Chapter I An Overview of Central Excise -...

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Special course material on Central Excise Receipt Audit Chapter I This session provides an overview of Central Excise Act and the provisions relating to levy and collection of Central Excise duty 1. Brief history and developments 1.1 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 (List 1) under Seventh Schedule read with Article 246 of the Constitution of India. 1.2 The Central Excise duty is levied in terms of the 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 event 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 (Goods of Special Importance) Act, Additional Duties (Textiles and Textiles Articles) Act, Cess etc. 1.3 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. Now, 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. 1.4 In 1994, the gate pass system gave way to the invoice-based system, and all clearances are now 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 scrutinises it or conducts selective audit to ascertain correctness of the duty payment. Even the classification and value of the goods have to be merely declared by the assessee instead of obtaining approval of the same from the Department. 1.5 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. From 1.4.2003, monthly payment of Duty by 5 th of next month was allowed. 1.6 In 2001, new Central Excise (No.2) 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 Appeal Rules, 2001etc. 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 32 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. These rules have, however, again been replaced by a new set of Rules known as Central Excise Rules, 2002 brining out certain changes in the existing Rules. An Overview of Central Excise

Transcript of Chapter I An Overview of Central Excise -...

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Chapter I This session provides an overview of Central Excise Act and the provisions relating to levy and collection of Central Excise duty 1. Brief history and developments 1.1 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 (List 1) under Seventh Schedule read with Article 246 of the Constitution of India. 1.2 The Central Excise duty is levied in terms of the 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 event 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 (Goods of Special Importance) Act, Additional Duties (Textiles and Textiles Articles) Act, Cess etc. 1.3 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. Now, 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. 1.4 In 1994, the gate pass system gave way to the invoice-based system, and all clearances are now 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 scrutinises it or conducts selective audit to ascertain correctness of the duty payment. Even the classification and value of the goods have to be merely declared by the assessee instead of obtaining approval of the same from the Department. 1.5 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. From 1.4.2003, monthly payment of Duty by 5th of next month was allowed. 1.6 In 2001, new Central Excise (No.2) 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 Appeal Rules, 2001etc. 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 32 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. These rules have, however, again been replaced by a new set of Rules known as Central Excise Rules, 2002 brining out certain changes in the existing Rules.

An Overview of Central Excise

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2. Administration of Central Excise 2.1 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 10 Zones and a Chief Commissioner of Central Excise heads each Zone. There are, in total, 61 Commissionerates in these Zones headed by Commissioner of Central Excise. Divisions and Ranges are the subsequent formations, headed by Deputy/Assistant Commissioners of Central Excise and Superintendents of Central Excise, respectively. 2.2 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; 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. 3. Tax payers' assistance and responsiveness 3.1 The CBEC have issued instructions from time to time for rendering assistance to the taxpayers in the Commissionerates of Central Excise and Divisional Offices. These offices are duty bound to provide necessary guidance to the public in all matters concerning Central Excise Law, procedure, tariff and exemptions etc. 3.2 The Commissioners of Central Excise are required to post knowledgeable officers of appropriate rank, senior Inspector or Superintendent to be in-charge of "Tax-payers' Assistance Unit" in each Commissionerate and Divisional headquarter. The officer will have easy access to the Deputy/Assistant Commissioners, Additional/Joint Commissioners and Commissioner to seek their advice and guidance on the spot in case of genuine doubts. 3.3 The “Tax-payers' Assistance Unit" in addition to rendering advice to the assessees, should also help them in meeting the officer concerned for necessary guidance, and clarification, where required. 3.4 In order to have a responsive tax administration, the Board has decided that all intimations, declarations and queries received from the Members of trade and industry should be replied to in a time bound manner and with a sense of responsibility and accountability. In order to achieve this, the following directions have been issued to the Central Excise field formations: (1) All declarations, intimations, etc. when send by FAX, e-mail, by post or by Courier shall be accepted by the field formations. (2) Appointments should be given on e-mail on request from the trade (3) All queries by e-mail should be accepted and the replies sent by e-mail (4) Any query received from the trade must be answered within a maximum of four weeks from the date of receipt (5) To make e-mail an effective mode of communication between the Department and the public, e-mail connectivity should be provided to all offices in the field formations and properly maintained and wide publicity of the e-mail address should also be given. .

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Provisions of the CE Act relating to incidence of duty

Section 3 (1) of CE Act provides that “There shall be levied and collected in such manner as may be prescribed, duties of excise on all excisable goods, which are produced or manufactured in India and at the rates set forth in the schedule to the Central Excise Tariff Act, 1985”. Levy includes imposition and assessment of tax (Vijaya Prints - 1989 - SC) collection follows. Thus Section 3 deals with the following:- 1. Creation of duty 2. Naming the duty 3. Fixing authority for levy and collection 4. Scope of duty 5. Tariff rates Conditions for levy of ED :- 1. It must be goods 2. The goods must be excisable 3. There must be manufacture/production 4. The manufacture/production must be in India Who is to pay ED? ED shall be paid by the person in whose hands the taxable event occurs. The said event is manufacture/production. Hence, the duty liability is on the manufacturer / producer only. Taxable event occurs at the very moment of manufacture. Tax liability accrues simultaneously. Duty accrues neither earlier nor later. (Good year case-1990-SC). But collection of duty is postponed to the time of clearance At present, duty for a particular month is payable by 5th of next month (except during the month of March where it is payable by 31st March). Incidence of ED is directly relatable to manufacture; collection is deferred as a measure of convenience (Mcdowell-1985-SC). When ED is NOT payable by the person 1. If what is manufactured is not goods. 2. Goods have been manufactured; but they are not excisable goods/being exempted. 3. They are excisable goods; but they have not been manufactured. 4. There was manufacture of excisable goods; but the person is not the manufacturer. 5. Manufacture is not in “India” How are these four concepts defined? 1. Goods - Not defined in CE Act. 2. Excisable Goods - specifically defined. 3. Manufacture - No specific definition. Inclusive definition only 4. Manufacturer - -do-

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Why not defined? CE Act is a fiscal law relating to industry, which is fast developing. Evidently, the legislature does not want the CE law to be fettered by rigid straight jacket definitions. Production Vs. Manufacture:- Tobacco, Tea, Coal, Ore, Salt etc. are all produced. Other goods made in the factory are manufactured. ED is attracted on both. What shall be done when a concept has not been defined in a law? 1. Look for some other law, defining the concept 2. Rely on Trade parlance theory 3. Go in for dictionary meaning 4. Go by the meaning spelt out by the Courts (III stage)

“Goods”

- Not defined in CE Act! But defined differently in different statutes:- 1. Art. 366 (12) of Constitution:- “Goods” includes all materials, commodities and articles. 2. Sn. 2(22) of Customs Act:- “Goods” means every kind of moveable property other than auctionable claim and money and includes stocks, shares, growing crops and things attached to and forming part of land which are agreed to be severed before sale or under the contract of sale.” - Websters dictionary:- “Goods” includes, inter alia, the following:- Wares, merchandise and commodities bought and sold by merchants and traders.

Vendibility Test The levy of ED is at the stage of manufacture. Manufacture is for sale. And hence saleability is the criterion for the levy of ED. This was the line of thinking of the Apex Court. Further the SC was inspired by the definition of webster’s dictionary. Hence, the prescription of “vendibility test”. In other words, things that are bought and sold are goods. DCM Case (1963-SC) Raw Material Intermediate product Final product Groundnut Hyderogenation Refined oil Deodorisation Vanaspathy Oil and process process Til Oil ED was leviable on Refined oil. Sale took place after deodorisation. In the market, the product is known as “Refined oil: after deodorisation only”. Applying the marketability test, the Supreme Court held that “Refined oil” which is not deodorised is NOT goods. This test of marketability was applied in Bihar Sugar Mills case, Union Carbide case, Bhor Industries case, Moti Laminates case etc. To sum up, no duty is levied on the intermediate product, provided it is used in the manufacture of dutiable final products.

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Bhor Industries (1989 - SC) Sn. 2 (d) :- Excisable Goods are the goods that find a place in the CE Tariff. - For a commodity to attract ED, is it enough if it finds a place in the CE Tariff? - Or should it pass the vendibility test also? - Simply because an article fall in the tariff, it would not ipso-facto, attract duty. In addition, it should be known as “Goods” in the market. In other words, it should pass the “Vendibility” test also. Ambalal Sarabhai case (1989 - SC) Transient Goods or Goods having short shelf-life being not marketable. Hence not excisable. Further the department should prove that the goods are marketable. CCE vs. Bansal Indus Gases 2003(151) ELT.4(SC 3 member bench) Carbide sludge arising in the manufacture of acetylene gas is not marketable and hence not liable to duty.

Marketability Vs Saleability - Marketable does not mean being actually marketed, it means capability of being brought to market and sold. - Can anything saleable be treated as marketable? No! Even rubbish can be sold. - Dross and skimmings sold by M/s. Aluminium Company are merely refuse or ashes given out in the process of removing impurities in the raw materials. - Because some metal can be retrieved out of dross and skimmings, they are sold!!

Excisable Vs Dutiable

SL. No.

Position in tariff

Excisable

Dutiable

1. Found in Tariff with X% Yes

Yes

2. Found in Tariff with X%; But covered by Sn.5AExemption

Yes No

3. Found in Tariff with Nil%

Yes No

4. Not found in tariff

No No

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Manufacture Test DCM & others (1977 - SC) - Judgement on manufacture:- Manufacture implies a change; but every change is not manufacture; and yet every change is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation. A new and different article must emerge having a distinctive name, character or use. In other words, unless there is metamorphosis as a result of some process, there is no manufacture at all. - Groundnut/Til oil is purified by the process of hydrogenation. It is now called VNE oil (vegetable non-essential oil). VNE oil is not marketed as such. It is deodorised and the vanaspathy thus obtained is marketed. - Market recognises vanaspathy as Refined oil and not VNE oil (preodorised stage). - In the circumstances, hydrogenation does not lead to any manufacture and hence VNE oil does not attract duty as refined oil. - No manufacture. Therefore no duty. In State of Karnataka Vs. Raghurama Shetty(1981) 47 STC 369 (SC) it was held that de-husking of paddy into rice is a manufacturing process as rice is distinct commercially different commodity from paddy. Intention to manufacture - Should there be an intention to manufacture? - No, not necessarily. - (Example):- Bagasse and molasses coming out as waste in sugar industry are goods manufactured and hence assessable to duty. Value addition - Will mere value addition through a process, amount to manufacture? - No. - The result should be emanation of a new article, to call the process a “manufacture”. Section 2(f) read with Chapter notes to the Central Excise Tariff Act, 1985 define some of the processes amounting to manufacture. In such cases there is no need to test whether the process(s) amount to manufacture.

Mobility test Site based activities - NarneTulaman’s case - 1988 - sc - “Load cells”, “Platforms” and “Indicating systems” were assembled at site in the ground as weigh bridge. - This was held to be manufacture. - But the judgement did not decide that duty can be levied on immovable articles. - This aspect was not at all considered by the Apex Court.

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- The Verdict is sub silentio on the mobility aspect of end product. - CBEC’s orders - In this connection, the CBEC has, inter alia, clarified that if the piece by piece erection or installation of parts or components results in an immovable property at site, then no duty will be levied on such property. - But duty will be chargeable, if the assembly results in a different recognisable marketable product before installation in an immovable manner.Thus excisability depends upon the mobility of the final product at the time of manufacture. - Sirpur Paper Mills case - 1998 - SC Paper making machine was assembled and erected at site from bought out components and own made components. - The resultant product is not immovable property like a building. - Embedding in concrete base has been done to ensure wobble free operation only. - It could be dismantled from the base and re-erected elsewhere. - There was manufacture (from components to machine). - The machine made was moveable (answered mobility test). - Held there was manufacture of excisable goods. -Therefore ED was attracted.

- Board’s Circular – Taking cue from the Sirpur judgement the CBEC in exercise of the power conferred under Section 37B of the Central Excise Act issued orders (No.53/2/98 cx dated 2.4.1998) – 1998 (76) ECR – 41c, clarifying that the ratio of Sirpur judgement should be followed scrupulously in deciding the excisability of plant and machinery assembled at site after considering the broad criteria (i) final product is distinct (ii) it is specified in Tariff; (iii) it is movable goods and saleable in market.

- Triveni Engineering & Industries Ltd.(2000-(120) ELT – 273 (SC)

However, Supreme Court in Triveni case has held that installation or erection of Turbo alternator on platform specially constructed on land cannot be treated as common base, such alternator would be “immovable” property, hence not taxable. - Each case had therefore to be decided on merit after considering the broad criteria as specified in Sirpur case. The present legal provision is as decided in Triveni Engineering, ie. ‘The marketability test requires that the goods are as such should be in a position to be taken to market and sold. If they have to be separated, the test is not satisfied’. Thus, if machinery has to be dismantled before removal, it will not be goods. It, therefore, follows: (a) duty cannot be levied on immovable property, (b) if plant is so embedded to earth that it is not possible to move it without dismantling, no duty can be levied, (c) if machinery superficially attached to earth for operational efficiency and can be easily removed without dismantling, duty is leviable, (d) Turnkey projects are not dutiable but individual component/machinery will be dutiable if marketable.

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Chapter II

This session deals with the concepts of classification of goods under the Central Excise Act for the purpose of levy of duty.

The actual amount of Excise duty payable is dependent upon the value of goods and rate of duty. In turn, the rate of duty is determinable on the basis of classification of goods. The classification of goods is nothing but determination under which heading or sub-heading a particular product would be covered. Even for the purposes of determining eligibility to exemption, the classification of goods is to be first decided because most of the exemption are with reference to the Tariff heading to sub-headings. Thus, the classification of goods assumes greater importance in the field of Central Excise and is one of the main field of litigation.

From 28.2.1986, the tariff schedule was taken out of Central Excise Act 1944 and a new

tariff schedule based on HSN (Harmonised System of Nomenclature) was enforced under an independent enactment of Central Excise Tariff Act 1985. The new Central Excise Tariff schedule in all contains 96 chapters grouped in twenty sections. Each of these twenty sections relates to a broader class of goods such as Section I relates to Animal and Dairy products. Section VI relates to all products of Chemical and allied industries while Section XI relates to Textiles and Textile articles. Each of these Sections has been further divided into various chapters and each chapter contains goods of one class. Each chapter has been further divided into various headings depending upon different types of goods belonging to the same class or products. These headings have further been divided into sub-headings. The excisable goods under new Central Excise Tariff have been classified basically using four digit system, with two more digits added for further sub classification wherever needed. The first two digits refer to chapter in the schedule and the next two digits have been added for further sub classification wherever needed. Eight digit excise classification has been introduced with effect from 28.2.2005. Thus, a 4 digit code is called as ‘heading’, next 2 digits indicate ‘sub-heading’ and last two digits indicate ‘tariff item’. The system of numbering of headings and the sub classifications adopted in the new Central Excise Tariff follows the scheme as in the Harmonised System of Nomenclature. As may be observed from the schedule, besides the headings numbers and sub-heading numbers, a system of dashes has also been adopted for classification. As indicated in Note 1 of the General Explanatory Notes given in the 1st schedule.

Classification of excisable goods

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(i) Where the description of an article or group of articles under a heading is preceded by “-”, the said article or group of articles shall be taken to be such classification of the article or group of articles covered by the said heading. (ii) Where, however, the description of an article or group of articles is preceded by “- -”, the said article or group of articles shall be taken to be a sub classification of the immediately preceding description of article or group of articles which has “-”. (iii) where the description of an article or group of articles is preceded by “---“ or “----“,t he said article or group of articles shall be taken to be sub-classification of the immediately preceding description of the article or group of articles which has “-“ or “—“. There are three principles underlying the system of numbering: (1) Where there is no classification of goods. (2) Where there is classification of goods under a heading, but there is no further sub classification, it may be observed that maximum of nine sub classification of main headings are possible. (3) Where there is sub classification of the goods under a heading, as also a further sub classification of the sub classified goods, a maximum of nine sub classifications of each of the sub classification of the main heading are possible. As regards residuary classification, there are two possibilities, viz. (a) Residuary classification under a heading. (b) Residuary classification under a sub classification in a heading. Classification of ‘parts’ under new Excise Tariff Act, 1985 The classification of ‘parts’ of items covered by chapters 82 to 96 is governed by individual chapter notes or in some cases by Section Notes. (For example, Chapter Note 2 in respect of Chapter 82, Chapter 2 in respect of Section XVI covering Chapters 84 and 85; Section Notes 2,3 & 5 in Section XVIII covering Chapters 86 to 89; Chapter Note 2 in respect of Chapter 90 etc.). By and large, subject to certain exclusions mentioned in respective Section Note or Chapter Note, parts or parts and accessories in respect of certain Chapters, are generally classified in the same Heading number in which the main item falls provided there is no separate heading number covering such parts or parts and accessories. In case there is a sub-heading number under a Heading number in the Tariff covering ‘parts’, then all parts of items covered under that heading number fall only under the sub heading number. On perusal of Chapter Note or Section Note in respect of Chapters 82 to 96, it would be seen that parts of general use are excluded from these Chapters. Parts of general use has been defined in Section Note 2 of Section XV. “Parts of general use” are not to be regarded as “parts” of individual items falling under these Chapters and in all cases such “parts of general use” are classified in Section XV C base metals and articles or base metals only. The classification of “parts or parts and accessories” or Section XVI (Chapters 84 & 85) is explained in detail as follows:

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(a) Section XVI covers Chapters 84 & 85, which cover machinery and mechanical appliances; electrical equipment, electronic items etc. Parts and accessories of these articles are also covered by these Chapters. (b) The important aspect is to make note of certain exclusions which are described in Section Note 1 of this Section (such as transmission or conveyor belts or plastics, vulcanised rubber, spools, bobbins, transmission or conveyor belts or textile materials, interchangeable tools of heading No.82.02 or brushes of heading No.96.03, parts of general use etc.) (c) Note 2 of Section deals with classification of parts of machinery. In general, parts which are suitable for use solely or principally with particular machines or with the group of machines or apparatus falling under the same heading, are classified under the same heading as those machines or apparatus subject to exclusions mentioned earlier in Section Notes. In some cases separate headings are, however, provided for:

(A) Parts of engines of heading 84.07 or 84.08 (heading 84.09). (B) Parts of the machinery of headings 84.25 to 84.30 (heading 84.31) and so on.

(d) The above principles of classification do not apply to ‘parts’; which in themselves constitute an article covered by a heading of this Section (other than headings 84.85 and 85.48) these are in all cases classified in their own appropriate heading even if specially designed to work as ‘part’ of a specific machine, for example, (1) Pumps and compressors (headings 84.13 and 84.14) (2) Taps, cocks, valves etc. (heading 84.81) (3) Electric motors of heading 85.01. (4) Transmission shafts, cranks, bearing housing, fly wheels (heading 84.83) (5) Other parts which are recognisable as such, but are not suitable for use solely or principally with a particular machine or class of machines (i.e., which may be common to a number of machines falling in different headings), are classified in heading 84.85 (if not electrical) or in heading 85.48 (if electrical), unless they are excluded by the provisions set out above. Rules for interpretation of the Central Excise Tariff The Central Excise Tariff Act, 1985, which is by and large, based upon the Harmonised System Nomenclature (HSN) has adopted the very same principles and these are now prescribed as rules for interpretation of the tariff schedule. However, as against six rules prescribed for the HSN, the Central Excise Tariff Act has incorporated (as part of the statute) only 5 rules, omitting one rule of HSN relating to classification of packing material. Rule-1: It is first established that the Section and Chapter titles are provided in the tariff only for facilitating reference. The text of Section/Chapter headings do not have any legal bearing. While it is only the titles which have no bearing on classification, the actual Sections/Chapters do have a legal status to the extent that they represent particular groups of headings. The rule states that classification should be determined first and foremost by reference to the text of the headings (4 digits) and any relative Section/Chapter Notes.

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Rule 2 (a): This rule has the effect of broadening the scope of various headings, beyond the terms of their texts, since it provides for classification in a heading of an article referred to therein, even if that article is incomplete or unfinished or is removed in assembled or disassembled. Two separate principles are embodied in this rule. First, an incomplete or unfinished article is to be treated as a complete or finished article. Secondly an un-assembled or disassembled article must be classified as if it were assembled. Regarding classification of an incomplete or unfinished article as if it is complete or finished, there is an important proviso incorporated in this rule. It is that in the incomplete/unfinished state, the article must have the essential character of the complete/finished article. The scope to the phrase “essential character” must be clearly understood. For an article to have achieved the essential character as stated in this rule, it would suffice if in the incomplete/unfinished condition, it has got the character identifying the article and the stage is one, where it can not, in any manner, be converted into any article other than the one the essential character of which it has assumed. The second part or the rule refers to articles removed in unassembled/disassembled condition. They should be classified under the heading appropriate to the assembled article, though in the condition in which they are removed, they are actually unassembled /disassembled. Rule 2(b):- This rule specifies that headings in which there is a reference to material/substance also cover such material/substance mixed to combine with other materials/substances. Utilising Rule 2(b), one should not broaden the scope of a heading so that the heading actually covers articles which can not be regarded (as required by rule 1) as answering the description in heading.

Rule 3: This rule provides three methods to classify goods which prima-facie appear to attract several different headings, either by utilising 2(b) or for any other reason. These methods are to be operated in the same sequential order in which they are set out in this rule. Thus rule 3(b) will apply only if 3(a) fails and 3(c) should be invoked only after ruling out 3(a) & (b). The order of priority is therefore as below: (a) Most specific description (b) Essential character (c) Heading which occurs last in the numerical order

Generally it could be said that a description by name is more specific than a description by class. Again, a description which identifies the goods clearly and precisely is more specific than the one which is less complete. Rule 3(b) points to the essential character as the determining factor. This has to be determined by taking into consideration various criteria such as the nature of the material or component, its bulk quantity, weight or value or the role of each constituent material in relation to the use of the goods. Rule 3(b) also covers goods put up in sets. A set does not mean a number of the same article grouped together. To utilise rule 3(b), it should be determined as to which among the constituents confers the essential character of the set. Rule 3(c) simply says that among the alternative headings, the one which occurs last in the schedule should be preferred to the earlier ones.

Rule 4:- Classification should be made under the heading to which the product in question is most akin. Kinship can depend upon many factors such as description, character or even use.

Rule 5: This rule is the equivalent of Rule 6 of HSN Rules since in the C.E.T. Rule 5 of H.S.N has been omitted. This rule clearly specifies a classification principle that identifying an appropriated sub heading is to be contemplated only after the product concerned has first been

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properly classified under the correct four digit heading. This rule further specifies that for classification among sub headings, the same rules as are applicable to the heading themselves (Rules 1 to 4) are to be applied. Within the context of a single heading, the choice of one dash sub heading may be made only on the basis of the one dash sub heading. Similarly two dash sub headings should be compared only with other two dash sub headings. In other words, one should not compare a two dash with a one dash sub heading or vice versa.

Exemption from duty Central Excise Tariff Act prescribes the rate of duty for each Chapter head and Sub head. This rate is called ‘Tariff

Rate’ and the duty payable is ‘Statutory Duty’. Central Excise Act grants powers to Central Government to modify

the rates as per requirements by issuing a notification. The duty actually payable as per notification is called

‘effective rate of duty’.

If the goods are exempt by way of a notification, they are called ‘exempt from duty’. If the tariff itself

specified duty as ‘NIL’, the goods are chargeable to ‘NIL’ rate of duty. Under Central Excise ‘exemption’ means

exemption by notification under Section 5A of Central Excise Act.

According to the Central Excise Rules, goods removed for export under Bond without

payment of duty does not mean that goods are exempt from duty or chargeable at nil rate of duty

but goods removed under new Central Excise (Removal of goods at concession rate of duty for

manufacture of excise goods) Rules will be ‘exempted’ goods. Based on various court decisions, it has been held that:

(i) the inputs remain ‘duty paid’ even when CENVAT credit is taken on them (ii) whenever an exemption notification is issued subject to condition that appropriate duty of excise has

been paid on the inputs, the exemption will not be available if the inputs are exempted from excise

duty or are subject to nil rate of excise duty.

(iii) ‘Exempted goods’ cannot be termed as goods which have ‘suffered duty’ ie. Goods which have

‘suffered duty’ means those goods on which duty actually has been paid.

(iv) Exemption notification cannot be interpreted in a way so as to create a duty liability which is not there

(Sakthi Sugars Ltd. v. Vol.I-1983(12) ELT)

….2

- 2 - A notification has to be published in Official Gazette, which is then made available to

public. There may be time gap between issue of a notification and its publication in official Gazette. It has been provided that the Central Excise notification will be effective on the date it

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is issued. Thus, an exemption notification will be valid on the day it is issued though it may be published in official Gazette later. However, when there is no specific provision in Act, a notification becomes effective on the day it is published in official Gazette.

Under Section 5A(IA) inserted with effect from 13.5.2005, if a notification grants unconditional exemption to certain goods, assessee cannot pay Excise Duty on such goods. Earlier, it was consistently held by Tribunal that assessee has option to ignore exemption and pay Excise Duty, even in cases where exemption is unconditional. Now, these decisions are no longer valid. However, a conditional exemption is at the option of assessee. Similarly, when more than two benefits are available, assessee can avail either of the benefits.

New units in backward area:

In order to encourage development of back areas, excise duty exemption has been granted to goods manufactured by new units (or existing units undertaking substantial expansion) in the specified areas (a) North Eastern Region, (b) Kutch district of Gujarat, (c) State of Jammu & Kashmir, (d) State of Sikkim, (e) Himachal Pradesh and (f) Uttaranchal. In the case of NE region, the unit should pay excise duty. Duty paid through PLA is refunded next month or self credit is allowed. Buyer who purchases goods from such unit is entitled to avail full CENVAT credit of duty paid. In the case of units in Himachal and Uttaranchal, there is direct exemption.

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Chapter III This session deals with the valuation of excisable commodities for levy of duty Valuation for the purpose of levy of Central Excise duty is dealt with under Sec.4 & 4A of the Central Excise Act. To supplement this, Central Excise Valuation (Determination of price of excisable goods) Rules 2000 is provided. When duty is leviable on advalorem basis, the assessable value will be the normal price which is otherwise called ‘transaction value’.(Sec 4) Normal price is the price at which such goods are ordinarily sold by the assessee to a buyer in wholesale trade for delivering at the time and place of removal, where the buyer is not a related person and where price is the sole consideration for the sale. Section 4A deals with value of excisable goods with reference to retail sale price. In this case, retail price is to be statutorily declared on the package. This is also called MRP. If more than one MRP is found, then the higher MRP is deemed to be retail sale price. The above provisions will not apply to goods for which tariff value is fixed by the Government u/s. 3(2). Section 3A empowers Central Government to charge Excise Duty on the basis of capacity of production in respect of certain notified goods. Duties specified in notifications are to be levied.

TARIFF VALUE (Sec.3(A)

NORMAL PRICE (Sec. 4)

MAXIMUM RETAIL PRICE (Sec. 4A)

Applies to notified Commodities; i. Cement ii.Sugar; iii.Pan Masala of specific weight

Applies to all goods chargeable to duty on Adv.(excepting products covered under Sec.3(3)/Sec.4A

Applies to notified Commodities

Simple and specific Complex and covers various situations

Simple and specific;

No abatement Abatements permissible under law

Fixed quantum of abatement

Static and require constant monitoring

Flexible Flexible

Not encountered legal problems Most litigated provision Relatively new provision

Not likely to be enlarged; ---------------- Likely to be enlarged to cover more commodities

Not evasion prone Evasion prone Evasion minimal

Valuation - certain important terms

1.Value 9.Place of removal

Valuation

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2.Price 3.Advalorem 4.Assessee 5.Wholesale trade 6.Sale 7.Delivery 8.Time of removal

10.Sole consideration 11.Favoured buyer 12.Class of buyer 13. Discounts 14. Durable and returnable 15. Packing

Valuation - Section 4

1. Transaction value - Section 4(1)(a) 2. Definiton of assessee - Section 4(3)(a) 3. Persons deemed as related - Section 4(3)(b) 4. Place of removal - Section 4(3)(c) 5. Definition of Transaction Value - Section 4(3)(d)

1) Price at delivery or at any other time nearest to the time of removal -Rule – 4 of Central Excise Valuation (Determination of Price of Excisable goods) Rules,2000

2) Sale for delivery at a place other than place of removal - Rule – 5 -do-

3) Additional consideration - Rule – 6 -do- 4) Transfer to a place from where goods

are sold - Rule – 7 -do- 5) Captive consumption - Rule - 8 -do- 6) Clearance to related persons - Rule - 9 -do- 7) Sale through Inter Connected Undertaking - Rule -10 -do- 8) Best judgment - Rule -11 -do-

Implied Abatements 1. Interest on receivable - Not includible 2. Post delivery inspection/testing charges - Includible if mandatory 3. Third party optional testing charges - Includible 4. Actual Freight element exhibited in the invoice - Not includible 5. Loading charges outside the place of removal - Includible, if door delivery of goods 6. Optional accessories - Includible if cleared with main machinery 7. Erection charges ) - Not includible if not forming part 8. Installation and commissioning charges ) of Contract 9. Design/Layout sites - Includible 10. Training charges - Includible if relate to goods supplied

Valuation (Includible elements) – if recovered from customer

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1. Packing charges 2. Excess freight collected 3. Warranty & after-sales service 4. Design & Development charges 5. Publicity/advertisement charges 6. Marketing/selling/distribution expenses 7. Depot expenses 8. Interest on inventories 9. Loading charges incurred within

factory

10. Know-how technical consultancy charges 11. Pre-delivery testing/inspection charges 12. Commission to agents 13. Over-riding commission to distributors 14. Cost of mould/die/pattern 15. Notional interest on advances 16. Discount on damages 17. Other additional consideration Value of prime accessories

Bombay Tyre International 1983 (14) ELT 1896 SC 1. Constitutional validity of Section 4 upheld 2. Agreement that duty should be levied only on manufacturing profit/loss negatived 3. Design charges, warranty, after-sale service to be included 4. Publicity/advertising expenses to be included 5. Equalized freight/transit insurance abatable 6. Trade discount/turnover discount allowed 7. ED/Taxes excludible 8. Special secondary packing at the instance of the buyer excluded. 9. Validity of related person concept upheld 10. Competency of Excise officials to lift the corporate veil affirmed MRF judgment 1995 (77) ELT 433 SC 1. Depot expenses disallowed 2. Year ending discounts, bonus discounts allowed 3. Secondary packing ponds case affirmed 4. Interest on inventories disallowed 5. Interest on receivables allowed 6. Marketing, selling and marketing expenses to be included 7. From cum-duty price discount should be demanded first and then Excise Duty Metal Box Co. VS. CCE 1995 (75) ELT 449 1. Notional interest on advances made by customer added to price to arrive at value 2. Uniformity in trade discount not required - bulk buyer not to be treated as a favoured buyer 3. After loading notional interest on price, higher discount permissible 4. Nexus and deflation in price required to be proved. CCE, Pune VS. Daichi Karkaria Ltd. 1999(112) ELT 353 SC (3 member) 1. Cost not defined in Excise Act; Hence to be reckoned by accounting principle 2. As per guidance notes issued by C.A. Institute, duty credit is like rebate/set off. Hence cost

of raw materials to be treated as net of Excise Duty 3. Under Rule 6(b)(ii) of Central Excise Rules, 1944 (since replaced with new Central Excise

Rules, 2001)- for determination of landed cost of raw materials, Excise Duty element not to be included when working under Modvat Scheme

M R P Assessment

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I Introduction:

When goods are chargeable to duty on ad valorem basis, the value thereof is determined based on the provisions contained is Section 4, which provides for adoption of wholesale price with certain adjustments on Assessable Value. However, in the Finance Act, 1997, a new concept of valuation based on Maximum Retail Price has been introduced by incorporation of new Section 4A. II Scope: 1. As per Section 4A, the Government is empowered to notify any goods, to which the provisions of Standards of Weight and Measures Act, 1976 (60 of 1976) or any other law apply and according to which the retail price of such goods shall have to be declared on the packages. In terms of Packed Commodities Rules framed under Weights and Measures Act, pre-packaged commodities are required to contain certain declarations on the package. In terms of Packed Commodities Rules, “pre-packed commodity” is defined as:- Pre-packed - commodity with its grammatical variations and cognate expressions, means a commodity which, without the purchaser being present, is placed in a package of whatever nature, so that the quantity of the product contained therein has a pre-determined value and such value cannot be altered without the package or its lid/cap, as the case may be being opened or undergoing a perceptible modifications, and the expression “package” wherever it occurs shall be construed as a package containing a pre-packed commodity. Explanation I: Where, by reasons merely of the opening of package, no alternation is caused to the value, quantity, nature or characteristics of the commodity contained therein, such commodity shall be deemed for the purposes of those rates to be a pre-packed commodity, for e.g., an electric bulb or fluorescent tube is a pre-packed commodity, even though the package containing it is required to be opened for testing the commodity. Explanation II: Where a commodity consists of a number of components and these components are packed in one, two or more units for sale as a single commodity, such commodity shall be deemed for the purpose of these rules, to be pre-packaged commodity. 2. From the above definition, it is clear that only when a commodity is sold in a pre-packed form, the provisions of Weights and Measures Act would apply. As on date only the provisions of Standards of Weights and Measures Act requires affixing of MRP on certain pre-packed commodity. Hence, as per the provisions of Section 4A of the Central Excise Act, 1944 the products covered under the ambit of Weights and Measures Act would fall within the frame work of MRP scheme. 3. The Provisions of Standards of Weights and Measures Act, 1976 are mainly intended to establish standards of weights and measures, to regulate interstate Trade or Commerce in weights, measures; and other goods which are sold or distributed by weight, measure or numbers and to provide for incidental matters connected with trade and commerce. Section 83 of the said Act empowers the Central Government to make Rules to provide for the manner of declaration of the contents of the package and specification of weight, measure and numbers in accordance with which the retail sale price shall be declared on the packages. Accordingly, the Central Government has framed the Standards of Weights and Measures (Packaged Commodities) Rules, 1977. In the said Rules, the provisions contained in Chapter II would be relevant for the purpose of determination of MRP in terms of Section 4A of Central Excise Act, 1944.

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4. The said Chapter II contains provisions which are applicable to packages intended for retail sale. The important terms such as Retail Sale and Retail Package as defined in the Packaged Commodities Rules, 1977 are extracted below: ‘Retail Sale’ in relation to a commodity, means the sale, distribution or delivery of such commodity through retail sales agencies or other instruments for consumption by an individual or a group of individuals or any other consumer. ‘Retail Package’ means a package containing any commodity which is produced, distributed, displayed, delivered or stored for sale through retail sales agencies or other instruments for consumption by an individual or a group of individuals. 5. In terms of Rule 4, sale, distribution or delivery of any pre-packed commodity is permissible only when the package in which the commodity is pre-packed bears thereon a required declaration. Rule 6 deals with declaration to be made on every package. In terms of the said rule every package shall bear thereon or on a label securely affixed thereto certain required information including the retail price of the said package. The other connected rules 15, 16 and 17 deals with declaring retail sale price on combination packages, group packages and multi piece packages, respectively. 6. Rule 23 deals with whole sale dealer as well as retail dealer, mandating that no whole sale dealer or retail dealer shall sell, distribute or deliver any packed commodity unless the said package complied with the provisions of the Act and the rules and in addition, no retail dealer including manufacturer shall sell the commodity exceeding the MRP. Thus the entire provisions of Chapter II of the said Act which deals with Rule 3 to Rule 28 speaks only about the retail package and only in this particular chapter there is a mandatory requirement of declaring/affixing MRP. 7. The provisions applicable to wholesale packages are dealt with in chapter III i.e., Rule 29. There is no mandatory requirement in the said Rule for affixing MRP or the retail price in the said packages. Hence it is felt that the commodities which are sold or removed in the course of wholesale trade in wholesale packing, there is no requirement of affixing MRP. Similarly, the commodities which are sold in bulk or in wholesale packages meant for industrial consumers also may not come in the purview of MRP concept. III Applicability: 1. When excisable goods chargeable to duty on advalorem basis are notified under Section 4A, then not withstanding anything contained in Section 4, such value shall be deemed to be the retail price declared on such goods less permissible abatements. In terms Section 4A, (2) Central Government is empowered to allow such abatements by notification in the official gazette. For the purpose of allowing abatements, the Central Government may take into account the amount of duty of excise, sales tax and other taxes, if any, payable on such goods. For the purpose of Section 4A, the term retail sale price means the maximum price which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes local or otherwise, freight, transport charges, commission payable to dealers, that all charges towards advertisement, delivery, packing, forwarding and the like, and the price is sole consideration. Where any excisable goods have more than one retail price, then the maximum of such retail price shall be deemed to be retail price for the purpose of determination of MRP under section 4 A. 2. At present 83 commodities(covered under 99 tariff headings/sub headings) are covered under Section 4 A and the Government has provided different abatement for various commodities. The coverage of this scheme and the permissible abatements have been declared under Notification No. 5/2001- CE (NT) dt. 1.3.2001. One more important aspect about the MRP scheme is that the MRP declared in the packaged commodities should be the sole

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consideration and if there is scope for receipt of additional consideration, as in the case of various exchange schemes offered by the manufacturers of consumer durable, the MRP declared will not be regarded as the sole consideration and such commodities shall be assessed duties based on the value determinable in terms of Section 4.

IV Consequential Amendments (i) After the introduction of MRP scheme for certain notified products, notifications granting Small Scale exemption such as 8/2001 -CE and 9/2001-CE dt 01.03.01 have all been modified accordingly to determine the eligibility for exemption as well as the extent of exemption to be quantified in terms of MRP in respect of the product notified under Section 4A. (ii) Section 4A has been further amended to provide for a specific provision to confiscate the notified excisable goods, if any manufacturer removes from the place of manufacture such notified goods without declaring the retails sale price on such packages or declares a retail sale price which does not constitute the sole consideration for sale, or tampers with, obliterates or alters any such declaration made on the packages after removal. This provision is in addition to the other provisions existing in the Central Excise Rules for confiscation.

V Conclusion: It is expected that with the introduction of Maximum Retail Price concept, the task of

determination of value will become simpler and there may not be any scope for unnecessary and unwarranted litigation. The attitude of the assessee resorting to under-valuation through various means such as job work manufacture, purchase from SSI units with brand name, sale to/through related persons, sale to favoured buyers, off loading certain elements of value in the guise of discount, freight, after sale service, warranty charges etc., will be totally eliminated.

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Chapter IV

This session deals with the provisions of the Central Excise Act for admissibility of input credits to be adjusted towards payment of duty on goods produced Benefits 1. Reduces cascading effect. 2. No duty on duty. 3. Instant credit. 4. Proper accounting of materials and considerable reduction in evasion. 5. Step towards GST (Goods & Services Tax) 6. Increased productivity and higher revenue realisation. Cenvat Scheme (Effective from 1 July, 2001) Rule 1. Gazette notification of input and final products.

Rule 2. Definition

Rule3. Applicability

Rule 4. Conditions for allowing credit

Rule 5. Refund of CENVAT Credit

Rule 6. Obligation of manufacturer of dutiable and exempted goods.

Rule 7. Documents and accounts

Rule 8. Transfer of CENVAT Credit

Rule 9. Transitional provision

Rule 10. Special dispensation in respect of inputs manufactured in factories located in specified areas of North Eastern Region

Rule 11. Power of central government to notify goods for deemed CENVAT Credit

Rule 12. Recovery of CENVAT Credit wrongly taken.

Rule 13. Confiscation and penalty

CENVAT Scheme Central Value Added Tax – Scheme

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CENVAT – Admissibility and procedure: 1. Inputs may be used in or in relation to the manufacture of the final products. 2. Inputs may be removed as such for home consumption or for export. 3. In such cases amount equivalent to the duty on transaction value under Sec 4 of CE Act,

1944, covered by an invoice under rule 52-A of Central Excise Rules, 1944. 4. Inputs as such or after partial processing may be removed for job work or for

manufacture of intermediate goods to be returned within 180 days. 5. On return of the said goods, may be removed for home consumption, export, for use in

the manufacture of any final products or to 100% EOU, EPZ units etc. 6. Waste also to be returned or else to produce proof of payment of duty at job worker’s

end. 7. To be sent under challan duty authenticated as prescribed by CBEC. 8. If inputs not received within 180 days, differential duty will be charged. 9. Credit allowed can be used for payment of duty on any final products declared under

Rule 57G, on inputs removed as such and on goods not charged to duty under Rule 57CC of 1944 rules.

10. Credit on inputs used in the manufacture of final product and intermediate goods

exported under bond will be allowed to be utilised for payment of duty on any final products cleared for home consumption. However, it cannot be utilised for any refunds. Cash refund is permissible subject to limitations and conditions as per rules and notifications issued thereunder.

11. No cash refund, if drawback or benefit of Rule 12(1)(B) of Central Excise Rules, 1944

availed. 12. For clearances to EPZ/100% EOU/STP/EHTP and under notification 108/95, utilization

of input credit for payment of duty on other final products will be allowed, but no cash refund is allowed..

13. Disposal of waste, either on payment of duty or by destruction. 14. Asst. Commissioner to permit transfer of modvat credit balance in case of shifting of the

factory, merger, amalgamation or transfer subject to conditions and limitation particularly the liability and balance inputs should also taken over by the new unit and accounted for.

Goods not eligible for credit: 1. Packing materials in respect of which exemption is available.

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2. Packing materials/containers, the cost of which is not includible in terms of sec. 4 of the Act.

3. Crates, glass bottles used for packing aerated waters. 4. Inputs which are used in the manufacture of Capital goods which are further used in the

factory for manufacture. Amount of CENVAT Credit eligible under the scheme (i) In terms of the notification issued, a credit will be restricted only to the extent of C.V.D.

paid by 100% E.O.U., E.P.Z., S.T.P. and E.H.T.P. units on their DTA (Domestic Traffic Area) clearances.

(ii) A.E.D. paid under the various enactments to be used for payment of A.E.D. under the

respective Act only. (iii) Goods falling under heading 2710.11/2710.12/ 2710.13/2710.19 (excluding natural

gasoline liquids) and high speed diesel oil (HSD) falling under the heading 27.10 not eligible for the cenvat benefits.

(iv) National Calamity Contingent duty leviable under Sec.136 of the Finance Act and the credit can be utilised only for payment of NCC duty. (v) No credit in respect of duty paid on the inputs used for manufacture of texturised yarn

(including draw twisted or draw wound yarn) of polysters falling under heading No.5402. Rule 3: Applicability

1. Removal of inputs for manufacture of intermediate goods by job-worker directly to his premises.

2. Job worker should avail benefit of notification no.214/86.

1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of - (i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act; (ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable under the Excise Act; (iii) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978); (iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); (v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vi);

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(viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, as substituted by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law: Provided that a provider of taxable service shall not be eligible to take credit of such additional duty; (viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act; and (x) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004), (xi) the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law, paid on- (i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004, including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004.

Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products and the provider of output service shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First Schedule to the Customs Tariff Act.

(2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer of final products shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in process or inputs contained in the final products lying in stock on the date on which any goods manufactured by the said manufacturer or producer cease to be exempted goods or any goods become excisable.

(3) Notwithstanding anything contained in sub-rule (1), in relation to a service which ceases to be an exempted service, the provider of the output service shall be allowed to take CENVAT credit of the duty paid on the inputs received on and after the 10th day of September, 2004 and lying in stock on the date on which any service ceases to be an exempted service and used for providing such service.

(4) The CENVAT credit may be utilized for payment of – (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or

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(d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or (e) service tax on any output service: Provided that 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:

Provided further that the CENVAT credit of the duty, or service tax, paid on the inputs, or input services, used in the manufacture of final products cleared after availing of the exemption under the following notifications of Government of India in the Ministry of Finance (Department of Revenue),-

(i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999]; (ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999]; (iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; (v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; (vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and (vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003],

shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of.

Provided also that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law, shall be utilised for payment of service tax on any output service: Provided also that the CENVAT credit of any duty mentioned in sub-rule (1), other than credit of additional duty of excise leviable under clause 85 of the said Finance Bill, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law, shall not be utilised for payment of said additional duty of excise on final products. (5) When inputs or 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 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 referred to in rule 9:

Provided that such payment shall not be required to be made where any inputs are removed outside the premises of the provider of output service for providing the output service:

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Provided further that such payment shall not be required to be made when any capital goods are removed outside the premises of the provider of output service for providing the output service and the capital goods are brought back to the premises within 180 days, or such extended period not exceeding 180 days as may be permitted by the jurisdictional Deputy Commissioner of Central Excise, or Assistant Commissioner of Central Excise, as the case may be, of their removal.

(6) The amount paid under sub-rule (5) shall be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods under sub-rule (5).

(7) Notwithstanding anything contained in sub-rule (1) and sub-rule (4),-

(a) CENVAT credit in respect of inputs or capital goods produced or manufactured, by a hundred per cent. export-oriented undertaking or by a unit in an Electronic Hardware Technology Park or in a Software Technology Park other than a unit which pays excise duty levied under section 3 of the Excise Act read with serial numbers 3,5, 6 and 7 of notification No. 23/2003-Central Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st March, 2003] and used in the manufacture of the final products or in providing an output service, in any other place in India, in case the unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification No. 23/2003-Central Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st March, 2003], shall be admissible equivalent to the amount calculated in the following manner, namely:-

Fifty per cent. of [X multiplied by {(1+BCD/100) multiplied by (CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value.

(b) CENVAT credit in respect of,- (i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of 1978); (ii) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (iii) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii) and (iii); (v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); and (vi) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004); and (vii)the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law,

shall be utilized only towards payment of duty of excise or as the case may be, of service tax leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), or the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004, additional duty of excise leviable under section 157 of the

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Finance Act, 2003, or the education cess on taxable services leviable under section 91 read with section 95 of the said Finance (No.2) Act, 2004, or the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law, respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves, if such inputs are removed as such or after being partially processed or on any output service: Provided that the credit of the education cess on excisable goods and education cess on taxable services can be utilised, either for payment of the education cess on excisable goods or for the payment of the education cess on taxable services. Explanation.-For the removal of doubts, it is hereby declared that the credit of the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) paid on or after the 1st day of April, 2000, may be utilised towards payment of duty of excise leviable under the First Schedule or the Second Schedule to the Excise Tariff. (c)the CENVAT credit, in respect of additional duty leviable under section 3 of the Customs Tariff Act, paid on marble slabs or tiles falling under sub-heading No. 2504.21 or 2504.31 respectively of the First Schedule to the Excise Tariff Act shall be allowed to the extent of thirty rupees per square meter;

Explanation.- Where the provisions of any other rule or notification provide for grant of whole or part exemption on condition of non-availability of credit of duty paid on any input or capital goods, or of service tax paid on input service, the provisions of such other rule or notification shall prevail over the provisions of these rules.

Rule 4 Conditions for availing CENVAT Credit

(1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service:

Provided that in respect of final products, namely, articles of jewellery falling under heading 7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who get such final products manufactured on his behalf, on job work basis, subject to the condition that the inputs are used in the manufacture of such final product by the job worker. (2) (a) The CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service at any point of time in a given financial year shall be taken only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same financial year:

Provided that the CENVAT credit in respect of capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if such capital goods are cleared as such in the same financial year.

Provided further that the CENVAT credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law, in respect of capital goods shall be allowed immediately on receipt of the capital goods in the factory of a manufacturer.

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(b) The balance of CENVAT credit may be taken in any financial year subsequent to the financial year in which the capital goods were received in the factory of the manufacturer, or in the premises of the provider of output service, if the capital goods, other than components, spares and accessories, refractories and refractory materials, moulds and dies and goods falling under heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act, are in the possession of the manufacturer of final products, or provider of output service in such subsequent years.

Illustration.- A manufacturer received machinery on the 16th day of April, 2002 in his factory. CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent years..

(3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer, provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company.

(4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961( 43 of 1961).

(5)(a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CENVAT credit or otherwise, but the manufacturer or provider of output service can take the CENVAT credit again when the inputs or capital goods are received back in his factory or in the premises of the provider of output service

(b) The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications.

(6) The Commissioner of Central Excise having jurisdiction over the factory of the manufacturer of the final products who has sent the input or partially processed inputs outside his factory to a job-worker may, by an order, which shall be valid for a financial year, in respect of removal of such input or partially processed input, and subject to such conditions as he may impose in the interest of revenue including the manner in which duty, if leviable, is to be paid, allow final products to be cleared from the premises of the job-worker.

(7) The CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9.

Rule 5 Conditions for refund of Cenvat Credit

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Where any input or input service is used in the final products which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate products cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,

(i) duty of excise on any final products cleared for home consumption or for export on payment of duty; or

(ii) service tax on output service,

and where for any reason such adjustment is not possible, the manufacturer shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification:

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in respect of such duty. Provided further that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill, under the Provisional Collection of Taxes Act, 1931, the force of law, shall be utilised for payment of service tax on any output service.

Explanation: For the purposes of this rule, the words ‘output service which are exported’ means the output taxable services exported in accordance with the Export of Services Rules, 2005.

Rule 6 Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services

(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or exempted services, except in the circumstances mentioned in sub-rule (2). Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule (2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, except inputs intended to be used as fuel, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.

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(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:-

(a) if the exempted goods are-

(i) goods falling within heading No. 22.04 of the First Schedule to the Excise Tariff Act (hereinafter in this rule referred to as the said First Schedule);

(ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity;

(iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer;

(iv) Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity;

(v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;

(vi) final products falling within Chapters 50 to 63 of the said First Schedule,

(vii) goods supplied to defence personnel or for defence projects or to the Ministry of Defence for official purposes, under any of the following notifications of the Government of India in the Ministry of Finance (Department of Revenue), namely:-

(1) No. 70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th June, 1992;

(2) No. 62/95-Central Excise, dated the 16th March, 1995, G.S.R. 254 (E), dated the 16th March, 1995;

(3) No. 63/95-Central Excise, dated the 16th March, 1995, G.S.R. 255 (E), dated the 16th March, 1995;

(4) No. 64/95-Central Excise, dated the 16th March, 1995, G.S.R. 256 (E), dated the 16th March, 1995,

the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to ten per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory;

(c) the provider of output service shall utilize credit only to extent of an amount not exceeding twenty per cent. of the amount of service tax payable on taxable output service.

Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer or provider of output service by debiting the CENVAT credit or otherwise.

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Explanation II.- If the manufacturer or provider of output service fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 14, for recovery of CENVAT credit wrongly taken.

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.

(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either-

(i) cleared to a unit in a special economic zone; or

(ii) cleared to a hundred per cent. export-oriented undertaking; or

(iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

(iv) 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 of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or

(v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or

(vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting.

(vii) all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under section 3 of the said Customs Tariff Act when imported into India and supplied against International Competitive Bidding in terms of notification No. 6/2002-Central Excise dated the 1st March, 2002. Rule 7 : Documents 1. An invoice issued by a manufacturer of inputs.

2. An invoice issued by the manufacturer of inputs from his depots, premises of the consignment agents or any other place of business.

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3. Invoice issued by a manufacture for clearance of inputs or capital goods.

4. Invoice issued by the first stage dealer or second stage dealer in terms of the provisions of CE(No.2), Rules 2001.

5. An invoice issued by the second stage dealer of excisable goods registered and duly authenticated by the proper officer.

6. Invoice issued by an importer registered.

7. Invoice issued by an importer from his depot or from the premises of consignment agent of the said importer or premises as the case may be, is registered in terms of the provisions of CE(No.2), Rules 2001.

8. An invoice issued by a registered first stage dealer of imported goods and duly authenticated by the proper officer.

9. A Bill of entry. 10. A supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in terms of the provisions of CE(No.2) Rules 2001 from his factory, or from his depot or from the premises of consignment agent of the said manufacturing importer. Rule 9 - Transitional Provision: 1. Inputs lying in stock. 2. Duty paying documents. 3. To be used in the manufacture of final products. 4. Input and final products duly notified. 5. No credit earlier availed. 6. Final product not exempt or charged to nil rate of duty. 7. Opting out of cenvat, input duty on the stock available to be assessed and expunged from

the credit account. Excess, if any would lapse. Short credit if any, would be recovered by cash payment.

8. Unutilised balance of credit as on 1.7.2001. Rule 12 – Recovery of credit wrongly taken 1. Credit if taken or utilised wrongly to be recovered along with interest applying the

provisions of Sec 11A and Sec 11AB of CE Act, 1944.

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Chapter V

1. Introduction

1.1 Refund of any duty of excise is governed by Section 11B of the Central Excise Act, 1944. By definition, refund includes rebate of duty paid on goods exported out of India or on materials used in the manufacture of goods exported out of India. The refund claim can be filed within one year from the relevant date in the specified Form-R by an assessee or even a person who has borne the duty incidence, to the Deputy/Assistant Commissioner of Central Excise having jurisdiction over the factory of manufacture.

1.2 The "relevant date" has been defined in the said section and refund of duty paid can be sought provided the manufacturer has not passed on the burden of duty. In case the burden of duty has been passed on, the refund can be claimed by the buyer who has actually paid the duty if he has not passed the incidence of duty to any other person, or, in the alternative, the amount can be deposited in the Consumer Welfare Fund created by the statute.

1.3 The Central Excise Act also provided for payment of interest on delayed payment of refund. As per Section 11BB, if any duty ordered to be refunded under Section 11B has not been refunded within three months from the date of receipt of the refund application in the prescribed manner and form along with the supporting documentary evidence as laid down in the relevant rules, interest at the rate notified by the Government shall have to be paid on such duty from the date immediately after the expiry of three months from the date of receipt of application till the date of refund of such duty.

2. Presentation of refund claim

2.1 Any person, who deems himself entitled to a refund of any duties of excise or other dues, or has been informed by the department that a refund is due to him shall present a claim in proper Form, along with all the relevant documents supporting his claim and also the copies of documents/records supporting his declaration that he has not passed on the duty incidence.

2.2 The claim will be filed with the Deputy/Assistant Commissioner of Central Excise with a copy to the Range Officer.

2.3 The claim shall be presented in duplicate and shall be duly signed by the claimant or by a duly authorised person on his behalf and shall be pre-receipted (with revenue stamp on original copy, where necessary).

2.4 It may not be possible to scrutinise the claim without the accompanying documents and decide about its admissibility. If the claim is filed without requisite documents, it may lead to delay in sanction of the refund. Moreover, the claimant of refund is entitled for interest in case refund is not given within three months of the filing of claim. Incomplete claim will not be in the interest of the Department. Consequently, submission of refund claim without supporting documents will not be allowed. Even if post or similar mode files the same, the claim should be rejected or returned with Query Memo (depending upon the nature/importance of document not filed). The claim shall be taken as filed only when all relevant documents are available. In case of non-availability of any document due to reasons for which the Central Excise or Customs

REFUNDS

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Department is solely accountable, the claim may be admitted so that the claimant is not in disadvantageous position with respect to limitation period.

3. Scrutiny of refund claim and sanction

3.1 The Range Officer will complete the scrutiny of the papers within 2 weeks from the date of receipt of the claim in the Range Office and send a report of their scrutiny to the Divisional Deputy/Assistant Commissioner of Central Excise.

3.2 The Divisional Office will scrutinise the claim, in consultation with Range, and check that the refund application is complete and is covered by all the requisite documents. This should be done, as far as possible, the moment refund claim is received and in case of any deficiency, the same should be pointed out to the applicant with a copy to the Range Officer within 15 days of receipt.

3.3 In the Divisional Offices, final processing of refund claims after the receipt of Range Officer’s report should be completed including the verification of the fact whether the assessee has passed on the duty incidence to their buyer (in cases where the refund claim is filed by a manufacturer or owner of warehoused goods). The types of cases to which this provision will not be attracted are already specified in section 11B itself. Where the duty incidence has been passed on, the duty refund, if otherwise admissible, will be ordered in file, but will also be ordered to be credited to the Consumer Welfare Fund. The burden of proving that the duty incidence has not been passed on, is on the claimant and the latter may be required to submit sufficient documentary proof for this purpose. It is clarified that the question of unjust enrichment has to be looked into case by case. There cannot be a general instruction indicating the documents and /or record, which the claimant should produce as a proof that he has not, passes on the duty incidence to any other person.

3.4 Claim for refund of less than Rs. 100 shall not be entertained in respect of all excisable commodities.

4. Payment of refund

4.1 Where the claim has been admitted whether in part or in full, and claimant is eligible for refund, the Deputy/Assistant Commissioner of Central Excise should ensure that payment is made to the party within 3 days of the order passed after due audit, if any.

4.2 All claims shall be paid to the applicant by a cheque on the authorised bank with which the sanctioning authority maintains account.

4.3 On receipt of sanctioning claims from the dealing hands, the cheque shall be written out by the cashier (or his assistant) and simultaneously an entry made in the cash book. The Assistant Commissioner shall sign the cheque as well as the entry in the cashbook simultaneously. A receipt of the cheque should be obtained from the payee and placed on file. After the cheque has been signed, it shall either be delivered to the claimant or his authorised representative personally when the next calls for it or sent to him by Registered Post ‘Acknowledgement Due’ at Government cost.

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5. Post Audit

5.1 All refund claim papers should be sent by the Divisional Deputy/Assistant Commissioner to the Commissionerate Headquarters (to the Additional/Joint Commissioner–Audit) within a week after the payment thereof irrespective of the amount involved. At the Commissionerate Headquarters, a special cell comprising Deputy/Assistant Commissioner (Audit) – for immediate supervision – one superintendent, one Inspector and two Deputy Office Superintendents may be created out of the sanctioned strength of the audit staff in the Commissionerate for post -audit of these claims.

5.2 This cell may undertake examination on merits of each such claim where the amount of refund granted is Rs. 5 lakh or more. In regard to the remaining refund claims involving amounts below Rs. 5 lakh, post audit may be undertaken on the basis of random selection by the Deputy/Assistant Commissioner (Audit). This post audit may be completed before the expiry of three months from the date of payment and where ever the grant of refund is not found to be correct, action should be taken in terms of provisions contained in Section 35E of the Central Excises Act, 1944, this special Cell may work directly under the charge of Additional/Joint Commissioner (Audit).

6. Monitoring and control for timely disposal of refunds 6.1 The Commissioner of Central Excise should devise appropriate control to ensure that the refund/rebate claims are expeditiously sanctioned within the time limit stipulated above.

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Chapter VI

This session provides an overview of the origin and present position of Service Tax and its administration 1. Constitutional & Legal provisions behind levy of Service Tax in India.

Constitutional Validity

Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories-

a) Union list (only Central Government has power of legislation)

b) State list (only State Government has power of legislation)

c) Concurrent list (both Central and State Government can pass legislation).

To enable parliament to formulate by law principles for determining the modelities of levying the Service Tax by the Central Govt. & collection of the proceeds there of by the Central Govt. & the State, the amendment vide constitution (95th amendment) Act, 2003 has been made. Consequently, new article 268 A has been inserted for Service Tax levy by Union Govt., collected and appropriated by the Union Govt., and amendment of seventh schedule to the constitution, in list I-Union list after entry 92B, entry 92C has been inserted for taxes on services as well as in article 270 of the constitution the clause (1) article 268A has been included.

2. Formation and function of DGST:

Considering the increasing workload due to the expanding coverage of service tax, it has been decided to centralise all the work and entrust the same to a separate unit supervised by a very senior official. Accordingly, the office of Director General (Service Tax) has been formed in the year 1997. It is headed by the Director General (Service Tax). The functions and powers of Director General (Service Tax) are : i To ensure that proper establishment and infrastructure has been created under different central excise Commissionerate to monitor the collection and assessment of service tax. ii To study the staff requirement at field level for proper and effective implementation of service tax. iii To study as to how the various service taxes are being implemented in the field and to suggest measures as may be necessary to increase revenue collection or to streamline procedures : iv To undertake study of law and procedures in relation to service tax with a view to simplify the service tax collection and assessment and make suggestions thereon: v To form a data base regarding the collection of service tax from the date of its inception in 1994 and to monitor the revenue collection from service tax: vi To inspect the service tax cells in the Commissionerate to ensure that they are functioning effectively : vii To undertake any other functions as assigned by the Board from time to time.

Service Tax

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i) The Directorate of Service Tax has been co-ordinating between the Board and Central Excise Commissionerates. It also monitors the collection and the assessment of Service Tax. The Service Tax Revenue Reports, received from various Central Excise Commissionerates, are complied at the Directorate and the performance of the Commissionerates/Zones in Service Tax collection are being monitored for corrective actions.

ii) During the course of Inspection of the Central Excise Commissionerates, the Inspection team of this Directorate has in variably pointed out the requirement of the staff in field level for proper and effective implementation of Service Tax. The Directorate has also suggested necessary measures to be adopted to increase service Tax revenue collection. The grey areas and evasion prone services have been brought to the notice of the Commissionerate for conducting effective Surveys/Audit.

iii) The Directorate of Service Tax has drafted a separate act for Service Tax and the Rules therefor and has forwarded the same to the Ministry for approval vide letter F.No.V/DGST/30-Misc-56/2000 dtd. 19/02/2001. The Service Tax manual has also been prepared and forwarded to Board for approval and issue during year 2001. The correspondences received from field formations and service providers are scrutinised from law and the clarifications sought for are replied to wherever possible. In cases where the doubts/clarification sought involved policy matter, the Board has been apprised for issuing clarification/instruction.

iv) This Directorate has taken up the issue of forming a database regarding register of the assessee and collection of Service Tax in co-ordination with the Directorate of Systems.

v) The Directorate has also recommended electronic administration in implementation of Service Tax to bring transparency in tax administration and avoid interfacing between Service providers and tax authorities. The Board has also instructed the Commissionerate to feed the figures of service tax revenue collection in the system on line before 7th of every month. The Directorate of Service Tax has advised all the Central Excise Commissionerates to re-consile service tax collection with the help of T.R.-6 challans and the statements of the P.A.O.

vi) The Directorate of Service Tax has been conducting inspection of Central Excise Commissionerates. During the course of inspection, verification of Service Tax records, maintained by the Commissionerate, is done. Staff of Service Tax Cell are also guided suitably in proper implementation of Service Tax and maintenance of records. A meeting with the Service Tax officers is always conducted in the Commissionerate during inspection. Open-house meeting is also arranged in the Commissionerate wherever it was felt necessary. Problems faced by the assessees in Service Tax compliance are sorted out in the open-house meeting with the members of various service providers associations.

Presently there are 65 Central Excise Commissionerates and 6 Service tax Commissionerates within the jurisdiction of 23 Central Excise Zones. The 6 Service Tax Commissionerates have been established in Mumbai, Delhi, Kolkata, Chennai, Ahmedabad & Bangalore

3. Existing scheme for levy, assessment & collection of Service Tax in India

Levy and assessment

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Service tax is levied on specified taxable services and the responsibility of payment of the tax is cast on the service provider. System of self-assessment of Service Tax Returns by service tax assessees has been introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are expected to be filed half yearly

Central Excise officers are authorized to conduct surveys to bring the prospective service tax assessees under the tax net. Directorate of Service Tax at Mumbai over sees the activities at the field level for technical and policy level coordination.

Legal provisions

The provisions relating to Service Tax were brought into force with effect from 1st July 1994. It extends to whole of India except the state of Jammu & Kashmir. The services, brought under the tax net in the year 1994-95 ,are as below:

(1) Telephone (2) Stockbroker (3) General Insurance

The Finance Act (2) 1996 enlarged the scope of levy of Service Tax covering three more services, viz.,

(4) Advertising agencies, (5) Courier agencies (6) Radio pager services.

But tax on these services was made applicable from 1st November, 1996.

The Finance Acts of 1997 and 1998 further extended the scope of service tax to cover a larger number of services rendered by the following service providers, from the dates indicated against each of them. (7) Consulting engineers (7th July, 1997) (8) Custom house agents (15th June, 1997) (9) Steamer agents (15th June, 1997) (10) Clearing & forwarding agents (16th July, 1997) (11) Air travel agents --- (1st July, 1997) (12) Tour operators (exempted upto 31.3.2000 Notification No.52/98, 8th July, 1998, reintroduced w.e.f. 1.4.2000)

(13) Rent-a-Cab Operators (exempted upto 31.3.2000 Vide Notification No.3/99 Dt.28.2.99, reintroduced w.e.f. 1.4.2000) (14) Manpower recruitment Agency (1st July, 1997) (15) Mandap Keepers (1st July, 1997) The services provided by goods transport operators, out door caterers and pandal shamiana contractors were brought under the tax net in the budget 1997-98, but abolished vide Notification No.49/98, 2nd June,1998.

The Service Tax is leviable on the 'gross amount' charged by the service provider from the client, from the dates as notified and indicated above.

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Government of India has notified imposition of service Tax on twelve new services in 1998-99 union Budget. These services listed below were notified on 7th October, 1998 and were subjected to levy of Service Tax w.e.f. 16th October, 1998. (16) Architects (17) Interior Decorators (18) Management Consultants (19) Practicing Chartered Accountants (20) Practicing Company Secretaries (21) Practicing Cost Accountants (22) Real Estates Agents/Consultants (23) Credit Rating Agencies (24) Private Security Agencies (25) Market Research Agencies (26) Underwriters Agencies In case of mechanized slaughter houses, since exempted, vide Notification No.58/98 dtd. 07.10.1998, the rate of Service Tax was used to be a specific rate based on per animal slaughtered. In the Finance Act’2001, the levy of service tax has been extended to 14 more services, which are listed below. This levy is effective from 16.07.2001. (27) Scientific and technical consultancy services (28) Photography (29) Convention (30) Telegraph (31) Telex (32) Facsimile (fax) (33) Online information and database access or retrieval (34) Video-tape production (35) Sound recording (36) Broadcasting (37) Insurance auxiliary activity (38) Banking and other financial services (39) Port (40) Authorised Service Stations (41) Leased circuits Services In the Budget 2002-2003, 10 more services have been added to the tax net which are listed below. This levy is effective from 16.08.2002. (42) Auxiliary services to life insurance (43) Cargo handling (44) Storage and warehousing services (45) Event Management (46) Cable operators (47) Beauty parlours (48) Health and fitness centres (49) Fashion designer (50) Rail travel agents. (51) Dry cleaning services.

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and these services have been notified on 1-8-2002 and were subject to levy of Service Tax w.e.f. 16-8-2002.

It is expected that in view of more & more services brought under the Service Tax net, the service tax revenue would now form a major part in Govt. Revenue earnings.

In the Budget 2003-04 seven more services along with extension to three existing services have been added to the tax net which are listed below. The levy of service tax on these services is effective from 1st July, 2003. (52) Commercial vocational institute, coaching centres and private tutorials (53) Technical testing and analysis (excluding health & diagnostic testing) technical inspection and certification service. (54) Maintenance & repair services (55). Commission and Installation Services (56). Business auxiliary services, namely business promotion and Support services (excluding on information technology services) (57) Internet café (58) Franchise Services The rate of Service Tax was increased from 5% to 8% on all the taxable services w.e.f. 14.5.2003.

In the Budget 2004-05, 10 more services have been introduced in the service tax net along with reintroduction of three existing services as follows: (59) Transport of goods by road (earlier Goods Transport Operators service re-

introduced). (60) Out door Caterer’s service (re-introduced) (61) Pandal or Shamiana service (re-introduced)

(62) Airport Services (63) Transport of Goods by Air Services (64) Business Exhibition Services (65) Construction Services in relation to Commercial or Industrial BuildingConstruction Services in relation to Commercial or Industrial Building In the Budget 2005-06, 9 more services have been introduced in the service tax net as follows with effect from 16.06.2005: (66) Intellectual Property Services (67) Opinion Poll Services (68) TV or Radio Programme Services (69) Survey and Exploration of Minerals Services (70) Travel Agent’s Services other than Rail and Air travel agents (71) Forward Contract Services (72) Transport of goods through pipe line or other conduit Services. (73) Site preparation & clearance Services (74) Dredging Services (75) Survey & Mapmaking Services (76) Cleaning Services (77) Membership of Clubs & Associations (78) Packaging Services

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(79) Mailing list compilation & Mailing Services (80) Construction Services in relation to Residential Complexes

The levy of service tax on these services is effective from 10th September, 2004 and the rate of service tax has been enhanced to 10% from 8%. Besides this 2% Education Cess on the amount of service tax has also been introduced. Thus the effective service tax rate is now 10.2% including Education Cess. Presently, the tax is levied at a uniform rate of 12% on the value of taxable services. In effect, the total Service Tax payable would be 12.24% of the value of taxable services. (Service tax rate inclusive of education cesses is 12.36% after enactment of Finance bill 2007).

In the Budget for 2007-08, 7 more services were specified as taxable services.

Administrative mechanism.

Service Tax is administered by the Central Excise Commissionerates working under the Central Board of Excise & Customs, Department of Revenue, Ministry of Finance, Government of India. The unique feature of Service Tax is reliance on collection of tax, primarily through voluntary compliance.

Government has from the very beginning adopted a flexible approach concerning Service Tax administration so that the assessees and the general public gain faith and trust in the tax measure so that voluntary tax compliance, one of the avowed objectives of the Citizens Charter, is achieved. Substantive and procedural liberalization measures, adopted over the years for this purpose, are clear manifestations of the above approach. Following are some of the measures adopted in that direction:

(i) Under Section 67 of the Finance Act, 1994, Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid on the value received. This has been done to ensure that providers of professional services are not inconvenienced, as in many cases, the entire amount charged/billed may not be received by the service provider and calling upon him to pay the tax on the billed amount in advance would have the effect of asking him to pay from his own pocket. It would also make the levy a direct tax, which is against the very scheme of Service Tax.

(ii) Corporate assessees are given the liberty to pay tax on the value of taxable service, provided by them in a month, by the 25th of the following month to enable them to finalize the accounts. Further, the individual assessees are required to pay the levy only once in a quarter.

(iii) The process of registration of assessees has been considerably simplified.

(iv) No separate accounts have been prescribed for the purposes of Service Tax. It has been provided that accounts being maintained by the assessees under any other law in force would be sufficient. This has placed the Department at considerable inconvenience to itself, so as to minimize difficulties for the assessees.

(v) The Finance Act’2001 has introduced self assessment for service tax returns; thereby sparing the assessees from the rigours of routine scrutiny and assessment.

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(vi) Frequency of filing the returns is minimized. Filing of Statutory return has been made half yearly and by the 25th of the month following the half-year. This is in replacement of the monthly/quarterly returns prescribed earlier.

(vii) Penal provisions do exist in respect of Service Tax also. Failure to obtain registrations, failure to pay the tax, failure to furnish the prescribed returns, suppression of the correct value of the taxable services and failure to comply with notice do attract penal provisions as prescribed. But, it is specifically provided that no penalty is imposable on the assessee for any of the above failures, if the assessee proves that there was reasonable cause for the failure. This provision has been inserted to take care of the genuine difficulties of the new assessees.

(viii) Government's liberal attitude is more evident in the case of prosecutions. Hardly will there be any tax statute with revenue implications, where prosecutions of the offenders are not provided. In the case of the Service Tax also it was thought of and sections 87 to 93 of the Finance Act, 1994, did provide for prosecution of offenders. However, these provisions were subsequently withdrawn as a noble gesture towards the assessees.

(ix) Service Tax Credit Rules, 2002, have been replaced by the CENVAT Credit Rules, 2004, introduced by the Finance Act, 2004, where under CENVAT credit has been extended across the sectors i.e. goods and services.

General exemptions from Service Tax

Section 93(1) of the Finance Act, 1994, empowers the Central Government to grant exemption from payment of Service Tax. In exercise of these powers, the Central Government has granted partial/full exemption to a number of services. Besides, the following general exemptions from service tax is available to all service tax assesses:-

(a) Exemption to all taxable services provided to United Nations or an International Organisation – Vide Notification NO.16/2002-S.T., dated 2.3.2002.

(b) Exemption to services provided to all developers of Special Economic Zones or a

Unit (including the unit under construction) of a Special Economic Zone by any service provider for development, establishment, maintenance and operation of Special Economic Zone – vide Notification No.4/2004-S.T. dated 31.3.2004.

No exemption to EOUs: The Foreign Trade Policy (2004-09) had announced that the EOU/EHTP/STP/BTP units will be exempted from payment of Service Tax, but the Finance Ministry has not issued any notification providing general exemption for EOUs. Further the Board clarified that the EOUs can also take credit of the Service Tax borne by them, which will in effect provide them relief from Service Tax – Circular No.54/2004-Cus., dated 13.10.2004.

Small service providers exempted : Notification No.6/2005-S.T., dated 1.3.2005 exempts taxable services up to the value of Rs.4 lakhs, provided value of their taxable services did not exceed Rs.4 lakhs in the preceding year. With effect from 1.4.2007, the small service provider exemption is being enhanced to Rs.8 lakhs vide Notification No.4/2007-S.T., dated 1.3.2007.

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However, this exemption is not available to persons who provide taxable services using brand name of others. Recipients of taxable services, wherever made liable, are also not covered by this exemption. Job work : Exemption has been provided from service tax to a person producing goods, from the inputs received from a manufacturer and sending the resultant product to the same manufacturer for further manufacture of final products, on which excise duty is payable [Notification No.8/2005-Service Tax, dated 1.3.2005]1. Service Tax is not leviable on job work processes when such activity amount to manufacture under Central Excise Act, 1944-See C.B.E. & C.Circular Letter No.341/13/2005-TRU dated 12.5.2005.

Export of Services – No Service tax leviable Any taxable service may be exported without payment of service tax under Rule 4 of Export of Service Rules, 2005. Rule 5 of the said Rules provides for rebate of service tax and cess paid. Rebate is given for service tax and cess paid on taxable service or service tax or duty paid on input services or inputs. Notifications extending the facility of rebate to all taxable services along with conditions to be fulfilled and procedures have been issued. Exports to Nepal and Bhutan have been excluded. [Notification Nos.11/2005-S.T., dated 19.4.2005 and 12/2005-S.T., dated 19.4.2005]. Import of Services As per new Section 66A introduced by the Finance Act, 2006, “taxable services” includes “services to be provided” as well as “services provided from outside India to a recipient in India”. Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 have been notified. Thus for taxable services provided from abroad the service recipient in India is liable to Service Tax – Notification No.11/2006-S.T., dated 19.4.2006.

No service Tax for free service No Service Tax is payable when service is provided free of charge or no amount is charged from customer rather it is paid from its own pocket. As per Section 66 of the Finance Act, 1994, the service tax is chargeable on the value of taxable service and therefore if the value of service is zero, then Service tax shall also be zero. [Vide C.B.E. & C. Circular No.62/11/2003, dated 21.8.2003.

Works Contract not liable to Service tax In Budget 2007-08, it has been proposed to levy service tax on the service portion of works contract by bringing services in relation to works contract as a separate taxable service. Only those works contract which attract VAT/Sales tax involving transfer of property will be covered. Such works contract include erection, commissioning or installation, commercial or industrial construction, construction of complex and turnkey projects. Infrastructure projects like roads, airports, railways, transport terminals, bridges, tunnels and dams are being excluded. An optional composition scheme under which an assessee will be required to pay service tax on 2%

1 Amended by Notification No.19/2005-S.T., dated 7.6.2005.

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of total value of works contract is on the anvil. CENVAT credit on inputs, capital goods and input services will not be admissible for an assessee working under the optional composition scheme. Contract was for construction, erection and installation of desulphurisation plant on payment of lump sum price. Work contract cannot be vivisected and part of it subjected to service tax – Daelim Industrial Co. Ltd. v. Commissioner – 2006 (3) S.T.R.124 (Tri.-Del.) = 2003 (155) E.L.T.457 (Tri.-Del.) Service tax not leviable when Sales Tax/VAT paid Imposition of service and sales taxes were constitutionally mutually exclusive, and as sales tax was paid on the cards, Service tax was not imposable – Idea Mobile Communications Ltd. v. Commr. Of C. Ex., Trivandrum – 2006(4) S.T.R.132(Tri.-Bang.)

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Chapter VII

1. Introduction

1.1 Central Excise law is a self-contained provision. Besides containing the provisions for levy of duty, the law also provides for the adjudication of matters relating to the legal provisions. The adjudication is done by the departmental officers, and in this capacity they act as quasi-judicial officers.

2. Adjudication and determination of duty

2.1 Adjudication of confiscation and penalty has to be done by Officers specified in section 33 of the Central Excise Act, 1944. Central Excise Officers have the power to determine duty short paid or not paid erroneously refunded under section 11A of the said Act. For this purposes, the Board has decided the powers of adjudication and determination of duty shall be exercised, based on monetary limit (duty involved in a case): -

(A) All cases involving fraud, collusion, any wilful misstatement, suppression of facts, or contravention of Central Excise Act/ Rules made there under-with intent to evade payment of duty and / or where extended period has been invoked in show-cause-notices, (including CENVAT cases, will be adjudicated by:-

Central Excise Officers Powers of Adjudication(Amount of duty involved)

Commissioners Without limit

Additional Commissioners Above Rs. 20 lakhs and upto Rs.50 lakhs

Joint Commissioners Above Rs.5 lakhs and upto Rs. 20 lakhs

Dy./Asstt.Commissioners Upto Rs.5 lakhs

(B) Cases which do not fall under the category (A) above, will be adjudicated as follows:-

Central Excise Officers Powers of Adjudication(Amount of duty involved)

Commissioners Without limit

Additional Commissioners Above Rs. 20 lakhs and upto Rs. 50 lakhs

Joint Commisioners Above Rs.5 lakhs and upto Rs.20 lakhs

Deputy/Assistant Commissioners Upto Rs. 5 lakhs.

ADJUDICATION

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2.2 The Board, under section 2(b) of the Central Excise Act, 1944 read with rule 3 of Central Excise Rules, 2002 also invests certain officers with powers of Commissioners or other officers through out the territory of India, for the purpose of investigation and adjudication.

Interest, Penalty, Confiscation, Duty Payment under Protest

1. Introduction

1.1 Interest of duty not paid on time is provided for in the Central Excise statute. It is expected that the interest provision would normally not have to be invoked as the assessee would make the duty payment on time.

1.2 Penalty and confiscation of offending goods i.e. which have violated the provision of the Central Excise law are an outcome of the adjudication proceedings. These are deterrents aimed at cautioning the dishonest taxpayer.

2. Interest on duty

2.1 Under the provisions of Section 11AB, interest is charged on the delayed payment of duty. Thus, it is in the interest of an assessee to discharge the duty liability the earliest and not to prolong the dispute only for the sake of delaying payments. The interest will be charged under said Section 11AB, as follows:

At the rate for the time being fixed by Central Government by notification in the official Gazette, from the first date of the month succeeding the month in which the duty ought to have been paid till the date of payment of such duty.

2.2 There may not be need for any explicit mention of the interest liability in the show-cause notice since the legal provisions are explicit. However, the same may be done as a matter of abundant precaution. Likewise, the adjudicating officer may incorporate the fact about the interest liability in the order confirming the demand.

3. Penalty and Confiscation

3.1 Penalty is imposed under any of the following provisions of the Central Excise Act, 1944 or the rules made thereunder: -

(i) Section 11AC prescribes a mandatory penalty equal to the duty not levied or paid or short paid or erroneously refunded by reason of fraud, suppression etc. However, in the event the duty and interest thereon is paid within 30 days of the communication of the order, the penalty shall be 25% of the duty subject to it being paid within the said period of 30 days.

(C) Cases related to issues mentioned under first proviso to Section 35B(1) of Central Excise Act, 1944 would be adjudicated by the Addl. Commissioners/ Joint Commissioners without any monetary limit.

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(ii) Rule 25 of the Central Excise Rules provides for penalty on any producer, manufacturer, registered person of a warehouse or a registered dealer not exceeding the duty on the excisable goods in respect of which any of the specified contravention have been committed, or rupees ten thousand, whichever is greater. The penalty is subject to the provisions of Section 11 AC of the Central Excise Act, 1944. The offending goods are also liable to confiscation. The specified contravention are:

(a) Removal of any excisable goods in contravention of any of the provisions of the said rules or the notifications issued under the said rules; or

(b) Non-accountal of any excisable goods produced or manufactured or stored; or

(c) Manufacture, production or storage of any excisable goods without having applied for the registration certificate required under Section 6 of the Central Excise Act; or

(d) Contravention of any of the provisions of the said rules or the notifications issued under the said rules with intent to evade payment of duty.

(iii) Under rule 26 of the said Rules It is provided that any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or the said Rules, shall be liable to a penalty not exceeding the duty on such goods or rupees ten thousand, whichever is greater.

(iv) Rule 27 of the said Rules provides for imposition of a general penalty which may extend to five thousand rupees and with confiscation of the goods in respect of which the offence is committed. This is attracted when no other specific penalty is provided for.

3.2 If penalty is imposed under Section 11AC, penalty under rule 25 will not be imposed. This, however, does not preclude the Department from confiscating the goods, imposing any fine in lieu of confiscation and prosecuting a person.

3.3 As per Rule 28 of the said Rules, when any goods are confiscated under these rules, such thing shall thereupon vest in the Central Government. Accordingly, the Central Excise Officer adjudging confiscation shall take and hold possession of the things confiscated, and every Officer of Police, on the requisition of such Central Excise Officer, shall assist him in taking and holding such possession.

3.4 Rule 30 provides that if the owner of the goods, the confiscation of which has been adjudged, exercises his option to pay fine in lieu of confiscation, he may be required to pay such storage charges as may be determined by the adjudicating officer.

3.5 Provisions for disposal of goods confiscated are contained in rule 29 of the said Rules. Goods of which confiscation has been adjudged and in respect of which the option of paying a fine in lieu of confiscation has not been exercised, shall be sold, destroyed or otherwise disposed of in such manner as the Commissioner may direct.

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4. Duty under protest

4.1 As per Section 11B of the Central Excise Act, 1944 the time limitation of application for refund of duty fixed at one year from the relevant date shall not apply when the duty has been paid under protest.

4.2 Any assessee who desires to pay duty under protest, may do so by following the procedure mentioned below:

a. The assessee shall inform the Superintendent or Inspector of Central Excise in writing giving reasons for paying duty under protest and a dated acknowledgement will be given to him.

b. He will mark invoices or monthly/quarterly return indicating the goods on which duty is paid ‘under protest’. If it is a lump-sum duty payment in respect of past demand, he may record the fact of duty payment under protest in the Personal Ledger Account [against debits] CENVAT Account [against debits] and the Daily Stock Account.

c. If a case is appealed against by the assessee or where the appeal period for further appeal is available, he may continue to pay duty under protest. However, if decision is not in his favour and he exhausts the appellate remedy or does not appeal within stipulated period, the assessee shall not have any right to pay duty under protest.

4.3 A letter of protest or a representation for paying duty under protest shall not constitute a claim of refund.

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Chapter VIII

The audit of central excise duties is regulated by the general principles governing the audit of receipts. It is primarily the responsibility of the departmental authorities to see that all revenue or other debts due to government which have to be brought to account are correctly and promptly assessed, realised and credited to government account. Audit of receipts should, however, see that any payment for which a party may be liable is actually received and brought to account and that receipts which have entered the books of a department are correctly calculated and are in fact credited to government account in time. The most important function of audit is to see that adequate regulations and procedures have been framed by the revenue department to secure an effective check on the assessment, collection allocation of excise duty and to satisfy itself that such regulations and procedures are actually being carried out. Audit also makes such examination as it thinks fit with respect to the correctness of the sums brought to account in respect of Union excise duties. The audit department does not in any way substitute itself for the revenue authorities in the performance of their statutory duties. But audit satisfies itself in general, that the departmental machinery is sufficiently safeguarded against error and fraud and that, so far as can be judged, the procedures are formulated to give effect to the requirements of the law. The audit of central excise duties is conducted at the following different levels: (i) Scrutiny of notifications, clarifications, instructions etc. issued by the Government of India, Ministry of Finance and the Central Board of Excise and Customs. This is done by the directorate of receipt audit (indirect taxes) in the Office of the Comptroller and Auditor General. (ii) Concurrent audit: This is done by the concurrent audit parties of the Offices of the Accountants General (Audit)/Directors of Audit in the Offices of the chief accounts officers of the central excise collectorates. (iii) Local audit: This is conducted by the peripatetic parties of the central excise receipt audit wings of each Accountant General (Audit)/Director of Audit. The local audit covers audit of: (a) Central excise range offices; (b) Factories working under the self-removal procedure; (c) division officers and Commissionerates. Scrutiny of notifications etc. The copies of the notifications issued by the government under section 5-A of the Central Excise Salt Act, 1944, fixing the effective rates of central excise duties, are sent to the directorate of receipt audit (indirect taxes). On their receipt, these notifications are scrutinised in the directorate and then circulated among the various Accountants General/Directors of Audit. Where considered necessary, the Government of India files leading to the issue of notifications, other clarifications, instructions etc. issued by the government and the Board are similarly scrutinised in the directorate. The directorate of receipt audit also serves as a guide to the various audit offices in conducting audit of central excise duties. It issues guidelines for conducting audit of those duties as also prescribes the periodicity and quantum of audit of those duties. To achieve uniformity in the task of conducting audit of central excise duties over the country as a whole it serves as a co-ordinator between the various audit offices. It also serves as a link between the audit offices on one side and the Government of India on the other.

Principles of audit of central excise

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Concurrent Audit The function of the chief accounts officer in each Central Excise Commissionerate essentially consists in ensuring independently that the duties paid by the assessee through personal ledger account (PLA) from time to time have, in fact, been credited into the government account and that there are no overdrawals. To enable the chief accounts officer in the discharge of his duties each range officer should send a monthly return to the chief accounts officer showing details of the payments made by the assessees in their PLAs supported by the duly certified copies (quadruplicate) of the paid challans. On receipt of these monthly returns, the chief accounts officer completes the personal ledger accounts of each assessee maintained by him and reconciles the departmental figures with those booked by the pay and accounts offices. It is seen in the course of concurrent audit that:- (i) the range officers actually send the monthly returns supported by certified copies of the paid challans; (ii) the chief accounts office actually posts the personal ledger accounts of the assessees from these monthly returns; (iii) the chief accounts office takes prompt action in reconciling the departmental figures with those booked by the pay and accounts officers; and (iv) removes discrepancies, if any, noticed in the course of reconciliation without undue delay. Local Audit As per Rule 22(3) of Central Excise Rules 2001), every assessee working under the self-removal procedure shall furnish to the audit parties deputed by the Comptroller and Auditor General of India: (i) the accounts and returns whether the same are maintained or prescribed in the pursuance of the central excise rules, 2002 or not; and (ii) the cost audit reports, if any, under section 223 of the Companies Act, 1956. Thus the central excise audit parties have been given statutory authority to visit the factories where excisable goods are produced or manufactured and to scrutinise the central excise and other records maintained by the assessees. To make the audit of a factory effective and purposeful, advance preparation is made by the members of the central excise audit party. It is as under: (i) A study of the manufacturing process of the commodity to be audited is made from the available literature etc. (ii) A critical study of the tariff, the exemption notifications, if any issued, and available case laws relating to that commodity is made. (iii) Perusal of paragraphs relating to that commodity which have been featured in the previous audit report is done.

(iv) Perusal of the instructions on the subject, if any, issued from Headquarters. In the course of audit of a factory, it is seen that the manufacturer has registered with the Central Excise Department before starting production of the excisable goods, that he got the premises for manufacture of the excisable goods and the store room approved by the central excise department; and that he executed a bond undertaking to pay the duty on the goods manufactured, and to observe all rules and regulations.

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Courseware on Central Excise Receipt Audit

It is also scrutinised in audit that the manufacturer took on record all the excisable goods produced by him, paid the central excise duty due thereon before their clearance from the place of manufacture or within the stipulated period once in a month and submitted periodical returns in this regard to the central excise department regularly. It is also seen in audit that the departmental officers exercised adequate checks on the manufacture and collection of duty; the internal audit party adequately verified, compared and analysed data; and that the department took action in case of breaches of central excise law. The first step in this direction is to see that the classification of goods made by the assessee is correct. For this purpose recourse to the rules of interpretation for classifying excisable goods, sectional and chapter notes to the tariff is taken. In cases of doubt, assistance of explanatory notes to the Harmonised System of Nomenclature (HSN) is taken. The judgements of the Supreme Court, various High Courts and decisions of the customs, excise and gold control (appellate) tribunal are also referred to. If it is not possible to ascertain the correct classification of excisable goods either with the help of the aforesaid statutes or the judicial pronouncements, then the correctness of classification of excisable goods is judged with reference to its popular meaning or how it is known in the commercial parlance. Sometimes chemical test reports are also referred to. The next step in checking the assessment made by the department is to see whether the effective rate of duty has been correctly worked out and if those effective rates of duty are subject to the fulfilment of certain conditions (for example concessional rates of duty have been prescribed for the excisable goods produced by small scale units), it is checked in audit that the assessee has fulfilled those conditions.

In cases where the input-output ratio between the principal raw materials and finished goods has been prescribed either by the Board or by the central excise commissioner, it is checked whether that ratio has actually been achieved (for example, one set of magnets has been prescribed as the principal raw material for manufacture of one electric meter; one electric motor is necessary for producing one electric fan). If that ratio has not been prescribed, comparison of the raw materials used and the production of excisable goods by an assessee during various periods of production (i.e. production of each month or each quarter etc.) is done. Sometimes production norms of the different assessees producing identical excisable goods are also compared. The balance sheet of the assessee for the previous few years is also studied to ascertain the trends of production and sales during those years. The private records maintained by the assessee and the returns submitted by him to other departments/agencies of the government are also scrutinised to find out whether the assessee has made efforts to conceal any production of excisable goods.

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Excise Audit 2000 1. Introduction 1.1 In conventional sense, Audit means scrutiny and verification of documents, events and processes in order to verify facts and, draw conclusions regarding the correctness of recording of facts and the efficiency of a system under study. For Central Excise purposes Audit means scrutiny of the records of assessee and the verification of the actual process of receipt, storage, production and clearance of goods with a view to check whether the assessee is paying the central excise duty correctly and following the central excise procedures. 1.2 Under the conventional /traditional system of central excise audit, audit parties visit assessees unit without much preparation and verify all the statutory records (i.e. those prescribed under the Central Excise law) to check compliance of procedures and also leakage of revenue, if any. Experiences show that such audits do not result in detection of major aberrations. Most of the audit objections pertain to either minor procedural irregularity or duty short payment of small amounts mostly due to human error. Further, this method of auditing does not envisage checking of the internal records of the assessee as well as those records which are maintained by the assessee under the other laws like Income Tax Act, Sales Tax Act, Companies Act etc. 1.3 One of the announcements made during Budget 2000 as a measure of simplification of procedures, was the dispensation of all statutory records under the central excise law. No longer was the assessee required to record the receipt of raw material, production and clearance/sale of finished goods etc. in registers/documents prescribed by the central excise department. As a result, the assesses are now allowed to maintain all their records in whichever form they like (including maintenance of the entire records in electronic form) provided the essential information required for calculation of central excise duty liability can be obtained from such records. Under these circumstances, it becomes necessary for the auditors to look into the assessees own (private) records to verify whether the assessee is paying central excise duty correctly and following the laid down procedures. 1.4 Another change brought in recent years is doing away the system of assessment of the returns by the departmental officers. Now the assessee is required to self assess his monthly tax returns (called the E.R.1/E.R.2) before filing the same with the department. The departmental officers only scrutinise this return to check for any apparent mistake made by the assessee. They are not required to carry out detailed verification. Therefore, the entire burden of checking whether the assessee actually paying his taxes correctly, now lies with audit. 1.5 The statutory changes resulting in dispensation of statutory records as well as assessment of returns by departmental officers has led to the conventional/traditional system of audit becoming irrelevant. 2. What is Excise Audit 2000 2.1 Traditional audit will eventually be replaced by Excise Audit 2000 (EA 2000), a new system of audit. This new system was initiated from 1st December 1999 when it was implemented in case of all assessees paying cash duty of over Rs.5 crores per annum. In June 2000, the CBEC has revised the frequency norms of audit (of Central Excise units) as under: Quantum of annual total duty payment in cash + CENVAT credit Frequency of audit 1. Units paying more than Rs.3 crores Every year 2. Units paying between Rs.1 crore and Rs.3 crores Once every 2 years 3. Units paying between Rs.50 lakh and Rs.1 crore Once every five years 4. Units paying below Rs.10 lakh 2% of the total number

every year

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Courseware on Central Excise Receipt Audit

2.2 The essential philosophy of EA 2000 is that this audit is based on the scrutiny of business records of the assessee. This is a more systematic form of audit wherein the auditors are required to gather basic information about the assesee and analyze them to find out vulnerable areas before conducting the actual audit. The audit is therefore more focused and in-depth as compared to the traditional audit. Further, at every stage of audit, the assessee is consulted. This makes EA2000 audit user friendly. 3. Procedure of Excise Audit 2000 3.1 Selection of Assessee 3.1.1 The process of EA 2000 begins with identification of a unit to be audited. Normally, there are about 1000 to 1500 assessees under the jurisdiction of a Central Excise Commissionerate. It is not possible for the audit staff to conduct audits of all the units every year. Therefore, depending upon the manpower availability, about 300 to 400 units are selected for conducting audit during a financial year. Under the conventional system of audit the units were picked up randomly without any scientific basis of selection. Under EA 2000, the selection of the unit is done taking into account the 'risk-factors'. This means that the assessees who have a bad track record (having past duty evasion cases, major audit objections, past duty dues etc.) are given priority for conducting audit over those having clean track record. 3.2 Desk Review 3.2.1 The auditors are assigned the assessees to be audited at the beginning of the financial year. The auditors are required to gather as much information about the assessee as possible. They can gather information from the departmental records, published documents like balance sheets annual statements etc., and through market Enquirer. Since this can be done without interacting with the assessee, this step called as 'desk-review'. 3.3 Documenting Information 3.4.1 At the stage of ‘Desk Review’ the auditors may have already identified certain areas, which warrant closer examination. The auditor may also require certain documents or information from the assessee to complete his preliminary investigation. For this he may write letter to the assessee or send him a questionnaire to obtain this information. This step is called 'gathering and documenting assessee information'. 3.4 Touring 3.4.1 The auditor then visits the unit of the assessee to see the actual running of the unit, the systems that are followed for maintaining records in various sections and the system of movement of goods and the related documents within the unit. This step is called 'touring of the premises'. This gives the auditors a general overview about the procedure adopted by the assessee and the possible loopholes through which revenue leakage can take place. 3.5 Audit Plan 3.5.1 Based on his experiences and the information gathered so far about the assessee, the auditor now makes an 'audit plan'. The idea of developing audit plan is to list the areas which, as per the auditor, are the vulnerable areas from the revenue point of view. Since number of documents/records maintained by assessee is huge, it is also necessary that the auditor should select only some of them for the actual verification. The preparation of audit plan helps him to

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do that. It must be remembered that audit plan is not rigid but a dynamic concept. During the course of audit if the auditor notices certain new facts or new aspects of the planned area of audit, he can always alter the audit plan accordingly, with the approval of his supervisor. Similarly, in case during the actual audit, if the auditor is convinced that any area which was earlier planned for verification does not require in-depth scrutiny, he may alter the plan midway after obtaining approval of the superior officers. Preparation of audit plan is one of the most important steps of EA 2000. A well thought audit plan generally increases the success of audit results manifolds. 3.6 Verification 3.6.1 The most important step of audit is the conduct of actual audit, which in technical parlance is called 'Verification'. The auditors visit the unit of the assessee on a scheduled date (informed to the assessee in advance) and carry out the scrutiny of the records of the assessee as per the audit plan. The auditor is required to compare the documentation of a fact from different documents. For example, the auditor may check the figures of clearance of finished goods showed by the assessee in central excise return with the sales figures of the said goods in Balance Sheet, Sales Tax Returns, Bank statements etc. The auditor may also enquire about the entries which appear vague (say an entry like 'Misc. Income') in various records and documents. The idea behind conduct of verification is to reasonably ensure that no amount, which as per the Central Excise law is chargeable to duty, escapes taxation. The process of verification is always carried out in the presence of the assessee so that he can clarify the doubts and provide required information to the auditor. 3.7 Audit Objection and Audit Para 3.7.1 Where the auditor finds instances of short payment of duty or non-observance of Central excise procedures, he is required to discuss the issue with the assessee. After explanation provided by the assessee, if the auditor is satisfied that such non-tax compliance has occurred, he records the same as an 'Audit Objection' or 'Audit Para' of the 'draft audit report' that he would be preparing at the end of the verification process. Auditor is advised not to take formal objections to mere procedural lapses/ infractions/adoption of wrong procedures, which do not result in any short payment of duty or do not have bearing upon the duty payment. In such case the auditor is required to discuss the matter with the assessee and advise him to follow the correct procedure in future. Further, while making an audit para, attempt should be made to tabulate the duty short paid by the assessee at the spot and incorporate it in the para itself. However, if this is not possible for the paucity of time or for the want of some information not available at that time, the auditor should make a note of the same in his report. 3.8 Audit Report 3.8.1 At the end of the process of verification the auditor prepares an 'Draft Audit Report' which incorporates all the audit objections/audit paras. An audit report provides (issue or para wise) the issue in brief, the reply or the explanation of the assessee, the reason for the auditor not being satisfied with the reply, the amount of short payment (if tabulated) and the recoveries of the same (if could be made at the spot). The draft audit report is then 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.

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Courseware on Central Excise Receipt Audit

4. Conclusion 4.1 EA 2000 is a modern, transparent and interactive method of audit wherein the auditor proceeds with audit fully conversant with the business of the assessee. On his part, the assessee is given full opportunity to explain his stand on any particular matter so that matters are resolved in full appreciation of legal position. EA 2000 is thus a participative audit. 4.2 A requirement of EA 2000 is that the auditors must be thorough in their knowledge of Central Excise law and procedures, notifications, instructions and circulars issued by the Finance Ministry and the judicial decisions on issues relating to central excise laws. To be successful auditor, knowledge about financial bookkeeping, accountancy and proficiency in understanding commonly used commercial books and documents is of great help. Further, being computer literate is an added requirement while auditing an assessee who maintains his accounts in electronic format.