

The question of denial of CENVAT credit does not arise whether a particular cost is included in the transaction value. – ABB case



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1) Renting of motor vehicle

2) Repair and maintenece services

3) General insurance services

4) Authorized service station services

IN RELATION TO

Motor Vehicles

Specified Motor vehicles*

In case of manufacturer

Not Capital goods

The above mentioned services are NOT input services and

CENVAT credit not available

In case of service provider providing

7 specified services

Capital goods

The above mentioned

services are Input services

and

CENVAT credit available

In case of other service

providers

Not capital goods

The above mentioned

services are NOT input

services and


Other Motor vehicles


Caital goods, provided they are

used in the factory or

used outside factory for

generation of electricity for

captive use

The above mentioned services are Input

services and


In case of service provider

Capital goods, provided they are used for

providing output service.

Thus, if a cost is included in the assessable value, its CENVAT credit will be certainly eligible. However, even if it is not included, it will be still eligible if it is I relation to business of assessee.

(vi) Rule 2(l)(B) and 2(l)(BA), the exclusion clauses of the definition excludes certain services in so far as they relate to motor vehicle which is not capital goods. What are the cases in which these services are eligible as Input services?

* Refer capital goods definition for the meaning of specified motor vehicles.

Note: Other services not mentioned above provided in relation to motor vehicles is input services, whether or not such motor vehicle is capital goods.


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Illustration explaining the above analysis: 1. An assessee gave his motor vehicle for servicing with authorized service station. They provided services

and charged `11,236 inclusive of service tax. The said authorized service station service will be input service to the assessee and CENVAT credit of `1,236 is available if, motor vehicle is capital goods for the assessee. Otherwise, the said service is not input service and credit not available.

2. Credit of service tax paid is available on supply of tangible goods through motor vehicles and hiring of the motor vehicles, where such motor vehicles are eligible as capital goods.

3. CENVAT credit w.r.to service tax paid on insurance and repair is not available, if the motor vehicles are not eligible as capital goods.

Exception to the above provision:

In case of manufacturer of motor vehicle or general insurance service provider in respect of motor vehicle insured or reinsured by him, the CENVAT credit w.r.to service tax paid on insurance, servicing, repair and maintenance is available, irrespective of whether the motor vehicle is capital goods or not for them. Example: A manufacturer of motor vehicle can avail credit of service tax paid on the transit insurance and on the repair of motor vehicles manufactured by him, even though the motor vehicle is not capital good for the manufacturer.

(vii) In case of certain services, the service recipient is liable to pay service tax (under reverse charge) e.g.

Import of services. Whether the service tax paid in that case can be taken as CENVAT credit? Yes, the service receiver is eligible to avail CENVAT credit even if he is liable to pay the same under

relevant rules of reverse charge – Jindal steel and power V. CCE Rule 3 of CENVAT credit rules has been amended vide Finance Act, 2011 with retrospective effect from

18-4-2006 providing that service tax paid under Section 66A (i.e. Import of services) of Finance Act, 1994 will be eligible as input service.

The service tax under reverse charge should be paid in cash, i.e. CENVAT credit should not be utilized for payment of service tax in such cases.

(viii) Is the credit of Input services used for repairs or renovation of factory or office available?

Credit of input services used for repair or renovation of factory or office is allowed. Services used in relation to renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, are specifically provided for in the inclusive part of the definition of input services.

(ix) From the combined analysis of the definition of Inputs as per Rule 2(k) and Input services as per Rule 2(l),

it is clear that inputs/input services used for employees are not available as credit. Is this position true? From the analysis of Rule 2(k), it is clear that all goods (Not only food items) used in a guest house, residential colony, club or a recreation facility and clinical establishment are excluded from the purview of Inputs only if “such goods” are used Primarily for personal use or consumption of any employee.

From the analysis of Rule 2(l), it is clear that all services (Not only the mentioned services because the words used are ‘such as’) when used primarily for personal use or consumption of any employee are excluded from the purview of Input services.

The following Circular No. 943/04/2011 clarifies the position: It is not that the credit of only specified goods and services listed in the definition of inputs and input services shall not be allowed. The list is only illustrative. The principle is that CENVAT credit is not allowed when any goods and services are used primarily for personal use or consumption of employees.

Some examples to support the above clarification: Outdoor catering for sales promotion would be eligible, even if some employees attend the

lunch/dinner, since it is not primarily for personal use or consumption of employees. Mobile phones to employees mainly for business purposes (Black berry!!!) should be eligible even

if incidentally used for personal purposes. Club membership fee of a director will be eligible as he is not an employee.



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(x) Is the credit of Business Auxiliary service (BAS) on account of sales commission now disallowed after the deletion of the expression “activities related to business”? The definition of input services allows all credit on services used for clearance of final products upto the place of removal. Moreover activity of sale promotion is specifically allowed and on many occasions the remuneration for same is linked to actual sale. Reading the provisions harmoniously it is clarified that credit is admissible on the services of sale of dutiable goods on commission basis.

(xi) Can the credit of Inputs or Input services used exclusively in trading be availed?

Trading is an exempted service. Hence the credit of any inputs or input services used exclusively in trading cannot be availed.

(xii) Can a item which do not qualify as “Input” be treated as “Input Service”?

As per the department circular 334/3/2011, the definition of input service has been aligned with the definition of input such that goods that do not constitute ‘Input’ do not qualify as ‘Input Service’

Definition of Capital goods:

Rule 2(a) – “Capital goods” means (w.e.f 1/4/2012) (A) The following goods, namely: (i) all goods falling under chapter 82, 84, 85,90, heading No. 68.05 grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act; (ii) Pollution control equipment;

(iii) Components, spares and accessories of the goods specified at (i) and (ii); (iv) Moulds and dies, jigs and fixtures; (v) refractories and refractory materials (vi) Tubes, pipes and fitting thereof; and (vii) Storage tank, and (viii) Motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis, but including dumpers and tippers

Used- (1) In the factory of manufacturer of final products but does not include any equipment or appliance used in an office; or (1A) outside the factory of the manufacturer of the final product for generation of electricity for captive use within the factory; or (2) For providing output service;

(B) Motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for-

(i) Providing an output service of renting of such motor vehicle; or (ii) Transportation of inputs and capital goods used for providing an output service; or (iii) Providing an output service of courier agency.

(C) Motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of-

(i) Transportation of passengers; or (ii) Renting of such motor vehicle; or (iii) Imparting motor driving skills.

(D) Components, spares and accessories of motor vehicles which are capital goods for assessee. Chapter 82: Tools, implements, spoons & forks of bare metal and parts thereof. Chapter 84: Machinery and mechanical appliances and their parts. Chapter 85: Electricals and electronic machinery and equipment. Chapter 90: Optical, photographic & surgical equipments. Heading 6804: Grinding wheels Heading 6805: Natural (or) artificial abrasive powder on Base of textile material

Note: Depreciation on capital goods should not be availed on the excise duty portion of value of capital goods. I.e. the cost of capital goods in balance sheet should exclude excise duty portion, then only credit shall be available, otherwise the manufacturer will enjoy double benefit. First, credit of excise duty and second depreciation on excise portion.


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FAQ’s on capital goods.

(i) What are the specified motor vehicles and to whom credit available on those motor vehicles. Whether CENVAT credit available on Motor vehicles other than specified to manufacturer and output service provider?

Motor vehicles other than the following: (i) Motor vehicles for transport of 10 or more persons including driver (ii) Motor cars and other motor vehicles principally designed for transport of persons, including station wagons and racing cars (iii) Motor vehicles for transport of goods (iv) Motor cycles incl. mopeds and cycles fitted with an auxiliary motor, with or without side cars.


CENVAT credit available, provided they are used in the factory or used outside factory for generation of electricity for captive use

In case of service provider

CENVAT credit available, provided they are used for providing output service.

Exception (i) & (ii) (i) Motor vehicles for transport of 10 or more persons including driver (ii) Motor cars and other motor vehicles principally designed for transport of persons, including station wagons and racing cars [Motor vehicles designed to carry passengers including their chassis, registered in the name of the service provider]

In case of manufacturer CENVAT credit not available

In case of service provider engaged in (i) Transportation of passengers; or (ii) Renting of such motor vehicle; or (iii) Imparting motor driving skills.


In case of other service providers


Exception (iii) (iii) Motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider

In case of manufacturer CENVAT credit not available

In case of service provider engaged in (i) Providing an output service of renting of such motor vehicle; or (ii) Transportation of inputs and capital goods used for providing an output service; or (iii) Providing an output service of courier agency.


In case of other service providers


Exception (iv) (iv) Motor cycles incl. mopeds and cycles fitted with an auxiliary motor, with or without side cars.

In case of manufacturer, Service provider.

CENVAT credit not available.

(ii) Air – Conditions, refrigerating equipment and computers are used in the factory. Will it be considered as

capital goods? Will the credit be available?



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Yes; the credit is available provided they are used in the factory (not in office) of the manufacturer of final product.

Inkjet printer has been used to print the date of manufacture and sale price on bottles. As it is mandatory as per law, the printing of price on the bottle of the beverage is a process of manufacture and is treated as capital goods which are eligible for CENVAT credit. -- Surat Beverage Pvt. Ltd. v. CCE

(iii) If inputs are used for the purpose of capital goods and in turn if capital goods are used for finished goods,

then credit in respect of inputs is available. Whether credit for inputs used in immovable property (i.e. construction of building) is available. Is there any exception. The materials used for constructing foundation for machinery does not qualify as inputs because The foundation made of cement, being immovable property is not capital goods and The cement was not used directly (or) indirectly in the manufacture of final product.

-- UOI v. Hindustan Zinc Ltd. The exception is storage tank.

As storage tank is specifically mentioned as capital goods, the materials used for constructing storage tank are considered as inputs and credit shall be available.

(iv) Whether the credit with respect to capital goods obtained on hire purchase/ lease/ loan is available?

Yes. But it is advisable that the invoice issued by manufacturer of capital goods shows name of manufacturer as consignee, though the invoice of manufacturer will be in name of the financing company.

(v) Whether the credit on accessories eligible as capital goods for CENVAT purposes?

Yes, accessories are eligible as capital goods. Accessory may or may not be required for essential working of main unit. Accessory is an object used for convenience and effectiveness of main unit. It may not be used in the particular machine and is capable of being used as common object with number of machines. In this case, it was held that plastic crates for material handling within the factory are eligible as accessory of capital goods and hence eligible for CENVAT credit – Banco Products V. CCE (2009)

(vi) Whether Ownership of capital goods is essential to avail CENVAT credit on capital goods?

No, The CENVAT credit rules, 2004 does not state that capital goods should be ‘Purchased’. It has stated that it should be ‘Used in the factory’ or for provision of output services. Therefore ownership of capital goods is not required for the purpose of CENVAT credit on capital goods, also laid down in the case of Gujrat Alkalies V. CCE

(vii) Does the spares for rope ways used for bringing crushed lime stone from mines to the factory are capital

goods and does the credit available? Yes, as laid down in the case of Birla Corporation Ltd., v. CCE.

(viii) CENVAT credit on capital goods is available only when mines are captive mines i.e. they constitute one

integrated unit with main cement factory. Credit of duty on capital goods will not be available if the mine supplies to various cement factories of different assumes. ---Vikram Cement v. CCE.

Input Service Distributor:

Rule 2(m) – “Input service distributor” means an office of the manufacturer or producer of final products or provider of output service,

which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be

Three requirements must be satisfied as per the definition 1. Should have an office (May be manufacturer or service provider) 2. Input services must be received in the office under a valid invoice 3. Credit can be distributed to the divisions (engaged in manufacturing or providing service) only under

Invoice/bill/challan.


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Whether service tax paid in respect of services utilized in one unit be taken as credit by another unit where such service is not utilized? Is there any restriction on the ratio of distributing credit by Input service distributor? The Karnataka high court in CCE V. Ecof industries pvt. Ltd. held that availement of credit of the service tax paid on the input service at a particular unit by another unit, is not prohibited under law. Therefore, the other unit can take CENVAT credit even though the services are not received by that unit. [This judgment is as per the old provisions of the Rules, where in High court dismissed the plea of department. Accordingly, the CENVAT credit rules, 2004 are amended vide notification no. 18/2012 to include rule 7, the manner of distributing credit w.e.f. 1/4/2012]

Manner of distribution of credit (Rule 7)

1. When service is wholly used by a unit and service tax is paid by head office? Credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit.

2. When service is used in more than one unit and service tax is paid by head office?

Credit of service tax attributable to service used in more than one unit shall be distributed prorate on the basis of turnover of the concerned unit to the sum total of the turnover of all the units to which such service relates.

𝐶𝑟𝑒𝑑𝑖𝑡 𝑡𝑜 𝑏𝑒 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑡𝑜 𝑜𝑛𝑒 𝑢𝑛𝑖𝑡

= 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑜𝑓 𝑡ℎ𝑎𝑡 𝑢𝑛𝑖𝑡

𝑇𝑜𝑡𝑎𝑙 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑜𝑓 𝑎𝑙𝑙 𝑢𝑛𝑖𝑡𝑠 𝑓𝑜𝑟 𝑤ℎ𝑖𝑐ℎ 𝑠𝑢𝑐ℎ 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑖𝑠 𝑢𝑠𝑒𝑑𝑋 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝑡𝑎𝑥 𝑝𝑎𝑖𝑑

3. When service is wholly used by a unit exclusively manufacturing exempted goods and providing exempted

services and service tax is paid by head office? The credit shall not be distributed to such unit and the entire credit is not available. If the head office has availed, the credit should be reversed accordingly.

4. When service is used in more than one unit but one of those units is engaged exclusively in manufacture of

exempted goods and providing exempted services and service tax is paid by head office? That portion of credit attributable to such unit engaged exclusively in manufacturer of exempted goods and provision of exempted services is not to be distributed. That portion should not be distributed even to other units. [In other words, that portion of credit is not available and if head office has availed, the credit should be reversed accordingly]

5. What if the unit is manufacturing both exempted goods and dutiable goods or providing exempted

services and dutiable services? [Interpreted by me, not mentioned in rule 7] Credit shall not be distributed to such unit engaged EXCLUSIVELY in manufacture of exempted goods and provision of exempted services. Therefore, the credit can be distributed to such unit engaged both in exempted and dutiable transactions and it will utilize the credit accordingly (i.e. as lain down in rule 6 when common inputs or input services are used for exempted and dutiable goods or services)

6. Can the credit distributed exceed the service tax paid?

No. The credit distributed against documents for availing credit, does not exceed the amount of service tax paid there on.

Pinnacle learning, a commercial coaching service provider has the following branches which are engaged in coaching and training services. The turnover of each branch for the month of July is also given below.

Branch Engaged in Turnover

Chennai CA coaching (It is taxable) 200 lakhs

Bangalore Training corporate employees (It is taxable) 100 lakhs

Hyderabad Computer training (It is taxable) 50 lakhs

Delhi Vocational training (Exempted) 50 lakhs

Total Turnover 400 lakhs

Pinnacle learning is based at Chennai and controls the operations of all branches through an administrative office in Chennai. During the month of July, it has paid the following invoices



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for the services received:

Invoice No. Services in relation to Amount (Excl. of service tax)

8745 Advertisement in a news paper about the organisation.

20,00,000

456 Internet and other services used for Hyderabad branch

5,00,000

3589 Payment to a CA for internal audit of all branches 5,00,000

7013 Construction of class rooms in Delhi 10,00,000

Total service charges (Excl. Service tax) 40,00,000

Total service tax paid (40,00,000 X 12.36%) 4,94,400

Determine the amount of credit to be distributed to each unit as per the provisions of rule 7. Pinnacle learning has the practice of distributing credit of common services in the ratio of 5:4:3:2.

As Delhi branch is engaged in providing exempted services, the credit shall not be distributed and accordingly the specific services related to Delhi branch is not considered for distribution.

When a service is wholly used in one unit, the credit w.r.to service tax paid on such service should be fully distributed to that unit. Accordingly, the service tax paid on Invoice 456 is completely distributed to Hyderabad branch.

Computation of CENVAT credit of service tax to be distributed to various branches as per Rule 7:

Invoice particulars Chennai Bangalore Hyderabad

8745 Common services distributed to all branches (except Delhi) in the ratio of turnover

20,00,000𝑋12.36%𝑋200

400

= `1,23,600

20,00,000𝑋12.36%𝑋100

400

= `61,800

20,00,000𝑋12.36%𝑋50

400

= `30,900

456 Specific services, credit distributed to Hyderabad branch

- - 5,00,000 X 12.36% = 61,800

3589 Common services distributed to all branches (except Delhi) in the ratio of turnover

5,00,000𝑋12.36%𝑋200

400

= `30,900

5,00,000𝑋12.36%𝑋100

400

= `15,450

5,00,000𝑋12.36%𝑋50

400

= `7,725

7013 Specific services but shall not be distributed

- - -

Total amount to be distributed to each branch

`1,54,500 `77,250 `1,00,425

The total credit distributed should not exceed the total service tax paid. The total credit distributed is `3,32,175 which is less than the total service tax of `4,94,400. The balance of service tax which is not distributed is not available.

Duties/taxes that can be taken as credit:

Rule 3(1)

Basic excise duty (except in cases where excise duty @ 1% paid under Notification No. 1/2011) National calamity and contingent duty Education cess on excise duty (except in cases where excise duty @ 1% paid under Notification No. 1/2011) Secondary and higher education cess on excise duty (except in cases under Notification No. 1/2011) Service tax on input services Education cess on service tax Secondary and higher education cess on service tax.


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Additional excise duty paid under Section 85 of Finance Act, 2005. This duty is payable on pan masala and certain tobacco products. (This credit can be utilized only for payment of this duty)

Additional duty of excise leviable u/s 3 of additional duties of excise (Textile and textile articles) Act, 1978 and additional duties of excise (Goods of Special importance) Act, 1957.

Additional duties of customs u/s 3 to counter balance duties of excise. (Known as counter veiling duty (CVD)). In case of ships, boats and other floating structures for breaking up falling under 8909 00 00, credit of CVD will be allowed only to the extent of 85% w.e.f. 1.3.2011

Additional duties of customs u/s 3(5) to counter balance the sales tax, VAT and other local taxes. (This credit not available to service providers)

Excise duty paid on capital goods in terms of Notification No. 22/2003, at the time of de-bonding of EOU.

Restriction on Utilization:

EC availed should be utilized only for payment of EC.

SHEC availed should be utilized only for payment of SHEC.

SAD cannot be utilized for payment of service tax.

NCCD should be utilized only for NCCD

No restrictions on utilization of CVD.

In case the capital goods are removed as such, CENVAT credit of 100% can be availed and reversed accordingly.

In case of SSI units, 100% credit on capital goods available in the same financial year.

CENVAT credit cannot be utilized for payment of Clean energy cess, which is payable under section 83 of Finance Act, 2010. – Notification No. 26/2010

An assessee has paid duty on goods which are unconditionally exempted and passed the burden to the buyer. The buyer availed CENVAT credit on the said amount but Excise officer denied the availement. Is he correct? It has been clarified that if assessee still pays duty on goods which are unconditionally exempted, the amount paid is not duty. Hence the buyer will not be eligible for CENVAT credit of such amount. Further, the person paying excise duty will not be eligible for CENVAT credit of duty paid on inputs. Further, the assessee is required to deposit the duty charged with central government in view of section 11D of CE Act – CBEC&C circular No. 940/01/2011.

What are “Exempted goods” and “Exempted services”?

Exempted goods means excisable goods

Which are exempt from the whole of duty of excise leviable thereon, (i.e. Exempted goods)

Goods which are chargeable to “Nil” rate of duty (i.e. Nil rated goods) and also includes

Goods in respect of which the benefit of an exemption under Notification No. 1/2011 is availed. – Notification No. 3/2011

Coal, briquettes, ovoids and similar solid fuels manufactured from coal & All goods mentioned in chapter 31 (i.e. fertilizers) – Notification No. 21/2012

Exempted services means taxable services

Which are exempt from the whole of the service tax leviable thereon, (i.e. Exempted Services)

Services on which no service tax is leviable under section 66 of the Finance Act (i.e. Non taxable services) and also includes

Taxable services whose part of value is exempted on the condition that no credit of inputs and input services used for providing such taxable service, shall be taken. (i.e. Abatement under Notification 1/2006 and as amended)

Further, it has been clarified that “exempted services” includes trading. – Notification No. 3/2011

FAQ’s on Exempted goods and Exempted Services:

1. Can the credit of input or input services used exclusively in trading, be availed? Trading is an exempted service. Hence the credit of any inputs or input services used exclusively in trading cannot be availed.



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2. What shall be the treatment of credit of input and input services used in trading before 1.4.2008?

Trading is an exempted service. Hence credit of any inputs or input services used exclusively in trading cannot be availed. Credit of common inputs and input services could be availed subject to restriction of utilization of credit up to 20% of the total duty liability as provided for in extant Rules.

3. While calculating the value of trading what principle to follow- FIFO, LIFO or one to one correlation?

The method normally followed by the concern for its accounting purpose as per generally accepted accounting principles should be used.

4. Are the taxes and year end discounts to be included in the sale price and cost of goods sold while

calculating the value of trading? Generally accepted accounting principles (GAAP) need to be followed in this regard. All taxes for which set off or credit is available or are refundable/ refunded may not be included. Discounts are to be included.

Definition of output service:

As per Rule 2(p) Output service means any service provided by a provider of service located in the taxable territory but shall not include a service,- (1) Specified in the negative list under section 66D of the Finance Act; or (2) Where the whole of service tax is liable to be paid by the recipient of service

Removal of Inputs or Capital goods:

The answer is contained in Rule 3(5A) &3(6)


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Note: The amount calculated above or duty calculated on transaction value, whichever is higher shall be the amount to be reversed or paid accordingly.

FAQ ‘s on Removal of Inputs, Capital goods:

1. When the inputs or Capital goods are said to be removed as such? In case when inputs or capital goods are sold or transferred and also, As per Rule 3(5B), when the

inputs or capital goods on which CENVAT credit availed, before being put to use a) Written off fully or partially in the books of accounts or b) Where any provision to write off fully or partially has been made in the books of accounts In all the above cases, the manufacturer/Service provider is required to pay an amount equivalent to

the CENVAT credit taken in respect of inputs or capital goods. – Notification No. 3/2011

2. In case any inputs are removed as such outside the factory for providing free warranty for final

products, should the CENVAT credit availed in respect of such inputs be reversed? Rule 3(5) provides that when inputs/ capital goods on which CENVAT credit has been taken, are

removed as such from the factory, or premises of the provider of output service, the manufacturer of the

Removal of

Inputs - as such

Amount equal to CENVAT credit availed shall be paid

[See note below]

Capital goods

As such After use (i.e. Either as second hand machinery (or) as waste and scrap

Amount equal to CENVAT credit taken on capital goods

(-) percentage points calculated by straight line method for each quarter of a year or part thereof from the date of

taking the CENVAT credit

% points calculated by straight line method

In case of Computers & Computes peripherals

For each quarter in 1st year - 10%

For each quarter in 2nd year - 8%

For each quarter in 3rd year - 5%

For each quater in 4th and 5th year - 1%

[See note below]

In case of other capital goods

2.5% for each quarter

[See note below]



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final products or provider of output service, as the case may be, shall pay an amount equal to the credit

availed in respect of such inputs or capital goods and such removal shall be made under the cover of an

invoice and, As per Notification No. 3/2011, such payment shall not be required to be made where any inputs are

removed outside the factory for providing free warranty for final products.

The assessee claimed the CENVAT credit on the duty paid on capital goods which were later

destroyed by fire. The Insurance Company reimbursed the amount inclusive of excise duty. Is

the CENVAT credit availed by the assessee required to be reversed?

CCE v. Tata Advanced Materials Ltd. 2011 (Karnataka)

Issue Involved: The Insurance Company reimbursed the amount to the assessee, which included the excise duty, which the

assessee had paid on the capital goods and availed as CENVAT credit. Excise Department demanded the reversal of

the CENVAT credit by the assessee on the ground that the assessee had availed a double benefit.

HC Decision: As per CENVAT Credit Rules, 2004, CENVAT credit taken irregularly stands cancelled and CENVAT credit

utilised irregularly has to be paid for. In the instant case, the Insurance Company, in terms of the policy, had compensated the assessee. Merely because the Insurance Company had paid the assessee the value of goods including the excise duty

paid, it would not render the availement of the CENVAT credit wrong or irregular. It was not a case of double benefit as contended by the Department. The High Court therefore answered the substantial question of law in favour of the assessee and against

the Revenue.

Recent Circulars

Circular No. 907/27/2009

Issue Involved

What is the treatment of the CENVAT credit taken on the inputs, which have gone into manufacture of work in progress (WIP), semi finished goods and finished goods, and have also been written off fully in the books of accounts?

Clarification

The provisions are laid down in Rule 3(5C) and Circular No. 907/27/2009. Rule 21 of CE Rules, 2002 – Remission of Duty – The said rule provides for remission/waiving-off of the duty on finished goods destroyed by natural causes/unavoidable accident or rendered unfit for consumption

The clarification provided in the Circular No. 907/27/2009 is as follows:

If Remission of duty is granted on any goods manufactured

CENVAT credit on Inputs

Shall be reveresed as per

Rule 3(5C)

CENVAT credit on Input services

Not required to be reversed as per Rule 3(5C)

CENVAT credit on Capital goods

Not required to be reversed as per Rule 3(5C)


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Circular No. Circular No. 930/20/2010.

Issue Involved

Bottles are purchased and CENVAT credit availed. The Board in its instruction vide letter F.No. 261/ID/1/75-CX8 dated 17.09.1975 has stated that the tolerance of 0.5% is allowed on account of breakage of bottles due to handling in the course of movements from the manufacturing area to bonded store rooms and breakages during storage and clearance there-from. Will this provision be applicable in case of PET bottles also?

Clarification provided

As per the provisions of Rule 21 of Central Excise Rules, 2002, remission of duty before removal can be claimed on any goods lost or destroyed by natural causes or unavoidable accident, claimed by manufacturer to be unfit for consumption or marketing.

The said remission is granted subject to the condition of reversal of CENVAT credit taken on inputs used in the final product.

Rule 3(5C) was also inserted in CENVAT Credit Rules, 2004, to specifically provide for the same. Further, as per Rule 3(5B) of CENVAT Credit Rules, 2004, if the value of any input is written off,

the CENVAT availed on the same is required to be reversed. Therefore, if the final product (i.e bottled beverage) is broken/ destroyed then remission can be

claimed and if the bottle (input) is written off by the assessee as destroyed, the same is required to be dealt with as per the provisions of Rule 3(5B) of CENVAT Credit Rules, 2004

Other miscellaneous provisions in Rule 3

If inputs (or) capital goods, before being put to use are written off in the books (or) Provision in made in books, then ‘Amount’ to be paid equal to CENVAT credit availed. Provision applicable to both manufacturer and service provider.

Finished goods written off in the books

In case of Remission of duty under Rule 21 of CE

Rules

CENVAT credit of Inputs used in such goods should

be reversed.

In case duty is not remitted as per Rule 21

of CE Rules

Liable to pay excise duty on such goods manufactured

If Work in progess (WIP) iswritten off in the books

WIP has reached the stage where it can be considered as manufactured goods

In case of Remission of duty under Rule 21 of CE Rules

CENVAT credit of Inputs used in such goods should

be reversed.

In case duty is not remitted as per Rule 21

of CE Rules

Liable to pay excise duty on such goods manufactured

Where WIP cannot be considered as manufactured goods

The said goods should be considered as Inputs and the

treatment for reversal of credit applicable to input

would be applicable



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If remission of duty is granted under Rule 21 (i.e. goods have been destroyed by natural causes (or) unavoidable accident (or) goods are claimed by manufacturer as unfit for consumption (or) marketing), then -------- The CENVAT credit of duty paid on inputs shall be reversed.

Credit can be taken only as available on the last day of the current month. Eg: Op. Bal of CENVAT credit in the month of April - 10 lakhs

CENVAT credit on inputs purchased during April - 20 lakhs CENVAT credit on inputs purchased from May 1 to May 5 - 5 lakhs Duty liability on finished goods - 35 lakhs As per the above rule only 30 lakhs can be utilized from CENVAT credit.

CENVAT Credit in case of purchases from EOU – Notification No.22/2009 Rule 3(7)(a), if any inputs (or) capital goods are purchased from a 100% EOU (or) from a Unit in EHTP (or) STP and used in manufacture of final products (or) in providing any output service, then CENVAT credit shall be computed as follows: (a) CVD paid U/S 3(1) of Customs tariff Act ( which is equal to excise duty under section 3(1) (a) of central

excise Act) (b) Special CVD of 4% payable U/S 3(5) of customs tariff Act (c) EC and SHEC paid on excise duty calculated under Notification No. 23/2003.

Mode of calculation of excise duty under notification: The duty payable is calculated as if (i) Customs duty is reduced to 50% and (ii) CVD of 4% U/S 3(5) is not payable. However if goods cleared in DTA are exempt from VAT, this special additional duty will be payable. For ease of understanding consider the following illustration,

Suppose AV=50000, BCD =10%, CVD u/s3(1) = 20%, Additional duty of customs u/s3(5) =4%, EC and SEC as applicable.

W.e.f 7-9-2009,the computation procedure is as follows

Total Excise duty payable by EOU:

Assessable value 50,000

Add: BCD @ 5%( Exemption of 50%) 2,500 (1)

Add: CVD @ 20% on 52500 10,500 (2)

Add: EC&SEC on 10500 315 (3)

Add: EC&SEC on imported goods (1+2+3)x3% 399.45 (4)

Add: ACD u/s 3(5) @ 4% (50000+1+2+3+4) x 4% (If goods are liable to VAT in India, then duty u/s 3(5) is exempt)

2,548.75 (5)

Total Customs Duties (1+2+3+4+5) 16,263.2

The above customs duty shall be treated as excise duty payable by EOU (before EC&SEC)

Customs duty as computed 16263.2

Add: EC&SEC on above 487.896 (6)

Total Excise duty payable (Rounded off) 16751

CENVAT credit available to the buyer of these goods (DTA):

Additional Customs duty u/s 3(1) - Item{2} 10,500

Additional Customs duty u/s 3(5) - Item {5} 2548.75

EC & SHEC - Item {3} and {6} 802.29

Total -------------------------------------------- 13851.65 13852 (Rounded off)


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Availement of CENVAT credit:

Rule 4 Is the answer

When availed Quantum of credit

Input Immediately after receiving into factory / premises Note: CENVAT credit will not be denied on account of not availing the credit immediately

100% credit can be availed

Input service (Amended w.e.f 1-4-2011)

When invoice is received 100% credit can be availed

Special case Treatment of CENVAT credit

If payment of service tax mentioned in the invoice not made within 3 months from the date of Invoice.

Reversal of CENVAT credit availed (or) payment of an amount equal to CENVAT credit availed on such input service.

As and when the said payment is made CENVAT credit reversed or paid earlier can be availed.

In case of service tax under Reverse charge.

CENVAT credit shall be availed only on payment of service tax as indicated in the Invoice.

If value of Input service refunded or credit note received

Proportionate CENVAT credit availed must be reversed.

In respect of Invoices issued before 1-4-2011

CENVAT credit can be availed only when payment of service tax as indicated in the invoice is made.

In case of Advance payment As and when the payment is made i.e. CENVAT credit of the service tax attributable to such advance.

Capital goods Immediately on receipt Upto 50% in the first financial year Balance in subsequent years Condition: For availing balance the capital goods must be in possession of manufacturer

Note: In case of consumables like spare parts, components, moulds and dies, refractory materials and grinding wheels, the balance credit can be availed in subsequent year even if they are not in possession and use.

With effect from 01.04.2011, the aforesaid restriction of availing only 50% credit in the same financial year has been extended to the capital goods received outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory. – Notification No. 3/2011

Whether CENVAT credit of the service tax paid can be claimed where a service receiver does

not pay the full invoice value and the service tax indicated thereon due to some reasons? CENVAT credit of service tax can be availed where a service receiver does not pay the full invoice

value and the service tax indicated thereon due to reasons like discount, unsatisfactory service etc. provided he has paid the amount of service tax (whether proportionately reduced or the original amount) to the service provider. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would have to be altered accordingly. - Circular No. 122/03/2010 Special Provisions relating to job work in case of articles of Jewellery, articles of goldsmiths’ wares or articles of silversmiths’ wares As per Rule 4(1), Where the specified articles are manufactured on job work basis by a principle manufacturer, the CENVAT credit of duty paid on Inputs can be taken immediately on receipt of such inputs in the premises of the principal manufacturer, provided that such inputs are used in the manufacture of specified articles by the job worker.



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FAQ’s on Rule 4:

FAQ Answer

1. What is the duty date of making reversal or payment of an amount equal to CENVAT credit availed?

Manufacturer/ Service Provider

Due date of Reversal by Debiting CENVAT credit or otherwise

Manufacturer other than those availing SSI Exemption.

Service provider other than Individual/ Firm.

For the Month other than March

For the Month of March

On or before 5th of the following month

On or before 31st March

Manufacturer availing SSI Exemption.

Service provider, who is an Individual/ Firm.

For the Quarter other than quarter ending March

For the quarter ending in the month of March

On or before 5th of the following quarter

On or before 31st March

Note: If the said amount is not paid, it amounts to CENVAT credit wrongly taken and shall be recovered in the manner as provided in Rule 14.

2. In order to avail CENVAT credit w.r.to Capital goods, where the capital goods must be received?

The Capital goods must be received- a) In a Factory (or) b) In the premises of the provider of output service (or) c) Outside the factory of the manufacturer of final products for generation

of electricity for captive use within the factory.

3. If the Capital goods are destroyed by fire, should the CENVAT credit availed in respect thereof be reversed?

The decision in CCE V. Biopac India Corporation Ltd. (2010) (HC) is as follows: The CENVAT credit availed is not required to be reversed, if capital goods

are destroyed by fire. The CENVAT credit rules specifies that reversal should be made only on the

cases where, capital goods are removed as such, or removed after use, or removed as waste and scrap.

Since destruction by fire doesn’t fall in any of the said cases, therefore there can’t be any liability of payment of any duty/CENVAT credit.

4. Whether CENVAT credit of the service tax paid can be claimed where a service receiver does not pay the full invoice value and the service tax indicated thereon due to some reasons?

CENVAT credit of service tax can be availed where a service receiver does not pay the full invoice value and the service tax indicated thereon due to reasons like discount, unsatisfactory service etc. provided he has paid the amount of service tax (whether proportionately reduced or the original amount) to the service provider. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would have to be altered accordingly. - Circular No. 122/03/2010

Goods Sent on Job work:

Rule 4(5) : 4(6)

Manufacturer usually may not carry out all the process related to manufacture of finished product, but may be outsourced to other manufacturers or sub-contractors on job work basis. In such cases, he will clear the inputs to job worker’s premises for further processing, testing, repairs etc.

M

No disturbance to

cenvat credit

Manufact

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Job

worker

Inputs, partially processed

inputs, capital goods

Processed goods & capital

goods within 180 days from the

date of sending inputs


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If the processed goods & capital goods after job work are not received within 180 days

Payment of amount equal to cenvat credit availedon such inputs (or) capital goods

If the processed goods & capital goods after job work are received after 180 days

So much of amount previously reversed must be credited

No disturbance to

cenvat credit

No provision to return in 180 days

No disturbance to credit provided, prior permission of AC/DC has obtained, which shall be valid for a financial year.

FAQ’s on Rule 4(5) and Rule 4(6):

FAQ Answer

1. Will the CENVAT credit be allowed on inputs/ input service, if job worker is paying excise duty (i.e. Job worker not availing exemption notification No. 214/86)?

CENVAT credit will be allowed of the duties, tax or cess paid on inputs/input service used in manufacture of intermediate products by a job worker if- The Job worker is availing the exemption given

under Notification No. 214/86, and The said intermediate products are received by the

manufacturer of final products for use in or in relation to manufacture of final products.

2. Can the goods be sent for job work to own unit of principal manufacturer at other place?

Yes, the goods can be sent to another unit of the same manufacturer, as under Excise, the factory/premises/unit is registered but not the manufacturer. Each unit of the manufacturer should be registered separately and should be treated as independent company, but it should be manufacturer for the purpose of Excise Act, 1944 – Upadhyay Valves V. CCE (2010) (CESTAT)

3. If part of goods received within 180 days, what is the treatment of CENVAT credit attributable to such inputs?

If part of the goods is received back in 180 days, the obligation for debiting the credit shall arise only in respect of CENVAT credit attributable to that part which is not received within 180 days – CBE&C Manual

4. The Inputs and Capital goods are sent to job worker for processing. The processed inputs/finished goods are returned within 180 days but the capital goods are not received within 180 days. What is the treatment of CENVAT credit in such case?

It was held that CENVAT credit is not required to be reversed in case of capital goods as it is a revenue neutral exercise – Zenith Machine tools V. CCE (2010) (CESTAT)

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r

Jigs, fixtures, moulds & dies Job worker/ another manufacturer

Manufact

urer

Job

worker

Inputs, capital goods

Capital goods within 180 days

Buyer

Processed goods

(sale)



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CENVAT credit w.r.to Exports:

The provisions are contained in new Rule 5 of CENVAT credit rules, which is as follows:


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FAQ’s on Rule 5:

1. What is “Net CENVAT credit”? Total CENVAT credit availed on inputs and input services as reduced by amount reversed when inputs removed as such.

2. What is the meaning of export turnover of services? Payments received in respect of services exported (+) Advance received in respect of services to be exported and provision of services is complete (-) Advance received in respect of services to be exported and provision of services is not complete.

3. Will the refund be available, if duty drawback is allowed under customs?

No refund of credit shall be allowed if the manufacturer or provider of output service avails the drawback allowed under the customs and excise drawback rules, 1995 or claims rebate under export of services rules, 2005

Refund of CENVAT credit to units in Specified areas – Rule 5A:

When Refund shall be available?

When a manufacturer has cleared goods from a unit located in States of Assam, Tripura, Meghalaya, Mizoram, Manipur, Nagaland, Arunachal Pradesh, Sikkim

What will be the duty payable? The manufactured goods are exempt from duty as per Notification No. 20/2007.

What will be the Refund available?

Refund of CENVAT credit of duty taken on inputs required to manufacture final products specified in the said notification.

Whether CENVAT credit on inputs used to manufacture final products other than final products which are exempt or subject to nil rate of duty, available as refund?

No, on such goods duty is required to be paid and CENVAT credit availed can be utilized for payment of such duties but refund not available.

Reversal of CENVAT credit in case of service providers engaged in Banking and Financial services and Life Insurance Business – Rule 6(3B) and Rule 6(3C)

A substantial part of the income of a bank or a life insurance company is from investments or by way of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed.

In case of services relating to life insurance or management of ULIPs, such amount will be equal to 20% of credit availed. Other options of payment of amount under rule 6 shall not be available for these taxpayers.[omitted vide notification no. 18/2012]

Whether Sub-rules 3B and 3C of rule 6 apply to whole entity or independently in respect of each registration?

The obligation is applicable independently in respect of each registration. When such a concern is exclusively rendering any other service from a registered premise, the said rules do not apply. In addition to Banking and financial services and life insurance services, if any other service is rendered from the same registered premises, the said rules will apply and due reversals need to be done. – Circular No. 943/04/2011



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Inputs/Input services used in Exempted goods/services:[Rule 6]

Common inputs used for BOTH EXEMPTED AND DUTIABLE GOODS (AND) services: The provisions are contained in Rule 6 and sub rules of Rule 6

Rule 6(1) – The CENVAT credit shall not be allowed on such quantity of –

INPUT USED – IN or IN RELATION to manufacture of Exempted goods or FOR provision of Exempted services

INPUT SERVICE USED - IN or IN RELATION to manufacture of Exempted goods or FOR provision of Exempted services

Rule 6(2)/(3)/(3A) – 4 options are available if Inputs/Input services commonly USED for both Exempted goods/ services and Dutiable goods/ services.

Inputs/ Input service, used

In or in relation to Manufacture of exempted goods

1.If goods are removed to SEZ, EOU, EHTP, STP, UN agencies (or)

2.For exports without payment of duty(or)

3.removal of gold (or) silver arising in manufacture of copper or Zinc by smelting

4. Goods supplied under international competetive bidding

5. Goods supplied to a powerproject

6. Goods supplied for use of foreign diplomatic missions or consular missions or career counselling officers or diplomatic agents

Credit available

All other removals

Credit not available

For Provision of exempted services


Options

Option (i)

Maintain seperate inventory and

accounts of receipt and use of inputs and input services used for exempted goods/exempted output services.

Option (ii)

Pay an amount equal to 5% of valu

of exempted goods and services

Option (iii)

Pay an amount equal to

proportionate CENVAT credit attributable to

exempted goods or services - Method

of compuation follows.

Option (iv)

Maintain seperate accounts for inputs and pay an amount

equal to proportionate

CENVAT credit in respect of input services - w.e.f

1/4/2011.


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Option (i) – SEPARATE INVENTORY and ACCOUNTS should be maintained for INPUTS and INPUT services USED in respect of DUTIABLE goods and services, EXEMPTED goods and services. RECORDS for

Receipt, consumption and inventory of INPUTS used - Receipt and use of INPUT SERVICES

(i) in or in relation to the manufacture of exempted goods

(i) in or in relation to the manufacture of exempted goods

(ii) In or in relation to the manufacture of dutiable goods

(ii) In or in relation to the manufacture of dutiable goods

(iii) For provision of exempted services (iii) For provision of exempted services

(iv) For provision of Dutiable services (iv) For provision of Dutiable services

CENVAT credit on Inputs under clause (ii) and (iv) available.

CENVAT credit on Input services under clause (ii) and (iv) available.

Option (ii) – If the manufacturer/service provider opts not to maintain such separate accounts of inputs and input services, he has an option to pay an amount equal to 5% of the value of Exempted goods (In case of manufacturer) and 5% of the value of Exempted services (In case of service provider). EC and SHEC not payable on such 5% as it is amount and not duty. Some goods on which 1% ED is payable and which are known as Exempted goods, in that case it shall be reduced from the amount payable.

Manufacture of exempted as well as non-exempted goods

Inputs / Input service

Manufacture of exempted as well as non-exempted services

Maintain separate accounts Not to maintain separate accounts

Means separate accounts are maintained for receipt, consumption & inventory of inputs / input service used for dutiable goods / services & exempted goods / services

Option - II Option – III/IV

Credit on all inputs / input services is available

Credit available on all inputs / input services

Reversal on provisional basis

For dutiable goods / services

For exempted goods / services

On dutiable goods / services

On exempted goods / services

Credit in available

Credit not available Pay normal

duties On goods On services

Pay duty @ 5% of the value of exempted goods

Pay duty @ 5% of the value of exempted services

Two methods available



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The manufacturer of goods/the provider of output service have an option to pay the following amount:

Particulars Amount (Rs.)

6% of value of the exempted goods and/or exempted services Less: Duty of excise, if any, paid on the exempted goods

XXX (XX)

Amount payable under rule 6(3)(i) XXX

6% of the exempted value of the service to be paid in case of exempted services that are partially taxed with no facility of credits. However, if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be 6% of the value so exempted. For example, if the abatement on certain service is 60%, the amount required to be paid shall be 3.6% (6% of 60) of the full value of the exempted service.

Option (iii) – If assessee intends to pay amount on proportional basis, the amount is to be calculated as per the prescribed procedure and should inform the availement of such option to superintendent. Once option exercised cannot be changed for the financial year for which option is exercised.

While exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely :

(i) Name, address and registration No. of the manufacturer of goods or provider of output service; (ii) Date from which the option under this clause is exercised or proposed to be exercised; (iii) Description of dutiable goods or taxable services; (iv) Description of exempted goods or exempted services; (v) CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under

this condition;

Option III in detail Credit is available on all inputs / input services irrespective of whether it is used for exempted (or) dutiable

goods (or) services. But the following shall be reversed (i.e. paid)

Used in manufacture

of exempted goods

Amount

to be reversed

= CENVAT credit attributable to Inputs/

Input services

Used for provision

of exempted services

How to calculate the above “Amount to be reversed” Assesse should first take entire CENVAT credit of inputs and input services used in exempted as well as

taxable final products and services. At the end of the month, assessee should calculate CENVAT credit attributable to EXEMPTED GOODS and

EXEMPTED SERVICES on PROVISIONAL basis (For this purpose previous year ratios of Inputs/Input services used in Dutiable and Exempted Goods/Services can be taken)

At the end of the year, assessee should calculate the ratios on actual basis and make fresh calculations and pay difference if any before 30th June. If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.

Step 1: Computation of provisional amount – It shall be reversed Step 2: Computation of actual amount – only for computation Step 3: Payment of differential amount


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Step 1: Computation of Provisional Amount The amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods has to be arrived on actual basis (if possible) or input-output ratio or on some reasonable technical estimate basis (A certificate from Cost/chartered accountant has to be obtained). The amount of CENVAT credit attributable to inputs used for provision of exempted services is to be calculated as follows:

Amount to be reversed for EVERY MONTH shall be

- Amount of CENVAT credit attributable to

+ +

Cenvat credit taken

on inputs during the

month D x

A + C + D(-) cenvat credit of inputs

used in manufacture of

exempted goods

Cenvat credit takenB + D

on inputs services during the x A + B + C + D

month

Where (A) Value of dutiable goods manufactured & removed during the preceding FY. (B) Value of exempted goods manufactured & removed during the preceding FY. (C) Value of taxable services provided during the preceding FY. (D) Value of exempted services provided during the preceding FY.

FAQ’s on Rule 6:

1. How the CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods during the month is available?

This has to be done on the basis of actual (if possible) or input-output ratio or on some reasonable technical estimate basis.

2. What is the meaning of “Value” for the above purpose?

In case of Services, the value shall have meaning as assigned to it under sec. 67 of Finance Act, 1994 read with rules made there under; In case of Goods, the value determined under Sec. 3,4, 4A of the Excise Act, 1944 read with rules made there under.

In case of services covered under composition scheme, value = 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑢𝑛𝑑𝑒𝑟 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 𝑠𝑐ℎ𝑒𝑚𝑒

12.36% (i.e. The value shall be the value on which the rate of

service tax when applied for calculation of service tax results in the same amount of tax as calculated under the option availed)

In case of trading, the value shall be difference between sale price and the cost of goods sold or 10% of cost of goods sold whichever is higher.

Inputs Input services

Used in manufacture of exempted goods

Used for provision of exempted services

Used to manufacture exempted goods (or) for provision of exempted services



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Explanation to above chart:

1. Inputs may be used for 4 purposes – Dutiable FG, Exempted FG, Dutiable Services, Exempted services. 2. CENVAT credit on Inputs used for Exempted FG and Exempted Services not available. So, it must be

reversed (i.e. Paid) 3. CENVAT credit on inputs used for Exempted FG can be arrived using Input-Output ratio or some technical

estimate 4. The balance (i.e. after arriving at step 3) CENVAT credit on inputs must be used for Dutiable FG, Dutiable

services and Exempted services. (A+C+D) 5. Now the proportion of Exempted services (D) to Dutiable FG, Dutiable services and Exempted services

(A+C+D) has to be arrived based on previous year information 6. Step 4 X Step 5 = CENVAT credit on INPUTS used FOR EXEMPTED SERVICES 7. Continue the procedure for Input services USED for EXMPTED GOODS and EXCEMPTED SERVICES, only an

exception that both must be calculated on proportionate basis as Input services – Output ratio cannot be arrived.

Where the amount equivalent to CENVAT credit attributable to exempted goods or exempted services cannot be determined provisionally, as above, due to reasons that no dutiable goods were manufactured and no taxable service was provided in the preceding financial year. What is the treatment of CENVAT credit in such case?

The manufacturer of goods or the provider of output service is not required to determine and pay such amount provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted services for the whole year as prescribed in the following step and pay the amount so calculated on or before 30th June of the succeeding financial year.

Where the amount determined as above is not paid within the said due date, i.e., the 30th June, the manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay interest @ 24% p.a from the due date till the date of payment.

Step 2: Computation of Actual Amount

Amount to be reversed for WHOLE YEAR shall be - Amount of CENVAT credit attributable to

+ +

Cenvat credit taken

on inputs during the

financial year D x

A + C + D(-) cenvat credit of inputs

used in manufacture of

exempted goods

Cenvat credit takenB + D

on input services during the x A + B + C + D

financial year

Inputs Input services

Used in

manufacture of

exempted goods

Used for

provision of

exempted

services

Used to manufacture

exempted goods (or) for

provision of exempted

services


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Where (A) Value of dutiable goods manufactured & removed during the financial year. (B) Value of exempted goods manufactured & removed during the financial year. (C) Value of taxable services provided during the financial year. (D) Value of exempted services provided during the financial year.

Step 3: Payment of differential amount Where (A) Actual amount > provisional amount (B) Provisional amount cannot be determined during the preceding financial year then, manufacturer (or) output

service provider shall pay the differential amount (i.e. actual amount (-) provisional amount) on or before 30th June of succeeding financial year.

If not paid, Int. @ 24% p.a is payable. Note: 1. When provisional amount > actual amount, the manufacturer (or) output service provider shall adjust the

excess amount, on his own by taking credit of such amount. 2. The manufacturer of goods (or) the provider of output service shall intimate to the jurisdictional

superintendent of central excise, within a period of 15 days from the date of payment (or) adjustment, the prescribed particulars.

Option (iv): The manufacturer of goods/the provider of output service has an option to: (i) Maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of said clause (a)

And (ii) Pay an amount as determined under sub-rule (3A) in respect of input services. (i.e. Proportionate Reversal as stated above)

Conditions:

If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

It is hereby clarified that the credit shall not be allowed on inputs used exclusively in or in relation to the

manufacture of exempted goods or for provision of exempted services and on input services used exclusively in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services.

No CENVAT credit shall be taken on the duty or tax paid on any goods and services that are not inputs or

input services.

M/S XYZ Co. Ltd. a manufacturer of dutiable as well as exempted goods and also a provider of taxable as well as exempted services furnishes the following information You are required to compute the provisional amount of proportionate credit reversible

for the month, given that for every unit of exempted goods, three units of inputs are required.

FY : 20011-12

For the month of April, 2012

(1) Value of exempted goods removed @ Rs. 300 P.U 330 60

(2) Value of dutiable goods removed 605 75

(3) Value of exempted services provided 220 40

(4) Value of taxable services provided 275 25

(5) Credit of input services, commonly used for all goods and services

- 1,60,680

(6) Credit of inputs commonly used for all goods and services (8,000 units X Rs. 250 X 12.36%)

- 2,47,200



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Computation of CENVAT credit available on Input services: Total service tax paid and CENVAT credit availed on Input services for the month of April, 2012 is 1,60,680. As the services are used for all goods and services, proportionate reversal is required w.r.to services used in exempted goods and services, which is as follows:

1. Total value of all goods and services during PY = 605 + 330 + 275 + 220 = 1,430 lakhs 2. Value of exempted goods and services during PY = 550 lakhs 3. Proportionate credit to be reversed = 1,60,680 X 550/1,430 = `61,800 4. CENVAT credit available on Input services = 1,60,680 – 61,800 = `98,880

Computation of CENVAT credit available on Inputs: Total excise duty paid and CENVAT credit availed on Inputs for the month of April, 2012 is 2,47,200. As the inputs are used for all goods and services, proportionate reversal is required w.r.to inputs used in exempted goods and services, which is as follows:

1. Total value of all goods and services during PY = 605 + 330 + 275 + 220 = 1,430 lakhs 2. Total quantity of exempted output during the month of April, 2012 = `60,000/300 p.u = 200 units 3. Total quantity of Inputs purchased during the month = 8,000 units 4. Input output ratio = 3 5. Quantity of Input used for exempted output = 200 X 3 = 600 units 6. CENVAT credit w.r.to Inputs used in exempted output to be reversed = 600 X 250 X 12.36% = `18,540 7. Balance CENVAT credit available = 2,47,200 – 18,540 = 2,28,660 8. Total value of all goods and services excluding exempted goods = 1,100 lakhs 9. Value of exempted services = 220 lakhs 10. Proportionate credit to be reversed = 2,28,660 X 220/1100 = `45,720 11. Net CENVAT credit available on Inputs = 2,28,660 – 45,720 = `1,82,940

Therefore, total CENVAT credit available to M/S XYZ Ltd. = 98,880 + 1,82,940 = `2,81,820

Capital goods used for exempted as well as dutiable goods/services:

Can credit of capital goods be availed of when used in manufacture of dutiable goods on which benefit under Notification 1/2011- CE is availed or in provision of a service whose part of value is exempted on the condition that no credit of inputs and input services is taken (i.e. Abatement under Notification No. 1/2006-ST)?

As per Rule 6(4) no credit can be availed on capital goods used exclusively in manufacture of exempted goods or in providing exempted service.

Goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE is availed are covered under the definition of exempted goods and Taxable services whose part of value is exempted (i.e. Abatement under Notification 1/2006-ST) are covered under the definition of exempted services.

Capital goods used for

Exclusively for Exempted

goods

Preferential removals

Credit available

Other removals

Credit not avilable

Both exempted and taxable

goods

Credit available

Exclusively for exempted

services


Both exempted and taxable

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Credit available


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Hence credit of capital goods used exclusively in manufacture of such goods or in providing such service is not allowed. – Circular No. 943/04/2011

Documents on the basis of which credit can be taken:

Invoice of manufacturer from his factory (or) depot (or) premises of consignment agent. Invoice issued by registered importer from his premises (or) consignment registered with central excise. Invoice issued by registered first stage (or) second stage dealer Supplementary invoice by manufacturer or importer (Supplementary invoice is issued when the manufacturer

or importer is charged with additional duty on account of reasons other than non levy, short levy by reason of fraud, collusion, willful misstatement or suppression of facts or contravention of any of the provisions of the Excise Act or Customs Act or rules made there under with an intent to evade payment of duty.

A supplementary invoice, bill or challan issued by a service provider, in terms of the provisions of Service Tax Rules, 1994 except where the additional amount of tax became recoverable from the provider of service on account of non levy or non-payment or short-levy or short-payment by reason of fraud or collusion or wilful mis-statement or suppression of facts or contravention of any of the provisions of the Finance Act or of the rules made there under with the intent to evade payment of service tax.

Bill of entry Certificate issued by an appraiser of customs in respect of goods imported through foreign post office. TR – 6 (or) GAR – 7 challan of payment of tax where service tax is payable by service recipient as the person

liable to pay service tax. – Notification 18/2012 Invoice, bill (or) challan issued by provider of input service. Invoice, bill (or) challan issued by input service distributor. Whether CENVAT credit of the service tax paid can be claimed when payments are made through debit/credit notes, debit/credit entries in books of account or by any other mode as mentioned in Explanation (c) to section 67 of the Finance Act, 1994 for transactions between associate enterprises?

CENVAT credit is admissible in the said case. Rule 4(7) does not indicate the form of payment and does not place any restriction on payment through debit in the books of accounts. If the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called ‘gross amount charged’, credit will be allowed under said rule. - Circular No. 122/03/2010

FAQ’s on documents

1. Who is a first stage dealer? Ans: Rule 2(ij), MEANS

2. Who is second stage dealer? Ans: Rule 2(5) – A dealer who purchase goods from a first stage dealer.

Dealer of any subsequent stage after second stage cannot issue CENVATable invoice.

A dealer who purchase goods directly from

The factory of manufacturer under invoice

Depot of manufacturer under invoice

Consignment agent of

manufacturer under invoice

Any premises where the

goods are sold by (or) on behalf of

manufacturer under invoice

Importer (or) depot of

importer (or) consignment

agent of importer

under invoice



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3. Who is input service distributor? Ans: Rule 2(m) – MEANS

As per Rule 7, input service distributor can distribute credit in respect of service tax paid on input service subject to following conditions. Condition 1: Credit to be distributed cannot exceed service tax paid. Condition 2 : If such input services are used exclusively for manufacture of exempted goods (or) for providing exempted services, then credit shall not be distributed.

4. Whether CENVAT credit of the service tax paid can be claimed when payments are made through debit/credit notes, debit/credit entries in books of account or by any other mode as mentioned in Explanation (c) to section 67 of the Finance Act, 1994 for transactions between associate enterprises? Ans: CENVAT credit is admissible in the said case. Rule 4(7) does not indicate the form of payment and does not place any restriction on payment through debit in the books of accounts. If the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called ‘gross amount charged’, credit will be allowed under said rule. - Circular No. 122/03/2010

5. Can CENVAT credit be taken on the basis of private challans? Ans: CCEx. v. Stelko Strips Ltd. 2010 (255) ELT 397 (P & H) The High Court held that CENVAT credit could be taken on the strength of private challans as the same were not found to be fake and there was a proper certification that duty had been paid.

If dutiable goods turn out to be exempted goods:

Rule 11(2); 11(3), 11(4)

A manufacturer opts for 100% exemption from excise duty. Under a notification based on value (or) quantity of clearances (i.e. SSI exemption)

A manufacture opts for 100% exemption u/s 5A (CG in public interest will exempt) A provider of output service opts for 100% exemption from service tax,

Section – 5B of CE Act, 1944 If an assessee pays excise duty on the assumption that the said process carried on by him is ‘MANUFACTURE’ but later on court decides that the said process is NOT manufacture, then CG may issue a notification that

Then, the above persons are required to pay

CENVAT credit in respect of

a) Lying in stock

b) Lying in process

c) Contained in FG, Lying in stock

d) Contained in taxable service pending to be provided

Balance after deducting adjacent

Shall lapse & not allowed to be utilized for

payment of duty on any excisable goods

Office of manufacturer

of final products (or)

provider of output service

Towards purchase of input services

Issues invoices For distribution the credit of

service tax to such manufacturer (or) provider

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a) Assessee need not reverse the CENVAT credit and b) The buyer of such goods can avail CENVAT credit of duty paid by assessee

Assessee should not avail CENVAT credit on inputs and pay excise duty on output if the activity is not manufacture. If they were paying excise duty and subsequently it was found that the duty was not payable, they should approach Central Government for Notification under section 5B of CE Act for non reversal of CENVAT credit – Circular No. 911/1/2010.

Miscellaneous procedural CENVAT credit rules

Rule 9(2) CENVAT credit can be taken only if all particulars as prescribed in central excise rules (or) service

tax rules are contained in eligible duty paying document. Otherwise, permission of AC/DC is required.

Rule 9(5) ; 9(6) A manufacturer (or) provider of service shall maintain

Burden of proof regarding admissibility of credit is on assessee.

Procedures & Records for CENVAT Maintain records of inputs & capital goods Maintain records of CENVAT credit received & utilized Submit returns of details of CENVAT credit availed, principal inputs & utilization of principal inputs in form ER-1

to ER-6.

The AC / DC may allow CENVAT credit if

Such document contains

a) Details of duty (or) service tax payable

b)Description of goods (or) taxable service

c) Assessable value

d) Excise (or) service tax registration No.

e) Name and address of the factory (or) warehouse (or)premises of first (or) second stage dealer (or) provider oftaxable service.

AC/DC is satisfied that thegoods/services have beenreceived & accounted

Proper records for

a) Receipt

b) Disposal

c) Consumption &

d) Inventory

Of inputs & Capital goods procured

a) Receipt &

b) Consumption

Of Input services received



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Form of return Description Who is required to file

Time limit

ER-5 (Rule 9A) Information relating to principal inputs

Assesses paying duty of Rs. 1 crore (or) more p.a through PLA & manufacturing goods

Annually by 30th April for the current year (e.g. Return for 2008-09 in to be filed by 30.4.2008)

ER-6 (Rule 9A) Monthly return of receipt & consumption of each of principal inputs

Assesses required to subunit ER-S return

10th of the following month

Rule 9(8) Quarterly return First stage / second stage dealer

Within 15 days from the close of quarters

Rule 9(9) ST-3 Half yearly return Provider of output service

Within 25 days from the close of half year

ST – 3 Rule 9(10) Half yearly return Input service distributor

Within 1 month from the close of half year

Note: 1. Rule 9(11) – A revised return can be filed by service provider within 60 days of filing of original return. 2. ER-5 return and ER-6 return shall be filed electronically if manufacturer of final products has paid total excise duty

of Rs. 10,00,000 or more including the amount of duty paid by utilization of CENVAT credit in the preceding financial year – Notification 21/2010.

3. Further, the quarterly return of CENVATABLE invoices submitted by the first/second stage dealer under Rule 9(8) shall be filed electronically unconditionally. – Notification No. 21/2010.

Transfer of CENVAT credit [Rule 10 & Rule 10A]

Transfer of CENVAT credit from one unit to another [Rule 10]:

The unutilized CENVAT credit can be transferred from one unit to another on satisfying the following conditions:

1. The factory belonging to manufacturer or business belonging to service provider is shifted or transferred on account of change in ownership, merger, amalgamation, lease, joint venture.

2. Such transfer is with the specific provision for transfer of liabilities. 3. The stock of inputs as such or in process, or the capital goods, is also transferred along with the

factory/business premises 4. The inputs or capital goods on which credit has been availed have been duly accounted for to the

satisfaction of AC/DC of Excise.

Inter- unit transfer of CENVAT credit of SAD u/s 3(5) of customs Tariff Act, 1975 [Rule 10A

w.e.f 1/4/2012]:

The unutilized CENVAT credit of SAD can be transferred from one registered premises to another registered premises through transfer challan, subject to the following conditions:

1. Only a manufacturer or producer of final products, having more than one registered premises, for each of which registration has been obtained on the basis of common PAN.

2. The transferring unit and receiving unit should not have availed the exemptions under area based exemption notifications.

3. The manufacturer or producer shall submit the monthly return, as specified under these rules, separately in respect of transferring and recipient registered premises.


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Recovery of CENVAT credit along with Interest [Rule 14]

Where, (i) CENVAT credit has been taken AND utilized wrongly; or (ii) CENVAT credit has been erroneously refunded The same along with interest shall be recovered from the manufacturer or provider of output service and the

provisions of sec. 11A (recovery of duty short paid or short levied) and 11AA (interest on delayed payment of duty) of Excise Act, 1944 and sec. 73 (recovery of service tax short paid or short levied) and sec. 75 (interest on delayed payment of service tax) of Finance Act, 1994 shall apply respectively.

Confiscation and Penalty [Rule 15]

Cause Effect

Wrongful availement/Utilization of CENVAT credit on inputs, capital goods or input services

a) All such goods are liable to confiscation b) Penalty not exceeding, the higher of Duties (Excise and service tax) or Rs. 2,000

Wrongful availement/ Utilization of CENVAT credit by reason of fraud etc. With an intent to evade the payment of duty

Penalty in terms of Sec. 11AC of Excise Act.

Wrongful availement/ Utilization of CENVAT credit by reason of fraud etc. With an intent to evade the payment of service tax

Penalty in terms of Sec. 78 of Finance Act, 1994.

Whether penalty can be imposed on the directors of the company for the wrong CENVAT credit availed by the company? Ashok Kumar H. Fulwadhya v. UOI 2010 (251) E.L.T. 336 (Bom.) It was held that words “any person” used in rule 15(1) of the CENVAT Credit Rules, 2004

clearly indicate that the person who has availed CENVAT credit shall only be the person liable to the penalty.

The Court observed that, in the instant case, CENVAT credit had been availed by the company and the penalty under rule 15(1) was imposable only on the person who had availed CENVAT credit [company in the given case], who was a manufacturer.

The petitioners-directors of the company could not be said to be manufacturer availing CENVAT credit.



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Exemptions under Excise

Notifications issued by the central government to be laid before parliament [Sec. 38] Central Govt. is empowered to issue notifications as per the following provisions of the Act. All the notifications issued under the said provisions must be laid before the parliament for 30 days when the parliament is in session. Sec. 3A Power of Central government to charge excise duty on the basis of production capacity in respect of notified goods Sec. 4A Notifying goods and declaring abatement for the purpose of MRP based valuation Sec. 5A(1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette exempt excisable goods either absolutely or subject to such conditions from the whole or any part of excise duty Sec. 5A(2) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by special order exempt excisable goods from payment of duty of excise, under circumstances of an exceptional nature to be stated in such order. Sec. 5B When a product is not leviable to excise duty as held by the court but the assessee has taken CENVAT credit w.r.to Inputs, Input services & Capital goods used in the manufacture of such product, then the central government may by notification in the official gazette order for non reversal of such credit allowed to the assessee subject to such conditions. [The assessee should not claim for refund of duty in such a case] Sec. 11C Central government may by notification in the official gazette, direct not to recover excise duty not levied or short levied as a result of past general practice.

Under Sec. 5A and 11C, Central Govt. has been granted power to issue notification for granting partial or full exemptions from excise duty.

Note: The notifications issued under Central Excise Act have full legislative backing.

Power to grant exemption from duty [Sec. 5A of CE Act]

Tariff rate Statutory Duty Effective rate of duty

CETA/Customs tariff prescribe the rate of duty for each heading and it is known as “Tariff rate”

The duty payable to government

The Central Excise Act and Customs Act has granted powers to Central government (i.e. Executive organ) to modify rates as per requirements by issuing exemption notification, which is known as ‘Effective rate of duty”

Note: “EXEMPTED GOODS” means only those goods exempted under notification under sec. 5A. These exempted goods are excisable goods but are not known as nil rated goods.

Exemption Notification: Sec. 5A(1) of the CEA authorises central government to exempt the excisable goods

a) Generally b) Either absolutely or subject to such conditions (to be fulfilled before or after removal) c) From whole or part of excise duty.

But the exemption should be in public interest and it should be by way of notification in the official gazette. The notification becomes effective on the date it is issued for publication in the official gazette. (Sec. 25(1) of customs Act and same provision is in service tax also)

The Notifications shall be placed before each house of parliament for a total period of 30 days

If parliament decides to amend any of such notification, it will

have effect in the modified form

If parliament decides not to amend, such notifications will

continue to be effective


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Exemption Order: Sec. 5A(2) authorizes Central government to grant exemption, in public interest, in exceptional circumstances by a special order. The exceptional circumstances should be specified in the order. It is not necessary to publish the order in official gazette.

Retrospective effect: An exemption notification cannot be amended with retrospective effect. But the central government for the purpose of clarifying the scope or applicability of exemption notification or exemption order may insert an explanation to the exemption notification or order WITHIN ONE YEAR of such notification or order.

Such explanation will have retrospective effect from the date of exemption notification.

Exemption for past general practice (Sec. 11C): If a) There was a generally prevalent practice of levy or non levy of any excisable goods and b) Such goods were actually liable for duty at higher rates; Central government may, by notification in official gazette direct that such excess duty payable, need not be paid (Sec. 28A of Customs Act).

Refund – If a particular assessee had paid duty at a higher rate than prescribed in notification issued under sec. 11C, he shall be entitled to apply for refund of such extra duty paid.

Application for refund should be made within 6 months from issue of the notification. Refund subject to provisions of unjust enrichment

Various Exemptions under Excise:

1. Small Scale Industry Exemption - Notification No. 8/2003 and 9/2003 2. Exports under Excise – Rule 18 and Rule 19 of Central Excise Rules, 2002 3. Clearance of goods to an Export Oriented Unit (EOU) – Notification No. 22/2003 4. Clearance of Excisable goods from a DTA unit to Special Economic Zone (SEZ) 5. Articles taxable at a lower rate of 1% as specified by Notification No. 1/2011 6. Removal of goods at concessional rate of duty for manufacture of excisable goods. 7. Exemption to new units located in backward area

1. Exemptions to SSI:

1. Why SSI exemption?

To encourage their growth

For administrative convenience with respect to cost and time

2. When SSI exemption is available?

Previous Year Current Year

Turnover ≤ 400 Lakhs Exemption available

Turnover > 400 Lakhs Exemption not available

3. What is the amount of Exemption?

Two options are available

Option (i)

# Upto `150 lakhs exempted

# Cenvat credit not available

Option (ii)

# Normal duty payable

# Cenvat credit available



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4. If SSI exemption is availed, whether CENVAT credit available on Capital goods? The CENVAT credit not available w.r.to Inputs and Input services but the relaxation is provided in respect of capital goods, where in the manufacturer would have the facility to avail CENVAT credit during the exemption period and can utilize the same after the expiry of exemption limit i.e. on crossing the notified limit of `150 lakhs.

5. If SSI exemption is opted for, whether the credit available on Inputs on crossing the turnover limit of `150 lakhs during the current year? The credit as standing on the first day of the financial year in which the exemption is availed shall be lapsed and CENVAT credit on inputs purchased not available upto the date when turnover is less than `150 lakhs. In other words the credit on Inputs will be available once the turnover crosses the exemption limit.

6. If SSI exemption is availed, whether CENVAT credit available on Input services? The notification no. 8/2003 specifically provides for denial of credit of duty paid on inputs, but does not provide for denial of CENVAT credit on Input service. In respect of capital goods also, the credit is allowed even during the period of exemption to SSI manufacturers and this is because notification does not provide for denial of CENVAT credit on capital goods. In the absence of any such restriction in the notification no. 8/2003 in respect of input services, a unit availing of SSI exemption is eligible for the CENVAT credit of service tax paid on input services. – Vallabh Vidyanagar Concrete Factory V. CCE (2010) (CESTAT)

7. Whether SSI Exemption available to Large Scale Industry? Yes, provided turnover during PY is ≤ 400 lakhs

8. Whether manufacturer of any excisable goods is eligible to avail SSI exemption? All goods are not eligible tough most of the goods have been covered. Examples of goods presently not eligible are – Tea, pan masala, some tobacco products, sandal wood oil, weapons, travel sets for toiletries etc. The manufacturer is advised to ascertain the classification of products before making a decision whether or not to opt for the benefit under this notification.

9. Under Excise Act, 1944 the registration is for a unit rather than a manufacturer. Does it mean the SSI

exemption available for all the units of the same manufacturer separately? The aggregate value of clearance of all goods chargeable to duty by a manufacturer from one or more factories or by more than one manufacturer from the same factory shall be considered rather than considering them individually i.e. location wise or factory wise.

10. Can swapping be allowed between the options? The first option is automatic. If assessee wants to avail second option, he has to inform to AC (in writing) with a copy to Superintendent.

It must contain the following details:

Name and address of Manufacturer

Location of Factory/ies

Description of specified goods produced

Aggregate value of clearances of specified goods

11. Once the second option is availed, can he withdraw and avail the first option? Once assessee has Opted Out Of (not opted for) exemption, he has to pay duty on all clearances

during the financial year – Uttam Industries V. CCE Once assessee exercises option to pay full duty, he cannot withdraw during remaining part of

financial year – CCE V. Diamond wire Industries. From the above two decisions it is clear that even if turnover availed from middle of the year,

Turnover from 1st April has to be considered.

12. Can SSI Exemption and CENVAT credit facility be available? i.e. simultaneous availment of CENVAT and SSI exemption Yes, If an SSI unit manufacturing goods bearing brand name or trade name of others as well as other goods, it is eligible for grant of SSI exemption and can avail CENVAT credit in respect of inputs used for those goods.


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Relaxation vide budget 2010 is extended to plastic bottles and plastic containers manufactured under brand name of other but used as packing materials.

13. What are the products for which SSI Exemption is not available? Yes,

Pan masala and tobacco products

Tea whether or not flavored

Extracts, essences, and concentrates of coffee or tea

Surgical or dental batteries

Sandalwood oil

Textile articles

Ceramic tiles

Revolvers, Pistols, Firearms, other arms

Matches

Watches

Power driven pumps for water not conforming to BIS

Tractors, Motor vehicles, Cars and chassis

Products covered under compounded Levy scheme (i.e. Stainless steel pattas/pattis and aluminum circles)

Automobiles, Primary iron and steel

14. How to calculate the limit of 400/150 lakhs?

✓ = Included X = Not Included

Particulars 400 Lakhs 150 Lakhs

1. Export turnover. X X

2. Export to Nepal/Bhutan. [Though exports to Nepal is treated as normal exports, the SSI exemption notification has not been amended]

✓ ✓

3. Sale to SEZ/EOU/EHTP/STP/UN/International organisation. X X

4. Outright sale to a buyer, who then Exports. ✓ ✓

5. Export under Bond through Merchant Exporter. X X

6. Sale of Non Excisable goods. X X

7. Goods manufactured with others brand name, cleared on payment of duty (This is ineligible for exemption under this notification).

X X

8. Goods manufactured in rural area under others brand name. ✓ ✓

9. Value of Intermediate products when final product is eligible for SSI Exemption.

X X

10. Value of Job work done under specified notifications - 214/86, 83/94, 84/94.

X X

11. Job work or any process which does not amount to manufacture.

X X

12. Clearance of strips of plastic Used within factory of production.

X X

13. Turnover of goods exempted under other notification or where no excise duty payable for any other reason.

✓ X

14. Value of goods captively consumed for manufacture of final product which is exempted under a notification other than SSI Exemption notification.

✓ ✓

If we carefully analyze the above table the exclusions for the purpose of calculating the values in both cases, it is clear that for the purpose of determining the limit of `150 lakhs al exempted clearances are excluded. However this is not the case for determining the limit of `400 lakhs where in the exclusion is only for clearances exempted by specified notifications and for



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clearances to specified persons. If a manufacturer has `350 lakhs of exempted goods manufactured and `80 lakhs of dutiable goods in the previous year, then in the current year he would not be eligible for the exemption, since the total value of clearances crosses `400 lakhs. The rest of the exclusions would remain similar in both these cases.

15. Will the Exemption available if SSI units send the raw material for job work and the processed intermediate goods returned from job work?

Yes, the clearance of FG is exempted provided the total turnover is below 150 lakhs. 1. The SSI Unit has to file a declaration (Declaration No. 1) to AC of his DIVISION that goods returned

after job work will be used in his factory for manufacture of FG which is exempt from duty – Notification No. 84/94

2. The SSI Unit has to file a declaration (Declaration No. 2) to AC of JOB WORKER’s DIVISION that goods returned after job work will be used in his factory for manufacture of FG which is exempt from duty – Notification No. 84/94

16. Apart for Exemption with respect to payment of duty, Is there any other concessions to SSI?

Normal Procedural Provision Procedural concessions to SSI

1. Monthly Return 1. Quarterly Return in ER – 3 by 10th of the month following the quarter

2. Monthly payment of duty – By 5th of the following month. For the month of March – 31st of march

2. Quarterly payment of duty – By 5th of the month following the quarter For the quarter ending march – 31st of march

3. Normal Export procedures 3. Simplified Export procedures.

4. Registration with Excise authorities applicable as per the provisions

4. Exemption from registration.

5. A lot of Excise formalities applicable 5. It doesn’t have to follow any excise formality but has to maintain records to prove that their turnover is less than 150 lakhs.

6. CENVAT credit on capital goods is available upto 50% during the current year and balance during the subsequent year.

6. 100% of the CENVAT credit on capital goods is available in the first financial year itself.

The SSI Unit whose turnover is > 90 lakhs (called ‘specified limit’) has to file a declaration with AC and obtain a dated acknowledgement. Such declaration has to be made once in life time and not every year.

Only with the specific permission of AC and for specific purpose Excise inspectors, Preventive parties, audit parties can visit SSI.

Audit of SSI

Condition Audit Frequency Duration of Audit

Paid duty of Rs. 10 L to 1 C p.a through PLA

At least once in two years 7 working days

Paid duty < 10 L p.a through PLA

At least once in 5 years 5 working days

Restrictions on “Branded Goods” for the purpose of SSI Exemption:

The benefit of this exemption notification is not available, if a manufacturer carries on the manufacture of excisable goods, exclusively under the brand name of others (But exemption available if factories are located in a rural area).

“Brand name or trade name” means a brand name or trade name whether registered or not which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods.

The brand name or trade name should be associated with the PRODUCT [The intention of the legislature is that large units should not be able to manufacture all their products by outsourcing their manufacture to small units and escape the duty payments].

Exceptions to the above stated law (i.e. Benefit under this notification cannot be denied where goods bear the brand name or trade name of another person in the following cases:


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1. Where the components or part are cleared for use as original equipment in the manufacture of said machinery or equipment and the said goods should be removed following the procedure laid down in Central Excise (Removal of goods at concessional rate of duty for manufacture of excisable goods) Rules, 2001.

2. The manufactured goods bearing the brand name or trade name of: The khadi and village industries commission or State Khadi and village industry board or The national small industries corporation or State small industries development corporation or State small Industries corporation.

3. Relaxation is provided for goods manufactured bearing the brand name of others provided they are manufactured by a unit situated in rural area.

4. Restrictions does not apply to account books, registers, writing pads and file folders classifiable under First schedule to CETA.

5. Where the specified goods are in the nature of packing materials namely printed cartons of paper or paper board, metal containers, HDPE woven stacks, adhesive tapes, stickers, PP caps, crown corks, metal labels or printed laminated rolls.

Case laws on SSI Exemption:

Case Judgment

1. CCE V. ACE Auto Co. Ltd. (2011) (SC)

Facts & Issue involved: ACE Auto co. ltd., a manufacturer of clutch plates for motor vehicles, used to clear such goods under the brand name “TATA ACE” to the Tata Motors Co. Ltd. Whether SSI exemption available if the brand name of another person is used in the manufacture of excisable goods? Decision:

Notification No. 8/2003 bars exemption if assessee uses another person’s brand name or trade name with the intention of indicating a connection between the assessee’s goods and such other person.

However, if assessee is able to show that there was no such intention or that the user of the brand name was entirely fortuitous, it would be entitled to the benefit of exemption.

The objective of SSI exemption is to grant benefits only to those industries which do not have advantage of brand name or trade name.

In the present case, the brand name TATA didn’t belong to the assessee. Further by using the said brand name, the assessee had not only intended to

indicate a connection between the goods manufactured by them and TATA company but also the quality of their product as that of a product of TATA company, as they were supplying their goods to TATA co.

Hence, the assessee was not entitled to SSI exemption notification.

2. Parle Bisleri P. Ltd. V. CCE (2011) (SC)

Facts & Issue involved: Parle Bisleri P. Ltd. manufactured flavored soft drink which were assigned code names like G-44T, L-33A and cleared goods to its subsidiary M/s Parle Exports private ltd. (PEL). Whether clearing the goods with the code names belonging to the other person amounts to use of a brand name and whether having same effective financial control and management leads to clubbing the clearances of two units? Decision: Regarding 1st Issue:

Code names, used on the flavors cleared by the assessee belonged to M/s Parle Exports P. Ltd.

The codes were used to identify the flavors and they indicated a connection in the course of trade between the flavors and M/s Parle Exports P. Ltd.



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The franchisors were purchasing the flavors by referring to the code names. Hence, the code names were brand names within the meaning of SSI exemption

notification. Regarding 2nd Issue:

Both the companies were created as separate legal entities with a view to avail SSI exemption by both of them (i.e. Holding company and subsidiary company).

In reality, both of them had same effective financial control and management control.

Hence, the clearances of both the companies were liable to be clubbed for determining the eligibility to SSI exemption.

3. CCE V. Deora Engineering works (2010)

Facts & Issue Involved: Whether the clearances of two firms having common brand name, goods being manufactured in the same factory premises, having common management and accounts etc. can be clubbed for the purposes of SSI exemption?

The respondent-assessee was using the brand name of "Dominant" while clearing the goods manufactured by it.

One more manufacturing unit was also engaged in the manufacture and clearance of the same goods under the same brand name of "Dominant" in the same premises.

Both the firms had common partners, the brand name was also common and the machines were cleared from both the units under common serial number having common accounts.

Department clubbed the clearance of the goods from the both the units for the purposes of SSI exemption because both the units belong to same persons and they had common machinery, staff and office premises etc.

Decision: The High Court held that indisputably, in the instant case, that the partners of both the firms were common and belonged to same family. They were manufacturing and clearing the goods by the common brand name, manufactured in the same factory premises, having common management and accounts etc. Therefore, High Court was of the considered view that the clearance of the common goods under the same brand name manufactured by both the firms had been rightly clubbed.

4. CCE V. Meyer Health Care P. Ltd. (2011) (SC)

If SSI unit wrongly affixes a trade mark of another person, be it registered or not, then such default would not be eliminated by provisions of Trade marks Act, 1999 granting retrospective registration. Thus, grant of registration certificate with retrospective effect under Trade marks Act, 1999 will not automatically provide benefit of exemption to SSI unit.

5. Bonanzo Engineering & Chemical P. Ltd. V. CCE (2012) (SC)

It was held that merely because the assessee has, by mistake, paid duty on the goods which are exempted from such payment, doesn’t mean that the goods would become liable for duty. Further, merely because the assessee has not claimed any refund on the duty mistakenly paid by him, he cannot be denied the SSI exemption under Notification 8/2003.

6. Mahavir Metal Mart v. UOI (1997) (SC).

Total value of excisable goods shall exclude amounts of excise duty, sales tax and other Taxes

7. CCE v. Rukmani Pakkwell Traders (2004) (S.C.),

If there is more than one registered mark in respect of the same trade mark, then merely because the other person has the same registered mark in some other goods would not preclude one owner from getting benefit of exemption. However, it was also held that the use of even a part of brand name of another person indicating a connection in course of trade would be sufficient to disentitle a claim for SSI exemption.

8. Astra Pharmaceuticals P Ltd. v. CCE (1995) (SC)

in respect of medicinal preparations, the mark made by the manufacturers would be called a “house mark” and would not be the brand name. Therefore, the monograph which identifies a manufacturer's name would not be a brand name.


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Circulars & Notifications on SSI Exemption:

Circular No. 947/8/2011 On the issue of applicability of excise duty on uniforms or made-up articles like quilt, blankets, towels, linen etc bearing the name or logo of a school, security agency, company, hotel or airline etc., it is clarified that such products would not merit treatment as “branded” products merely because the name of the school, institution or company or their logo is either printed, embroidered or etched on them.

This is equally true of made ups such as towels, linen etc bearing the name of a hotel, restaurant or airlines.

In all these cases, there is no nexus between such a name or logo & the product at the time of its sale which is essential ingredient in the definition of the term “brand name”.

Unless such garments/made- ups also bear a brand name in addition to the name or logo of the school, security agency, hotels, airlines and company, such goods would not attract the excise duty.

It is also gathered that in some cases, apart from the name or logo of such organizations, the name of the tailor or manufacturer is affixed on such garments.

However, mere affixing of name of the tailor or manufacturer would not constitute a brand name.

Another related issue is the applicability of the mandatory excise duty to blankets which are supplied to the defence establishment, armed forces, police forces etc against tenders that stipulate that the name of the manufacturer should be clearly indicated or marked on the product. As pointed out above, affixing the name of the manufacturer on such goods would not, by itself, bring them within the ambit of branded goods.

Circular No. 937/27/2010-CX.

It is clarified that in view of the specific bar provided under section 5A(1A) of the Central Excise Act, 1944, the manufacturer cannot opt to pay the duty under second notification in respect of unconditionally fully exempted goods and he cannot avail the CENVAT credit of the duty paid on inputs.

It is further clarified that in case the assessee pays any amount as excise duty on such exempted goods, the same cannot be allowed as “CENVAT credit” to the downstream units, as the amount paid by the assessee cannot be termed as “duty of excise” under rule 3 of the CENVAT Credit Rules, 2004.

The amount so paid by the assessee on exempted goods and collected from the buyers by representing it as “duty of excise” will have to be deposited with the Central Government in terms of section 11D of the Central Excise Act, 1944.

Moreover, the CENVAT Credit of such amount utilized by downstream units also needs to be recovered in terms of the rule 14 of the CENVAT Credit Rules, 2004. - Circular No. 940/1/2011

Note - In the case of ready-made garments and made-up articles bearing a brand name/sold under a brand name, no such option is henceforth available and a duty of 10% is payable regardless of the composition of the item/article.

Notification No. 24/2010

SSI exemption is available in case the specified goods are in the nature of packing materials and are meant for use as packing material by or on behalf of the person whose brand name they bear even if they bear the brand name of others. “Packing material” includes labels of all kinds



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Clubbing of clearances:

SSI exemption is available if aggregate value of clearances of all excisable goods for home consumption by a manufacturer from one or more factories, or from a factory by one or more manufacturers does not exceed the prescribed limit [i.e. turnover shall be clubbed for availing SSI exemption]

Case laws in this regard:

Case Judgement

1. AC v. Jayanthilal Balubhai & Ors. (1978) (SC)

If one person owns a factory and is a partner in another factory, the production of all factories cannot be clubbed.

2. Jagjivandas & Co. v. CCE (1985) (SC)

Factors such as common location of factories, common expenses, common partners, and common trade mark, sharing of machinery usage, mutual financial transaction without interest not enough to club clearances.

3. CCE V. Spring Fresh Drinks (1997) (SC)

Turnover of limited companies being independent not clubbable in the absence of financial flow back.

4. CCE v. MM Khambatwala (1996) (SC)

Manufacture of same products in factory as well as job workers factory not clubbable unless common control shown.

5. Renu Tandon v. UOI (1993) (HC)

Common employees, proximity of factories, closeness of relationship are not sufficient to club clearances in the absence of flow back of profits.

6. Alpha Toyo Ltd. v. CCE (1994) (CESTAT)

Units separately incorporated with separate plant not clubbable because of few common directors or grant of interest free loans.

7. CCEx., Ahmedabad, v. Arbuda Industries, (2008) (CESTAT)

Two units, one owned in individual capacity and other as Karta of HUF. Both the units are having separate machineries, separate incometax PAN No., separate sales tax, separate professional tax registration and separate electricity meters. No evidence to show that the two units are not independent. Clubbing of clearance does not apply

8. Coimbatore Engineering Works v. CCE (2009) (CESTAT)

In absence of any finding of there being any common funding and financial flow-back, clubbing of clearances is not permissible, merely on the premise of familiarities between partners of units and other administrative commonalities

SSI & Co. is eligible for exemption in terms of Notification No. 8/2003 for the year 2010-11. It provides the following particulars with regard to the clearances of goods effected during the said year. Determine the duty payable in respect of the year 2010-11:

Value of domestic clearances of goods with own brand name `120 lakhs

Value of clearances of goods with the brand name of others (including `30 lakhs in respect of goods manufactured in a rural area)

`100 lakhs

Value of clearances for exports `50 lakhs

Value of clearances for captive consumption `40 lakhs

Value of clearances of exempted goods `20 lakhs

Show your workings with explanations where required (May 11)

Computation of excise duty payable by M/s. SSI & Co. during the year 2010-11:-

Turnover to be excluded:

Value of clearances for export `50 lakhs

Value of clearances for captive consumption `40 lakhs

Value of clearances of exempted goods `20 lakhs

Value of domestic clearance of goods with brand name of others (excluding goods manufactured in rural area) – see note below

`70 lakhs

Turnover to be included:

Value of domestic clearances with own brand name `120 lakhs

Value of clearances of goods with brand name of others manufactured in rural area `30 lakhs


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Total `150 lakhs

Computation of Tax liability

On 1st Clearance of `150 lakhs Nil

On clearances with brand name of others worth `70 lakh (excluding rural area clearances) – No SSI exemption available and fully taxable @ 12%

`8,40,000

Add: EC and SHEC @ 3% on `7,00,000 `25,200

Total Duty liability `8,65,200

Note: the clearances with the brand name of others which are ineligible for SSI exemption has to be excluded while determining the limit of `150 lakh. However, clearances with the brand name of others manufactured in rural area are eligible for SSI exemption and hence, such clearances are included while determining the limit of `150 lakh.

2. Exports under Excise – Rule 18 and Rule 19 of Central Excise

Rules, 2002

When the Inputs are used in the manufacture of finished goods which are then exported without payment of duty then the manufacturer can get refund of excise duty paid on the said Inputs under the following options. Option (i) Export finished goods in accordance with the procedure as laid down in Notification No. 21/2004 and claim rebate of excise duty paid on the inputs purchased and used in the manufacture of said exported goods Option (ii) As per Rule 5 of CENVAT credit Rules, the finished goods can be exported under Bond or Letter of undertaking and the excise duty paid on Inputs used in the manufacture of such exported finished goods is taken as CENVAT credit and can be utilised. If CENVAT credit cannot be utilised then REFUND available.

Many conditions are prescribed under option (i) like detailed procedure requiring verification of manufacturing

process, Input output ratio, wastages etc., by the excise officer, therefore manufacturers of exempted goods used to export finished goods under bond and claim refund of CENVAT credit under Rule 5 of CENVAT credit Rules. Notification No. 24/2010 has been issued to provide that goods which are exempt from payment of duty or chargeable to nil rate of duty shall not be allowed to be exported under bond. But this notification is not applicable to 100% EOU as they are required to export goods under bond in terms of customs and excise notifications.

Export procedures under excise from the view point of manufacturer (Exporter)

Rule 18

Rebate (Refund) of duty paid on finished goods

which are then exported

Rebate of duty paid on inputs used in manufacture of finished goods which are

then exported without payment of duty

Rule 19

Rule 19(1) - Export under bond without payment of duty

Rule 19(2) - Duty free purchase of inputs used for manufacture

of finished goods which are exported



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Export under a claim of rebate – Under supervision of superintendent or Inspector (Rule 18 read with Notification No. 19/2004)

Preparation of Invoice

The Invoice should be in Triplicate The assessable value should be mentioned in the Invoice The Invoice should be prepared which can be from same series from which goods for home

consumption are cleared. A separate series of Invoice can also be maintained for export

Preparation of ARE-1 form

ARE-1 form has to be prepared in quadruplicate and should be as follows ORIGINAL – White TRIPLICATE – Pink DUPLICATE – Buff QUADRUPLICATE – Green QUINTUPLICATE - Optional

(It is sufficient if there is colour band on the top or right hand corner as per aforesaid colour scheme)

It should be signed by manufacturer The Assessable value should be mentioned in the ARE-1 forms

Sealing of goods for export at factory

Export goods are examined before despatch by central excise officers Sealing normally done by Inspector, Superintendent under export schemes and AC/DC in

exceptional cases The sealing of each package or container shall be as specified by commissioner. The excise officer will make endorsement on all copies of ARE-1

The excise officer may send the triplicate copy either by post or by handing over to the

exporter in a tamper proof sealed cover.

Clearance of goods for export by customs officer (At the place of export)

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The goods after Sealing by excise officers are taken to customs port. When export goods are examined before despatch by excise officers, the goods are not

examined by customs officer at port or airport of shipment, unless seals are found to be tampered.

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper

proof sealed cover

Filing rebate claim

It must be filed within 1 year from the date of export. Application on letter head claiming rebate along with

a) Original ARE-1 b) Invoice c) Self attested copy of shipping bill d) Self attested copy of bill of lading e) Disclaimer certificate where claimant is other than exporter.

The market price of excisable goods at the time of exportation should not be less than the amount of rebate of duty claimed

Rebate claim below Rs. 500 is not acceptable.

Rebate will be granted

Note: Where the rebate is claimed by EDI system, the duplicate copy of ARE 1 is sent to the Excise Rebate Audit section at the place of export. The officer for rebate claim could be AC/DC or Maritime commissioner.

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Export under a claim of rebate – Under self sealing and self certification (Rule 18 read with Notification No. 19/2004)


The Invoice should be in TRIPLICATE The assessable value should be mentioned in the Invoice The Invoice should be prepared which can be from same series from which goods for home

consumption are cleared. A separate series of Invoice can also be maintained for export


ARE-1 form has to be prepared in quadruplicate and should be as follows ORIGINAL – White TRIPLICATE – Pink DUPLICATE – Buff QUADRUPLICATE – Green QUINTUPLICATE - Optional (It is sufficient if there is colour band on the top or right hand corner as per aforesaid

colour scheme) It should be signed by manufacturer The Assessable value should be mentioned in the ARE-1 forms


Any manufacturer – exporter can clear export consignment with self sealing and self certification.

Sealing Self sealing should be done under supervision of owner, working partner, managing director or company secretary or a person duly authorised.


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In case of self sealing, certain percentage of packages/ containers will be opened at customs port by customs officer.

The customs officer shall examine the goods and then export will be allowed

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper proof sealed cover

Filing rebate claim

Same as Previous


Rebate of duty on inputs used in manufacture of export goods (Rule 18 read with Notification No. 21/2004)

Filing declaration with AC/DC & verification of Input output ratio

A declaration of Finished goods proposed to be manufactured or processed Rate of duty applicable on such finished goods Manufacturing/ processing formula with reference to quantity or proportion in which

materials are actually used Tariff classification, Rate of duty paid or payable on the materials so used A write-up of manufacturing process, in case of new product or in case where the

manufacturer is not regularly manufacturing the export goods Note: If there is more than one export product, separate statement of Input-output ratios

may be furnished for each export product. The AC/DC shall verify the input-output ratio mentioned in the declaration and if necessary

may call for samples or inspect goods and if everything found in order, grant permission.

Preparation of an Invoice

Same as previous procedure


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Export is required to be made under form ARE-2

Filing rebate claim

Application on letter head claiming rebate along with a) Original ARE-2 b) Duplicate copy of Invoice c) Self attested copy of shipping bill d) Self attested copy of bill of lading

The market price of excisable goods at the time of exportation should not be less than the amount of rebate of duty claimed

Rebate claim below Rs. 500 is not acceptable.


FAQ’s on Rule 18 (Rebate of duty):

1. What are the other conditions and limitations subject to which rebate granted in respect of duty paid on

exported finished goods? The conditions & limitations are specified in Notification no. 19/2004

The excisable goods shall be exported after payment of duty, directly from a factory or warehouse except as otherwise permitted by CBE&C by a special or general order

The excisable goods shall be exported within 6 months from the date of clearance for export from factory or warehouse or within such extended period as the commissioner may allow

In case of export of goods which are manufactured by a manufacturer availing area based exemption notification, no rebate shall be admissible.

2. Can a manufacturer claim rebate both in respect of outputs as well as Inputs as per Rule 18?

No, Export rebate is allowable only on duty paid on one of the items i.e. either on excisable goods or on material used in manufacture/ processing of such goods. Hence assessee is not entitled to claim rebate on both items simultaneously – Grasim Industries Ltd. V. UOI

3. If goods are to be exported by sea or air, the said goods have to be taken from factory or warehouse to

port or airport for export. If goods are in such a kind that it can be exported by post also, what is the procedure?

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After the goods are sealed, the exporter shall send duplicate copy of ARE-1 with sufficient postage stamps to cover postal charges, at the time of booking the consignment. The duplicate copy will be endorsed and sent by customs officer at the post office, after the post parcel is exported.

4. With whom rebate is filed?

(i) AC/DC of excise having jurisdiction over the factory of manufacture or warehouse (ii) Maritime commissioner of central excise

5. How the rebate shall be sanctioned? The said AC/DC or maritime commissioner shall compare

If AC/DC or maritime commissioner is satisfied that the claim is in order, the rebate shall be sanctioned either in whole or in part.

6. What are the conditions and limitations subject to which rebate granted in respect of duty paid on

materials used in finished goods which are exported? The rebate can be claimed on export of all finished goods whether excisable or not. The rebate can be claimed even if the process does not amount to manufacture Rebate cannot be claimed if the export is through merchant exporter ‘Material’ means all raw materials, consumables, components, semi-finished goods, assemblies,

sub-assemblies, intermediate goods, accessories, parts and packing materials required for manufacture or processing of export goods

Rebate of duty paid on capital goods used in relation to manufacture of finished goods which are exported, is not available.

Rebate is not available if the export is under a claim of duty drawback

7. Can rebate under Rule 18 be claimed for export to any country? No, exports to Nepal and Bhutan do not qualify for export incentives as payment is received in Indian rupees.

8. When rebate procedure may be useful?

a) If assessee has balance of duty in CENVAT credit (capital goods) A/C. It will be advisable to pay duty and claim refund, as balance in such account is never refundable.

b) When duty paid goods are proposed to be exported c) Claiming rebate is much simpler and straight forward procedure than claiming refund of duty paid on

inputs under CENVAT procedure d) An SSI unit may pay excise duty and claim rebate, as getting refund of CENVAT credit on inputs is not an

easy procedure. Moreover, he is not entitled to get refund of duty paid on capital goods.

9. The goods must be exported within 6 months from the date of clearance as specified in Notification no. 19/2004. Can the rebate claim be denied on the ground that goods were not exported within 6 months? No, it was held that even if goods were not exported within 6 months or even within extended period, rebate can be granted, as there is no loss of revenue – CCE V. Birla tyres, same view in chamunda pharma machinery V. CCE

10. What are the duties eligible for rebate?

Following duties are eligible for rebate

ORIGINAL ARE-1

DUPLICATE ARE-1

TRIPLICATE ARE-1

Copy received from exporter

Copy received from customs officer

Copy received from excise officer



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a) Basic duty paid b) Special excise duty c) Additional excise duty d) NCCD e) Education cess f) SAH education cess

Export without payment of duty by manufacturer – Exporter

Under supervision of superintendent or Inspector (Rule 19 read with Notification No. 42/2001)


Same as previous The top of the Invoice should be prominently ,Marked as “FOR EXPORT WITHOUT

PAYMENT OF DUTY”

Filing Letter of Undertaking (LUT)

Furnish a letter of undertaking (LUT) in form UT-1 to the AC/DC of excise. The LUT once given is valid for 12 calendar months It is not necessary to submit LUT for each consignment



colour scheme) It should be signed by manufacturer The Assessable value should be mentioned in the ARE-1 forms



exceptional cases The sealing of each package or container shall be as specified by commissioner. The excise officer shall make endorsements on all copies of ARE-1 The duty payable shall be determined and recorded in DSA as ‘Duty forgone on account of

export under Rule 19’

The excise officer may send the triplicate copy either by post or by handing over to the exporter in a tamper proof sealed cover.

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Discharge of Letter of undertaking (LUT)

A statement in prescribed form along with original ARE-1 as proof of export A suitable entry in records has to be made

If everything found in order, LUT will be discharged

Export without payment of duty by manufacturer – Exporter

Under self sealing and self certification (Rule 19 read with Notification No. 42/2001)



Filing Letter of Undertaking (LUT)

Furnish a letter of undertaking (LUT) in form UT-1 to the AC/DC of excise. The LUT once given is valid for 12 calendar months It is not necessary to submit LUT for each consignment




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proof sealed cover

Discharge of Letter of undertaking (LUT)

A statement in prescribed form along with original ARE-1 as proof of export A suitable entry in records has to be made

If everything found in order, LUT will be discharged

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Export without payment of duty by merchant exporter Under supervision of superintendent or Inspector

(Rule 19 read with Notification No. 42/2001) “Merchant exporter” is a person who procures the goods directly from the factory or warehouse and exports the same. In other words he is a trader in goods.



consumption are cleared. A separate series of Invoice can also be maintained for export The top of the Invoice should be prominently marked as “FOR EXPORT WITHOUT

PAYMENT OF DUTY”

Execution of Bond

A general bond B-1 has to be executed with maritime commissioner or AC/DC The bond can be surety or security bond He has to obtain CT-1 certificates from excise office (It can be obtained in a lot of 25) Depending on the track record, it will be given for a period of 1 to 3 months A ‘Running Bond Account’ shall be maintained and will be credited by bond amount when

bond is executed.

Obtain goods without payment of duty

CT-1 certificate has to be sent to manufacturer from whom goods are to be procured for export without payment of duty

Goods will be cleared by manufacturer on the strength of this certificate The estimated amount of duty liability should be debited in CT-1



colour scheme) It should be signed by manufacturer as well as merchant exporter The Assessable value should be mentioned in the ARE-1 forms


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exceptional cases The sealing of each package or container shall be as specified by commissioner. The excise officer will make endorsement on all copies of ARE-1

The excise officer may send the triplicate copy either by post or by handing over to

the exporter in a tamper proof sealed cover. At the time of clearance, the running bond account should be debited with duty

payable on export





proof sealed cover

Release of Bond and taking self credit in RBA

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A statement in prescribed form along with Original ARE-1 Self attested copy of bill of lading Self attested copy of shipping bill

Has to be submitted to the officer to whom bond was executed

If everything found in order, the Bond sanctioning authority shall discharge the bond. The merchant exporter can take self credit in Running Bond Account

Export without payment of duty by merchant exporter

Under self sealing and self certification (Rule 19 read with Notification No. 42/2001)



consumption are cleared. A separate series of Invoice can also be maintained for export The top of the Invoice should be prominently marked as “FOR EXPORT WITHOUT

PAYMENT OF DUTY”

Execution of Bond

A general bond B-1 has to be executed with maritime commissioner or AC/DC The bond can be surety or security bond He has to obtain CT-1 certificates from excise office (It can be obtained in a lot of 25) Depending on the track record, it will be given for a period of 1 to 3 months A ‘Running Bond Account’ shall be maintained and will be credited by bond amount when

bond is executed.

Obtain goods without payment of duty

CT-1 certificate has to be sent to manufacturer from whom goods are to be procured for export without payment of duty

Goods will be cleared by manufacturer on the strength of this certificate The estimated amount of duty liability should be debited in CT-1


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At the time of clearance, the running Bond account should be debited with duty payable on export.





Release of Bond and taking self credit in RBA

A statement in prescribed form along with Original ARE-1 Self attested copy of bill of lading Self attested copy of shipping bill

Has to be submitted to the officer to whom bond was executed

If everything found in order, the Bond sanctioning authority shall discharge the bond.

The merchant exporter can take self credit in Running Bond Account

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Export of Goods without payment of duty to Bhutan Notification No. 45/2001

Till 1/3/2012, special procedure was prescribed for exports to Nepal and Bhutan. Now, w.e.f. 1/3/2012, export to Nepal is like export to any other country (except Bhutan). Such export can be without payment of duty or under claim of rebate of duty. There is no requirement that the payment should be received in free foreign exchange. Hence, such export is possible even if payment is received in Indian rupees of foreign currency. CBEC vide circular No. 961/04/2012 has confirmed that rebate of central excise duty will be admissible even if payment is received in Indian currency or foreign currency. India has rupee trade with Bhutan and hence export incentives are not available if goods are exported to Bhutan. The clearance should be on normal invoice on payment of duty. Invoice should mention ‘For export to Bhutan’ and make declaration in prescribed form. Extra copy of invoice should be made, which is to be used at India-Bhutan border. The detailed procedure is as follows:

1. A general Bond B1 should be executed with Jurisdictional AC/DC covering the duty amount chargeable on

the goods for the purpose of export. 2. The exporter shall raise 6 copies of Invoice (ORIGINAL, DUPLICATE, TRIPLICATE, QUADRUPLICATE,

QUINTUPLICATE and SIXTUPLICATE) and present them along with the goods to the jurisdictional superintendent.

3. The superintendent shall verify the goods and will also seal the consignment and certify on the copies of invoices regarding his examination. He will return original copy to the assessee and will give DUPLICATE, TRIPLICATE & QUADRUPLICATE in a sealed cover.

4. The superintendent shall forward QUINTUPLICATE copy to the AC/DC and will retain SIXTUPLICATE copy for record purpose.

5. At the Land customs station (LCS) the goods along with the sealed cover containing the DUPLICATE, TRIPLICATE & QUADRUPLICATE is given to the officer in charge.

6. The OIC shall satisfy himself as to the identity of goods and check the documents and certify on the copies of Invoice and allow passage to Bhutan after making entries in his register and assigning running serial number to the consignment. The ORIGINAL copy of the invoice is returned to the exporter with the QUADRUPLICATE copy of Invoice.



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7. The OIC of LCS in India will send directly the DUPLICATE and TRIPLICATE copy the OIC of the LCS of Bhutan. 8. Once the goods reach Bhutan, the ORIGINAL copy is to be handed over to such officer who would then

examine the documents and the goods and hand over the DUPLICATE copy to the OIC of the Indian LCS. 9. The exporter shall submit the QUADRUPLICATE copy endorsed by the OIC of the Indian LCS to the AC/DC

who shall then verify the same with the QUINTUPLICATE copy received earlier from the Jurisdictional Superintendent who had verified consignment at the time of clearance from factory/warehouse and make entries in his bond register giving provisional credit and provisionally discharging the bond.

10. The OIC of the Indian LCS will then enter details as to return of the DUPLICATE copy of the invoice in his register and forward the same to the central excise officer who has jurisdiction over the exporter’s factory/ warehouse.

11. Once the DUPLICATE copy is received from the OIC of Indian LCS proving the fact of export, the credit in bond account is finalized and bond is discharged.

Discharge of Bond:

a) The exporter shall, within 6 months from the date of removal of goods, submit the quadruplicate copy of invoice as endorsed by the customs officer-in-charge of the land customs station in India along with the bank certificate evidencing receipt of payment in freely convertible currency to the jurisdictional central excise officer.

b) The jurisdictional central excise officer shall then verify the particulars with the quintuplicate copy received by him and make suitable entries in the Bond Account of the exporter. On receipt of the duplicate copy from the customs officer-in-charge of the land customs station in India, he shall verify the particulars of the same with the quadruplicate copy and makes suitable entries in the Bond Account of the exporter discharging the obligation under the bond.

c) In case the exporter fails to export the goods within 6 months from the date of removal from the factory or warehouse or any other approved premises, or in case of any other shortcomings, the exporter shall be liable to pay the full duty on such consignment along with interest @ 18% p.a as per sec. 11AA.

3. Clearance of goods to an Export Oriented Unit (EOU) – Notification No. 22/2003

The clearances made to an EOU will be exempt from duties of excise. The exemption is normally available on the strength of a certificate (i.e. CT-3) given by the EOU The exemption is based on a condition that the goods purchased are used by such unit for the purpose of

manufacturing goods which would ultimately be exported outside the country. The CENVAT credit benefit on the inputs used for manufacture and clearances to 100% EOU would be

available to the manufacturer making such clearances. Procedure to be followed by manufacturer for clearance to 100% EOU and procedure to be followed by EOU in terms of the Notification:


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Conditions: The goods in question to be procured without payment of duty are to be the ones covered in the

notification. The goods are to be generally received for manufacturing/production of articles for export or for job work

for export of goods or services The duties that are exempt on such procurements are the Basic Excise duty and additional excise duty in

case of goods of special importance. The 100% EOU is to bring goods directly from factory of manufacture or warehouse. Once the goods are received, the usage should be for the purposes indicated above. The manufacturer supplying goods to such 100% EOU should follow proper invoicing methods as laid down

in Rule 11 of CE Rules, 2002 and warehousing procedure as laid down in Rule 20 of CE Rules, 2002.

4. Clearance of Excisable goods from a DTA unit to Special Economic Zone (SEZ) A unit in DTA can clear excisable goods without payment of duty to SEZ CENVAT credit on Inputs and Input services used in manufacture of goods cleared to SEZ is available. The procurement of goods by such SEZ from DTA is governed under SEZ Rules, 2006. The DTA unit can clear the excisable goods without payment of duty under a bond by raising ARE-1 to a unit

in SEZ or Goods can be cleared on payment of duty where a rebate claim is to be filed.

PROCEDURE FOR CLEARENCE OF EXCISABLE GOODS WITHOUT PAYMENT OF DUTY TO A UNIT/DEVELOPER IN SEZ

PROCEDURE FOR CLEARENCE FROM WAREHOUSE TO SEZ UNIT/DEVELOPER.

1. The DTA unit shall raise a bond as in case of exports and raise an ARE 1 form having a preprinted serial number, in quintuplicate along with invoice for clearance. The procedure laid down under notification 19/2004 for export under claim of rebate can be followed with regard to distribution of ARE 1 copies.

1. The warehouse owner or the person authorized shall coordinate with the SEZ unit/ developer regarding the raising of a bill of entry and the submission of the same to the customs officer in charge of the warehouse.

2. The DTA unit shall coordinate with the SEZ unit/ developer for the purpose of raising a bill of export in addition to ARE 1 where the clearance is under claim for export entitlements.

2. The ware house owner shall have to raise an ex bond shipping bill for the purpose of clearing of the goods to the said SEZ unit/developer.

3. The DTA unit shall ensure that within 45 days from the date of clearance a copy of ARE 1 form and bill of export endorsed by the authorized officer of the SEZ for receipt of goods into the SEZ is received or submitted to the Superintendent.

3. The goods can be cleared without payment of duty.

4. In case the superintendent of DTA unit does not receive the proof of export within 45 days from the date of removal of goods from the factory or warehouse, he shall raise a demand of duty against the DTA unit

4. The re warehousing certificate for receipt of the goods at the SEZ would have to be received within 45 days from the clearance from the warehouse by way of endorsement on the ex bond shipping bill by the authorized officer of the SEZ.

5. The DTA unit shall ensure that where export entitlements are to be claimed, the receipt for supply is from the foreign currency account of the SEZ unit/developer.

6. Where any export entitlement in the nature of duty drawback or DEPB is to be claimed by the DTA unit, the same can be claimed once a disclaimer is received from the SEZ unit/ developer as to non availement of such benefits at their end.

5. Notification No. 1/2011 – CE

As per this Notification about 130 items are chargeable to Excise duty @ 1% ad valorem. The limitations as per the CENVAT credit rules are as follows:



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In respect of manufacture of these goods, CENVAT credit of duty paid on Inputs and Input services is not available.

As per Rule 6(4) no credit can be availed on capital goods used exclusively in manufacture of goods under Notification No. 1/2011 – Circular No. 943/04/2011

The buyer of such goods (for which the benefit of exemption under Notification No. 1/2011 is availed), cannot avail the CENVAT credit w.r.to duty paid by him. – Notification No. 3/2011

CENVAT credit cannot be utilized for payment of such duty on such goods (i.e. for payment of 1%, CENVAT credit cannot be used and should be paid by cash) – Notification No. 3/2011

6. Removal of goods at concessional rate of duty for manufacture of excisable goods:

‘Subject goods’ refers to those excisable goods, which are exempted from payment of duty under a notification issued under section 5A of the Central Excise Act, 1944 provided such goods are used for the purpose specified in the notification.

A provision for exemption, concession or exception, as the case may be, has to be construed strictly and if the exemption is available only on complying certain conditions, the conditions have to complied with. The provision provides that a manufacturer, who intends to receive subject goods for specified use at concessional rate of duty, shall make an application in quadruplicate to jurisdictional AC/DC. The buyer-manufacturer had not submitted any such application. As the condition of exemption notification was not complied with, the assessee was entitled to exemption – Indian oil corporation Ltd. V. CCE (2012) (SC)

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•Manufacturer who intends to receive "subject goods" for specified use at concessional rate has to make an application in quadruplicate to AC/DC of excise. [seperate application is to be made in respect of each supplier of goods]

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•Such manufacturer should also execute a bond to cover the duty liability estimated to be involved at a given point of time.

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•After such excecution of such bond the AC/DC of excise shall counter sign the copies of application, which shall then be distributed as follows:

•One copy to range superintendent of the manufacturer of subject goods

•Two copies to the manufacturer receiving subject goods (out of these, one copy shall be forwarded to the manufacturer of subject goods)

•One copy shall be retained by AC/DC of CE for his own records.

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•The manufacturer of subject goods shall on the basis of application forwarded to him, avail the benefit of the exemption notification. He shall then remove the goods at concessinal rate of duty and shall record on the applicatoin the removal details such as number and date of invoice, description, quantity and value of goods.

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The manufacturer receiving subject goods has to give information to the concerned authorities and has to maintain proper records relating to such goods and submit a quarterly return to the AC/DC by 10th of the following month.


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7. Exemptions to new units located in backward area:

1. Why this Exemption? In order to encourage development of backward areas

2. In which area the units should be located to avail Exemption?

(a) North Eastern region and Sikkim (b) Kutch District and Gujarat (c) State of Jammu and Kashmir (d) Himachal Pradesh (e) Uttaranchal

3. What is the amount of Exemption?

4. Whether Full refund is available? Refund of duty will be only to the extent of duty payable on value addition. The rate of Value addition has

been specified in respect of various products.

Chapter of the First schedule to CETA

Description of goods Value addition rate (%)

29 - All goods 29%

30 - All goods 56%

33 - All goods 56%

34 - All goods 38%

38 - All goods 34%

39 - All goods 26%

40 - Tyres, tubes and flaps 41%

72 or 73 - All goods 39%

74 - All goods 15%

76 - All goods 36%

85 Electric motors and generators, electric generating sets and part thereof

31%

Any chapter Goods other than those menctioned above 36%

Example: The duty payable by asseessee is Rs. 100 lakhs and CENVAT credit is 45 lakhs. Duty paid through PLA is 55 lakhs. If the goods are covered under chapter 40, the Refund shall be 100 lakhs X 41% = 41 lakhs instead of 55 lakhs.

Exemption for

Units located in Himachal Pradesh and Uttaranchal

Direct Exemption from Excise duty

Units located in North-East region, J&K,Sikkim and Kutch

Duty is payable through PLA and refund or self credit available during

the next month



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Procedures under Excise

The following flow chart explains the basic procedures to be followed:

Manufacturer, who intends to start business, should “Register”

Maintain sufficient “Records” as prescribed

Manufacture the goods within factory

Preparation of “Invoice” while clearing goods

“Assessment” of duty payable

“Payment of duty” on monthly basis

Submission of “Returns” on periodic basis

Procedures under Excise

Basic/Core Procedures

1. Registration of Factory /Ware house

2. Storage and Clearence of Final Products

3. Clearence of goods from factory

4. Payment of duty

5. Returns

6. Assessment

Non Core Procedures

1. Export without payment of duty (Rule 18)

2. Export under claim of rebate (Rule 19)

3. Receipt of goods for repairs/ reconditioning (Rule16)

4. Payment of duty under compound levy scheme

5. Warehousing of goods

6. Appeals and settlement

If it is cigarettes If it is other goods

System of ‘Physical control’ is applicable, wherein the goods has to be removed under an invoice to be assessed and counter signed by Excise officer

‘Self removal procedure’ is applicable, where manufacturer can clear the goods without supervision of Excise officer


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Organization hierarchy of Excise Department Ministry of Finance

Department of Revenue

Central Board of Excise and Customs (CBE&C)

Central Excise Zones headed by Chief Commissioners

Central excise commisionerates headed by commissioners Commissioner (Appeals)

Additional commissioner of Central Excise (for each commissionerate)

Joint commissioner of Central Excise (for each commissionerate)

Deputy/Assistant commissioner of Central Excise (for each division)

Superintendent (for each Range) – He is the lowest rank of gazetted officer

Inspector (Not a gazetted officer)

The responsibility of administration and collection of Excise duty is vested with CBE&C. It administers service tax matters through central excise authorities from Zone – Commisionerate – Division – Range.

Registration [Sec. 6 of Central Excise Act along with Rule 9 of Central Excise rules]

Who?

Every person who produces, manufactures, carries on trade, holds private store room or warehouse or otherwise uses excisable goods

EOU units procuring goods from DTA or supplying goods to DTA are required to be registered

What? Premises – Factory/Warehouse

How? Application for registration in FORM A-1 along with

Self attested copy of PAN

If copy of PAN is not available, copy of application made for PAN

The boundary of registered premises

Name should be the name and style in which applicant is likely to carry on business

In case of Proprietary firm/HUF – Name of proprietor/HUF In case of partnership firm – Name of all partners In case of company – Name of CEO, Chairman, MD, and key

directors In case of society or other business – Names of Key personnel

engaged in the management

Duly signed by In case of partnership – Working or managing partner In case of corporate assessee – Director, Secretary or other

person who is holding power of attorney

When? Within 30 days from the date of commencement of the business.

Procedure Contained in?

CBE&C Circular No. 662/53/2002 and Notification No. 35/2001

With Whom?

Jurisdictional AC/DC in duplicate In case of EOU located in port towns – to AC/DC of customs, who is administrative in-charge of EOU.



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Application scrutinized by INSPECTOR in the office of AC/DC If it is in order, then fed into SACER (System for Allotment of Central excise Registration) A Certificate of Registration will be generated which contains 15 digit code.

First 10 digits – PAN Next 2 digits – Word “XM” in case of manufacturer, “XD” in case dealer Next 3 digits – character numeric code (001,002,003 etc.).

Delivered to assessee within 30 minutes. If not possible to generate acknowledgement to that effect will be

given on the spot. Later, RC shall be either sent by post or handed over personally to assessee on the next working day.

Original copy will be retained by divisional office and duplicate copy will be sent to Range superintendent for

Post facto verification.

The Superintendent and inspector shall verify the declared addressand premises within 5 working days

If found in order, the fact will be certified on the duplicate copyand sent to divisional office for record. Major variation like fake address, non existence of factory etc,.

Shall be intimated to AC/DC for revoking the registration, after giving opportunity of hearing

FAQ’s on registration:

1. Who are exempt from registration? Notification No. 36/2001 grants exemption from registration.

1. Persons who manufacture excisable goods which are unconditionally exempt from excise duty 2. SSI units availing exemption based on value of clearance, whose turnover is less than SSI exemption limit.

A declaration in prescribed form has to be submitted to AC/DC when its turnover is more than ‘specified turnover ‘of Rs. 90 lakhs. Such declaration has to be filed only once and not every year.

3. Person getting goods manufactured from others on his own account, he is the manufacturer and has to obtain registration. However he can be exempted from registration if,

(a) He authorizes actual manufacturer to comply with all excise procedural formalities (b) Agrees to furnish information regarding selling price for determination of assessable value.

4. Persons manufacturing excisable goods under customs warehousing procedures, if all their products are exported

5. Person who carries on wholesale trade or dealers in excisable goods who does not issue CENVATable invoice i.e. who is not a registered dealer

6. Users of excisable goods 7. A unit in SEZ 8. EOU having no inter-linkage with domestic economy through sale or purchase of goods 2. A manufacturer carries on the manufacturing activity in more than one premise. Is single registration

sufficient? The registration is of not manufacturer or business, it is registration of factory/ premises. Therefore,

separate registration is required for each separate premise.

3. The factory of a manufacturer is separated by railway line for convenience of transportation. Is the manufacturer required to make two separate registrations?

Often a factory has different portions located in adjoining premises, or premises separated by road, railway line or canal. In such case, commissioner can allow single registration and other conditions and limitations may be specified.

4. When the amendment to registration certificate should be made and what is the procedure? The registration certificate indicates

Name of assessee


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Constitution

Type of business (manufacturer or dealer or warehouse or depot or EOU unit) and

Address If there is any change in the above details, application in Form A-1 should be submitted. Important Points: 1. Form: A-1 is the general form for registration as manufacturer/ Dealer/ Producer/ Warehouse.

Form: A-2 for power loom weavers, hand processors, dealers of yarn and fabrics and manufacturers of readymade garments

Form: A-3 for manufacturers of hand rolled cheroots of tobacco

2. Surrender of registration certificate – Registered person has to apply for de-registration if he ceases to carry on operation for which he is registered in form Annexure III to Notification No. 35/2001 and should surrender original RC.

He should also declare that no government dues are against him and no demand is pending against him.

3. Revocation or suspension of registration – If there is any breach of any condition of the Act and Rules or if

the holder or person in his employment has been convicted of an offence, AC/DC will revoke or suspend the registration certificate.

4. Penalty for Non registration – Duty on contravening goods or Rs. 10,000 whichever is higher. Contravening

goods can be confiscated – Rule 25(1) of CE Rules. According to Sec. 9 Imprisonment upto 7 years will be imposed.

5. Meaning of Factory:

FAQ’s on definition of ‘Factory’:

1. A manufacturer due to meet the demand, has started manufacturing the goods in his house in an emergency situation. Does his house falls under the definition of ‘Factory”?

The term ordinarily refers to regularity and continuity. If some manufacture is carried out in emergency at a place, it will not be ‘factory’. Thus even if manufacturing is carried out in a house, it will not be treated as ‘factory’. The guiding factor is “Regularity and continuity”.

2. Whether open land is included in the phrase ‘Premises’?

‘Premises’ is not restricted to buildings, but it covers open land also.

3. A mine is situated at a distance from factory and it is connected with a ropeway. Should the mine be considered as part of factory?

When no manufacturing process is carried on in the mine, Mine situated at a distance cannot be considered as part of factory merely because it is connected with a ropeway – CCE V. JK Udaipur udyog Ltd.

Factory - Sec. 2(e)

Means

Any Premises

Includes

Precincts thereof

Wherein or in any part of which any manufacturing process connected with production of these goods

is being carried on or is ordinarily carried on.

wherein or in any part of which, excisable goods other than salt

are manufactured



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Exemption from Registration in case of mines engaged in production/manufacture of specified goods – Notification No. 10/2011

Every mine engaged in the production/manufacture of following goods is exempt from obtaining registration where the producer/manufacturer of such goods has a centralized billing/accounting system in respect of such goods produced by different mines and opts for registering only the premises or office from where such centralized billing or accounting is done:

Coal, briquettes, Ovoids and similar solid fuels manufactured from coal [Chapter heading 2701]

Lignite, whether or not agglomerated, excluding jet [Chapter heading 2702]

Peat (including peat litter), whether or not agglomerated [Chapter heading 2703]

Coke and semi-coke of coal, of lignite or of peat, whether or not agglomerated; retort carbon [Chapter heading 2704]

Tar distilled from coal, from lignite or from peat and other mineral tars, whether or not dehydrated or partially distilled, including reconstituted tars [Chapter heading 2706]

Application for registration by LTU – Notification No. 17/2011

Where a new factory or service provider, input credit distributor or first or second stage dealer becomes liable to be registered, after opting as large taxpayer, the application for such new registration ought to be made before the AC/DC of Central Excise, Large Taxpayer Unit in case of central excise and the Superintendent, Large Taxpayer Unit, in case of registration under the service tax Exemption to other units of manufacturers of recorded smart cards when premises from where centralised billing done is registered – Notification No. 14/2011

For a manufacturer engaged in manufacture of recorded smart cards falling under subheading 8523 is exempt from registration with respect to the manufacturing units, provided the premises where centralized billing or accounting to be done is registered.

Storage and accounting the Final Products:

Goods can be removed only on payment of duty. But can be stored without payment of duty i.e. deferring the payment of duty. There is no time limit within which goods must be removed from the place of manufacture or production. But the following rules have to be followed.

Rule 10(1) – A Daily Stock Account (DSA) of goods manufactured or produced on daily basis has to be

maintained which is as follows.

Daily Stock Account (DSA)

Opening Balance

(i)

Quantity Produced or manufactured

(ii)

Closing Balance (iii)

Quantity Removed (i)+(ii)-(iii)

Assessable Value of goods Removed

Amount of duty payable

Duty paid

Description

Of goods

Note: 1. The first page and last page of such account book shall be duly authenticated by the producer or

manufacturer or his authorised agent. All such records shall be preserved for 5 years.

Duly signed by manufacturer or producer or his agent


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2. If the manufacturer manufactures several grades/ qualities of a particular product, separate DSA of each grade/ quality is necessary.

3. The entry in DSA should be made only after goods are fully manufactured, duly tested and packed by assessee.

Rule 4(4) – Goods can be stored outside the premises of factory without payment of duty on the prior approval

of commissioner. While giving such permission commissioner may specify the conditions. Rule 25(1) – Non accounting of excisable goods manufactured, produced or stored is an offence. Penalty upto

duty payable on goods can be imposed and offending goods can be confiscated.

Invoice [Rule 11 of Central Excise Rules]:

Invoice should be given in Triplicate and should be marked as follows

Original Invoice – ‘ORIGINAL FOR BUYER’ Duplicate Invoice – ‘DUPLICATE FOR TRANSPORTER’ Triplicate Invoice – ‘TRIPLICATE FOR ASSESSEE’ Any additional invoice can be given and which should be marked ‘NOT FOR CENVAT PURPOSES’.

Before starting the new invoice book, the serial numbers has to be informed to the Range superintendent. Any cancelled invoice has to be preserved for record purposes. If the assessee has to pay differential duty then a supplementary invoice to that effect has to be given. In case of cigarettes, invoice shall be counter-signed by Inspector. Assessee has to pay differential duty by preparing supplementary invoice in the following cases:

In case of provisional assessment Assessee got price escalation from buyer Duty was short paid through mistake

Serial No: ___________ INVIOICE/BILL Excise Reg. No: _________

Name and Address of

Manufacturer Date: __________

Address of Jurisdictional Central Excise Division

Name of Consignee : ________________________________

Address : _____________________________

Registration No : ________________________________

Description of Goods Classification (Head) Quantity Value Rate of duty

Time and Date of Removal: ___________________________

Mode of Transport: ______________________ Vehicle No: _________________

Excise Duty Payable: ____________________

Sd/-

(Service provider or person

authorized by him)



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Buyer can avail CENVAT credit on the basis of such supplementary invoice, except when such differential duty payment was on account of fraud, suppression of facts, collusion or willful misstatement. It has been clarified that if differential duty is paid later, interest u/s 11AB will be payable for differential amount paid later.

Payment of Duty [Rule 8 of Central Excise Rules]:

Note: For the Month of March and Quarter ending March the due date shall be MARCH 31st

It is advisable for the Assessee to first utilise available CENVAT credit and then pay balance in cash

Even if manufacturer pays duty on monthly basis, the buyer of goods is entitled to get CENVAT credit as

soon as goods are received in the factory – Rule 8(2)

In case of EOU units, provision of payment on monthly basis is applicable – Rule 17(1)

Duty, interest, penalty should be rounded off to nearest Rupee – Sec. 37D

If duty is not paid fully on or before duty, assessee is liable to pay the outstanding amount along with

Interest on the amount due [Rule 8(3)]. The rate of interest is specified under section 11AB. If part of duty is

paid, the provision of interest will apply to that part of duty which is not paid.

If interest is paid under rule 8(3) for delayed payment of duty, penalty is not imposable – CCE V. Nirlon Ltd.

How tax should be paid

By PLA through GAR-7 challan

With the bank approved by

CBE&C

By Cheque

It is sufficient if cheque is

deposited with bank on or before

due date.

By CENVAT credit Account

Electronically through internet

banking

Who has paid Excise duty of 10 lakhs or above in

preceding financial year or has already paid 10 lakhs in

current financial year. (Either in cash or by utilizing cenvat

credit or both)

When tax should be paid

Normal Assessee

Normal Payment


month

E - Payment


month

SSI Units

Normal Payment


quarter

E - Payment


quarter


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If duty and interest is not paid within 30 days after due date, assessee will forfeit the facility to pay duty in

monthly instalments. He will have to pay duty through PLA before clearance of goods. He cannot utilise

CENVAT credit for payment of duty during that period. This forfeiture of facility is automatic and

mandatory. Any order from AC/DC of Central Excise is not required. The forfeiture of facility will continue

till such date on which all dues including interest are paid.

Form and maintenance of Personal Ledger Account (PLA):

It should be maintained in TRIPLICATE. Dr. Personal Ledger Account Cr.

To Duty payable By GAR-7 Challan

(For the amount of duty paid through PLA) (For Depositing the amount

Of duty in bank through challan)

Duty is payable in authorised bank by way of GAR-7 challan, where bank is having ‘EASIEST’ facility PLA contains following details

(a) Serial No. and date (b) Details of credit like basic duty, special duty, additional duty etc. (c) Details of debit and (d) Balance

PLA can be used only for payment of excise duty. Other payments like rent, penalty, fine etc. Should be paid directly through GAR-7 challan.

Returns under Excise (Rule 12 of Central Excise Rules):

Form of Return Description Who is required to file Time limit

ER – 1 Monthly return by large units All Manufacturers except SSI

10th of the following month

ER – 2 Return by EOU All EOU units 10th of the following month

ER – 3 Quarterly return by SSI Units availing SSI exemption

20th of the month following the quarter

ER – 4 Annual Financial Information Statement

Assesses paying duty of Rs. 1 crore or more through PLA

30th November every year for the previous year

ER – 7 Annual Installed capacity statement All assesses, except Manufacturers of biris and matches without aid of power and Manufacturers of reinforced cement concrete pipes.

30th April every year for the previous year

Form Specified in the Notification No. 8/2011

Quarterly retun of goods produced, removed and other particulars.

Assessee availing exemption under Notification No. 1/2011 and manufactures only those excisable goods specified in the notification.

Within 10 days from the end of the quarter.

(Some returns are covered under CENVAT credit rules – Refer)



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The return is basically ‘self assessment’ and the form of return contains self-assessment memorandum. The

return is required in quintuplicate. Assessee will have sixth copy as his record copy.

The return is acknowledged by superintendent of central excise and one copy duly acknowledged is

returned to assessee.

The return should be accompanied by

(a) Two copies of PLA

(b) Relevant GAR-7 challan evidencing payment of duty

A summary extract could be put at end of PLA extract indicating

(a) Opening balance after discharging duty liability of previous month

(b) Credits during the month

(c) Total duty discharged during the month

(d) Closing balance after discharging duty liability

Basic details required in the ER-1/ER-2/ER-3 return are –

(a) Period (month/quarter) for which return is submitted

(b) Name of assessee and registration number

(c) Details of goods manufactured, cleared and duty payable. This should be product-wise under 8 digit

Tariff Number

(d) Details of duty paid through CENVAT Credit and Account Current (i.e. PLA)

(e) Details of each type of CENVAT credit availed

(f) Details of other payments i.e. interest, arrears etc.

(g) Self Assessment memorandum.

The ER-4 requires information in respect of following –

(a) Details of Value of Inputs

(b) Details of major raw materials independently accounting for 10% or more of total value constituting

10% or more of total value of raw materials

(c) Details of Expenditure under specified heads

(d) Goods manufactured by assessee through job worker

(e) Details of sales of major finished goods which independently account for 10% or more of total value

of finished goods sold

(f) Details of other income

(g) Job work undertaken done for others.

Non submission of return on or before due date attracts penalty upto 10,000 – Rule 27.

No provision of revised return to manufacturer.

Assessment under Excise:

What is Assessment?

Assessment means determining the tax liability. It is of two types a) Self assessment b) Provisional assessment

What is self assessment?

The assessee himself has to determine classification and valuation of goods and pay duty accordingly.

But in case of cigarettes, the superintendent or inspector shall assess the duty payable

Assessment

Self-Assessment [Rule 6] Provisional Assessment [Rule 7]


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before removal of goods The return submitted by assessee has to be along with ‘Self Assessment Memorandum’,

in which assessee declared that a) The particulars in ER-1/ER-2/ER-3 are correctly stated b) Duty has been assessed as per the provisions of the Act.

What is provisional assessment?

When, a) Assessee is unable to determine the value of excisable goods on account of non

availability of any document or information or b) Assessee is unable to determine rate of duty applicable He will pay the duty on provisional basis and later on pay/receive the differential duty, if any

Procedure for Self assessment:

FAQ’s on scrutiny of returns and assessment:

1. What is scrutiny of return? To check whether the information contained in the return is complete, prima facie valid and internally consistent. Required action will be taken based on the scrutiny by superintendent, to safeguard the revenue. A detailed check list for the scrutiny has been given in Annexure-1 of the circular No. 818/15/2005.

2. Are all returns to be scrutinized?

Circular No. 818/15/2005, provided manner of scrutiny of ER-1/ER-3 returns.

3. Who will do scrutiny of returns? Range superintendent and will be assisted by Inspectors.

4. What is scrutiny of assessment?

After initial scrutiny of returns, 5% of returns will be selected for detailed scrutiny i.e. Scrutiny of assessment. This will be done on the basis of ‘Negative impact on revenue for the maximum number of parameters’.

Assessee shall submit return along with 'Self assessment memorandum'

Scrutiny of returns by 'Proper officer'

Scrutiny of assessment

(Some returns will be selected on minirisk parameter basis)

Every assessee shall make available to proper officer all documents and records for verification as and when required

If assessment is found to be in order

'Self assessment' is final

If the officers are of opinion that there is short payment, show cause notice cum demand will have to be issued.

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The modus operandi will be such that in annexure-2 of circular No. 818/15/2005, specifies 8 parameters. Units having maximum number of negative parameters showing abnormal trends will be selected for detailed scrutiny of assessment.

5. What is the time limit for completion of this scrutiny? Both scrutiny of returns and scrutiny of assessment should be completed within 3 months from the date of receipt of return.

Procedure for provisional assessment:

Assessee has to request for provisional assessment in writing and also giving reasons thereof to AC/DC

AC/DC shall specify the rate or value at which the duty will be paid on provisional basis

AC/DC may by order allow payment of duty on provisional basis

Assessee has to execute a bond for payment of differential duty

Within 6 months from the date of order of provisional assessment, AC/DC should pass order for final assessment

(The period can be extended by further 6 months by commissioner and further without any timelimit by cheif

commissioner)

Interest is payable, in case differential amount is payable by assessee

If excess amount was paid, it is refundable with interest. The refund is subject to provisions of unjust enrichment


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FAQ’s on provisional assessment:

1. Can department order for provisional assessment? If central excise officer finds that self assessment is not in order, he can as assessee to produce additional documents, records and other information and then issue demand notice.

If the above is not possible, Best judgement assessment is resorted. But the department cannot order provisional assessment.

2. If AC/DC is of the opinion that provisional assessment is not necessary. What is the guideline available? AC/DC may ask assessee to appear before him on the appointed day. After the hearing, he may order that provisional assessment is not necessary.

3. What is the value for which bond is executed? The difference has to be calculated on the basis of probable duty payable applying the highest rate/ value applicable to such goods for a period of 3 months.

4. The return should be usually accompanied with ‘self assessment memorandum’. What if, in case of provisional assessment? The monthly/ quarterly return and invoices should be marked as ‘PROVISIONALLY ASSESSED vide order No. ____ dated ____’. There is a declaration in ER-1/ER-2/ER-3 where assessee has to mention the goods under ‘Provisional assessment’.

5. AC/DC is required to pass order of final assessment within 6 months. If assessment cannot be finalised within 6 months, what is the remedy available? The cases must be submitted to commissioner with request letter of assessee, through AC/DC indicating reasons for non-finalisation and amount of differential duty for future clearances before the expiry of period of 6 months.

6. Explain the phrase ‘Refund subject to provision of unjust enrichment’? Refund will be granted to manufacturer if he has not passed on incidence of duty to another person.

7. What is the rate of interest payable in case of differential duty payable? Interest as specified in Sec. 11 AB (i.e. 18%) will be payable by assessee FROM – First day of the month succeeding the month for which such amount is determined. TILL – Date of payment of differential duty. Note: Interest is payable from first day of next month after clearance of goods, as the word used is ‘for’. Eg: If goods were cleared in July 2000, entire duty is paid in September 2001 and assessment is finalised in March 2007, interest will be payable from 1st august 2000 to September 2001.

8. What is the rate of interest receivable in case of refund of differential amount? The rate is as specified in Sec. 11 BB (i.e. @6%) will be receivable by assessee. FROM – First day of the month succeeding the month for which refund is determined TILL – The last date of refund. Note: The interest is payable by department not from the date of finalisation of provisional assessment, but from the month next to the month on which duty was provisionally paid.



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Goods brought for Repairs, remaking and reconditioning [Rule 16]:

The provisions as contained in Rule 16 are as follows: If the duty paid goods are brought for being re-made, refined, re-conditioned or for any other reason,

assessee should take CENVAT credit of duty paid as if such goods are received as inputs and utilize the credit accordingly.

The goods brought must themselves be reprocessed and then sent. If the goods brought are scrapped and fresh goods are sent, it is new manufacture. Fresh duty is payable and CENVAT credit of goods returned cannot be availed.

Mr. Mallya, a manufacturer of computer parts sold goods to Mr. Adithya and paid excise duty, cleared goods under an invoice

Mr. Adithya received the goods into his premises and availed CENVAT credit w.r.to excise duty paid on such goods

During material inspection by production department of Mr. Adithya, the goods are found to be substandard

The goods were returned to Mr. Mallya by Mr. Adithya and reversed the CENVAT credit so availed.

The goods were received in the factory of Mr. Mallya and he availed CENVAT credit (i.e. What he originally paid as excise duty)

The substandard goods received were scrapped and new goods were

supplied to Mr. Adithya

It is manufacture and duty shall be payable.

The CENVAT credit so availed must be reversed

Mr. Adithya can avail the Excise duty paid as

CENVAT credit.

The substandard goods were reprocessed and then sent

If the process carried out amounts to manufacture

Duty is payable as applicable on the date of removal and the CENVAT

credit can be utilised

Mr. Adithya can avail the Excise duty paid as CENVAT

credit

If the process carried out does not amount to

manufacture

The CENVAT credit so availed must be reversed

Mr. Adithya can avail the CENVAT credit so reversed

by Mr. Mallya


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If process carried out on the goods brought amounts to manufacture, assessee should pay duty at the rate applicable on the date of removal. Value shall be determined accordingly.

If the process does not amount to manufacture, an amount equal to CENVAT credit taken at the time of receipt of final product is payable. The buyer can avail CENVAT credit of this amount.

FAQ’s on Rule 16:

1. What are the illustrations of the phrase ‘Goods can be bought for any other reason’?

If goods are returned by buyer as they were in excess

If buyer refuses to accept the goods

2. What is the time limit for bringing the goods for repair? There is no time limit. Goods can be brought at anytime.

3. What are the documents on the basis of which CENVAT credit be availed by the assessee when goods are

brought?

If buyer sends the goods under his invoice, credit can be taken on the basis of that invoice

Credit can be taken even on the basis of own invoice which was raised when goods were originally cleared – Gujrat containers Ltd. V. CCE

4. After repairs and reconditioning should the goods be sent to buyer who returned the goods or can it be

sold to any other buyer? No. After repairs and reconditioning etc., goods can be sent to anyone. There is no requirement that goods must be sent only to the person from whom these were received.

5. What happens if procedure under Rule 16 is not followed?

Permission has to be obtained from commissioner for bringing the goods for repairs, reconditioning etc

Clearance of goods for carrying out tests or other process (Rule 16C):

The above is permissible only with specific permission of commissioner.

Special Points:

The above provision does not apply to prototype which is sent out for trial or development test. The other premises need not be registered If any scrap is generated during the process at the other premises, it should be either cleared on payment

of duty or brought back to premises of principal manufacturer. The value for payment of duty when goods are cleared from other premises will be the price at which

principal manufacture sells the goods to final customer – Circular No. 844/2/2207.

Factory/ premises of manufacturer

Other Premises

Goods cleared for tests or other process not amounting to manufacture

Brought back to factory without payment of duty

Removal on payment of duty

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Jobwork in jewellery (Rule 12AA):

Rule 12AA provides that any person who is not an EOU or an SEZ Unit, who gets the following goods manufactured on job work basis, should register, maintain accounts and pay duty as if he is the assessee.

Goods Covered under this rule: Article of jewellery of precious metals falling under heading 7113 Articles of goldsmiths’ or silversmiths’ wares of precious metals falling under heading 7114.

Always the person getting the goods manufactured (i.e. merchant manufacturer) should pay the duty and cannot authorize job worker to register and pay duty. – Notification 8/2012

Procedure and facilities for Large tax payer Unit (Rule 12BB):

1. Removal of Goods by LTU:

Goods Excisable goods Inputs/ Capital Goods removed as such

Rule applicable Rule 12BB of CER, 2002 Rule 12A of CENVAT Credit Rules.

Situation Removal without payment of duty

Removal of inputs/ capital goods, on which

credit has been without reversal of credit.

2. Conditions: a) Removal to: Goods can be re moved from one premise of the LTU to his another premise. b) Removal from recipient premise:

Manufacture: Goods are manufactured / produced using the above goods (Inputs, Imports) etc., Removal: Such manufactured goods are removed for

Home consumption, by payment of appropriate duties.

Exported out of India under a Bond or Letter of undertaking. Time Limit: Manufacturer and removal should be done within 6 months from the date of receipt of

the Recipient premise. 3. Transfer Challan:

a. Challans should be serially numbered. b. Contents:

Registration Number, Name and Address of the LTP. Description, Classification, Time and Date of Removal. Mode of transport and Vehicle Registration Number, Quantity of the Goods, and Registration Number and Name of the Consignee.

4. Other conditions:

Particulars Intermediate Inputs Capital Goods

Situation Used in manufacture of exempted or non excisable goods

Excisable goods manufactured is not removed within 6 months.

Excisable finished goods not removed within 6 months.

Inputs cleared as such.

Used exclusively in manufacturer of exempted goods.

Capital goods cleared as such

Duty liability Amount of duty payable on such import plus interest.

Duty equivalent to CENVAT Credit taken with interest.

Duty equivalent to CENVAT Credit with interest.

Payable by Recipient premises Recipient premises Recipient premises.

Governing Section/Rule

11 AB of CEA. Rule 14 of CENVAT Credit Rules.

Rule 14 of CENVAT Credit Rules.

Note: Duty payable in respect of intermediate products is based on the provisions prevailing on the date of removal from the sender's premise.

5. Nonapplicability: The facility to remove goods without payment of duty does not apply to – a) 100 % EOU b) Unit located in EHTP / STP


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6. Other Points: a) Duty paid eligible for CENVAT Credit: Duty paid by the recipient premise due to nonfulfillment of

condition, can be availed as CENVAT Credit. b) No reversal of credit at Sender's premise: Nonfulfillment of conditions does not result in reversal of credit

taken by the sender premise.

Procedure for maintenance of records and payment of duty by the independent weaver of unprocessed fabrics (Rule 12C): 1. Who is an independent weaver? Weaver

a. Purchases the yarn himself b. Works on them, and c. Sells the grey fabrics manufactured by him.

2. What are the goods covered under this rule?

Unprocessed fabrics under Chapter 50 55, 58 or 60 of Schedule I to Central Excise Tariff Act.

3. Can a person other than independent weaver comply with the maintenance of records?

The independent weaver of may authorize another person to comply with provisions of Central Excise Duties except that of Registration.

4. Who is the ulitimate responsibility under Excise Rules,2002?

Responsibility to comply with Central Excise Rules, 2002 lies with the independent weaver. In case of short payment or non-payment of duty on such unprocessed fabrics, consequences and penalties shall apply both to the said independent weaver and his Authorised agent.

5. Is there any penal provisions for non compliance?

Penal consequences due to non-payment or short payment will apply to both the weaver and authorized person.

Warehousing of goods (Rule 20):

Rule 20 of Central Excise Rules, 2002 empowers the Central Government to issue notifications for permitting removal from factory to warehouse or warehouse to another warehouse without payment of duty and Board is authorized to prescribe the conditions, limitations and safeguards subject to which this procedure would operate. Consignor shall Make an application in prescribed form in quadruplicate Prepare an invoice (in triplicate)



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FAQ’s on warehousing of goods:

1. Can the goods be despatched to any warehouse? The Commissioner of Central Excise will specify the places under his jurisdiction where warehouse can be registered, by issuing Trade Notice. Any person desiring to have warehouse will get himself registered under the provisions of Rule 9 of the said Rules.

2. Who has the responsibility of payment of duty? The responsibility for payment of duty on the goods that are removed from the factory of production to a warehouse or from one warehouse to another warehouse shall be upon the consignee. However, if the goods dispatched for warehousing or re-warehousing are not received in the warehouse, the responsibility for payment of duty shall be upon the consignor.

3. What is the period for which goods may remain in a warehouse? Any excisable goods may be kept in a warehouse to which such goods have been warehoused till the expiry of 3 years from the date on which such goods were first warehoused.

4. What if the consignor fails to receive the duplicate copy of the application duly endorsed by the consignee?

If consignor fails to receive within 90 days of removal of such goods or such extended period as the commissioner may allow, then the consignor is liable to pay the appropriate duty leviable on such goods.

In case the superintendent-in-charge of the consignor does not receive the original copy of the application duly signed by the consignee and countersigned by the superintendent-in- charge of the consignee within 90 days of removal of goods, then weekly remainders must be issued by him to the superintendent-in-charge of the consignee.

If despite such remainders the original certificate is not received within 60 days from the expiry of the said period of 90 days, the superintendent in charge of the consignor shall inform the same to the AC/DC

The AC/DC shall either secure a satisfactory proof of goods being received by the consignee or ensure that appropriate duty leviable on such goods is recovered from the consignor.

Remission of duty (Rule 21):

When remission of duty applicable?

Goods have been lost or destroyed by natural causes or by unavoidable accident or are claimed by the manufacturer as unfit for consumption or for marketing, at any time before removal

Who will sanction the remission?

Competent Central Excise Officer

Amount of duty empowered to be remitted

Commissioner Without limit, but normally any amount exceeding Rs.5,00,000

Additional/Joint Commissioner

Rs.1,00,000 to Rs.5,00,000

Deputy/Assistant Commissioner

Rs.10,000 to Rs.1,00,000

Superintendent Below Rs.10,000

Inspector None

If the goods are destroyed by accident which could have been avoided, whether remission of duty available?

In such circumstances remission of duty cannot be done

If goods are lost in theft or dacoity?

Remission not available – Gupta Metal Sheets V. CCE

Loss of molasses due to auto Remission available as it is unavoidable reason – Shankar sugar mills V. CCE


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Combustion?

Damage owing to natural cause Goods viz. cement damaged due to rain of unprecedented intensity all over State Damage of goods could not be attributed due to failure of assessee to safeguard excisable goods?

Remission available - Rajapalayam Cement & Chemicals ltd V. CCE

Bonds under Excise:

Meaning of Bond: Bond is an instrument by which the obligation to pay money is created expressly. It is also a legal agreement whereby a person undertakes to do or not to do anything subject to conditions stipulated in the agreement.

Purpose of Bond: The primary purpose of the bond is to secure due compliance with the rules and procedures laid down under the Excise law. A bond is a collateral security, which is secured by the department to ensure payment of appropriate duty in addition to the available statutory provisions.

Basic classification: Bonds are basically two types, i.e. surety and security. Surety Bond: Under a surety bond another person stands as surety to guarantee the performance on the

part of obligor. The surety should be for the full value of the bond and the person standing as surety should be solvent to the extent of the bond amount. Under the Contract Act the liability of the surety is co-extensive with that of the principal debtor and hence the department is at liberty to enforce the recovery of the dues either from the obligor or from the surety.

Security Bond: In these kinds of bonds, security is offered instead of guarantee. Security can be in the nature of Post office saving deposit, National saving certificate or similar realisable government papers of central or state government. Bank deposit receipt of large scheduled banks is also acceptable. Interest on such securities will accrue to person making such deposit.

B-1 Surety / Security (General Bond)

For export of goods without payment of duty under Rule 19

B-2 Bond Surety / Security (General Bond)

For provisional assessment

B-3 Bond (General Bond) For due dispatch of excisable goods removed for rewarehousing and export there from without payment of duty.

B-11 Bond For provisional release of seized goods

B-17 Bond (General) Surety / Security

Composite bond of EPZ/ 100% EOUs for assessment, export, accounting and disposal of excisable goods obtained free of duty.

Withdrawal of facilities and imposition of restrictions on certain assessees by central government [Rule 12AAA of CENVAT credit Rules, 2004 & Rule 12CCC of Excise Rules, 2002] – Notification 3 to 5/2012

1. What are the facilities that shall be withdrawn and what are the restrictions imposed under these rules? a) Monthly payment may be withdrawn and assessee shall be required to pay duty at the time of

removal. b) Non utilization of CENVAT credit for payment of excise duty c) Records to be maintained for those principal inputs on which credit has not been availed.

[Principal inputs are those inputs the cost of which is ≥ 10% of the total value of Inputs] d) Intimation to superintendent regarding receipt of principal inputs (whether credit availed or not)

within specified period and make available for verification upto a period specified in the order.



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e) If the person if found to be committing the offences for second time or subsequently, every removal of goods from the factory shall be under an invoice counter signed by Inspector or superintendent.

f) The registration granted to first stage dealer or second stage dealer can be suspended and during such period such dealer shall not issue any Invoice for sales and credit cannot be availed by the buyer.

g) If merchant exporter is found to be involved in the offences, self sealing and self removal procedure may be withdrawn.

2. When such facilities are withdrawn or restrictions imposed?

When the assessee is allegedly found to have committed certain specified offences and the excise duty or CENVAT credit alleged exceeds 10,00,000

3. What are the offences specified under these two rules by central government?

a) Removal of goods without the cover of an invoice and without payment of duty; b) Removal of goods without declaring the correct value for payment of duty, where a portion of sale

price, in excess of invoice price, is received by him or on his behalf but not accounted for in the books of account;

c) Taking of CENVAT Credit without the receipt of goods specified in the document based on which the said credit has been taken;

d) Taking of CENVAT Credit on invoices or other documents which a person has reasons to believe as not genuine;

e) Issuing duty of excise invoice without delivery of goods specified in the said invoice; f) Claiming of refund or rebate based on the duty of excise paid invoice or other documents which a

person has reason to believe as not genuine; g) Removal of inputs as such on which CENVAT credit has been taken, without

4. What is the procedure for withdrawal of facilities or imposition of restrictions?

CE – Commissioner of excise, CCE – chief commissioner of excise, ADGCEI – Additional director general of central excise intelligence, DGCEI – Director general of central excise intelligence.

CE or ADGCEI on satisfying that asseesee has committed offence after examination of records, forward to CCE or DGCEI within 30 days of detection of case

The CCE or DGCEI, on examination shall forward the proposal along with recommendations to CBEC

[An opportunity of being heard can be given to assessee before forwarding the proposal]

An officer authorized by CBEC shall examine the recommendations snd issue an order specifying

a) The type of facilities to be withdrawn

b) The type of restrictions to be imposed

c) Period for which such facilites are withdrwan

d) Period for which such restrictions will be operative


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Audit under Central Excise:

Valuation Audit [Sec. 14A] CENVAT credit Audit [Sec. 14AA]

Excise Audit 2000

1. Who can order?

Any Central Excise Officer not below the rank of AC/DC can order for valuation audit

The Commissioner of Central Excise may call for the audit

There is no order for this audit, but the assessees are covered under this audit based on their annual duty liability

2. When the audit can be ordered?

If the officer is of the opinion, at any stage of enquiry, investigation or any other proceedings before him, that the value has not been correctly declared or determined by a manufacturer or any person.

If commissioner has reason to believe that the credit of duty availed of or utilized by a manufacturer of any excisable goods – (a) is not within the normal limits having regard to the nature of the excisable goods produced or manufactured, the type of inputs used and other relevant factors, as he may deem appropriate; (b) has been availed of or utilized by reason of fraud, collusion or any willful mis-statement or suppression of facts.

The frequency of conducting the Excise Audit 2000 is as follows:

Amount of annual duty (in cash + CENVAT credit) paid by assessee -

Frequency of audit

Above ` 3 crores

Every year

Between ` 1 crore and ` 3 crores

Once every two years

Between ` 50 lakhs and ` 1 crore

Once every five years

Less than ` 50 lakh

10% of the units audited every year

3. Any prior approval from higher authority required?

Yes. Prior approval of the Chief Commissioner of Central Excise is necessary.

No No

4. Is the order for audit appealable?

Opportunity for hearing is to be given to the assessee before the issuance of the direction for special audit

The directions given by AC/DC for special audit after obtaining prior approval of Chief Commissioner of Central Excise is not an appealable order in terms of section 35B. – Neel metal products V. CCE (2008) (CESTAT)

Opportunity for hearing is to be given to the assessee before the issuance of the direction for special audit

Order of special audit, passed by commissioner is not appealable – Shree prithvi steels V. CCE (2008) (CESTAT)

N.A

5. Who should conduct the audit?

The Central Excise officer will direct such manufacturer/person to get

The Commissioner shall direct such manufacturer to get the accounts of his factory, office,

Audit staff of the department



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the accounts of his factory, office, depots, distributors or any other place, as may be specified by the said Central Excise Officer, audited by a Cost Accountant or Chartered Accountant.

depot, distributor or any other place, as may be specified by him, audited by a Cost Accountant or Chartered Accountant

6. Can assessee select Chartered Accountant or Cost accountant for audit?

No. Such Cost Accountant or Chartered Accountant will be nominated by the Chief Commissioner of Central Excise in this behalf.

No. Such Cost Accountant or Chartered Accountant will be nominated by the Commissioner of Central Excise in this behalf.

N.A

7. To whom the audit report should be submitted?

The Cost Accountant or the Chartered Accountant has to submit the duly signed and certified audit report within the period specified by the Central Excise Officer.

He shall also mention in the report such other particulars as may be prescribed by such Central Excise Officer.

The Cost Accountant or the Chartered Accountant has to submit the duly signed and certified audit report within the period specified by the Central Excise Officer.

He shall also mention in the report such other particulars as may be prescribed by such Central Excise Officer.

The draft audit report is submitted to the superior officers for review, who examine the sustainability of the objections raised by the auditors.

After such review, the audit report becomes final and in cases where the disputed amounts have not already been paid by the assessee at the spot, demand notices are issued by the department for their recoveries.

8. Can the time period of audit be extended?

Such period can be extended by the Central Excise Officer at the request of the manufacturer/person for material and sufficient reason. However, the maximum period of submission of audit report shall be 180 days from the date of receipt of the cost audit order by the manufacturer.

Not specified in this section Governed by departmental administration principles and practices.

9. Is it sufficient if manufacturer has already got his books audited?

This audit shall be in addition to any other audit under any other law for the time being in force or otherwise. [This audit is mandatory]

This audit shall be in addition to any other audit under any other law for the time being in force or otherwise. [This audit is mandatory]

As this audit is conducted by the department, it is mandatory always.

10. Who will bear the audit fees and expenses?

The expenses of audit and audit fees shall be paid be excise department.




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Documents to be produced on demand for the purpose of section 14A (Valuation

Audit)/14AA (CENVAT Audit):

Assessee, first stage dealer and second stage dealer were required to produce, on demand, the records maintained by him in respect of accounting of transactions, all financial statements, cost audit reports and income tax audit reports to the following persons:-

(i) Officer empowered under sub-rule (1) or (ii) Audit party deputed by the Commissioner/Comptroller and Auditor General of India (iii) Cost Accountant/ Chartered Accountant as nominated under section 14A/14AA of the Act

for the scrutiny by the officer/audit party/cost accountant/chartered accountant within the time-limit specified by them.

INDIRECT

TAX LAWS

Value Added

Tax (VAT)

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Table of Contents

A Road to CST: .................................................................................................................................. 141

Introduction to VAT: .......................................................................................................................... 143

When Sales Tax is levied? .................................................................................................................. 146

Concept of Input tax credit: ............................................................................................................... 148

Unutilized Input credit: .................................................................................................................. 148

Conditions for availing input tax as credit: ....................................................................................... 149

Input tax credit is not available in the following cases: .................................................................... 149

Issues in utilization of Input tax credit: ............................................................................................. 150

Variants of VAT: ................................................................................................................................ 151

Tax treatment under VAT for Stock transfer: .................................................................................... 152

Impact of VAT on Imports: ................................................................................................................ 152

Methods of Value added: ................................................................................................................... 153

Tax rates Under VAT: ........................................................................................................................ 155

Procedures under VAT ....................................................................................................................... 156

Hierarchy under VAT: ............................................................................................................... 156

Registration under VAT: .................................................................................................................... 156

Composition Scheme under VAT: ...................................................................................................... 157

Consequences of Non-registration: ........................................................................................... 158

Cancellation of Registration: ..................................................................................................... 158

Tax Payers Identification Number (TIN): .................................................................................. 158

Maintenance of Records: ........................................................................................................... 158

VAT INVOICE: .................................................................................................................................. 159

Format of VAT Invoice: ............................................................................................................. 159

System of cross checking under VAT: ........................................................................................ 159

Returns and Assessment under VAT: ................................................................................................. 160

Accounting Entries for VAT: .............................................................................................................. 160

Merits and Demerits of VAT: ............................................................................................................. 160

VAT Audit: ......................................................................................................................................... 161

VAT and sales tax incentives: ............................................................................................................ 161

VAT and Works Contracts ................................................................................................................. 162

VAT and Hire purchase ..................................................................................................................... 164

FAQ’s under VAT and Hire purchase: .......................................................................................... 165

VAT and Lease transactions .............................................................................................................. 165



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Value Added Tax (VAT)

Delhi, March 21, 2005: VEXATIOUS ALTERNATIVE TAX?: Sections of trade are up in arms against the proposal to introduce value added tax at the State level, unconvinced by the arguments of economists and policymakers. What is VAT? And why traders opposed implementation of VAT? – Analyse the impact of VAT and we will discuss the issue at last!!!

A Road to CST:

CST though called CENTRAL Sales tax, the state will collect and retain the tax.

CST shall be paid by the seller to that state where the movement of goods starts.

The state governments are entrusted with the authority to collect and administer CST through the

respective state commercial tax departments.

The rate of CST is as follows:

Sec. 3 of CST Act, 1956: A sale or purchase of goods shall be deemed to take place in the course of

interstate trade or commerce if the sale or purchase –

a) Occasions the movement of goods from one state to another or

b) Is effected by transfer of documents to title of the goods during their movement from one state

to another.

Documents of title to goods means a document which evidences that the person holding the document

has the title to goods. Lorry receipt, Railway receipt, Air way bill, bill of lading are known as documents of

title to goods.

CST is levied on all subsequent interstate sales made by a one person to another. The system of tax credit is

absent in CST. But this general rule has exceptions:

a) Interstate sale by transfer of documents of title

b) Penultimate sale

c) Special provision in case of declared goods

Sale to

Registered Dealers

2% or Local sales tax rate whichever is lower

Unregistered Dealers

Local sales tax rate



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Sec. 6(2) of CST Act, 1956 – Subsequent sales by transfer of documents of title is exempt provided the

dealer selling goods issues a certificate in prescribed form (E-I/E-II) to the purchasing dealer.

Sec. 5(3) of CST Act, 1956 – Sale preceding the export sale is known as penultimate sale which is exempted

as it is deemed to be in the course of export. Such exemption is available only if the sale is as per the

following order of events.

Sec. 14 of CST Act, 1956 – Special provision in case of Declared goods.

The following are the declared goods:

1) Cereals

2) Pulses

3) Coal including coak in all forms but excluding charcoal

4) Cotton

5) Cotton fabrics

6) Cotton yarn

7) Crude oil

8) Aviation Turbine Fuel

9) Hides and Skins

10) Iron and steel

11) Jute

12) LPG for Domestic use

13) Oil seeds

14) Man made fabrics

15) Sugar

16) Unmanufactured tobacco

17) Woven fabrics of wool

In case of the above goods, the buyer of such goods can avail the tax paid by the previous persons as credit

and can be set off for payment of tax on subsequent sales. But with a precondition that the same goods

must be sold subsequently without any processing.

Various Forms and its importance under CST

Form Purpose Form Purpose A Application for registration F In case of Branch transfer B Certificate of Registration G Indemnity bond when C Form is lost C Declaration by purchasing dealer to

obtain goods at concessional rate H Certificate of Export – In case of

penultimate sale D Not Applicable from 1-4-2007 I Certificate by SEZ unit E-I/E-II Certificates for Sale in Transit J Certificate to be issued by Foreign

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Introduction to VAT:

Power to Levy: seventh schedule to the constitution List I (Union List) – Entry No. 92A – Taxes on sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce. List II (State List) – Entry No. 54 – Tax on sale or purchase of goods other than news papers, where such sale or purchase takes place in the course of Intrastate trade or commerce

Meaning of “Sale”: Transfer of property in goods by one person (i.e. Seller) to another person (i.e. Buyer)

- For Cash (i.e. Cash Sales) or - For Deferred payment (i.e. Credit Sales) or - For any other Valuable Consideration (i.e. Barter system)

What is VAT?

It is the Indirect tax imposed on the value addition.

Value addition is measured by Sale Price (-) Purchase price

The tax paid on purchases is set off against tax paid on sales

It is introduced to avoid cascading effect of tax.

VAT CHART (With Uniform Rate):

Inter State Sale

(Sale outside the

State)

Intra State Sale

(Sale within the State)

It arises when seller is in one

state and buyer is in another state

It arises when both seller and

Buyer are in the same state Central Sales Tax (CST)

is applicable

Value Added Tax (VAT)

is applicable

Raw material Producer

Sale = Rs. 100 (VAT = Rs. 10)

Goods Manufacturer

Sale = Rs. 150 Gross VAT = Rs. 15 Net VAT = Rs. 5 (Rs. 15 – 10)

Input tax Credit taken =Rs. 10

Wholesaler



Retailer

Sale = Rs. 200 Gross VAT = 20 Net VAT = Rs. 2 (Rs. 20 – 18)


Consumer

Types of Sale

(Sale outside the

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Observation (i) Explanation Advantage

The VAT paid by the

consumer (i.e. To retailer) and revenue to the government (i.e. VAT paid by all to Government) is same

In the above chart VAT paid by consumer to Retailer is Rs. 20. Therefore the burden on consumer is Rs. 20.

Transparency in a tax system can be achieved when there are no hidden taxes, which means the tax borne by consumer should be the revenue to the government.

From the above chart it is clear that the revenue to the government is Rs. 20 (10+5+3+2)

TRANSPARENCY in VAT Under a VAT system, the

buyer knows out of the total consideration paid for purchase, what is tax component. This transparency enables state govt. to know as to what is the exact amount of tax coming at each stage. Thus it is a great aid to the govt. while taking decisions with regard to tax rate.

Observation (ii) Explanation Advantage

The tax paid by the

consumer is routed to the government by all the players in their value added ratio.

The revenue to the government of Rs. 20 is routed by Raw material producer, goods manufacturer, wholesaler, retailer in their value added ration from consumer.

Value added ratio = 100:50:30:20 (Total sale price = 200)

Tax paid ratio = 10:5:3:2 (Total tax paid to Government = 20)

Each person knows his VAT liability which means that there is certainty in VAT.

CERTAINTY in VAT The VAT is a system based

dimply on transactions. Thus there is no need to go through complicated definitions like sales, sales price. The tax is also broad based and applicable to all sales in business leaving little room for different interpretations. Thus, this system brings certainty to a great extent.

VAT CHART (With Varying Rates):

Raw material Producer

Sale = Rs. 100 (VAT = Rs. 10)

Goods Manufacturer



Wholesaler



Retailer

Sale = Rs. 200 Gross VAT = 40 Net VAT = Rs. 4 (Rs. 40 – 36)


Consumer



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Observation (iii) Explanation Disadvantage

When VAT rates are not uniform, the basic premise on which VAT system was built, is at risk. The players won’t pay VAT on the basis of their Value added ratio. It leads to tax evasion at a stage and it does not provide equality.

In the previous chart where VAT rates are uniform, the tax paid by consumer (Rs. 20) is shared by RM producer, goods manufacturer, wholesaler, retailer in their value added ratio and accordingly their tax burden is determined.

If the same continues in this chart also, then the tax paid by consumer (Rs. 40) shall be shared by the players as follows:

Value added

Tax liability

RM producer 100 20 Manufacturer 50 10 Wholesaler 30 6 Retailer 20 4 Tax paid by consumer 40

But as per the above chart the tax payable is as follows:

RM producer 100 10 Manufacturer 50 20 Wholesaler 30 6 Retailer 20 4 Tax paid by consumer 40

No uniformity in VAT rates The merits accrue in full

measure only under a situation where there is only one rate of VAT and VAT applies to all commodities without any question of exemptions whatsoever. Once concessions like differential rates of VAT, composition schemes, exemption schemes are built into the system, distortions are bound to occur and the fundamental principle that VAT will totally eliminate cascading effects of taxes will also be subject to qualifications.

Illustration on Basic Concept: Mr. S acquires goods from Mr. T for ` 1,000 on which tax is 10%, Mr. S adds `400 value of goods and sells at `100 profit. The tax rate is 20%. What is the ultimate price for customer

(a) If VAT system is not present (b) If VAT system is implemented

Without VAT With VAT Sale price of Mr. T 1000 Sale price of Mr. T 1000 Add: Tax @ 10% 100 Add: Tax @ 10% 100 Amount paid by Mr. S 1,100 Amount paid by Mr. S 1,100 Cost to Mr. S 1,100 Cost to Mr. S (1,100 – 100) 1,000 Add: Profit and Value of goods 500 Add: Profit and Value of goods 500 Sale price of Mr. S 1,600 Sale price of Mr. S 1,500 Add: Tax @ 20% 320 Add: Tax @ 20% 300 Cost to Customer 1,920 Cost to Customer 1800 Tax payable by Mr. S ` 320 Tax payable by Mr. S (300 - 100) ` 200 Total Revenue to Government `420 Total Revenue to the Government ` 300

Observation (iv) Explanation Advantage

The cost saved by the consumer and tax revenue lost by the government is one and the same.

From the above illustration, the cost to consumer when VAT system is implemented is less compared to without VAT system. The consumer saves Rs. 120. The tax payable by Mr. S to the government is decreased when VAT system is implemented i.e. Rs. 120. Therefore the government loses its revenue in order to contribute it to consumer.

Avoids cascading effect of tax A persistent criticism of VAT has been that since the tax is payable on the final sale price, the VAT usually increases the prices of goods. However, VAT does not have any inflationary impact. With the introduction of VAT, tax impact on RM is totally eliminated. Therefore, there will be no increase in prices.



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Why the VAT credit should not be considered in the cost and how it can be set off with tax payable?

Logical Explanation Accounting Explanation

The VAT paid on purchases is available as credit. Whenever a portion of cost incurred is available as credit, it should not be considered while calculating the net cost incurred. If it is considered then cost to consumer will increase and leads to cascading effect of tax which is against the VAT system. The credit so available will be utilized for payment of VAT liability.

For purchases: Purchases A/C ----- Dr. VAT credit Receivable A/C --- Dr. To Cash/Creditors A/C For Setoff: VAT payable A/C --- Dr. To VAT credit receivable A/C To Cash (Bal. if any)

When Sales Tax is levied?

- Whether at the time of First sale? - Whether at the time of Last sale? - Whether at any other time?

Observation (v) Explanation Advantage

The history of levy of sales tax starts from the phase of single point sales tax at the time of first sale and now ends

As government loses its revenue on further transactions, it shifted from single point sales tax at the time of first sale to single point sales tax at the time of last sale.

But when tax is levied on the last sale, the government doesn’t have any say except to rely on the information provided by retailer, which makes the retailer to evade

Removal of anomaly of single point taxation VAT eliminates single point sales tax at the time of first sale and last sale. In case of last point tax system, 1. Temptation to evade tax is high 2. Quantum of tax at one point is high 3. Exemption is available against statutory forms, possibility of misuse of forms cannot be ruled out.

Single point sales tax at the time of First sale

Single point sales tax at the time of last sale

Multi point sales tax on total Sales price (i.e. on full price)

Multi point sales tax on value addition

Tax is levied on every sale of a product, on the full amount of its sale price whether there is value addition or not

Theoretically easy but very difficult coming to practicality as small retailers in our country do not maintain accounts

Scope for tax evasion

Tax is levied at the time of every sale on the amount of value addition

i.e. when goods are sold to Ultimate Customers

Government loses tax on value addition made on subsequent sale

It leads to cascading effect of tax

It prevents cascading effect and helps in better tax administration and collection



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with a phase called multipoint sales tax on value addition.

tax. So the levy of sales tax shifted to multi point sales tax on the total sale price. But it is not free from any limitations. It leads to cascading effect of tax and as a result the sale price or cost to consumer will increase

In case of first point tax system, tax was avoided by way of selling the goods at first point to their sister concerns at lower rates and thereafter increasing the price. All the above anomalies are taken care under VAT.

Illustration on imposition of Sales tax: A manufacturer sells a product for Rs. 1,000 to the wholesaler. The wholesaler adds Rs. 300 as his margin and sells the same to retailer. The retailer adds Rs. 500 as his margin and sells the same to ultimate consumer. VAT rate is 4%.

1) Single point sales tax at the time of first sale Sales tax = Rs. 1,000 X 4% = Rs. 40.

2) Single point sales tax at the time of last sale Sales tax = Rs. 1,800 X 4% = Rs. 72

3) Multipoint sale tax on total sale price Sale price of manufacturer 1,000 Add: Sales tax @ 4% 40

Cost to wholesaler 1040 Add: Margin 300

Sale price of Wholesaler 1340 Add: Sales tax @ 4% 53.60

Cost to Retailer 1393.6 Add: Margin 500

Sale price of Retailer 1893.6 Add: Sales tax @ 4% 75.74

Cost to Consumer 1969.34

4) Multipoint sales tax on value addition

Sale price of manufacturer 1,000 Add: Sales tax @ 4% 40

Gross Cost to wholesaler 1040 Less: VAT credit Available 40

Net Cost to Wholesaler 1,000 Add: Wholesalers Margin 300

Sale price of Wholesaler 1300 Add: Sales tax @ 4% 52

Gross Cost to Retailer 1352 Less: VAT Credit available 52

Net cost to Retailer 1300 Add: Retailers Margin 500

Sale price of Retailer 1800 Add: Sales tax @ 4% 72

Cost to Consumer 1872



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Concept of Input tax credit:

VALUE ADDED TAX (VAT)

Net VAT Payable by registered dealer = Output tax (-) Input tax

Illustration on availment and utilization of Input tax credit: Ram purchased Inputs worth Rs. 1,00,000 and made sales of Rs. 2,00,000 in the month of January. The input tax rate and output tax rate are 4% and 12.5% respectively. Calculate the Net VAT payable by Ram for the month of January? (Assume purchases and sales are exclusive of tax)

Net VAT payable = Output tax – Input tax Output tax = 2,00,000 X 12.5% = 25,000 Input tax = 1,00,000 X 4% = 4,000 Net VAT payable for the month of January = Rs. 21,000

Unutilized Input credit:

When the Input tax is more than the output tax, there will be excess credit. The excess credit available after meeting the VAT liability can be utilized for the payment of CST on interstate sales, if any.

Even after paying CST if there is balance of tax credit, it will be carried over till the end of succeeding financial year and if it remains unutilized, will be REFUNDED.

However in some states the refund will be granted after the end of first financial year itself.

Illustration on utilization of Input tax credit for payment of CST: Tax paid on purchases made in the state within a month (Input tax)- 10,000 Tax charged for sales in the state within a month - 4,500 CST paid for Inter-state purchases- 3,500 CST charged for Inter-state sales within a month - 5,000

Input tax credit available = 10,000

Input

Tax

Output

Tax Raw Material

Consumables Trading goods

Capital Goods

Sale of Finished goods (or) Trading goods

VAT paid by registered dealer on purchase of inputs, Capital goods, Consumables for business to produce finished goods. (or) VAT paid by registered dealer on purchase of trading goods which are subsequently sold for a margin.

VAT payable or charged by the registered dealer on sale made to consumers



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Net VAT payable = Nil (i.e. 4,500 – 10,000) Excess credit available = 5,500 The excess credit of Rs. 5,500 can be utilized for payment of CST liability, if any i.e. 5,000 and balance of Rs.

500 can be carried forward and can be utilized for payment of output tax.

Conditions for availing input tax as credit:

1) The goods should be purchased for any one of the following purposes. a) For Intra-state sales/ Inter-state sales b)

For the manufacture of taxable goods or goods used in the packing of such manufactured

goods intended for Intra-state/ Inter-state Sales. c)

For manufacturing or packing goods intended for export

d) For use in the execution of works contract e) For making zero-rated sales.

2) Purchases to be made within the state. Credit on interstate purchases is not available. 3) Purchases to be made only from another VAT registered dealer against a valid Invoice. 4) Tax credit on capital goods is available but to be adjusted over a period of 36 months

Note: The states may reduce the period and In Maharashtra the credit on capital goods can be claimed immediately on purchase.

5) Input tax credit on capital goods specified in negative list is not available. Note: The states have taken their own decisions to provide negative list

6) The Input tax credit on purchases made within a month can only be utilized to pay output tax payable on sales made during that month.

Input tax credit is not available in the following cases:

1) Purchases from unregistered dealers 2) Purchases from other states (i.e. Interstate purchases)

The Government of A.P allows the VAT paid by B as credit to C, only because again C will pay VAT on subsequent sale (Either Intra-state or Inter-state). But the Government of T.N will not grant credit of duty paid by A to B, as it is a revenue loss to the state of T.N

3) Import of goods

Goods, Used as

Containers or packing materials Raw materials Consumable Stores

Goods, Used as

Raw materials Capital goods Consumable Stores Packing materials/ Containers

A of Tamil Nadu

•Pays CST to Government of T.N

•Recovers CST from B of A.P

B of Andhra Pradesh

•Pays VAT to Government of A.P

•Recovers VAT from C of A.P

C of Andhra Pradesh

• Pays VAT to Government of A.P

• Recovers VAT from subsequent buyer



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4) Purchase of goods specified in the negative list by the respective state governments. Following are the goods not covered under Vat.

a) Petrol, diesel, Aviation Turbine Fuel (ATF) or other motor spirit b) Liquor and c) Lottery tickets

Note: The states may or may not bring these commodities under VAT laws 5) Purchases from registered dealer who opts for composition scheme (i.e. Dealers who pay lower rate of

duty) 6) Purchase of goods without Invoice 7) Purchase of goods which are being utilized in the manufacture of exempted goods. In some states, partial

input tax credit is available in respect of inputs used for manufacture of exempted goods 8) Goods in stock, which have suffered tax under an earlier Act, but under VAT Act they are covered under

exempted items 9) Purchase of goods dispatched to other states as branch transfer. 10) Purchases from registered dealer who does not show tax amount separately in invoice. 11) Purchased goods used for personal use/Consumption or provided free of charge as gifts. 12) Purchase of goods for use as fuel in generation of power

Issues in utilization of Input tax credit:

Issue-1: Common inputs used for Exempted and taxable sale

Issue-2: Goods are purchased and used in the manufacture of finished goods which are then exported. The Input tax credit on those goods remains unutilized. What is the treatment available?

When goods are exported, the exporter will get REFUND of the Input tax credit paid by him. The refund will be allowed within a period of 3 months from the end of the month in which goods were exported.

Issue-3: Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOU) purchases raw materials by paying VAT and uses these raw materials for manufacture of finished goods. Is there any incentive in respect of Input tax credit on purchases as they are engaged only in export of goods?

The incentive is available in the following manner

Note: States may reduce the time period of 3 months.

•Exemption from payment of tax on purchasesOption (i)

•Refund of Input tax credit on purchases within 3 months from the date of purchaseOption (ii)

Option (i) Option (ii)

Maintain separate records for inputs used in exempted sale and taxable sale.

Proportionate input tax credit on inputs used in taxable service

Credit of inputs used in exempted sale is not available

Step 1: Calculate the ratio of Taxable sales in total sales. Step 2: Calculate the input tax credit on total inputs Credit Available = Step 1 X Step 2



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Variants of VAT:

Variants of VAT (i.e. Different modes of allowing input tax credit)

How the Gross product variant leads to delay in modernization and upgradation and how income variant and consumption variant helps in modernization and upgradation? The gross product variant distinguishes between capital intensive industries and labour intensive

industries by disallowing tax credit on capital goods. When credit on capital goods is not available, the company will usually decide not to buy capital goods (like machinery, equipment etc.,) and divert the funds as expenditure on human resource. Due to this reason the modernization and upgradation in the industry will be delayed. The income variant and consumption variant makes no distinction between capital intensive and labour intensive activities. Tax avoidance by classifying capital goods purchases as revenue purchase is avoided. This simplifies tax administration. Secondly, when credit not available on capital goods, the VAT paid on capital goods will be added and it forms the cost of purchase. As a result depreciation will increase, due to which money at disposal (profit after tax and depreciation) will decrease. Otherwise this amount would have been invested for other purpose.

Illustration on Variants of VAT: Mr. A has purchased Cloth worth Rs. 50,000 (i.e. 100 meters) inclusive of 4% VAT and stitching machine for Rs. 1,00,000 inclusive of 10% VAT. Labor and Overheads excluding depreciation is 25,000. The sale price is fixed at 50% above cost. Stitching machine has life of 2 years. Compute the amount of VAT payable in cash, as per

(a) Gross product Variant b) Income Variant c) Consumption Variant

Gross Product variant: Computation of sale value:

Value of Cloth (50,000 X 100/104) 48,077 Labor and Overheads 25,000 Depreciation (1,00,000/2) 50,000

Total Cost 1,23,077 Add: Profit @ 50% of cost 61,538

Gross product variant Income Variant Consumption Variant

VAT is levied on all sales (Multipoint tax) and deduction is allowed for tax paid on inputs and depreciation on capital goods

MERIT Avoids cascading effect as VAT credit available

DEMERITS - Heavier tax burden as

double taxation on capital goods

- Delay in modernization and upgradation

VAT is levied on all sales (Multipoint tax) and deduction is allowed for tax paid on inputs and capital goods

VAT is levied on all sales (Multipoint tax) and deduction is allowed only for tax paid on inputs excluding capital goods

MERITS - Avoids cascading effect - Helps in modernization

and upgradation

DEMERIT No specific method of computation of Depreciation

MERITS - Avoids cascading effect - Helps in modernization

and upgradation - Simple and Easy method - Tax administration is

convenient DEMERIT Deferment of credit to Government



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Sales Value 1,84,615

Computation of VAT payable: Output tax (1,84,615 X 4%) 7,385 Less: Input tax (50,000 X 4/104) – only on cloth 1,923

VAT payable in cash 5,462

Income Variant:

Computation of sale value: Value of Cloth (50,000 X 100/104) 48,077 Labor and Overheads 25,000 Depreciation (1,00,000/2) X 100/110 45,455



Computation of VAT payable: Output tax (1,77,797 X 4%) 7,112 Less: Input tax (50,000 X 4/104) – only on cloth 1,923 Less: Input tax (1,00,00/2) X 10/110 4,545

VAT payable in cash 644

Consumption Variant:

Computation of sale value: Value of Cloth (50,000 X 100/104) 48,077 Labor and Overheads 25,000 Depreciation (1,00,000/2) X 100/110 45,455



Computation of VAT payable: Output tax (1,77,797 X 4%) 7,112 Less: Input tax (50,000 X 4/104) – only on cloth 1,923 Less: Input tax 1,00,00 X 10/110 = 9,090 5,189

VAT payable in cash 0

Unutilized Credit = 9,090 – 5,189 = 3901, to be carried forward.

Tax treatment under VAT for Stock transfer:

Stock transfer is not a sale and there is no VAT liability The Input tax credit with respect to

i) Inputs used in manufacture of finished goods which are then transfer ii) Goods purchased which are then transferred

Is available after retention of 2% of such tax by the state governments.

Impact of VAT on Imports:

The states do not have power to impose tax on ‘Imports’ as it is covered under Union list. So, No VAT on imports

If imports are brought into VAT chain, the cascading effect of tax can be reduced and tax compliance can also be improved.

The Empowered committee is discussing this issue with the Government of India.



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Methods of Value added:

Methods of computation of “Value added” to the goods

Illustration on Methods of computation of VAT: Mr. X, who has printing works purchased paper worth Rs. 1,04,000 (inclusive of VAT @ 4%) and incurred the following expenses

Wages to workmen = 25,000 Rent of building = 15,000 Depreciation on machinery = 10,000 Other consumables = 5,000

And sold at a profit on the works with 15,000 Compute the VAT payable under

a) Addition method b) Invoice method c)Subtraction method

Addition Method Invoice Method Subtraction Method

Deducting tax on inputs from tax on sales

Factor payments mean all payments made to factors of production. Eg: Rent, Hire charges, Depreciation, Int. on capital, Wages etc.,

Deducting the value of Purchases from value of sales

Aggregate of all Factor payments and profit

Tax is imposed at each stage of sales and on entire sales value. Tax paid at earlier stages are allowed as set off

Used mostly when tax is not charged separately in invoice i.e. Sales is inclusive of Sales tax

As it does not facilitate matching of sales invoices with purchase invoices, it is difficult to detect tax evasion

Mainly used in Income variant

Most common and popular method

It provides an opportunity for dishonest traders to acquire “Bogus bills”

VAT liability at each stage = Value added X Rate/ (100+Rate)

Direct subtraction

Intermediate Subtraction

Indirect Subtraction

Sales (Excl. of tax) (-) Purchases (Excl. of tax) Value added (Excl. Of tax)

Sales (Excl. of tax) (-) Purchases (Incl. of tax) Value added (Excl. Tax)

Sales (Incl. of tax) (-) Purchases (Incl. of tax) Value added (incl. Of tax)



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Addition Method: Value added = Sum of all factor payments

Wages to workmen = 25,000 Rent of building = 15,000 Depreciation on machinery = 10,000 Other consumables = 5,000 Profit = 15,000 Total = 70,000

Invoice method: VAT = Output tax (-) Input tax Computation of sales value:

Raw material (1,04,000 X 100/104) = 1,00,000 (+) Factor payments = 70,000 Sale Value = 1,70,000

Subtraction method: (i) Direct Subtraction:

Sales (Exclusive of VAT) = 1,70,000 (-) Purchases (Exclusive of VAT) = 1,00,000 Value added = 70,000 VAT = 70,000 X 4% = 2,800

(ii) Intermediate subtraction: Sales (Exclusive of VAT) = 1,70,000 (-) Purchases (Inclusive of VAT) = 1,04,000 Value added = 66,000 VAT = 66,000 X 4% = 2,640

(iii) Indirect subtraction:

Sales (Inclusive of VAT) = 1,76,800 (-) Purchases (Inclusive of VAT) = 1,04,000 Value added = 72,800 VAT = 72,800 X 4/104 = 2,800 VAT payable under Addition method, Invoice method, direct subtraction, indirect subtraction is same

Invoice method V. Subtraction method:

Manufacturer A extracted raw produce X and Y from mines and sold the same to Manufacturer B for Rs. 40,000 and Rs. 60,000 respectively. Manufacturer B used X and Y as raw material and sold the resultant product to Wholesaler C for Rs. 3,00,000. Wholesaler sold the same to retailer D for Rs. 4,50,000. The retailer sold the same to a consumer for Rs. 5,00,000. Compute VAT payable under

(a) Invoice method

If VAT rate on inputs and outputs are uniform

If VAT rate on inputs and outputs are not uniform

No conflict between the methods and VAT payable will be same

The VAT payable will be different under two methods

VAT = Tax @ 4% on value added = 70,000 X 4% = 2,800

Output tax = 1,70,000 X 4% = 6,800 (-) Input tax = 1,00,000 X 4/104 = 4,000

VAT = 2,800



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(b) Subtraction method, if (i) Manufacturer A sells produce X for Rs. 40,000 (VAT – 4%) and produce

Y for Rs. 60,000 (VAT – 12.5%) (ii) All other sales are liable to VAT @ 4%. All prices quoted are exclusive

of VAT. Invoice method:

VAT on sales VAT credit Net VAT payable

Manufacturer A (Note 1) 9,100 0 9,100 Manufacturer B (Note 2) 12,000 9,100 2,900 Wholesaler C (Note 3) 18,000 12,000 6,000 Retailer D (Note 4) 20,000 18,000 2,000

20,000

Note 1: 40,000 X 4% + 60,000 X 12.5% = 1,600 + 7,500 = 9,100 Note 2: 3,00,000 X 4% = 12,000 Note 3: 4,50,000 X 4% = 18,000 Note 4: 5,00,000 X 4% = 20,000

Subtraction method:

Sale price (inclusive of VAT)

Purchase price (inclusive of VAT)

Value added (inclusive of VAT)

VAT on value added

Manufacturer A (Note 1) 1,09,100 *

0 1,09,100 9,100

Manufacturer B (Note 2) 3,12,000 1,09,100 2,02,900 7,804 ** Wholesaler C (Note 3) 4,68,000 3,12,000 1,56,000 6,000 Retailer D (Note 4) 5,20,000 4,68,000 52,000 2,000

24,904

* 40,000 X 104% + 60,000 X 112.5% = 41,600 + 67,500 = 1,09,100 ** 2,02,900 X 4/104 = 7,804

Tax rates Under VAT:

Exempted category About 50 commodities comprising of Natural and unprocessed products in unorganized sector Items which are legally barred from taxation Items which have social implication

This category also includes a maximum of 10 commodities flexibly chosen by the states from a list of goods (finalized by empowered committee of state finance ministers) which are of local importance for the individual states without having any inter-state implication.

4% VAT category A large number of goods are covered under this category which will be common for all the states.

Basic necessities such as medicines and drugs Agricultural and industrial Inputs Capital goods and Declared goods

The schedule of goods applicable for this category will be in the respective state laws.

12.5% VAT category This is a residuary category and all the commodities which are not covered in the other categories falls under this category.

1% VAT category For precious stones, bullion, gold and silver ornaments

Non VAT goods Petrol, Diesel, Aviation turbine fuel Other motor spirit



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Lottery tickets Note: The states may or may not bring these commodities under VAT laws. The empowered committee agreed that all these commodities are

subjected to 20% tax rate.

Procedures under VAT

Hierarchy under VAT:

The state VAT law is administered by various authorities. The responsibilities of such authorities are specified in the Act or rules or notifications issued there under.

Commissioner of Commercial Taxes

Joint Commissioner of Commercial Taxes

Assistant Commissioner/Deputy Commissioner of Commercial Taxes

Commercial Tax Officer

Assistant/ Deputy Commercial Tax officer

Tax Collectors

Further, for administrative and appellate purposes, tax law board, appellate Tribunal and other authorities have also been constituted.

Registration under VAT:

Dealer means any person, who consequent to (or) In connection with (or) Incidental to (or) In the course of his business, Buys or sells goods for a consideration (or) otherwise.



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Composition Scheme under VAT:

Why Composition Scheme?

The dealer who avails composition scheme shall be required to pay a composite amount of tax. Composite tax = Gross annual turnover X Composite rate of tax prescribed by the state government. The rate may be reduced upto 0.25% and the states may levy composite tax on ‘taxable turnover’ instead of ‘gross annual turnover’. It saves a lot of labour and effort in keeping records.

Who can opt for Composition scheme?

Any dealer whose turnover is between 5 lakhs (or Rs. 10 lakhs) and 50 lakhs in the last financial year.

Who are not eligible to opt for composition scheme?

a) Dealers having Inter-state sales b) For Importers and exporters c) Dealer transferring goods outside the state otherwise than by way of sale or for

execution of works contract. d) Dealers who stock transfer outside the state

Is this Composition scheme compulsory?

No, it is optional. A dealer whose turnover is between the above limit can either opt for composition scheme or pay normal duties

Every dealer will opt for composition scheme instead of paying normal duties. What is the disadvantage in opting for composition scheme?

A dealer who opts for composition scheme has the following disadvantages as compared to a dealer who opts to pay normal duty.

a) The Input tax credit on Inputs as well as capital goods is not available b) Issuance of VAT invoice by the dealer is not possible as a result the person

who buys goods from such dealer cannot avail Input tax credit.

How the option for Composition scheme can be opted?

The option can be exercised by intimating in writing to the commissioner under whose jurisdiction his business is located. The option is available for a year or a part of the year in which he gets himself registered.

What are the other advantages of composition scheme?

(i) Simple return form to cover longer return period (ii) No need to maintain any statutory records as prescribed under the Act except records for purchase, sales, inventory.

What are the other consequences of composition scheme?

1) On the date of exercise of option, the dealer should not have the stock of goods which were brought outside the state

2) Once the option is exercised, the dealer should not have interstate purchases 3) The Input tax credit on the stock lying with the dealer as on the date of

exercising the option has to be reversed 4) If the Input tax credit is not availed, it won’t be deducted from the cost. As a

result the cost to the consumer will increase. The VAT chain gets affected because of composition scheme.

Observation (vi) Explanation Disadvantage

Composition scheme is neither a win- loss nor win-win situation to buyer and seller but it is a loss-loss situation.

The seller cannot avail input tax credit in respect of input tax paid as a result he will be losing the input tax credit on purchases made by him. The seller will not be able to pass on the benefit of input tax credit, which will add to the cost of the goods

Breakage of VAT chain The buyer shall not get any tax credit for the purchases made by him from the composition scheme dealer. Therefore as soon as the dealer opts for the composition scheme, the VAT chain will be broken and the benefit of tax paid earlier will not be passed on to the subsequent buyer.

Mr. A, a retailer who keeps no inventories, presents the following expected

information for the year – 1) Purchase of goods = Rs. 20,00,000 (VAT @ 4%) 2) Sales (at fixed selling price inclusive of all taxes) = Rs. 30,00,000 (VAT

on sales @ 4%) Discuss whether he should for composition scheme if composite tax is 1% of



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turnover. Expenses of keeping detailed statutory records required under the VAT laws will be Rs. 50,000 p.a which shall get reduced to Rs. 20,000 if composition scheme is opted for. Other expenses are Rs. 3,00,000 p.a

Option (i) – Mr. A can take the input tax credit available and may not opt for composition scheme. Option (ii) – Mr. A can opt for composition scheme but the input tax credit not available. Computation of Net VAT payable under both the options:

Normal VAT Composition scheme

Gross Turnover (Incl. of all taxes) 30,00,000 30,00,000 VAT payable 30,00,000 X 4/104

= 1,15,385 30,00,000 X 1% = 30,000

Less: Input tax credit availed (20,00,000 X 4%) (80,000) N.A Net VAT payable 35,385 30,000

Cost Benefit Analysis of Composition Scheme:

Costs of opting for Composition scheme Benefits of opting for Composition scheme 1. Saving in Net VAT payable = 5,385 2. Saving in administration cost = 30,000

Conclusion: As the Benefits are more than cost, it is advisable for Mr. A to opt for composition scheme. The decision will change if he has a huge balance of Input tax credit.

Consequences of Non-registration:

A dealer cannot carry on the business unless he is registered and olds a valid registration certificate Attracts default penalty Forfeiture of eligibility to set off all input tax credit related to the period prior to the registration The dealer will be compulsorily registered by the commissioner and the tax due shall be assessed on the

basis of evidence available with the commissioner.

Cancellation of Registration:

When business is discontinued When business is disposed off When business is transferred to new location When annual turnover of the dealer falls below the specified limit In all the above situations dealer has to surrender original registration certificate, pay the tax up to date.

Tax Payers Identification Number (TIN):

11 digit numerical code Every registered dealer will obtain this First 2 digits: State code as used by the Union ministry of company affairs Next 9 digits: Code allotted by each state.

Maintenance of Records:

Value and quantity of – Purchases, Sales, Goods manufactured, goods disposed of otherwise by sale, Inventory, Exempted sales

Copies of all Invoices, Debit or credit notes in serial number

Details of amount of tax charged on each sale

Details of Output tax, Input tax.

Details of availement and utilization of Input tax credit, balance carried forward. All such records shall be maintained for the period prescribed under the state laws and failure to keep these records attracts penalty.



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VAT INVOICE:

Every registered dealer whose turnover exceeds the specified amount should issue a serially numbered tax invoice to the purchaser.

The dealer should keep a counterfoil (or) duplicate of such tax invoice duly signed and dated. Invoice is a crucial document which needs to be preserved carefully by the purchasing dealer. In case the

original invoice is lost (or misplaced, a duplicate authenticated copy must be obtained from the issuing dealer. It is so because of the following reasons a) Tax credit can be availed only on the basis of Invoice b) The Invoice assists in performing audit and investigation activities effectively c) With the help of invoices, tax evasion can be easily traced out. d) The VAT chain mainly depends on the availment and utilization of VAT credit. If there is no VAT invoice,

the cascading effect on taxes cannot be prevented

Format of VAT Invoice:

System of cross checking under VAT:

Under this system, dealers may be asked to submit a list of sales/ purchases made by them. A computerized system of cross-checking is being worked, which involve comparing the VAT returns/ documents submitted to the VAT authorities with the returns/ documents submitted to the other state level authorities as well as the central excise, customs, service tax and Income tax authorities of the central government. This shall be possible only on the basis of coordination between the tax authorities of state governments and that of central government.



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Returns and Assessment under VAT:

ASSESSMENT

Under VAT, there is no system of compulsory assessment at the end of each year by the VAT authorities. It is based on the presumption that, unless otherwise proved, every dealer is honest

1. Self Assessment, where the VAT liability is computed by the dealer himself while submitting returns

2. Deemed Assessment, where if no specific notice is issued proposing departmental audit of the books of account of the dealer within the time limit specified, the dealer would be deemed to have been self-assessed on the basis of the returns submitted by him

3. Scrutiny Assessment, where scrutiny is done in case doubt arises of under reporting of transaction or evasion of tax.

Accounting Entries for VAT:

For purchase of Raw material Raw material A/C – Dr. Input tax credit A/C – Dr. To Bank A/C

For purchase of capital goods Plant and Machinery A/C – Dr. Input tax credit A/C – Dr. To Bank A/C

On sale of Finished goods Bank A/C – Dr. To Sales A/C To VAT payable A/C

On payment of VAT VAT payable A/C – Dr. To Input tax credit A/C To Bank/Cash

Merits and Demerits of VAT:

Merits of VAT Demerits of VAT

1. Avoids cascading effect of tax 2. Reduction in prices to the consumers

1. Regressive in nature, as it is imposed on ultimate consumer and tax paid by poor will be higher percentage than rich. This can be avoided by taxing necessities at a lower rate.

3. Very simple and easy to calculate tax, as no litigations are involved.

2. Higher administration cost due to increased number of dealers

4. Transparency, as each of them knows what they are paying and government also knows the exact amount of tax collected at each stage.

3. No matching of VAT rates between purchases and sales due to varying VAT rates

5. Self assessment which reduces corruption in tax departments

4. No integration of state VAT with Central VAT which makes no credit on interstate purchases.

6. Tax evasion is difficult 5. Detailed records even by small traders 7. Stable revenue collection, as credit is given only on production of evidence

8. Better accounting system 9. VAT system is neutral as to choice of seller.

RETURNS

Returns are filed monthly/ quarterly/annually as per the provisions of state laws

The returns will be accompanied with challans evidencing payment of VAT and with requisite details of input tax and output tax, inventory details etc.,

Every return furnished shall be scrutinised expeditiously. If any technical mistake is detected on scrutinizing, the dealer shall be required to pay the deficit appropriately.



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VAT Audit: Compulsory VAT audit or External audit: If the turnover of a dealer exceeds the specified limit fixed by the state government, then the accounts of such dealer should be audited by a Chartered Accountant (CA) and has to submit a report in prescribed form within specified period.

VAT audit is required due to

Departmental Audit or Selective audit: Audit by the authorities of the VAT department which is not mandatory but is resorted to in selective cases. The departmental audit is provided with a view to promote compliance with the provisions of VAT law. If any tax evasion is detected in the course of audit, the previous records of the concerned dealer may be taken up for audit. The audit is conducted in the following manner.

VAT and sales tax incentives:

Any exemption is against the principles of VAT because it breaks the VAT chain. The Input tax credit is not available for the dealers effecting exempted sales and similarly the buyers of such goods cannot avail any credit. The Empowered committee of state finance ministers has given the power to decide the exemptions to the states, as exemptions depend on the local conditions prevailing but has specified some conditions before giving exemptions:

Authorised officers of the department will visit the business place of the dealer to conduct the audit. The audit may also be arranged in the office of the auditor.

The Information will be gathered form various agencies such as suppliers, income tax department, excise and customs department etc.,

Examining the true and fair view of the books of accounts and the information available

Types of Incentives

Exemption from Tax

Not required to pay tax on purchase and sales

Goods become cheaper

VAT chain gets breaked

Deferment of liability

Normal provisions for collection of taxes

Not required to deposit tax immediately

Will be deposited after certain perod there by enjoying Interest benifit

Remission of tax

Tax will be collected but is not required to be paid

Refund of Input tax credit is available

Ignorance about VAT among trading community

Lack of resources with department to educate tax payers which can be overcome by qualified professionals. No conflict between the

methods and VAT payable will be same

Effective self assessment by dealer

VAT audit involves minute verification by independent auditor

A check over tax evasion



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The quantum and period of incentive should not be increased VAT chain should not be affected. (Only under deferment or remission mode it can be achieved) The department should be able to tract transaction to avoid tax evasion.

VAT and Works Contracts ‘Works contract’ means a contract for carrying out any work which, includes assembling, construction,

building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property. [Sec. 2(ja) of CST Act]

The works contract is deemed sale, which involves the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Under State VAT Laws works contract transactions too shall be subjected to VAT within the purview of the entry 54 of the List II of the Seventh Schedule of the Constitution.

Transfer of property in goods (whether as goods or in some other form) involved in execution of works contract is covered under ‘Deemed sales’ and is liable to sales tax.

Constitutional validity of levy: Article 366(29A)(b) – “a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;” Guidelines to ascertain Works contract:

1. There must exist an individual works contract (Divisible contracts are outside the scope) 2. Goods must be involved in the execution of works contract 3. Transfer of property in goods must pass as goods or in some other form. Form of goods has no relevance

(may have a relevance for determination of rate of tax). 4. Property in goods must pass during the execution of works not before or after the execution of works. 5. Some work has to be done on the property of the contractee by the contractor. 6. Pure labour contracts or service contracts are outside the purview of the sales tax/VAT law. 7. If during the execution of works contract, goods are consumed and their identity is lost then no transfer of

property occurs in those goods. 8. There must be a dominant intention to effect the transfer of property in goods in execution of works

contract. However, even if the dominant intention of the contract is rendering of a service and in that process if there is a transfer of property in goods, the contract will amount to a works contract.

Taxable Turnover for Works contract Taxable turnover = Value of goods the property in which has been transferred in the course of execution of works contract.

Value of goods

Addition method

Cost of acquisition of goods

(+) Profit margin prevalent in trade

(+) Cost of transfering the property in goods

(+) All other expenses till goods passes to contractee

(+) Cost of conversion, if property passes to contractee in some other form.

Deduction method

Contract price

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Note: Dealers can make use of the standard rate of deduction provided in the state VAT laws for deducting labour and other like charges in the contract.

Composition scheme for VAT on Works contract: 1. Composition scheme applicable for each works contract and is optional 2. Composite tax is calculated on the total value of the contract 3. before opting for the composition scheme the contractor must analyse the expenditure components like

labour charges, hire charges for machinery and tools, cost of consumables, cost of establishment, profit element, value of local tax-suffered goods, turnover of sub-contractors, value of exempted goods etc. because all these are included in the total contract value which is subjected to Composite tax.

4. Input tax credit on Inputs and capital goods used in works contract is not available

Illustration:

During the financial year 2010- 2011 a contractor has been assigned works contract relating to construction of an office building for Rs. 20 lakhs by an awarder in order to execute works contract. The contractor makes following purchases:

4% taxable items Goods Amount (Rs.) VAT paid (Input tax) Bricks 50,000 2,000 Iron and Steel 1,50,000 6,000

Total 2,00,000 8,000 12.5% taxable items

Goods Amount (Rs.) VAT paid (Input tax) Grit 50,000 6,250 Sand 80,000 10,000 Masonry Stone 1,45,000 18,125 Flooring stone 1,40,000 17,500 Cement 3,75,000 46,875 Timber 75,000 9,375 Sanitary Goods 25,000 3,125 Electric goods 25,000 3,125 Paints 25,000 3,125

Total 9,40,000 1,17,500 In consideration of execution of the works contract the contractor receives Rs.20 lakhs from the awarder against supplies and charges for labour and services. The contractor maintains proper books of accounts, which show following particulars:

Gross Turnover (GTO) Rs.20,00,000

Tax liability

VAT Rate

When output tax can be computed

seperately for each item of goods

Aggregate of output tax computed seperately for

each item of goods/ material

when output tax cannot be computed seperately for each

item of goods

Total value of goods is subjected to single rate of

tax.

Composition Rate

Entire value of contract X Composite rate of tax



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Eligible deductions of charges towards labour and services (Rs. 5,00,000) Taxable Turnover (TTO) Rs.15,00,000 Division of T.T.O. Supply of 4% taxable goods Rs. 2,63,000 Supply of 12.5% taxable goods Rs.12,37,000

Now to calculate net VAT payable first find out input tax, output tax and input tax credit, which comes as under:

INPUT TAX: Tax paid on purchases of 4% taxable goods Rs. 8,000 Tax paid on purchases of 12.5% taxable goods Rs.1,17,500 Total Input tax credit Rs.1,25,500 OUTPUT TAX: Tax on supply of 4% taxable goods (Rs. 2,63,000 X 4%)

Rs. 10,520

Tax on supply of 12.5% goods (Rs. 12,37,000 X 12.5%)

Rs. 1,54,625

Tax liability Rs. 1,65,145 Net VAT payable = Rs. 1,65,145 – Rs. 1,25,500 = Rs. 39,645.

VAT and Hire purchase

What is hire purchase? Under this transaction, the hirer acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last instalment is paid.

“An agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which: (i) The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic installments. (ii) The property in the goods is to pass to such person on the payment of the last of such installments, and (iii) Such person has a right to terminate the agreement at any time before the property so passes”.

– Definition as per Hire purchase Act, 1972

Constitutional validity of levy: Article 366(29A)(c) - "A tax on the delivery of goods on hire-purchase or any system of payment by instalments." Though the option to purchase is exercised only at the end, by virtue of this sub clause State legislations have been able to deem that a sale takes place on the date of delivery of the goods on hire purchase.



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Taxable event for Hire purchase transaction: Delivery of goods under hire-purchase or instalment sale has to be a physical or actual delivery of goods.

Consequently, the taxable event takes place in the State in which the goods are actually delivered and hence subject to tax under the VAT law of such State.

The provisions of the State VAT laws as applicable to normal sales are equally applicable to hire-purchase and instalment sales.

FAQ’s under VAT and Hire purchase:

1. Should the tax be paid again at the time of conclusion of sale?

It depends on the respective state VAT laws.

2. A company is purely engaged in financing activity for hire purchase. The transaction between the company and hirer is purely financial nature. Is the company covered under VAT provisions? The Supreme Court in the case of Sundaram Finance Ltd. V. State of Kerala held that, intention of the company in obtaining hire purchase and other agreement was to secure return of loan advanced to the customer and there was no real sale of vehicle intended to the customer by the company. The Court therefore held that there was no sale of the vehicle by Sundaram Finance Ltd. to the hirer and so it was outside the purview of sales-tax law.

3. Whether Input tax credit is available to the hirer?

The hire purchase transaction is at par with normal sale transaction. Therefore normal provisions relating to input tax credit will apply. However, some States have provided for prorata credit.

4. The hire purchase price includes an element of finance charges which in nature of service provided by

financier. Whether deduction is available in respect of finance charges from the hire purchase price for payment of VAT? While some of the State VAT legislations have provided for deduction of such interest or finance charges in arriving at the sale price to be treated as turnover in a hire purchase transaction, some States have not done so.

5. VAT on hire purchase is levied on the date of delivery of property (goods) to hire purchaser by hire

vendor. If the said goods are returned, will that tax paid be refunded by the state Government? Many States provide the time limit for granting the claim of goods returned. Therefore, if the goods are not returned during that specified period, no benefit will be available.

VAT and Lease transactions

Lease is chargeable to tax by virtue Article 366(29A)(d) of the Constitution of India. This is a tax on the transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.

The taxable event is the transfer of right to use any goods and hence immovable property is not covered. The taxable turnover means the valuable consideration paid or payable for any sale in a given period.

Certain States have provided for deduction of interest or finance charges for the purpose of determination of taxable turnover.

Lease of an asset in the course of inter-State trade cannot be subject to VAT. Transfer of right to use does not presuppose ownership of the goods. A sub-lease of an asset also is

taxable unless specifically exempt under the State VAT Law. Sale of leased asset after the end of the lease period is taxable as a normal sale. The maintenance of leased asset involving supply of materials for maintenance/ repair by the lessor will not

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Hence, there should would be no VAT on the value of materials supplied during maintenance/repair of the leased asset.

The assets given on lease will be generally capitalized by the lessor in his books and will be treated as capital assets. Thus, provision relating to input tax credit on capital goods will apply.

The lessor would pay VAT at the time of procurement of goods. However, liability to pay VAT on lease rentals will be spread over the tenure of the lease. Therefore, some States have provided for utilization of input credit for paying output tax only over the entire period of lease

1. What is taxable Event for Levy?

The taxable Event is the transfer of right to use the machine (Note: On Immovable property given on lease VAT is not levied)

2. What is the Value for the purpose of Levy?

Taxable Turnover = Consideration for the lease + Other charges (-) Interest or other finance cost.

3. Taxable Turnover: P.V of Lease Rentals discounted at a discount rate applicable to the leasing company

= 3,00,000 X PVCF @ 10% for 10 years = 3,00,000 X 6.144 = 18,43,200

4. As the lease transaction is spread over a period of 10 years, is the leasing company required to pay VAT on full value? Since the lease rental is spread over the lease term, therefore the states have chosen to tax the lease transactions over the lease term. Therefore the taxable turnover should be computed for each year and accordingly VAT shall be payable

Taxable turnover p.a = 18,43,200/10 = 1,84,320. 5. What is the position of Input tax Credit? The VAT paid on purchases is available as Input tax credit and since the VAT liability is spread over the lease term, the input tax credit is allowed to utilize in installments spread over the lease term (MVAT has allowed the whole credit immediately)

Input tax credit p.a = 1,50,000/10 = 15,000

What is the Net VAT payable?

INDIRECT

TAX LAWS

Common

Topics under

Excise,

Customs &

Service tax

Tharun Raj



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Table of Contents

Show cause notice for short payment of duty: ............................................................................. 169

FAQ’s on Show cause notice: .................................................................................................. 169

Recent case laws on Demand and adjudication under Excise and customs: .......................... 172

Interest on delayed payment of duty ............................................................................................ 172

Penalty in case of short levy (or) non levy (or) short payment (or) erroneous refund (Revised

w.e.f 2011) .......................................................................................................................................... 173

FAQ’s on Interest and Penalty ................................................................................................ 174

Liability under Indirect taxes to be first charge .......................................................................... 175

Power of Search and Seizure ....................................................................................................... 175

Refund of duty under excise ......................................................................................................... 175

FAQ’s on Refund: .................................................................................................................... 176

Recent case laws on Refund under Excise and Customs: ........................................................ 178

Non recovery of duties not levied or short levied as a result of general practice ....................... 179

Duties/Tax collected must be deposited with the Central Government ....................................... 179

Interest on the amounts collected in excess of duty ..................................................................... 180

Provisional attachment to protect revenue in certain cases ........................................................ 180

FAQ’S on Order: ..................................................................................................................... 182

Adjudication:................................................................................................................................ 182

Appeals: ....................................................................................................................................... 183

Forms under Appeals:.............................................................................................................. 183

FAQ’s on appeals and revisions: ............................................................................................. 184

Summary of Appeals ................................................................................................................ 187

FAQ’s on monetary limits for filing appeals: .......................................................................... 189

Recent case laws on appeals under excise, customs and service tax ................................... 189

Advance Ruling ............................................................................................................................ 190

FAQ’s on Advance Ruling: ...................................................................................................... 190

Case laws on Advance Ruling: ................................................................................................ 192

Settlement commission: ................................................................................................................ 192

FAQ’s on Settlement commission: ........................................................................................... 193

Case laws on settlement commission: ...................................................................................... 195


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Common Concepts under Excise and Customs

Show cause notice for short payment of duty:

Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994

Section 11A Section 28 73

FAQ’s on Show cause notice:

1. Who can issue show cause notice? Show cause notice should be approved and signed by officer empowered to adjudicate the case. The authority to adjudicate the case are:

When demand of duty/CENVAT credit is below ` 1 lakh Superintendent

When demand of duty/ CENVAT credit is between ` 1 lakhs and ` 5 lakhs

AC/DC

When amount is between ` 5 and ` 50 lakhs Additional commissioner/ Joint commissioner

When the amount is > ` 50 lakhs Commissioner

Issue of show cause notice or Demand

Adjudication

Confirmation of demand/ order

Appeal

If Excise Duty/Customs duty/Service tax has not been levied or paid (or) has been Short levied or short paid (or) Erroneously refunded (It may be for any reason)

Central excise officer serve show cause notice

Opportunity of personal hearing will be given to the person

Demand will be confirmed (i.e. Excise officer/Customs officer will determine the duty payable) by issue of order

giving reasons



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2. What are the requirements of show cause notice? Demand of duty or penalty on a person cannot be confirmed unless a show cause notice is issued to him. A simple letter asking to pay duty is not a show cause notice It should be issued within the specified time limit or the extended time limit, as the case may be. A notice

issued after the specified or extended time limit becomes time barred and void. A show cause notice issued after payment of duty/tax is void Show cause notice must be in writing It should be specific and not vague. Amount demanded must be specified (Duty finally determined cannot exceed the amount shown in SCN) It should state the nature of contravention and provisions contravened If penalty is proposed to be imposed, this should be mentioned in the notice It should inform and clearly state the charges/ allegations and grounds. If SCN is issued in one ground, demand cannot be confirmed on other ground

“The show cause notice should ask the person, why he should not pay the amount specified in the notice or why the penalty should not be imposed on him”

3. What is the time limit for serving show cause notice?

Situation Time limit

Duty of Excise/Duty of Customs/Service tax not levied or not paid or has been short levied or short paid or erroneously refunded For OTHER REASONS

Within 1 year from ‘Relevant date’*

Duty of Excise/Duty of Customs/Service tax not levied or not paid or has been short levied or short paid or erroneously refunded In case of fraud; collusion; any wilful mis-statement; suppression of facts; contravention of any provision with an intention to evade payment of Excise duty/Customs duty/Service tax.

Within 5 years from ‘Relevant date’*

* The period during which there was any stay by an order of the court or tribunal in respect of payment of such duty shall be EXCLUDED.

4. What is “Relevant date” for calculating the time limit? In case of Excise:

Case Relevant date

(i) If return is filed as per provisions of law The actual date of filing return

(ii) If return was required to be filed, but was not filed The date on which return should have been filed

(iii) In any other case The date of payment of duty

(iv) Provisional assessment Date of adjustment of duty after final assessment

(v) On account of erroneous refund Date of such refund

Note: Demand can be raised only after assessment. In case of provisional assessment no demand can be raised.

Special points on computation of time limit: The first day is to be excluded and last day should be included No time limit in respect of demands not covered U/S 11A Where the service of notice is stayed by order of court, the period of such stay can be excluded. In case of Customs:

Case Relevant date

(i) Where duty is not levied or interest is not charged The date on which proper officer makes an order for the clearance of goods

(ii) Where duty is provisionally assessed Date of adjustment of duty after final assessment

(iii) On account of erroneous refund Date of such refund

(iv) In any other case The date of payment of duty

In case of Service Tax:

Case Relevant date

(i) If return is filed as per the Act or Rules The actual date of filing return

(ii) If return was required to be filed but not filed The date of which return should have been filed


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(ii) Where service tax is provisionally assessed Date of adjustment of service tax after final assessment

(iii) On account of erroneous refund Date of such refund

(iv) In any other case The date of payment of service tax

5. To whom show cause notice is given? Liability to pay duty is on manufacturer and duty cannot be demanded from buyer, stockist or consumer. Therefore, SCN is given to manufacturer only.

In case of Normal goods To the manufacturer of goods irrespective of the ownership of such goods.

In case of Seized goods To the owner as well as the person from whom the goods were seized.

6. Will the SCN be issued if Duty/Tax is paid before issue of SCN?

*Interest in accordance with Sec. 11AB for Excise, Sec. 28AB for Customs and Sec. 75 for Service tax.

7. Sec. 11A specifies ‘Erroneously refunded’. What is the refund covered in this case? Refund includes rebate of excise duty paid on goods exported from India or rebate on excisable material used in manufacture of goods exported out of India.

8. Can a show cause notice cum demand be issued at the same time? Protective demand means issue of show cause notice cum demand in time, so that it does not get time barred. On receipt of audit objections, protective demands should be issued in time, before they get time barred – CBE&C circular No. 210/28/81

9. The Assessing officer has issued a show cause notice within 5 years from the relevant date (i.e. for cases involving fraud; misrepresentation; wilful misstatement etc.,). On appeal, the CESTAT concluded that the notice issued is not sustainable as the reasons for which SCN has been issued (i.e. Fraud, misrepresentation etc.,) could not be established against the person to whom the SCN was issued. How the AO can deal with this issue? w.e.f 1/4/2011, Where any appellate authority or tribunal or court concludes that the notice issued for the charges of fraud, collusion etc., is not sustainable as it cannot be established against the person to whom it is served, then AO shall determine the duty/tax payable by such person for the period of 1 year, deeming as if the normal SCN was issued (i.e. SCN issued for other reasons)

Amount of Duty/Tax along with the interest* is paid by the assessee before SCN is served to him and intimated in writing to

department

If Duty/Tax along with interest is fully discharged

On receipt of such information, the excise officer shall not serve

any SCN

If assessing officer is of the opinion that Duty/Tax along with interest is not fully

discharged

The Assessing officer shall proceed to issue a SCN for the amount which

falls short within 1 year from the date of receipt of information

Either - a) On his own ascertainment or

b) As ascertained by the Assessing officer



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10. An assessee paid duty on exempted parts, availed CENVAT credit and reversed it when utilising it for exempted final product. The so called method followed by assessee is revenue neutral (i.e. There is no revenue loss). Can demand be issued in that case? The procedure followed was revenue neutral and hence duty is not payable. However penalty was held valid for violation of rules.

11. What is the time limit for confirmation of demand?

Situation Time limit

Normal cases (i.e. other than fraud, collusion etc.,) Within 6 months from the date of issue of SCN

In case of fraud, collusion, wilful mis-statement, suppression of facts, contravention of any provision with an intention to evade payment of duty

Within 1 year from the date of issue of SCN

Note: Most of the FAQ’s are common for Excise, Customs and service tax. Retrospective amendment in sec. 28 of customs Act, 1962 Sec. 28 has been amended retrospectively to empower various officers appointed under customs to issue show cause notices. The officers of customs empowered in this regard include: Officers of commissionerates of customs (preventive) Director general of revenue (Intelligence) Director general of central excise (Intelligence)

Recent case laws on Demand and adjudication under Excise and customs:

Case Judgment

1. Hans steel rolling mill V. CCE 2011 (SC)

Time limit under sec. 11A is not applicable to recovery of dues under compounded levy scheme as it is a comprehensive scheme separate from normal provisions of Excise Act, 1944

2. CCE V. Accrapac P. Ltd. 2010 (Guj.)

Failure to disclose a fact of manufacture which is required to be disclosed under the applicable regulations does not amount to suppression of facts and does not invoke extended period of limitation.

Arrears of duty under section 11A can be paid by utilizing the CENVAT credit which has accrued subsequent to the period to which the arrears pertained. - Circular No. 962/05/2012

As per the proviso to rule 3(4) of the CENVAT Credit Rules, 2004, while paying duty of excise or service tax, as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case may be.

The above restriction under rule 3(4) applies only to normal payment of excise duty, where duty for a particular month or quarter is to be discharged by the 5th of the following month.

Unlike normal payment is made after self-determination of duty, under sec. 11A, duty is determined by the central excise officer and the payment is mandated after such determination.

Therefore, the restriction on the utilization of the CENVAT credit is not applicable ot the demands confirmed under sec. 11A

Interest on delayed payment of duty


Section 11AB Section 28AB Section 75

When interest shall be payable? In case any duty has not been levied or paid or has been short levied

or short paid or erroneously refunded.

Note: Such interest for late payment is payable even in cases of fraud, collusion, wilful misstatement or suppression of facts or contravention of any provisions of Act or rules made there under.

What is the Rate of interest? 18% p.a (w.e.f 1-4-2011)

What is the period for which interest payable?

In case of Excise: FROM – The date on which such duty becomes due (i.e. Date of removal


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of excisable goods) TILL – Date of payment of such duty In case of Customs: FROM – The first day of the month following the month in which the duty ought to have been paid or from the date of erroneous refund. TILL – Date of payment of such duty

When duty becomes payable due to order/Instruction issued by CBE&C, what is the interest payable in such case?

If full amount of such duty is voluntarily paid by assessee within 45 days from the date of issue of such order, instruction or direction, without reserving the right to appeal against such payment then the assessee shall be exempt from the payment of interest even if the duty was due earlier.

Penalty in case of short levy (or) non levy (or) short payment (or) erroneous refund (Revised w.e.f 2011)


Section 11AC Section 114A 78

When penalty shall be levied?

Where any duty has not been levied (or) paid (or) has been short levied (or) short paid (or) erroneously refunded by reason of fraud, collusion, wilful mis-statement and suppression of facts or contravention of any provisions of the Act or rules with an intent to evade payment of duty.

What is the amount of penalty?

In case of Excise/Service Tax:

PENALTY, WHERE DETAILS OF THE TRANSACTIONS ARE AVAILABLE IN THE SPECIFIED RECORDS

If Excise duty/Service Tax accepted by assessee, in full or in part, is paid along with interest before issue of SCN

1% p.m from the month following the month in which such duty was payable (or) 25% of such Excise duty/Service tax, Whichever is LOWER

If Excise duty/Service tax is paid within 30 days from the date of communication of order [Note: In case of Service tax penalty is also required to be paid within 30 days]

25% of such Excise Duty/Service tax

[The period of 30 days will be extended to 90 days, if the value of taxable service is ≤ 60 lakhs]

In any other case [The notice has been served and subsequent to that Excise officer is of the opinion that the transactions have been recorded]

50% of such Excise duty/Service tax

Penalty under Excise, Customs and Service tax

General Penalty

Excise - Rule 25, 26 & 27 of Excise Rules, 2002

Customs - Sec. 112 and 114

Service tax - Sec. Sec. 76 & 77 of FA, 1994

On account of fraud, collusion etc.,

Excise - Sec. 11AC

Customs - Sec. 114A

Service tax - Sec. 78 of FA, 1994



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PENALTY, WHERE DETAILS OF THE TRANSACTIONS ARE NOT AVAILABLE IN THE SPECIFIED RECORDS

Any case 100% of such Excise duty/Service tax

If the penalty is payable under this section, the provisions of sec. 76 shall not apply

In case of Customs:

If customs duty accepted by assessee, is paid in full or in part along with interest within 30 days of receipt of notice

25% of the Duty

If customs duty along with penalty is paid within 30 days from the date of communication of order of the proper officer

25% of the duty or Interest

In any other case 100% of the duty or Interest

Where any penalty has been levied under this section, no penalty shall be levied under sec. 112 or sec. 114

Special points: Penalty shall be reduced to 25%, if duty, interest and penalty deposited within 30 days from the date of communication of order.

If the duty amount is subsequently increased/decreased in appeals, then such benefit will be available only when such increased duty, interest and penalty deposited within 30 days from the date of determination of increased duty.

FAQ’s on Interest and Penalty

1. On an appeal, CESTAT has modified the excise duty determined by the Excise officer. Whether interest and penalty calculated on the modified amount or original amount?


Section 11A(12) and 11A(13)

Not specified under Customs

Section 78(2)

Where the appellate authority i.e. Commissioner (Appeals) or CESTAT or Court modifies the amount of duty/tax

Such modified amount is less than the duty/tax

determined by Excise officer

Such modified amount is more than the duty/tax determined by Excise officer

Penalty & Interest payable on

Modified amount of duty/tax In case of Excise: Original amount as well as modified amount of Excise duty In case of Service tax: Modified amount of service tax

Computation FROM the date on which original amount of duty/tax becomes due TILL the date of payment of modified amount of duty/tax

Under Excise: In case of Original amount of duty FROM the date on which it becomes due TILL the date of order for modification. In case of modified amount of duty FROM the date of order in respect of such increased amount TILL the payment of duty. Under Service tax: FROM the date on which it becomes due TILL the payment of tax

Example An assessee has manufactured goods on 1/8/2011. The duty has not been paid. Excise officer issued a SCN for Rs. 48,00,000 and on appeal, the duty payable

An assessee has manufactured goods on 1/8/2011 and removed on 5/9/2011. The duty has not been paid on account of fraud. Excise officer issued a SCN for Rs. 48,00,000 and on appeal, the amount payable is modified to Rs. 55,00,000 on 5/3/2012.


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is modified to Rs. 35,00,000. Penalty = N.A (As the above non payment is not on account of fraud, collusion, wilful mis-statement etc.,) Interest = 18% p.a on Rs. 35,00,000 calculated from 5/9/2011 till actual date of payment.

Penalty = 100% of duty payable (i.e. Rs. 55,00,000) [If duty along with interest and penalty is paid within 30 days from the date of such order, then reduced penalty of 25% is applicable] Interest = 18% p.a on Rs. 48,00,000 calculated from 5/9/2011 to 5/3/2012 and on Rs. 55,00,000 from 5/3/2012 till actual date of payment

2. Is payment of interest mandatory even if not specified in the order determining duty?

When an order determining the duty/tax is passed by the central excise officer/customs officer, the person is liable to pay the said duty/tax shall pay the amount of interest whether or not such amount of interest is specified separately.

3. What is the procedure for recovery of interest not paid or short paid?

The above provisions related to issue of SCN is applicable to recovery of interest short paid or not paid or erroneously refunded.

Liability under Indirect taxes to be first charge


Section 11E Section 142A Section 88

These sections create first charge on the property of a defaulter for recovery of the Central excise duty, Customs duty and Service tax.

The above first charge is subject to the provisions of Companies Act, Recovery of Debt due to bank and financial Institution Act Securitisation Act and Reconstruction of Financial Assets and Enforcement of security interest Act

After paying the above mentioned dues, the dues under Indirect taxes will have the first charge

Power of Search and Seizure


Section 12F Section 105 Section 82

Joint commissioner/ Additional commissioner of Excise/Customs or such other excise/customs officer as notified by Board can authorize search and seize the premises, documents, books or things.

The said officer should have reason to believe that above goods liable for confiscation are secreted in any place.

The provisions of search and seizure under Code of criminal procedure, 1973 is applicable (subject to the modification that wherever the word “Magistrate” appears in the said code, the words “commissioner of central excise” is replaced.

Hence, the police officer should submit copies relating to search to the commissioner of central excise

Refund of duty under excise


Section 11B Section 27 Section 83

Procedure under Excise: Refund application should be filed in Form ‘R’ (in duplicate) along with Original GAR-7 challan/PLA/other document through which duty was paid Proof that duty burden has been borne by the assessee and has not been passed to the customer



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Other documents in support of refund claim E.g. Invoices Stating the reasons thereof for refund claim in a statement/application.

Procedure under customs:

FAQ’s on Refund:

1. What are the reasons for which refund claim shall be made? In case of Excise: Excess payment of duty due to mistake Forced by department to pay higher duty Finalization of provisional assessment Export under claim of rebate Assessee paid duty under protest/ pre deposit of duty for appeal, and appeal decided in favor of

assessee. Refund of CENVAT credit if final product exported Unutilized balance in PLA. In case of Customs: If the importer or exporter has paid the duty and interest and has not passed in the incidence if

such duty and interest to any other person. If the duty and interest is paid on imports made by an individual for his personal use. If the duty and interest has been borne by the buyer and he has not passes on the incidence

thereof to any other person. In case of drawback of duty payable under sec. 74 and sec. 75 of the customs Act, 1962.


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In case the refund is in respect of export duty. In case the duty and interest is borne by any other such class of applicants as the central

government may by notification in the official gazette specifies and such classes of persons have not passed on the incidence thereof to any other person.

2. What is the time limit within which Refund claim must be filed?

In case of Excise: Refund claim should be lodged within 1 year from ‘Relevant Date’. In case of customs:

In case of imports by an individual for his personal use or import by government or by any educational, research or charitable institution, hospital

Within 1 year from ‘Relevant date’

In any other case Within 6 months from ‘Relevant date’

3. What is the definition of relevant date for calculating the time limit for filing refund claim?

In case of Excise:

Situation Relevant Date

a) Exports by sea or air When ship or aircraft leaves India

b) Exports by land Date on which goods leave Indian frontier

c) Export by post Date of dispatch of goods by post office to a place outside India.

d) In case of compound levy scheme and assessee pays the full amount of duty, but later reduced by government

Date on which notification regarding reduction of rate is published

e) Refund claim filed by purchaser Date of purchase of goods

f) Duty exempted by special order under section 5A(2)

Date of issue of such order

g) Duty was paid on provisional basis Date of adjustment of duty after final assessment of duty

h) In any other cases Date of payment of duty

In case of Customs:

Situation Relevant Date

a) In case of refund claim by a person other than importer

Date of purchase of goods by such person

b) In case of goods which are exempt from payment of duty by a special order

Date of issue of such order

c) In case where duty is paid provisionally under sec. 18

Date of adjustment of duty after the final assessment thereof.

d) Where duty becomes refundable as a consequence of judgment, decree, order or direction of appellate authority, Appellate tribunal or any court as the case may be

The date of such judgment, decree, order or direction.

e) In any other cases Date of payment of duty

4. Who can file refund claim? Assessee who has paid the duty (or) Buyer on whom the burden of duty has been passed.

5. What is refund subject to unjust enrichment?

It is reasonable assumption that as and when a manufacturer pays excise duty, he will pass on the burden immediately to the buyer of such goods.

In such a case, if refund is granted to him, he will be enjoying the benefit at the cost of buyer. It will not be just and equitable. This is known as “Unjust enrichment”



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So, Refund shall be granted to manufacturer only if he proves that the duty liability has not been passed on to the buyer or if buyer makes the refund claim, he has to prove that the burden has not been passed on to the subsequent person. In other words, the burden of proof is on the person who makes the refund claim.

6. What happens if the burden is passed on to the subsequent person?

In majority of the cases, it is not practicable to identify individual consumer and ay refund to him, at the same time the duty cannot be retained by the government

In such cases the amount will be paid to consumer welfare fund. The fund so created shall be utilized for payment to:

a) Any agency/organization engaged in consumer welfare activities for a period of 3 years, registered under any law.

b) Any industry engaged in viable and useful research activity in formulation of standard mark of products of mass consumption.

c) State government d) Consumer for legal expenses incurred by consumer.

7. When the doctrine of unjust enrichment shall not apply?

In case of Excise: Rebate of excisable goods exported out of India (If he had exported on payment of duty) Rebate of excise on excisable materials used in manufacture of goods exported out of India (If

he has not availed CENVAT credit) Refund of duty paid on inputs Export duty Duty drawback

In case of Customs: If the importer or exporter has paid the duty and interest and has not passed on the incidence

of such duty and interest to any other person If the duty and interest is paid on imports made by an individual for his personal use. If the duty and interest has been borne by the buyer and he has not passed on the incidence

thereof to any other person In case of drawback of duty payable under sections 74 and 75 of customs Act, 1962 In case the refund is in respect of the export duty as specified in section 26 (i.e. Goods Exported

and re-imported within 6 months) of Customs Act, 1962. In case the duty and interest is borne by any other such class of applicants as the CG may by

notification in official gazette specify and such class of persons have not passed the incidence thereof to any other person.

8. What is the time limit within which the duty must be refunded to the applicant?

Within 3 months from the date of application. If not so paid, interest @ 6% shall be payable to the assessee.

Recent case laws on Refund under Excise and Customs:

Case Judgment

1. Ranbaxy Laboratories

Ltd. V. UOI 2011 (SC)

Interest under sec. 11BB becomes payable on the expiry of a period of 3 months from

the date of receipt of the application for refund [But not from the date of order of

refund]

2. CCE V. Techno rubber

Industries P. Ltd. 2011

(Kar.)

The assessee is eligible to get refund on the basis of debit note issued by the buyer, as

the excess amount paid by assessee to department is not passed to buyer.

3. CCE V. Gem properties

P. Ltd. 2010 (Kar.)

When the assessee has paid excess duty and included it in the cost of production, it is a

case of unjust enrichment and refund shall not be granted unless otherwise assessee

proves that duty paid is not included in the cost of production. [Mere loss in the

financial year is not proof]


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4. CCus. Chennai V. BPL

Ltd. 2010 (Mad.)

Only CA certificate is not valid to substantiate refund claim as the said certificate is mere

evidence acknowledging certain facts.

5. Aman Medical products

V. CCus, Delhi 2010 (Del.)

Refund is available to the importer is he has paid higher duty by filing bill of entry even

though the payment is not in pursuance of an assessment order.

6. Narayan Nambiar

Meloths V. CCus 2010

(Ker.)

Refund is available on the basis of attested copy of GAR-7 challan also [No need to file

original GAR-7 challan]

Non recovery of duties not levied or short levied as a result of general practice

Central Excise Act, 1944 Customs Act, 1962

Section 11C Section 28A

Who has the power to exempt?

CG has the power to exempt from such duty or excess duty through notification in official gazette having regard to the interest of industry.

When such exemption shall be granted?

The CG is satisfied that a) The goods in question were/are liable to duty of excise but according to

general practice the duty of excise was/is not being levied on such goods. b) The goods in question were/are liable to a higher amount of duty but according

to general practice the excise duty was/is being levied at a lower rate.

Despite general practice, if such duty is deposited, will the refund be available?

Yes, in accordance with the refund provisions within 6 months from the date of issue of notification to exempt such goods

Duties/Tax collected must be deposited with the Central Government


Section 11D Section 28B Section 73A

What is the obligation covered under the said section?

The following persons should pay the duty/tax so collected immediately to the credit of central government. A person who is liable to pay duty under the respective Acts or Rules made

there under. A person who has collected any amount in excess of duty assessed or

determined and paid on any excisable goods from the buyer of such goods/Any person in any manner as representing duty of excise

A person who has collected any amount as representing duty of excise on any excisable goods which are wholly exempt or chargeable to nil rate of duty.

When the said duty/tax must be deposited?

The sections didn’t specify the time limit but used the words ‘FORTHWITH” which means that immediately on the respective due dates.

What if the duty/tax collected is not deposited?

The central excise officer may serve a SCN on the person liable to pay such amount. After considering the representation if any made by the person on whom the notice is served, the central excise officer shall determine the amount die from such person (The amount should not exceed the amount as specified in SCN) and thereupon such person shall pay the amount so determined.

Is there any remedy to the person who has borne the liability of the duty/tax (i.e. Buyer or Service provider)

The amount paid to the credit of the central government under this section shall be adjusted against the duty of excise/service tax/customs duty payable by the person on finalization of assessment. The amount of surplus, if any shall either be credited to the consumer welfare fund or shall be refunded to the person who has borne the incidence of such amount.



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How the person can get the refund?

He has to claim for refund in the proper refund application within 6 months from the date of issue of public notice by AC for the refund of such surplus amount.

Interest on the amounts collected in excess of duty


Section 11DD N.A Section 73B

When the amount is collected in excess, it should be deposited into the governments account on the due date, if not interest shall be payable as follows:

In case of Excise 15% p.a FROM – The first day of the month succeeding the month in which the amount ought to have been paid TILL – The actual date of payment.

In case of Service tax The value of taxable services provided during a financial year > 60 lakhs

18% p.a FROM – The first day of the month succeeding the month in which the amount ought to have been paid TILL – The actual date of payment.

In case of Service tax The value of taxable services provided during a financial year ≤ 60 lakhs

15% p.a FROM – The first day of the month succeeding the month in which the amount ought to have been paid TILL – The actual date of payment.

Provisional attachment to protect revenue in certain cases


Section 11DDA Section 28BA Section 73C

During the pendency of any proceeding u/s 11A or u/s 11D, the central Excise officer may for protecting the interests of revenue, order provisional attachment of property belonging to any person to whom notice is served in the prescribed manner. Attachment of property is permissible u/s 11DDA, if SCN is given in the following situations:

Sec. 11A a) Duty of excise has not been levied or paid b) has been Short levied or short paid c) Erroneously refunded

In case of fraud, collusion, wilful misstatement and suppression of facts or contravention of provisions with intent to evade payment of duty.

Sec. 11D Duty collected from buyer must be paid immediately (forthwith) to the credit of central government (If not, then SCN issued)

The excess amount of duty collected from buyer must be paid immediately (forthwith) to the credit of central government (If not, SCN issued)

The procedure is as contained in CBE&C circular No. 874/12/2008.


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Special points:

1) The period of six months can be extended with written permission of chief commissioner but the total period cannot be more than 2 years

2) The provision should be resorted only when duty involved is more than 25 lakhs

3) Personal property cannot be attached

4) Attachment should not hamper the business of assessee

5) Property which is exempt from attachment under code of civil procedure shall not be attached

6) Movable property should be attached only if immovable assets are not sufficient.

7) Where an application for settlement of case is made to the settlement commission, the period commencing from the date on which such application is made and ending with the date on which an order of acceptance or rejection of application is made shall be excluded from the period above [This exclusion is not applicable in case of service tax]

Procedure for passing order by adjudicating authority:

Note: 1. In case of charge of clandestine removal (Removal of goods done secretly) (or) Wrong classification or

under valuation, burden of proof is on department. 2. If a statement of a person is relied upon, opportunity of cross examining the person must be given if

demanded. If such opportunity is not given, the statement cannot be relied upon – Kalra Glue factory V. Sales tax tribunal.

Issue of show cause notice

Assessee has to give reply, by presenting his case before adjudicating authority (Within one month)

Assessee shall produce supportive evidence and be allowed examination and cross examination of witness.

To decide the quantum of demand, determination of duty is necesary. Hence assessee can raise dispute regrding the following:

(i) Rate of duty when duty is demnaded, even if he had not raised it earlier

(ii) He can callenge classification, even if he had not challenged it earlier

(iii) He can raise dispute about correct determination of 'Value'

As per the principles of natural justice, the adjudicating authority shall give opportunity of personal hearing to a party in proceeding

Adjudicating authority may issue order

Adjudicating authority can give time to parties and adjourn the hearing for reasons to be recorded in writing.

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FAQ’S on Order:

1. What is the time limit for passing order? CBE&C circular No. 732/48/2003 Normal cases – Within 5 days after personal hearing Special cases and for certain reasons – Within 15 days or at most within 1 month after personal hearing.

2. Who has to pass the adjudicating order? Can an officer other than the officers with whom personal hearing has been given, pass the order? No, Same officer who has given personal hearing should pass the order. If he is transferred before adjudication order is passed, new officer should give fresh hearing – Bhagirath Iron V. CCE

3. What are the requirements of order? Commissioner must himself quantify the duty payable with assistance from departmental officers and

after hearing the appellant – Nihon Electronics V. CCE Order must be based on points alleged in show cause notice. An order based on point not alleged in

show cause notice is not sustainable. It is a principle of natural justice that an order confirming demand mentioned in SCN must be with

reasons

4. An adjudicating authority has issued an order. Can he issue supplementary order or can he make additional demand? Once adjudicating authority issues an order, he can only correct clerical mistakes or error apparent on record but cannot issue supplementary order or additional demand. The order once signed is final, even if not communicated to party.

Adjudication:

The following list of FAQ’s explain the concept of adjudication.

1. What is adjudication? Adjudicate means to hear or try and decide judicially and adjudication means giving a decision.

2. What happens after adjudication?

An adjudication order shall be passed by the adjudicating authorities

3. Who has power to pass adjudication order?

Adjudicating authority has power to pass adjudication order. ‘Adjudicating authority’ means any authority competent to pass any order or decision under the excise Act, 1944. Hence the excise authorities except commissioner (Appeals) and CBE&C comes under adjudicating authority

4. Are they bound by any trade notice or instructions of superiors?

No, they are quasi judicial authorities

5. Is any adjudicating authority competent to pass any adjudication order? i.e. for any amount of duty.

No, the monetary limits has been specified under CBE&C circular No. 24/2011.

Commissioner No monetary limit

Additional commissioner/Joint commissioner

Between 5 to 50 lakhs

AC/DC Between 1 lakh to 5 lakhs

Superintendent Upto 1 lakh*

* Superintendent can decide cases where amount involved is Rs. 1 lakh except issued relating to classification and valuation and except where suppression of facts is alleged. He can decide issues relating to CENVAT credit and penalties.


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Appeals:

Forms under Appeals:

Under Excise Under Customs Under Service Tax

Appeal to Commissioner (Appeals) By Assessee EA-1 CA-1 ST-4

Appeal to Commissioner (Appeals) by Department EA-2 CA-2 N.A

Appeal to CESTAT by Assessee EA-3 CA-3 ST-5

Memorandum of cross objections (for CESTAT) EA-4 CA-4 ST-6

Appeal to CESTAT by Department EA-5 CA-5 ST-7

Appeal to High Court EA-6 CA-6 N.A

Memorandum of cross objections (for High court) EA-7 CA-7 N.A

Revision application to Central Government EA-8 CA-8 N.A



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FAQ’s on appeals and revisions:

1. What is the time limit for filing appeal?

Appeal to Time limit

Commissioner (Appeals) Within 60 days (3 months in case of Service tax) after the receipt of adjudication order

CESTAT Within 3 months after the receipt of adjudication order

2. Can the delay in filing be condoned?

A separate application has to be filed by the assessee to appellate authority (Commissioner (Appeals) or CESTAT) and stating there in the reasons for delay.

Delay upto last date of filing appeal need not be explained, but delay thereafter has to be explained.

Commissioner (Appeals) can condone delay only upto 30 days (3 months in case of Service tax) CESTAT can condone delay. But it considers various factors for condoned. CESTAT in some cases

one day delay may not be condoned while in other case, delay of even months can be condoned.

3. What is departmental appeal/Review? The adjudicating authority is a quasi-judicial authority when it passes adjudication order. Hence the order cannot be straight away annulled (declared to be no longer valid) by any authority higher to him. However if the higher authority is of the opinion that the order is not proper, it can order for its review by higher appellate authority (i.e. Commissioner (Appeals) or CESTAT). This is known as departmental appeal or review.


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4. Why review necessary?

5. What is the time limit for departmental appeal/Review?

Appeal to Time limit

Commissioner (Appeals) Within 3 months from the decision or order of adjudicating authority

CESTAT Within 3 months from the communication of order of commissioner

6. Can department make further appeal if it is not satisfied with the order of commissioner (Appeals)?

Yes, it will be termed as regular appeal but not a review. It should be noted that this appeal cannot be filed on entirely new ground. Plea must arise out of order. The decision to file appeal against the order of commissioner (Appeals) will be taken by committee of 2 commissioners and they should be of the opinion that the order is not legal or proper Copy of authorization of committee of commissioners is required to be filed along with appeal.

7. What is the procedure for filing appeal with commissioner (Appeals)?

Additional evidence can be produced before commissioner (Appeals) in the following cases a) When adjudicating authority has refused to admit evidence which ought to have been admitted. b) Where the appellant was not able to provide evidence due to sufficient reasons c) When sufficient opportunity was not given to appellant to produce relevant evidence.

8. What are the cases in which appeal cannot be made to tribunal?

In case of Excise: Loss of goods occurring in transit from factory to warehouse or to another factory Rebate of duty on goods exported outside India or excisable goods used in manufacture of

finished goods which are then exported Goods exported without payment of duty

The order for review by

Commissioner

For the purpose of satisfying himself as to legality or propriety

of any decision or order passed by Assisstant/Deputy/Joint

commissioner as adjudicating authority

Committee of chief commissioners

For the purpose of satisfying itself as to legality or propriety of any decision or order passed

by commissioner as adjudicating authority

Procedure to be followed by

Assessee

Appeal in Form No. EA-1 (In duplicate) along with,

# Certified copy of the decision or order against which appeal is filed

# Statement of facts and grounds of appeal

Department

Appeal in Form No. EA-2 (In duplicate) along with,

# Two copies of decision or order passed by adjudicating authority

# Copy of order passed by commissioner directing the authority to apply to commissioner (Appeals)



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Credit of duty allowed to be utilized towards payment of excise duty on final products under the provisions of the Excise Act or rules made there under.

In case of Customs: Any goods imported or exported as baggage Any goods loaded in a conveyance for importation into India Cases related to duty drawback.

9. What is the remedy available in such cases (as appeal cannot be made to tribunal)?

A revision application in Form EA-8 (In duplicate), along with Two copies of order of commissioner (Appeals) Two copies of original order against which commissioner (Appeals) has passed the order

Under secretary, Revision application Unit

Government of India Ministry of Finance

Department of Revenue Note:

Fee payable with application If duty and interest demanded > 1 lakh – Rs. 1000 If duty and interest and penalty < 1 lakh – Rs. 250

Application must be filed within 3 months from communication of order. This period can be further extended by 3 months on sufficient cause being shown.

10. What is the procedure for filing appeal to tribunal?

Note:

1. Tribunal may at its discretion, refuse to admit an appeal if the duty involved or difference of duty involved or penalty involved is less than Rs. 50,000.

2. However, appeal cannot be refused if the issue pertains to valuation or rate of duty 3. The memorandum of cross objections should be filed within 45 days from the date of receipt of

such notice from the CESTAT 4. Tribunal has no powers to review its orders. However, Tribunal can pass order for rectifying

mistake apparent from the records within 6 months of passing of order.

11. What is the fee for filing appeal with CESTAT?

Where the amount of duty and interest demanded and penalty levied ≤ 5,00,000 `1,000

Where the amount of duty and interest demanded and penalty levied > 5,00,000 but ≤ 50,00,000

`5,000

Where the amount of duty and interest demanded and penalty levied > 50,00,000 `10,000

Every application made before CESTAT `500

To be submitted personally to/ registered post to


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a) In an appeal for grant of stay or for rectification of mistake or for any other purpose b) For restoration of an appeal or an application.

Where appeal/application if filed by Department Nil

In case of cross objections Nil

12. What is the procedure for filing appeal to high court?

Note: High court can condone delay in filing appeal or cross objection, is sufficient cause is shown.

13. When an appeal to Supreme Court can be made?

Judgment of high court in appeal, if High court certifies it to be a fit case for appeal to supreme court

Order of Appellete tribunal, where it relates to question relating to rate of duty or value By Special Leave Petetion (SLP), i.e. Permission of supreme court even in cases where high court

does not certify it to be a fit case for appeal to supreme court.

Summary of Appeals

Commissioner of Central Excise/ Customs (Appeals)

CESTAT (Central Excise Appellate Tribunal)

High court Supreme court

Who can file an appeal?

Assessee or department




What is the time limit for filing appeal?

By Assessee: Within 60 days (3 months under service tax) from communication or decision or order. By Department: Reviewing authority has to pass its order Within 3 months from the date of communication of order

By Assessee: Within 3 months from communication or decision or order. By Department: Reviewing authority has to pass its order Within 3 months from the date of communication of order Appeal is to be

Within 180 days of receipt of the CESTAT’s order.

As per code of civil procedure, 1908



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Appeal is to be filed Within 1 month from the communication of such review order

filed Within 1 month from the communication of such review order

Can the delay in filing appeal be condoned?

Yes, on sufficient cause being shown by the appellant only upto 30 days (3 months under service tax)

Yes, on sufficient cause being shown by the appellant

Yes, on sufficient cause being shown by appellant


What is the time limit for disposing appeal

Within 6 months from the date of filing appeal

Within 3 years from the date of filing appeal (within 180 days from date of stay order if stay is given)



Adjournments in hearing

Only upto 3 times to a party.

Only upto 3 times to a party.



Monetary limits for department appeal (w.e.f 2011) [Sec. 35R/131BA/ 83 for ED/CD/ST]

N.A `5,00,000 or more `10,00,000 or more `25,00,000 or more

Sec. 35C – Rectification of mistake apparent from the record:

The Appellate Tribunal may, at any time within six months from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it and shall make such amendments if the mistake is brought to its notice by the Commissioner of Central Excise or the other party to the appeal. Non filing of Appeals or Revisions by the Department – Inserted in Finance Act, 2011


Section 35R Section 131BA Section 83

1. CBEC has been empowered to issue any instructions in this regard [See the instruction below related to fixation of monetary limits]

2. If the department has not made an appeal/application/revision w.r.to any matter, then in respect of the similar matter it can make appeal/application/revision. [i.e. The court or any assessee cannot question the department as to why they didn’t go for appeal for the similar issue before]

3. A person being a party in appeal/application/revision cannot contend that the department has acquiesced (i.e. accepted without protesting) in the decision on the disputed issue by not filing appeal/application/revision.

4. The CESTAT or the Courts should refer to the said section when department has not filed an appeal/application/revision [i.e. The court cannot ask the department to make an appeal, if it is specifically stated as per this section not to make appeal]

Reduction of Government litigation - providing monetary limits for filing appeals by the

Department before CESTAT/High Courts and Supreme Court – CBE&C Instruction

An appeal by department shall be filed before following appellate forums only if the duty/tax is equal to or above the following monetary limits.

CESTAT `5,00,000 or more High Court ` 10,00,000 or more

Supreme Court `25,00,000 or more


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Special Points:

The above monetary limit may be duty with or without penalty or Interest.

Where the imposition of penalty/Interest is the subject matter of dispute and the said penalty/interest exceeds the limit prescribed, then the matter could be litigated further.

In two cases, the above specified monetary limits are not applicable i.e. 1) Where the constitutional validity of the provisions of an Act or Rule is under challenge or 2) Where the Notification/Instruction/Order or circular has been held illegal or ultra vires.

Monetary limit shall be applicable on the disputed duty and not on the total duty demanded in a case.

The above specified monetary limits are applicable to cases involving REFUND and in case of REVISION also.

FAQ’s on monetary limits for filing appeals:

1. Whether duty involved mentioned in the Instruction refers to duty outstanding to be collected or the total duty demanded for deciding the threshold limit prescribed therein? Clarification: Monetary limit shall apply on the disputed duty and not on the total duty demanded in a case.

2. Whether monetary limits would apply to cases of refund?

Clarification: It would apply to cases of refund as well.

3. Whether revision applications filed would also be covered under the stipulation of monetary limits? Clarification: The limit specified herein will not be applicable to revision application

4. Whether exclusion of audit objections would cover internal audit objection cases also or whether they

would be limited to cases of revenue audit alone? Clarification: The intention was to apply the exclusion clause only to disputes arising out of revenue audit objections accepted by the Department. It has now been decided to delete the said exclusion clause. Therefore, in all cases of audit objections accepted by the Department, while protective demands may continue to be issued but the same would be subjected to the monetary limits for filing appeal in the Tribunal, High Courts and the Supreme Court.

Recent case laws on appeals under excise, customs and service tax

Case Judgment

1. CCE V. RDC concrete (India) P. Ltd. 2011 (SC)

While hearing the application for rectification of mistake by the CESTAT, the arguments not accepted earlier cannot be accepted (i.e. re-appreciation of evidence not possible), as re-appreciation of mistake cannot be said to be rectification of mistake apparent on record.

2. CCE V. Gujchem Distillers 2011 (Bom)

CESTAT cannot dispose of the appeal on a new ground which was not laid before the adjudicating authority. CESTAT should remand the matter back to the adjudicating authority.

3. Ccus. V. Trilux Electronics 2010 (Kar.)

If an order was passed by CESTAT based on consent (decision subject to certain events to be fulfilled), the revenue could not pursue an appeal against such order in a higher forum.

4. CCE & ST V. Volvo India Ltd. 2011 (Kar.)

High court has no jurisdiction to adjudicate the case relating to rate of service tax and value of taxable services. Such appeal lies with supreme court, which alone has exclusive jurisdiction to decide the said question.



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Advance Ruling


Section 23A Section 28E Section 96A

FAQ’s on Advance Ruling:

1. Who can make application for Advance ruling?


Section 23A(c) Section 28E(c) Section 96A(c)

Any public sector company A Non-resident/ Resident setting up a joint venture in India in collaboration with a Non resident/

resident A wholly owned subsidiary Indian company, of which Holding is a foreign company A Joint venture in India A resident falling within any such class or category of persons, as specified by central government.

2. What are the matters for which advance ruling can be sought?


Section 23C Section 28H Section 96C

(i) Classification of goods under CETA, 1985/ CTA, 1975 (ii) Applicability of an exemption notification under sec. 5A of CE Act, 1944 or under sec. 25 of the

Customs Act, 1962 having a bearing on the rate of duty (iii) Principles to determine value of goods, for the purpose of assessment


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(iv) Applicability of notifications issued in respect of duties of excise/customs under Excise/Customs Act, Excise/Customs Tariff Act and any duty chargeable under any other law for the time being in force in the same manner as duty of excise/customs.

(v) Admissibility of credit of excise duty paid or deemed to have been paid on the goods used in or in relation to manufacture of excisable goods

(vi) Determination of the origin of the goods in terms of rules notified under the customs tariff Act and matters relating thereto.

(vii) Determination of the liability to pay duties of excise on any goods under the Central Excise Act.

3. Who is the Authority for advance ruling? It has been provided that the Authority for advance rulings constituted under the Income Tax Act,

1961 shall function as Authority for advance rulings for the purpose of Customs Act, 1962, Central Excise Act, 1944 and Finance Act, 1944 (Service tax). To ensure availability of technical experts in the authority, it has further been provided that, for the purpose of advance ruling under excise, customs and service tax, the authority for advance ruling shall consist of an ‘officer of the Indian customs and Central excise who is qualified to be member of board’ instead of an officer of the IRS who is qualified to be member of CBDT.

It consists of a chair person who is a retired judge of supreme court, an officer of Indian Customs and Central excise who is qualified to be member of the board and an officer of the Indian Legal service who is qualified to be an additional secretary to the government of India

The authority shall have the powers of a) Discovery and inspection b) Issuing commissions c) Enforcing attendance of any person and examining him under oath d) Compelling and production of books of accounts and other records e) The authority shall be deemed to be a ‘civil court’ and every proceeding before the

authority will be a ‘judicial proceeding’.

4. In what cases the application for advance ruling shall be rejected?


Section 23D Section 28I Section 96D

If the question raised in the application is already pending in the applicants case before any central excise officer, the Appellate Tribunal or any court; or

If the question raised in the application is the same as in a matter already decided by the appellate tribunal or any court. Note: No application can be rejected without giving an opportunity of being heard to the assessee.

5. What is the binding nature of advance ruling?


Section 23E Section 28J Section 96E

The advance ruling pronounced by the authority is binding only – On the applicant who has sought it. In respect of the matter for which advance ruling was obtained. On the commissioner, and the authorities subordinate to him, in respect of the applicant. But not to any other person.

6. When will an advance ruling held to be void ab initio?


Section 23F Section 28K Section 96F

If on representation made to it by the commissioner or otherwise, the authority for advance ruling finds that the advance ruling was obtained by the applicant by fraud or misrepresentation of facts

Then, the authority may by order declare the advance ruling to be void ab initio i.e. from the beginning.



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Case laws on Advance Ruling:

Case Judgment

1. Oracle India P. Ltd. (2012) (AAR)

Advance ruling can be pronounced determining tax liability in relation to an activity which is ‘proposed to be undertaken’, by the applicant. Thus, advance ruling is confined only to undertaking of a proposed activity. Conversely, when an existing ‘activity’ is sought to be varied, added to or expanded, that would not entitle the existing entity to seek an advance ruling under the Customs Act, 1962.

2. UAE Exchange Centre Ltd v. UOI (2009) (Del. HC)

Ruling by Advance Rulings Authority binding on applicant, transaction on which ruling sought and the departmental officers concerned - Jurisdiction of Courts not excluded by implication or otherwise – Writ jurisdiction invocable against advance rulings - Article 226 of Constitution of India

3. Zuari Cement Ltd. (2009) (A.A.R.)

The advance ruling can be applied for only proposed activity. It cannot be applied for any ongoing activity. For example: Expansion of existing manufacturing activity

4. Tex (India) Pvt. Ltd. (2004) (AAR)

In this case, it was held that the application for rectification of mistake is not maintainable as the error was not apparent from the record.

5. Permalite Electricals (P) Ltd. (2004) (A.A.R)

It was held that, the question raised in application that has already been decided by the Appellate Tribunal and was not raised at the time of admission of application such plea cannot be entertained by the Authority.

Settlement commission:

It is a mechanism for speedy settlement of cases involving high revenue stakes. [This is similar to what is constituted under Income tax Act, 1961]

The cases shall be settled and dues shall be paid without going through adjudication stages. The proceeding before settlement commission is deemed to be judicial proceedings for the purpose of IPC. Settlement Commission is constituted by Central Government and shall consist of one Chairman, Vice-

Chairmen and other members as the Central Government may think fit. There is no scheme for settlement of cases under the service tax law. The decision of settlement commission will be according to the opinion of the majority. However, in case

the members are equally divided on any points, then the points of difference shall be referred to chairman or one or more additional members, and such points will be decided according to the opinion of the majority of the total members (i.e. additional members and the members who first heard it)


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The notice shall be given, asking the assessee to explain as to why the application made by him should be allowed to be proceeded with.

When the commissioner does not furnish the report within the period of 30 days from the date of communication made to him, settlement commission shall proceed further in the matter without the report of the commissioner.

Having received report from the commissioner, if the settlement commission is of the opinion that any further inquiry or investigation is necessary, it may direct the commissioner (investigation) within 15 days from the date of receipt of report to make such further inquiry or investigation.

The commissioner (Investigation) should furnish the report of such enquiry within 90 days from the date of receipt of communication from settlement commission.

Before passing an order, an opportunity of being heard must be given to the applicant and the commissioner of excise.

Note: Replace the words “Commissioner of Excise” with “Commissioner of Customs” in order to know the procedure for settlement of cases under customs Act, 1962

FAQ’s on Settlement commission:

1. Who can make an application for settlement? Can it be withdrawn?


Section 32E Section 127B

An assessee may make a case for settlement. An assessee is defined in Section 31(a) as any person who is liable to pay excise duty assessed and includes any manufacturer/producer or a registered person of a private warehouse. An application once made cannot be withdrawn.

2. What is it that can be settled?

- A case can be settled.

- Case is defined in section 31(c) as any proceeding under this Act or any other Act for the levy, assessment and collection of excise duty, pending before an adjudicating authority on the date on which an application is made.

- However, when any proceeding is referred back in any appeal or revision, as the case may be, by any court, Appellate Tribunal or any other authority, to the adjudicating authority for a fresh adjudication or decision, as the case may be, then such proceeding shall not be deemed to be a proceeding pending within the meaning of this clause.

- Thus, Settlement Commission can only be approached when original adjudication is pending.

3. When a person shall not be entitled to apply for settlement?


Section 32o Section 127L

a) Where an order of the settlement has been passed which provides for the imposition of the

penalty, on the ground of concealment of particulars of his duty liability; or b) Where after passing of an order of settlement, in relation to a case, such person is convicted of an

offence in relation to that case; or c) Where the case of such person is sent back to the central excise officer by the settlement

commission under Sec. 32L

4. What categories of cases cannot be settled? a) Where the assessee has filed the application for settlement in respect of a case relating to him

after the adjudication thereof; b) If the applicant has not filed returns showing production, clearance and central excise duty paid; c) Where the applicant has not received a show cause notice; d) Where the case is pending before the Appellate Tribunal or any Court; e) Where the dispute relates to interpretation of classification; f) Where excisable goods/books/documents are seized, the applicant cannot prefer an application

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g) The amount in the application should be at least ` 3,00,000 or more. In other words, cases less than ` 3,00,000 cannot be settled;

h) Where the applicant, while filing the application, has not deposited the additional amount of excise duty accepted by him along with interest due under section 11AA Where the assessee admits short levy on the goods for reasons other than misclassification, undervaluation, inapplicability of exemption notification or CENVAT credit.

5. Can Settlement Commission grant immunity from prosecution and penalty/ interest/ fine?


Section 32K Section 127H

The Commission can grant immunity from prosecution only for any offence under the Central Excise Act and either wholly or in part from the imposition of penalty and fine if it is satisfied that the applicant has made full and true disclosure and cooperated with the Commission. It may be noted that if prosecution is launched before receipt of application, immunity against such prosecution cannot be granted.

6. Can such immunity be withdrawn?


Section 32K Section 127H

Immunity can be withdrawn only if the person fails to pay the sums due within the time specified in the settlement order or where the applicant has concealed any material to the settlement or given false evidence relating to the settlement.

7. Can the case be sent back by the Settlement Commission to the Central Excise officer/Customs officer?


Section 32L Section 127I

This can be done only where the Commission is satisfied that the person has not cooperated. The consequences of this are that it would be deemed that no application has been made before the Commission.

8. Can the Central Excise officer who received the case back use the materials produced before the Commission? Yes as per Section 32L.

9. Is the order of settlement final?


Section 32M Section 127J

The order is final and conclusive and shall not be re-opened in any proceeding under this Act or under any other law. If the order was obtained by fraud or misrepresentation, it would become void.

10. What is the time limit for payment of amounts ordered by Settlement Commission?


Section 32F(9) Section 127C

The duty, interest, fine and penalty payable in pursuance of the order shall be paid by the assessee within 30 days of receipt of a copy of the order by him. If the assessee fails to do so the amount which remains unpaid shall be recovered along with interest due thereon as the sums due to the Central Government by the Central Excise Officer/Customs officer having jurisdiction over the assessee.

11. Can a completed proceeding be re-opened? Settlement Commission has been disempowered to reopen the proceedings in cases where applications under section 32E are made on or after the 1st day of June, 2007. However, in respect of application made before 01.06.2007, Settlement Commission can reopen completed proceedings.

12. Is the proceeding before the Settlement Commission a judicial proceeding?


Section 32P Section 127M


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The proceeding is a judicial proceeding within the meaning of Sec. 193 and 228 of the IPC.

13. Where are the Benches of the Settlement Commission located? The principal Bench is at New Delhi with other Benches at Chennai, Calcutta and Mumbai. The jurisdiction of the Bench is decided not by the place of business of the applicant but by the location of the headquarters of the Commissionerate passing the order.

14. Can the property of the applicant be attached?



The settlement commission has the power to order provisional attachment of any property belonging to the applicant in the prescribed manner. Such order can be made by the settlement commission during pendency of any proceedings before it where it is of the opinion that such attachment is necessary for the purpose of protecting the interests of the revenue. Any such provisional assessment shall cease to have effect from the date the sums due to central government in respect of such attachment are discharged by the applicant and the evidence in respect of such discharge is submitted to the settlement commission.

15. Can the applicant take legal assistance?



Assistance of authorised representative can be taken.

Case laws on settlement commission:

Case Judgement

RR Builders vs. CCE (2008) (HC)

Once there is a requirement prescribed by the statute by way of a qualifying condition it is not possible to admit applications which do not fulfil the requirements stipulated.

Mars Thereputics and Chem. Ltd. vs. CCESettlement Commission 2008 (HC)

An application can be admitted and proceeded with only when Settlement Commission is satisfied that applicant has made a full and true disclosure. The onus is on applicant to make a full and true disclosure of duty liability and the manner in which same is arrived at.

Re: Sadik Sadruddin Chunara (Sett.Comm) (2006)

The Person who is absconding and never appeared before the investigating agency cannot be prevented from making an application before Settlement Commission.

Commr of Customs v. Mahesh Raj (2006) (HC)

Smugglers, habitual offenders & unscrupulous elements cannot be offered protection under the settlement scheme. It covers cases only where there is no deliberate/intended desire on part of the importer to evade/avoid payment of duty.

UOI V. K. Amishkumar Trading P. Ltd. (2011) (HC)

There can be no application before settlement commission without show cause notice having been issued to the assessee. Thus, if the assessee has himself waived the requirement of issuing a SCN, he cannot, thereafter file an application before the settlement commission. By waiving the issuance of notice upon him, the assessee himself moves out of the jurisdiction of settlement commission.

Icon Industries V. UOI (2011) (HC)

- An application can be filed only if the applicant has filed returns showing production, clearance and central excise duty paid in the prescribed manner.

- A consolidated return covering more than one period cannot be considered as return filed in prescribed manner.

- Hence, the settlement commission can reject the application in such case.

J.R.B Engineering works V. Settlement commission (2012) (HC)

When an applicant has neither registered with the excise department nor has filed any declaration or return during the relevant period, the condition specified in the provisions of sec. 32E has not complied with ash therefore, the settlement commission was not maintainable at all.

Excise

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