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CHAPTER I
AN OVERVIEW OF CENTRAL EXCISE
Brief history and developments -
Central Excise duty is an indirect tax levied on goods manufactured in India. The tax is
administered by the Central Government under the authority of Entry 84 of the Union List
(No. 1) under Seventh schedule read with Article 246 of the Constitution of India.
The Central Excise duty is levied in terms of Central Excise Act, 1944 and the rates of duty,
ad valorem or specific, are prescribed under the Schedule I and II of the Central Excise Tariff
Act, 1985. The taxable even under the Central Excise law is 'manufacture' and the liability
of Central Excise duty arises as soon as the goods are manufactured. The Central Excise
Officers are also entrusted to collect other types of duties levied under Additional Duties of
Excise (Goods of Special Important) Act, Additional Duties of Excise (Textiles and Textile
Articles) Act, Cess etc.
Till 1969, there was physical control system wherein each clearance of manufactured goods
from the factory was done under the supervision of the Central Excise Officers. Introduction
of Self-Removal procedure was a watershed in the excise procedures. In 1969, the assessees
were allowed to quantify the duty on the basis of approved classification list and the price list
and clear the goods on payment of appropriate duty.
In 1994, the gate pass system gave way to the invoice-based system, and all clearances are
effected on manufacturer's own invoice. Another major change was brought about in 1996,
when the Self-Assessment system was introduced. This system is continuing today also. The
assessee himself assesses his Tax Return and the Department scrutinizes it or conducts audit
to ascertain correctness of the duty payment. Even the classification and value of the goods
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were to be merely declared by the assessee instead of obtaining approval of the same from the
Department.
In 2000, the fortnightly payment of duty system was introduced for all commodities, an
extension of the monthly payment of duty system introduced the previous year for Small
Scale Industries.
In 2001, new Central Excise (No.23) Rules, 2001 have replaced the Central Excise Rules,
1944 with effect from 1st July, 2001. Other rules have also been notified namely, CENVAT
Credit Rules, 2001, Central Excise Appeals rules, 2001 etc. With the introduction of the
new rules several changes have been effected in the procedures. The new procedures are
simplified. There are less numbers of rules, only 33 as compared to 234 earlier. Classification
declaration and Price declarations have also been dispensed with, the CENVAT declaration
having been earlier dispensed with in 2000 itself.
Administration of Central Excise -
The Central Excise law is administered by the Central Board of Excise and Customs (CBEC
or Board) through its field offices, the Central Excise Commissionerates. For this purpose,
the country is divided into 23 Zones and a Chief Commissioner of Central Excise heads
each Zone. There are total 92 Commissionerates in these Zones headed by Commissioners
of Central Excise. Divisions and Ranges are the subsequent formations, headed by Deputy/
Assistant Commissioners of Central Excise and Superintendents of Central Excise,
respectively.
For enforcing the Central Excise law and collection of Central Excise duty the following
types of procedures are being followed by the Central Excise Department -
a) Physical Control- Applicable to cigarettes only. Here assessment precedes clearance
which takes place under the supervision of Central Excise officers;
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b) Self-Removal Procedure- Applicable to all other goods produced or manufactured
within the country. Under this system, the assessee himself determines the duty
liability on the goods and clears the goods.
CHAPTER II
1. CONSTITUTIONAL BACKGROUND
Central Excise is a duty on excisable goods manufactured or produced in India, other than
alcoholic liquor. But liability is principally on manufacturer, except in a few cases. In
majority of cases, duty rate w.e.f. 24.2.09 is 10% plus education cess of 2% and Secondary
and Higher Education Cess of 1%. Thus, generally, duty is 10.30%. There are some
exclusions, partial or full exemptions and higher duties in some cases. As per Appendix IV
of CETA, the rate of additional duty on Goods of special Importance is 8% in majority of the
cases. (Section 3(1) of The Additional Duties of Excise (Goods of Special Importance) Act,
1957.
Power of Taxation under Constitution of India is as follows :
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(a) The Central Government gets tax revenue from Income-tax (except on Agricultural
Income), Excise (except on alcoholic drinks) and Customs.
(b) The State Governments get tax revenue from sales tax, excise from liquor and alcoholic
drinks, tax on agricultural income.
(c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and
house property tax.
Article 265 provides that no tax shall be levied or collected except by authority of Law. The
authority for levy of various taxes, as discussed above, has been provided for under Article
246 and the subject matters enumerated under the three lists set out in the Schedule-VII to the
Constitution.
Central Government and State Government can make laws.
Laws Relating to Central Excise
Central Excise Act, 1944(CEA) : The basic Act which provides the constitutional power for
charging of duty,valuation, powers of officers, provisions of arrests, penalty, etc.
Central Excise Tariff Act, 1985 (CETA) : This classifies the goods under 96 chapters with
specific codes assigned.
Central Excise Rules, 2002 : The procedural aspects are laid herein. The rules are
implemented after issue of notification.
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 : The
provisions regarding the valuation of excisable goods are laid down in this rule.
Cenvat Credit Rules, 2004 : The provisions relating to Cenvat Credit available and its
utilisation is mentioned.
2. Nature of Excise Duty
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Power to levy excise duty is derived from Constitution. Excise is a duty on excisable goods
manufactured or produced in India. Each word of this definition is vitally important to fix
liability of Central Excise Duty.
Indian Constitution has given powers to Central Govt. and State Govt. to levy various
taxes and duties. Powers of Central and State Govt. are enlisted in Seventh Schedule to our
Constitution. Entry No. 84 of list I of Seventh Schedule to the Constitution reads as follows :
Duties of excise on tobacco and other goods manufactured or produced in India, except
alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet
preparations containing alcohol, opium or narcotics.
In addition, in some cases, duty is imposed on 'deemed manufacture' also. Hence, central
excise duty is presently levied under entry 84 and 97.
Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under
entry No. 51 of list II of Seventh Schedule to the Constitution and it is called State Excise.
The Act, Rules and rates for excise on liquor are different for each State (this is the reason
why price of liquor varies widely from Goa to MP to Punjab. In some States, it is officially
not available.).
BASIC CONDITIONS OF EXCISE LIABILITY - Section 3 of Central Excise Act (
often called the Charging Section ) states that There shall be levied and collected in such
manner as may be prescribed duties on all excisable goods (excluding goods produced or
manufactured in special economic zones) which are produced or manufactured in India -
Basic excise duty is levied under sec 3 of central excise act at rates specified in first schedule
to central excise tariff act, 1985.
This definition of charging section of Central Excise is vital, because it clearly signifies that
there are four basic conditions for levy of Central Excise duty.
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(1) The duty is on goods.
(2) The goods must be excisable.
(3) The goods must be manufactured or produced
(4)Such manufacture or production must be in India.
Unless all of these conditions are satisfied, Central Excise Duty cannot be levied.
Manufacture of excisable goods in india is a taxable event
Goods manufactured in SEZ are excluded excisable goods A per section 3(1) of CE Act,
duty is leviable on all excisable goods (excluding goods manufactured or produced in Special
Economic Zones). Thus, goods manufactured or produced in SEZ are excisable goods
but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods
manufactured in SEZ are not exempted goods. They can be termed as excluded excisable
goods
Ownership of raw material is not relevant for duty liability sales tax is leviable on sales,
whether actual or deemed, while excise duty is a levy on taxable event of manufacture.
Liability under excise law is event based and irrespective if whther the goods are sold or
captively consumed.excise duty is not concerned with ownership or sale.
No exemptionto goods manufactured in J&K- services provided in J&K are exempt from
service tax. However, excise duty is payable on goods manufactured in J&K as provisions of
excise law have been extended to J&K.
Person liable to pay excise duty- Once duty liability is fixed, the duty can be collected from
a person at the time and place found administratively most convenient for collection.
The Duty liability in case of manufactured goods - Rule 4(1) of Central Excise Rules makes
it clear that excise duty is payable by the manufacturer or producer of excisable goods. In
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case where goods are allowed to be stored in a warehouse without payment of duty, the duty
liability is of the person who stores the goods. Rule 4(1) makes it clear that goods can be
removed from the place where they are manufactured or produced or warehoused, only on
payment of duty.
Ownership of raw material is not relevant for duty liability. Duty demand is payable by
manufacturer, even if it cannot be recovered from customer.
Duty liability in case of goods stored in warehouse - Rule 20 of CE Rules permit warehousing
of certain goods in warehouses without payment of duty. These goods are coffee, petroleum
products, benzene, tolune etc. In such cases, the duty liability is on the person who stores the
goods.
Duty liability in case of molasses produced in khandsari sugar factory - The other exception is
in case of molasses produced in a khandsari sugar factory, the duty liability is of the procurer
(i.e. purchaser) of such molasses. The duty is payable on the date of receipt of such molasses
in the factory of procurer. The duty on molasses produced in khandsari sugar factory is
payable only when the procurer procures the molasses for use in the manufacture of any
commodity. Such commodity may or may not be excisable.
Duty liability in case of job work - Even in case of job work, the duty liability is of actual
manufacturer and not of the raw material supplier. However, a job worker manufacturing
goods under notification No 214/86 is exempt from excise duty, as the raw material supplier
undertakes that he will use these goods further to manufacture final product or clear for
export or pay duty on such goods. [The only exception is in case of textile articles].
RATE OF DUTY AS APPLICABLE ON DATE OF REMOVAL RELEVANT- Though
taxable event is 'manufacture', duty payable is as applicable on date of removal i.e. clearance
from factory.
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STATE OF GOODS AT THE TIME OF REMOVAL IS RELEVANT - Goods have
to be classified and valued in the state in which goods are removed from the factory. Any
further processing done after removal is not relevant.
DUTY PAYABLE EVEN WHEN NOT COLLECTED - An assessee is liable to pay sales
tax and the question whether he has collected it from consumer or not is of no consequence.
His liability is by virtue of being an assessee under the Act
DUTY IS A MANUFACTURING EXPENSE FROM ACCOUNTING POINT OF
VIEW - Excise duty should be considered as a manufacturing expense and should be
considered as an element of cost for inventory valuation, like other manufacturing expenses.
Excise duty cannot be treated as a period cost.
3. Types of excise duties- Excise duties are of following types
Duties under Central Excise Act- Basic duty is levied under Central Excise Act.
Basic excise duty to be termed as Cenvat - Basic excise duty (also termed as Cenvat as per
section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule
to Central Excise Tariff Act, read with exemption notification, if any.
Education cess is payable @ 2% of the basic duty and Secondary and High Education Cess is
1% of basic excise duty.
Education Cess and SAH EDUCATION CESS on excise duty - If excise duty rate is 8%,
education cess will be 0.16% and SAH Education cess will be 0.08%. A provisions of Central
Excise Act, including those relating to refunds, exemptions and penalties will apply to
education cess and SAH cess.
Excise duty in case of clearances by EOU The EOU units are expected to export all their
production. However, if they clear their final product in DTA (domestic tariff area), the rate
of excise duty will be equal to customs duty on like article if imported in India. [provison
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to section 3(1)]. Note that even if rate of customs duty is considered for payment of duty,
actually the duty paid by them is Central Excise Duty. The rate of customs duty is taken only
as a measure. The EOU unit can sale part of their final products in India at 50% of customs
duty or normal excise duty in certain cases.
National Calamity contingent Duty A National Calamity Contingent Duty (NCCD) has
been imposed vide section 136 of Finance Act, 2001 [clause 129 of Finance Bill, 2001, w.e.f.
1.3.2001]. This duty is imposed on pan masala, chewing tobacco and cigarettes. It varies
from 10% to 45%. NCCD of 1% was imposed on PFY, motor cars, multi utility vehicles and
two wheelers and NCCD of Rs 50 per ton was imposed on domestic crude oil, vide section
169 of Finance Act, 2003.
Duties under other Acts - Some duties and cesses are levied on manufactured products
under other Acts. The administrative machinery of central excise is used to collect those
taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and
collection of these duties / cesses.
Duty on Medical and Toilet preparations - A duty of excise is imposed on medical
preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.
Additional duty on mineral products - Additional duty on mineral products (like motor spirit,
kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of
Excise and Customs) Act, 1958.
Duties Leviable
Basic Excise Duty is levied u/s 3(1) of Central Excise Act. The section is termed
as charging section. General rate of duty of central excise on non-petroleum products is
10% w.e.f. 27-02-2010. (The duty rate was 14% during 1-3-2008 to 6-12-2008, which was
reduced to 10% w.e.f. 7-12-2008 and to 8% w.e.f. 24-02-2009). This duty is applicable to
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majority of excisable goods. There is partial exemption to a few products.
Education Cess @ 2% of excise duty under section 93 of Finance (No. 2) Act (w.e.f. 9-7-
2004).
Secondary and Higher Education Cess (S&H Education Cess) @ 1% of the total duties of
excise vide section 136 read with section 138 of Finance Act, 2007 w.e.f. 1-3-2007.
Thus, total excise duty is 10.30% in majority of the cases.
National Calamity Contingent Duty A National Calamity Contingent Duty (NCCD) has
been imposed vide section 136 of Finance Act, 2001 on some products. NCCD of 1% has
been imposed on mobile phones w.e.f. 1-3-2008.
In addition, cesses and duties have been imposed on some specified products. 1.1.4 Goods
It is obvious from section 3(1) that, to attract excise duty, the following conditions must be
fulfilled :
There should be goods;
The goods must be excisable;
The goods must be manufactured or produced; and
The manufacture or production must be in India.
Goods manufactured or produced in SEZ are excluded excisable goods. This means, that
the goods manufactured or produced in SEZ are excisable goods but no duty is leviable, as
charging section 3(1) excludes these goods.
Thus, the goods manufactured in SEZ are not Exempted goods. They can be termed as
excluded excisable goods.
As per explanation to section 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.
Basic Ingredients
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From the above definitions of goods, the two essential elements of goods are emanated:
(i) They should be movable, and
(ii) They should be marketable.
MEANING OF "MANUFACTURE"
2.1 The taxable event for Central Excise duty to be attracted is manufacture or production
in India of excisable goods. Section 2(f) of the Act defines the term "manufacture" in an
inclusive manner so as to include any process:
(i) Incidental or ancillary to the completion of a manufactured product; and
(ii) Which is specified in relation to any goods in the Section or Chapter notes of the
Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; and
(iii) Which in relation to goods specified in the Third Schedule to the Central Excise Tariff
Act, 1985, involves packing or repacking of such goods in a unit, container or labelling or re-
labelling of containers or declaration or alteration of retail sale price or any other treatment to
render the product marketable to consumer.
(The clauses (ii) and (iii) above are termed as deemed manufacture.) The aforesaid
definition gives a wider content to the expression "manufacture" as several processes which
would not ordinarily be understood as amounting to manufacture are specifically included
therein. However, the most commonly used test for ascertaining "manufacture" for the
purpose of attracting Central Excise duty has taken place was evolved by the Supreme Court
in the case of Delhi Cloth and General Mills 1977 (1) ELT (J 199). In terms of this decision,
the activity or process in order to amount to "manufacture" must lead to emergence of a new
commercial product, different from the one with which the process started. In other words,
it must be an article with different name, character or use. Thus, a process which simply
changes the form or size of the same article or substance would
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not ordinarily amount to manufacture and no excise duty would be payable unless it is
deemed to be manufacture as follows:
In a particular case by a section or Chapter note of the Tariff; or
In relation to goods, which are specified under MRP based assessment under section
4A, packing or repacking of such goods, labelling or re-labelling of containers
including declaration or alteration of retail sales price shall amount to manufacture.
mEANING OF "GOODS"
Central Excise duty is levied on goods which are manufactured or produced. The
understanding of term goods is of vide importance in determining the leviability of Excise
Duty. The Act does not define the term "goods". The judgment of the Supreme Court in the
case of Delhi Cloth and General Mills (supra) is considered to be the landmark judgment
in this regard, where it is held that an an article can be called "goods" if it is known to the
market as such and can ordinarily come to the market for being bought and sold. Actual sale
of the article is not important but it must be capable of being bought and sold.
The marketability element of goods was enumerated in Union of India and Others, Appellants
vs. Sonic Electro Chem (P) Ltd. 2002 (52) RLT 878 (SC) where the Supreme Court held
that the essence of marketability is neither in the form nor in the shape or condition in which
the manufactured articles are to be found, it is the commercial identity of the articles known
to the market for being bought and sold. Whether immovable things are goods or not, was
clarified in the case of Triveni Engg. vs. CCE 2000 (120) ELT 273 by the Supreme Court
where it was observed that immovable property or articles embedded to earth, erections,
turnkey projects are not generally termed as "goods" because they cannot ordinarily come to
the market to be bought and sold.
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The Explanation is added by Finance Act, 2008 under section 2(d) provides that goods
includes any article, material or substance which is capable of being sold for consideration
and such goods shall be deemed to be marketable.
MANUFACTURER DUTY LIABILITY
The definition of manufacturer under the Act is an inclusive one and broadly specifies two
categories of manufacturer; i.e., one who manufactures on his own account or one gets the
goods manufactured through hired labour. Thus we can construe the meaning of the word
manufacturer as understood in common terminology. Manufacturer may be understood as
any person who is the creator, initiator and architect of the activities and the processes, which
bring in existence a new and identifiable product/goods in the market. Thus a manufacturer
is the one who undertakes manufacturing activity in reality. A purchaser of goods does not
become manufacturer, he can only be termed as a supplier of raw material, if applicable or a
person who gets goods manufactured according to his specifications or with his brand name.
Here, it is worthwhile to mention that such contracts are on a principal to principal basis. A
person supplying the raw material cannot be considered as hiring the job worker if he does
not supervise and control the activities of the job worker. However if the manufacturer is a
dummy or fake unit, then the raw material supplier or the brand name owner is deemed to be
the actual manufacturer.
Section 3A incorporated in the Statute by Finance Act, 2008 provides power to the Central
Government to charge excise duty on the basis of capacity to manufacture by manufacturer
himself in respect of notified goods. Till today, the product under this sub-section has not
been notified. Once the product has been notified, excise duty will be payable on the basis of
capacity.
Importance of notification
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The rate of duty prescribed against each of sub-heading specified in schedule to the Central
Excise Tariff Act is known as tariff rate. The effective rate of duty must be ascertained by
considering the various notification issued from time to time. The tariff rate read with the rate
prescribed in the notification determined the effective rate of duty payable on clearance of
goods.
Excisable Goods
Section 2(d) of Central Excise Act defines Excisable Goods as Goods specified in the
Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes
salt. As per explanation to section
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. Thus, unless the
item is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable.
In terms of the above definition of Excisable Goods, it may be held that all those goods,
which are specified in the Tariff Schedule are excisable goods. However, question arises as
to whether those goods, which are exempted from duty by a notification, but find a place in
the tariff schedule are excisable goods.
By analyzing the definition, the following two important ingredients of excisable goods are
found :
(a) Goods must be specified in the Schedule to the Central Excise Tariff Act, 1985;
(b) The goods so specified must be subject to duty.
Excisability of Plant & Machinery
In view of Entry N. 84 of List-I Seventh Schedule to the Constitution of India, duty of excise
could be levied only on goods and not on immovable property. The goods are classified and
charged to duty according to the state and condition in which they are removed from the
factory.
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Assembly of Plant & Machinery at Site
Mere bringing together of parts of a plant and machinery at site cannot be termed to be
manufacture and hence, assembled plant cannot be treated to be goods.
Where assembly of parts and components brings out a different recognizable marketable
product, before its installation or erection or attachment to the earth, it would be goods and
hence chargeable to duty.
Excisability of Waste & Scrap
Section 3 imposes duty on manufacture of goods. Waste and scrap are not manufactured, but
arise as a result of manufacture of the final product. Therefore, generally, there should not be
levied any tax on the waste and scrap.
Thus, waste and scrap can be goods but duitable only if manufactured and are mentioned
in Tariff.
CHAPTER III
1. VALUATION
The levy of duty requires the valuation of the goods under consideration after establishing
the duty liability and the classification of the goods. Except in cases where specific duty has
been provided for on the basis of certain unit like weight, length, etc. as in case of goods
like cigarettes (length basis), cement clinkers (per ton basis), for most of the goods the rates
are specified on an ad valorembasis; i.e., expressed as a percentage of value of goods. Thus
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for calculating the amount of duty payable, first the assessable value of the goods has to be
determined under the provisions.
The modes of valuation of goods under the Excise Act are:
(A) Tariff value
The Central Government is authorized under the provisions of section 3(2) of the Act, to fix the tariff value for
any goods which may be different for different classes of goods. This is also termed as the notional value. The
duty in such cases is the % of such tariff value and not the Assessable Value.
(B) M.R.P. value
The Central Government under section 4A of the Act can notify goods on which excise
duty will be payable on the MRP less % of abatement. Such value shall be deemed to be the
assessable value in such cases. The provisions of this section are applicable to products which
are statutorily required to put MRP under the Standards of Weight and Measures Act, 1976,
or any other law and in respect of which specific notification has been issued.
(C) Transaction value
(i) In respect of all other goods which are not covered by the above-mentioned provisions, their
assessable value would be in terms of "transaction value" as provided in section 4 of
the Act. The assessable value would be the transaction value when the goods are sold
by an assessee for delivery at the time and place of removal, where the assessee and
the buyer are not related and price is the sole consideration. In all other cases, which
do not fulfil the aforesaid conditions, value shall be determined as per the Central
Excise Valuation Rules, 2000. The definition of transaction value as per section 4(3)
(d) 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 at
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the time of sale or any other time. The definition gives an inclusive but not exhaustive
list of additions and deductions from the invoice price in respect of certain amounts.
(ii) The valuation rules have to be followed when transaction value cannot be
determined under section 4(1); which are enumerated below:
(a) If goods are not sold at the time of removal, the value of excisable goods
shall be value of goods sold by the manufacturer for delivery at any other
time nearest to the time of removal of goods except in cases of stock /branch
transfer, sale to related person, job work where specific provisions have been
made. (Rule 4)
(b) In case goods are sold for delivery at any other place other than the place
of removal, the value will be the price less the actual cost of transportation
from place of removal to the place of delivery. (Rule 5)
(c) In case the price is not the sole consideration in respect of any transaction,
the value of goods shall be the aggregate of such transaction value and
the amount of money value of additional consideration flowing directly or
indirectly from buyer to the assessee. (Rule 6)
(d) In case where goods are cleared to depot, consignment agent etc.,
transaction value shall be the normal transaction value of such goods sold
from such other place at or about the same time. The normal transaction value
is the price at which the greatest aggregate quantity of goods are sold. (Rule 7)
(e) In case of consumption of goods captively; i.e., consumed by the assessee
or on his behalf, the value shall be 110% of the cost of production. (Rule 8)
(f) In case of sale of goods to a related person, the value shall be the price at
which the related person has sold the goods to an unrelated person. In case
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a related person does not sell the goods but uses or consumes the goods in
production or manufacture of the article, the value shall be 115% of the cost of
production. (Rule 9)
(iii) The following deduction can be made from the transaction value for
determination of value under section 4
(a) Trade discount
The Board has clarified as follows:
"Discount of any type or description given on any normal price payable for
any transaction will not form part of the transaction value for the goods;
e.g., quantity discount for goods purchased or cash discount for the prompt
payment etc. will therefore not form part of the transaction value. However,
it is important to establish that the discount has actually been passed on
to the buyer of the goods. The different type of discounts extended as per
commercial considerations on different transactions to unrelated buyers if
extended is also permissible and different actual prices paid or payable for
various transactions are to be accepted."
(b) Tax and duties
The definition of transaction value stipulate that excise duty, sales tax and
other taxes paid or payable shall be excluded from the transaction value.
(c) Freight
The cost of transportation can be excluded even when freight is averaged
and also there is no condition that the cost of transportation should be shown
separately in the invoice. The cost of transportation will include the cost of
insurance during transportation of goods.
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(d) Interest for delayed payment
Interest for delayed payments is a normal practice in industry. Interest under a
financing arrangement entered between the assessee and the buyer relating to
the purchase of excisable goods shall not be regarded as part of the assessable
value provided that:
The interest charges are clearly distinguished from the price actually paid or
payable for the goods.
The financing arrangement is made in writing; and Where required, assessee
demonstrates that such goods are actually sold at the price declared as the
price actually paid or payable.
(e) Erection, installation and commissioning charges
If the product after erection, installation and commissioning is not excisable
the question of including these charges in the assessable value of the product
does not arise.
(iv) Inclusion in the price
Some of the expenditures like packing charges, designing and engineering charges,
handling charges incurred within the factory are required to be included in the price if
they are not already included.
Basis of calculation of duty payable i.e. Valuation
Modes of
calculation of excise
duty
Duty can be payable on basis of specific duty (based on weight,
length, volume etc.), MRP based duty [section 4A], compounded
levy, tariff value [section 3(2)], production capacity [section 3A]
or on ad valorembasis [section 4].
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MRP based
valuation [section
4A]
Products covered
under MRP
provisions
In case of about 110 products, duty is payable u/s 4A of Central on
basis of MRP printed on the package, after allowing abatement at
specified rates. MRP should be inclusive of all taxes and duties.
The provision applies only when product is package intended for
retail sale andis specified in a notification issued u/s 4A.
MRP provisions are
overriding
MRP provisions u/s 4A are overriding provisions.
Assessable value
when MRP not
applicable
Even in case of products covered u/s 4A, where MRP provisions
are not applicable, valuation will be on basis of value u/s 4 i.e.
Assessable Value.
MRP provisions do not apply to free samples, package less than
10gm/10 ml, wholesale package or package above 25 Kg (50 Kg
in some cases)
Deemed
manufacture of
products u/s 4A
In case of goods covered under section 4A, packing or repacking
and re-labelling is deemed manufacture.
Incorrect MRP Department can ascertain MRP if MRP not declared or incorrectly
declared or obliterated. Penalty can be imposed [section 4A(4)(a)
of Central Excise Act].
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Basic requirement
of Assessable Value
[section 4]
Transaction value as
assessable value
When duty is payable on ad valorem basis, it is payable on
assessable value as defined in section 4 of Central Excise Act.
Transaction Value is taken as Assessable Value only if goods are
sold at the time and place of removal, buyer is unrelated and price
is sole consideration [Section 4(1)(a) of Central Excise Act].
What is transaction
value
Transaction value is the price paid or payable for the goods at the
time and place of removal, by reason of, or in connection with
sale, inclusive of all expenses but excluding taxes [section 4(3)(d)
of Central Excise Act].
Transaction value does not include duty of excise, sales tax and
any other taxes on goods. Only taxes actually paid or payable are
allowed as deduction.
Price to be taken as
inclusive of excise
duty
If goods are cleared without payment of duty, the price is taken
as cum duty price and excise duty payable should be calculated
by back calculations CCE v.Maruti Udyog 122 Taxman 105 =
(2002) 3 SCC 547 = 141 ELT 3 (SC 3 member bench). If there
is additional consideration, it will be added to invoice price and
then duty payable is calculated by making back calculations
[Explanation to section 4(1) of Central Excise Act]
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Inclusions and
exclusions
in transaction
value
By reason of or in
connection with sale
of such goods.
Any amount charged is includible in assessable value if it is by
reason of or in connection with sale of such goods.
Packing and design
charges
Duty is payable on packing charges and design charges related to
manufacture.
Price escalation Duty is payable in case of price escalation after clearance, but not
when price was final at the time of clearance. If there is price rise
after clearance of goods from factory, differential excise duty and
interest @ 13% is payable.
Trade discounts Trade discount is allowable as deduction from assessable value.
Cash discount is allowable. Discount need not be uniform.
Notional interest on
advances
Notional interest on advances is includible only if there is
evidence that it has depressed the selling price.
Warranty charges Compulsory charges for after sale service during warranty period
are includible. After sale service charges which are optional are
not includible.
PDI and after sales
service
Pre-delivery charges (PDI) and after sale service charges are not
includible if these are incurred by dealer out of his commission.
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Outward freight
after place of
removal not
includible in
assessable value
Place of removal Transport charges upto place of removal are includible in
assessable value.
Ownership
transferring at
factory gate
If delivery is ex-works and property is transferred to buyer at
factory gate, outward freight is not includible in assessable value
as factory gate is the place of removal. This will be so even if
transport is arranged by manufacturer and charged to buyer.
Contract FOR Even if contract is F.O.R. destination basis, there can be sale at
factory gate, since as per section 39 of Sale of Goods Act, delivery
of goods to carrier is prima facie delivery to buyer. If contract is
F.O.R. basis andsale takes place only when goods are delivered to
buyer (i.e. property in goods passes to buyer at destination only),
transport charges are includible in assessable value.
Profit on transport
activity permissible
If assessee himself provides transport services, reasonable
profit on the transport activity should be permissible i.e. it is not
includible in assessable value.
Equalised freight Equalised freight is also allowable as deduction, if there is sale at
factory gate.
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Bought out goods
and accessories
when includible in
assessable value
Price of essential
bought out goods
Price of Bought out goods supplied along with manufactured
goods is includible, if these are essential parts of manufactured
goods.
Price of parts not
fitted at time of
removal
Since goods are to be assessed in the condition in which cleared
from factory, value of components not fitted is not required to be
added in assessable value, even if they are essential
Price of accessories
not includible
Price of accessories and optional bought out items is not includible
in Assessable Value
Accessory means an object not essential in itself but adding to
beauty, convenience or effectiveness of something else.
Valuation rules
Transaction value
not acceptable
If transaction value is not acceptable, valuation is required to be
done as per Valuation Rules [Section 4(1)(b) of Central Excise
Act and Valuation Rule 3]
Value of similar
goods
Valuation can be done on value of such goods (i.e. goods of
same class of same manufacturer) [Rule 4]
Transport upto place Cost of transport upto place of removal is includible in
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of removal assessable value but not beyond that [Rule 5]
Money value of
other consideration
includible
If price is not sole consideration, money value of other
consideration should be added e.g. cost of material, patterns,
dies, designs etc. supplied by buyer is required to be added to
Assessable Value [rule 6]. Value of patterns, dies etc. should be
added on pro-rata basis.
Captive
consumption
In case of captive consumption, duty is payable on basis of cost of
production plus 10%. Cost of Production should be calculated on
basis of CAS-4 [Rule 8]
Job work In case of job work, duty is payable by job worker. Valuation
is done on the basis of price at which raw material supplier
(Principal Manufacturer) sales the manufactured final product in
market [Rule 10A]. If goods are covered under MRP valuation
provisions, duty is payable on MRP basis.
Valuation in case
of sale from depot/
branch
Depot price at the
time of removal
In case of depot sale, duty is payable on basis of depot price
prevailing at the time of removal of final product from the factory
[Rule 7].
Subsequent sale
price not relevant
Price at which the goods are actually sold subsequently is not
relevant. Differential duty is not payable even if goods are sold
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later at higher price from depot. Similarly, refund is not available
if prices are goods are subsequently actually sold at lower price.
Transport charges
after depot
Transport charges upto depot and depot expenses are not
allowable as deduction (These are already included in depot
price). Transport charges from depot onwards are not includible in
assessable value.
Value addition done
at depot
Any value addition done at depot is not includible in assessable
value, if activity is not manufacture (the reason is that goods are
to be assessed in the condition in which they are removed from
factory).
Deemed
manufacture in case
of MRP
In case of products covered under MRP provisions, if packing
in retail pack and labelling of MRP is done at depot/place of
consignment agent, it will be deemed manufacture and excise
duty will be payable.
Valuation when sale
through related
person
Price to unrelated
buyer relevant
If goods are sold through related person, value for purpose of
excise will be the price at which the related buyer sales goods to
unrelated buyer.
Inter connected
undertaking
An inter-connected undertaking will be treated as related person
for excise valuation only if there is holding subsidiary relationship
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[Inter-connected undertaking means 25% common control]
Holding and
subsidiary
A holding and subsidiary are related persons,
Rate legal entities A mere distributor is not a related person.
A company or firm is a separate legal entity and cannot be
a related person of other company or firm.
Piercing corporate
veil
Even if the buyer does not fall within the definition of related
person, sale price to him can be rejected by piercing the corporate
veil. His selling price can be considered if it is found, by piercing
corporate veil, that the transaction is not at arms length i.e. price is
not the sole consideration.
Valuation in case of
entire sale through
related person
If goods are sold solely through related person (except in case of
inter connected undertaking, unless there is holding subsidiary
relationship), valuation will be normal transaction value at
which the related buyer sales to unrelated buyer [rules 9 and 10 of
Valuation Rules]
Supply of goods to
related person for
captive consumption
If goods are supplied to related person for captive consumption,
valuation will be on basis of cost of production plus 10%.
Partial sale through
related person
If sale is partly to related person and partly to unrelated person,
valuation shall be done on reasonable basis by residual method
under rule 11.
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If related person is only one of the buyers and substantial sales
are made to unrelated persons at same price, that price can be
considered for valuation in respect of sale to related person also.
Other provisions
relating to valuation
Residuary rule of
valuation
If valuation is not possible under any of aforesaid rules, valuation
will be on basis of best judgment assessment, i.e. value shall be
determined using reasonable means consistent with the principles
and general provisions of Valuation rules and section 4(1) of
section 4 of the Act [Rule 11]
Duty based on
production capacity
Section 3A of CEA provides for payment of duty on basis of
production capacity, without any reference to actual production.
Production capacity will be determined as per Rules. Pan masala
and gutkha are covered under these provisions.
Compounded levy
scheme
Compounded levy scheme under rule 15 of Central Excise rules,
provides for payment of duty on basis of production capacity.
It is an optional scheme. The scheme is presently applicable to
stainless steel pattas/patties and Aluminium circles. These articles
are not eligible for SSI exemption.
Tariff value [section
3(2) of Central
Excise Act]
In some cases, tariff value is fixed by Government from time to
time. This is a Notional Value for purpose of calculating the
duty payable. Once tariff value for a commodity is fixed, duty is
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payable as percentage of this 'tariff value' and not the Assessable
Value fixed u/s 4.
2. CENTRAL EXCISE (DETERMINATION OF RETAIL SALE PRICE OF
EXCISABLE GOODS) RULES, 2008
[Notification No. 13/2008-C.E. (N.T.), dated 01-03-2008]
In exercise of the powers conferred by section 37 read with sub-section (4) of section 4A
of the Central Excise Act, 1944 (1 of 1944), the Central Government hereby makes the
following rules, namely :-
RULE 1. (1) These rules may be called the Central Excise (Determination of Retail Sale
Price of Excisable Goods) Rules, 2008.
(2) They shall come into force on the date of their publication in the Official Gazette.
RULE 2.In these rules, unless the context otherwise requires, -
(a) Act means the Central Excise Act, 1944 (1 of 1944);
(b) retail sale price means the retail sale price as defined in section 4A of the Act; and
(c) words and expressions used in these rules and not defined but defined in the Act or any
other rules made under the Act shall have the meaning as assigned therein.
RULE 3. The retail sale price of any excisable goods under sub-section (4) of section 4A of
the Act, shall be determined in accordance with these rules.
RULE 4. Where a manufacturer removes the excisable goods specified under sub-section
(1) of section 4A of the Act, -
(a) without declaring the retail sale price on the packages of such goods; or
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(b) by declaring the retail sale price, which is not the retail sale price as required to be
declared under the provisions of the Standards of Weights and Measures Act, 1976 (60 of
1976) or rules made there under or any other law for the time being in force; or
(c) by declaring the retail sale price but obliterates the same after their removal from the
place of manufacture,
then, the retail sale price of such goods shall be ascertained in the following manner, namely :
(i) if the manufacturer has manufactured and removed identical goods, within a
period of one month, before or after removal of such goods, by declaring the
retail sale price, then, the said declared retail sale price shall be taken as the
retail sale price of such goods :
(ii) if the retail sale price cannot be ascertained in terms of clause (i), the retail
sale price of such goods shall be ascertained by conducting the enquiries in the
retail market where such goods have normally been sold at or about the same
time of the removal of such goods from the place of manufacture :
Provided that if more than one retail sale price is ascertained under clause
(i) or clause (ii), then, the highest of the retail sale price, so ascertained, shall
be taken as the retail sale price of all such goods.
Explanation. - For the purposes of this rule, when retail sale price is required
to be ascertained based on market inquiries, the said inquiries shall be carried
out on sample basis.
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RULE 5. Where a manufacturer alters or tampers the retail sale price declared on the
package of goods after their removal from the place of manufacture, resulting into increase in
the retail sale price, then such increased retail sale price shall be taken as the retail sale price
of all goods removed during a period of one month before and after the date of removal of
such goods:
Provided that where the manufacturer alters or tampers the declared retail sale price
resulting into more than one retail sale price available on such goods, then, the highest of
such retail sale price shall be taken as the retail sale price of all such goods.
RULE 6. If the retail sale price of any excisable goods cannot be ascertained under these
rules, the retail sale price shall be ascertained in accordance with the principles and the
provisions of section 4A of the Act and the rules aforesaid.
3. CLASSIFICATION OF GOODS
Central Excise Duty is chargeable at the rates, which are manufactured in India and are
subject to excise duty.
However, all goods cannot be charged with the same rate of duty. Therefore, the goods need
to be grouped into separate categories and sub-categories, for which the rate of excise duty
may be determined. This identification of goods through groups and sub-groups is called
classification of goods.
The rate of duty is found out by classifying the product in its appropriate heading under
Central Excise Tariff. The Central Excise Tariff Act, 1985 (CETA) classifies all the goods
under 96 chapters and specific code is assigned to each item. CETA is based on International
convention of Harmonised System of Nomenclature (HSN), which is developed by World
Customs Organisation (WCO) (That time called as Customs Cooperation Council). This is an
International Nomenclature standard adopted by most of the Countries to ensure uniformity
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(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a product
cannot be established, find technical or dictionary meaning of the term used in the tariff. You
may also refer to BIS or other standards, but trade parlance is most important.
(3) If goods are incomplete or un-finished, but classification of finished product is known,
find if the unfinished item has essential characteristics of finished goods. If so, classify in
same heading - Rule 2(a).
(4) If ambiguity persists, find out which heading is specific and which heading is more
general. Prefer specific heading.- Rule 3(a).
(5) If problem is not resolved by Rule 3(a), find which material or component is giving
essential character to the goods in question - Rule 3(b).
(6) If both are equally specific, find which comes last in the Tariff and take it - Rule 3(c).
(7) If you are unable to find any entry which matches the goods in question, find goods which
are most akin - Rule 4.
(8) Packing material is to be classified in the heading in which the goods packed are
classified Rule 5.
(9) In case of mixtures or sets too, the procedure is more or less same, except that each
ingredient of the mixture or set has to be seen in above sequence. As per rule 2(b), any
reference to a material or substance includes a reference to mixtures or combinations of that
material or substance with other material or substance.
As regards the Interpretative Rules, the classification is to be first tested in the light of Rule
1. Only when it is not possible to resolve the issue by applying this Rule, recourse is taken to
rules 2,3 and 4 in seriatim.
EXEMPTIONS FOR SMALL SCALE INDUSTRIES
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This notification provides exemption from whole of duty leviable on goods specified in
annexure to the notification up to the aggregate value of clearance of Rs. 1,50,00,000/- . In
computing 1,50,00,000/- the following clearance shall not be taken in account:
a) Clearances, which are exempt from the whole of the excise duty leviable thereon ( other
than an exemption based on quantity or value of clearances) under any other notification or
on which no excise duty is payable for any other reason;
b) Clearances bearing the brand name or trade name of another person, which are ineligible
for the grant of this exemption
c) Clearances of the specified goods which are used as inputs for further manufacture of any
specified goods within the factory of production of the specified goods;
The benefit is available to small scale manufacturer where:
a) The value of clearance in the previous financial year shall not be exceeds Rs. 4
crore
b) The goods have not been affixed with the brands name of other person.
In computing the value of clearance of Rs. 4 crores. The following clearance shall not be
considered :
a) Clearance of excisable goods without payment of duty
i) To a unit in a free trade zone or
ii) To a unit in a special economic zone; or
iii) To a hundred percent export oriented undertaking; or
iv) To a unit in an Electronic Hardware Technology Park or Software Technology Park; or
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v) Supplied to the United Nations or an international organization for their official use
or supplied to projects funded by them, on which exemption of duty is available under
notification No. 108/95.
b) Clearance bearing the brand name or trade name of another person, which are
ineligible for the grant of this exemption in terms of paragraph 4 of the notification.
c) Clearance of the specified goods which are used as inputs for further manufacture
of any specified goods within the factory of production of the specified
goods.
d) Clearance, which are exempt from the whole of the excise duty leviable thereon
under notification No. 214/86-Central Excise or No. 83/94-Central Excise or 84/94-
Central Excise.
If a manufacturer clears the specified goods from one or more factory the exemption shall
applicable to the aggregate value of clearance of all the products cleared by the manufacturer
from all the factories.
Where the specified goods are cleared by one or more manufacturer from the facto the
exemption shall apply to aggregate value of clearance of specified goods by all the
manufacturers. The exemption will not available separately to each manufacturer.