Concepts of Central Excise

Puneet Agrawal, B. Com (H), CA, LLB

Partner

ATHENA LAW ASSOCIATES

8/7/2015

Constitutional power

• Entry 84 of list 1 of seventh Schedule empowers the central government to charge Central Excise:

Entry 84Duties of excise on tobacco and other goods manufactured or produced in India except-(a) alcoholic liquors for human consumption.(b) opium, Indian hemp and other narcotic drugs and narcotics,but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

• Thus as per the said entry excise is charged where all the following conditions are cumulatively satisfied:– Manufacture/ production– Of goods– In India– Goods does not include alcoholic liquor etc

Basic ingredients for tax levy

• Four requirements for a levy:

– Chargeability;

– Rate;

– Value;

– Person liable

• Govindsaran Gangasaran (SC)

8/7/2015

Chargeability

Section 3: Charging Section

Following types of duty shall be levied and collected:

1. duty of excise (CENVAT) – on all excisable goods(excluded goods manufactured at SEZ)– which are produced/ manufactured in India – at the rates, set forth in the First Schedule of CETA

2. special duty of excise, in addition to the above excise duty – on excisable goods – specified in the Second Schedule of CETA – which are produced/ manufactured in India– at the rates, set forth in the said Second Schedule

Levy of duty

• Basic conditions which must be satisfied for deciding Excisability of any article are– The article should be

• “excisable Goods”

• Movable, and

• marketable,

– It should have come into existence as a result of “Manufacture”/ production.

• If any of the conditions is not satisfied, Central Excise duty can not be levied.

Meaning of excisable goods

• Excisable has been defined in Section 2 (d) of CEA as:

(d) "excisable goods" means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty of excise and includes salt;

Explanation.— For the purposes of this clause, "goods" includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.

Meaning of manufacture

Manufacture has been defined in Section 2(f) of CEA in a n inclusive manner as:

(f) "manufacture" includes any process,—

i. incidental or ancillary to the completion of a manufactured product;

ii. which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the CETA as amounting to manufacture; or

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

and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;

Case laws on manufacture

• Delhi Cloth mills - Manufacture means bringing into existence a new substance. A new and different article must emerge having a distinctive name, character or use

• A process leading to the emergence of a new commercial product different from the one with which the process was started– Hawkins Cookers Ltd Vs Collector 1997 (96) ELT 507

SC.– TISCO V. U.O.I 2004(164) ELT 372 SC.

Whether mixing amounts to manufacture

• Mixing and blending of coffee powder and chicory powder so as to bring into being a different commercial product known as french coffee is manufacture– CST V Dunken coffee Mfd. Co. 35 STC 493

• Mixing of propane and butane gas to get LPG is manufacture – GAIL V CCE 163 ELT 37

• Mixing of LDO with additives, resulted into emergence of new product viz. Malaria Larvicide Oil (MLO) having distinct character of spreading and forming a layer of oil over water body to cut off supply of oxygen to mosquito larvae, hence, process amounts to manufacture– IOC V CCE 145 ELT 305

Deemed manufacture

• Deemed manufacture is:

– which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the CETA as amounting to manufacture; or

– Packing/ repacking/ labeling/ re-labeling of goods specified in Third Schedule including the declaration/ alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,

• Even if the process is deemed manufacture the test of marketability is still to be satisfied

• Note 5 of Ch 27

In relation to natural gas falling under heading 2711, the process of compression of natural gas (even if it does not involve liquefaction), for the purpose of marketing it as Compressed Natural Gas (CNG), for use as a fuel or for any other purpose, shall amount to 'manufacture'.

Value

Duty computation

• Excise duty is payable on one of the following basis:

1. Specific duty based on some measure – under Section 3(1) no valuation section required. Ex length (cigarette), weight (sugar),

2. Duty as percentage of tariff value - fixed under Section 3(2). Ex Gold / Silver

3. Duty based on MRP under Section 4A

4. Duty based on annual production capacity under Section 3A

5. Compounded levy scheme

6. Duty as % assessable value as fixed under Section 4

Section 3A

• 3A. Power of Central Government to charge excise duty on the basis of capacity of production in respect of notified goods -

• (1) Notwithstanding anything contained in section 3, where the Central Government, having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of duty in regard to such goods or such other factors as may be relevant, is of the opinion that it is necessary to safeguard the interest of revenue, specify, by notification in the Official Gazette, such goods as notified goods and there shall be levied and collected duty of excise on such goods in accordance with the provisions of this section.

• Steel and gutka has traditionally been prone to duty evasion. Currently Section 3A is applicable only in respect of Gutka and not on steel

• Notification 16/ 2010 (CE) provides for the duty computation under Section 3A

• This is compulsory for the goods notified

Compounded levy Scheme

• 15. Special procedure for payment of duty.-

• (1) The Central Government may, by notification, specify the goods in respect of which an assessee shall have the option to pay the duty of excise on the basis of such factors as may be relevant to production of such goods and at such rate as may be specified in the said notification, subject to such limitations and conditions, including those relating to interest or penalty, as may be specified in such notification.

• (2) The Central Government may also specify by notification the manner of making an application for availing of the special procedure for payment of duty, the abatement, if any, that may be allowed on account of closure of a factory during any period, and any other matter incidental thereto.

Valuation

• Valuation under Section 4 – Transaction value

• Valuation under Section 4A – MRP based valuation

• Valuation Under Section 3(2) – Tariff value

Section 4 – track of major changes

• Prior to the year 2000 Excise valuation followed the mechanism of “Normal wholesale value” – price at which the goods are ordinarily sold at the factory gate to unrelated buyer – notional value

Section 4 – Transaction value (present law – w.e.f 1-7-2000)1. Where the duty of excise is chargeable on any excisable goods with

reference to their value, then, on each removal of the goods, such value shall be:

a) Transaction value - subject to fulfillment of following conditions:

a) the goods are sold by the assessee,

b) for delivery at the time and place of the removal,

c) the assessee and the buyer of the goods are not related

d) and the price is the sole consideration for the sale

b) Computed in prescribed manner (as per rules) – if any of the above conditions are not complied or where the goods are not sold

2. The provisions of this section shall not apply where the tariff value have been fixed.

Eicher tractor 122 ELT 321 – transaction value can be rejected only when one of the conditions are not complied with and not for any other reason

Transaction valueSection 4(3)(d) defines transaction value as

1. the price actually paid or payable for the goods when sold, and

2. includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee,

3. by reason of, or in connection with the sale,

4. whether payable at the time of sale or at any other time,

5. including, but not limited to, any amount charged for, or to make provision for,

I. advertising or publicity,

II. marketing and selling organization expenses,

III. storage,

IV. outward handling,

V. servicing,

VI. warranty,

VII. commission or any other matter

6. but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods;

Inclusions/ exclusions in TV

Packing Charges

• All kind of packing done in connection with sale is includible in assessable value;

Durable and returnable packing

• Value of returnable and durable packing will not be included in the assessable value – Circular No 643/ 34/ 2002 – CX dated 1.07.2002 and in CCE V. SRF Ltd. 224 ELT 74

• But if the packing is only durable and not returnable then packing cost is includible – CCE V. Hindustan safety glass works 181 ELT 178

• Rental charges for containers and interest charges for delayed return of container are not includible in the assessable value – CCE V. BisleriInternational Private Limited 186 ELT 257

Inclusions/ exclusions in TVDesign, Engineering and technical know how

• Design and engineering charges are essential for purpose of manufacturing and hence have to be included in AV;

Loading and handling charges within the factory

• Loading and handling charges are includible since they are incurred by reason of sale – Punjab Alkalies V. CCE. 179 ELT 341

• Charges of loading the goods in truck/ wagon within the factory are includible in the AV Indian Oxygen Limited V. CCE 36 ELT 622

Advertisement Expenditure

• Advertisement expenses incurred by marketing company to advertise soft drinks are not includible in the assessable value of concentrate which is sold by marketing company – CCE V. Parle International Limited 198 ELT 486 and

• Pepsi Foods V. CCE 82 ELT 33 (Tri) – No separate charges for advertisement therefore not includible

• Separate charge for royalty therefore includible – Pepsi foods 158 ELT 552 (SC)

Inclusions/ exclusions in TVPrice increase, variation and escalation

• In case of additional price is payable, Excise duty is payable on additional price realised - India Tin Industry 125 ELT 864

• If price is raised after its clearance and differential Excise duty is paid, interest is payable. However penalty is not payable - SKF India Limited (239)ELT385(S.C.)

Free after sale service and warranty

• Cost of free after sale services during warranty period is includible in AV since it certainly increases the marketability of the goods;

• Cost of after sale services and pre delivery inspection charges incurred by dealer during warranty period are includible - CBEC Circular No. 643/34/2002 – CX dated 1.07.2002

Inclusions/ exclusions in TVFree after sale service and warranty

• Even indirect flow back of consideration is includible in the AV – MarutiSuzuki India V. CCE 257 ELT 226

• The cost of optional after sale service is not includible in the assessable value - Volvo India V. CCE 182 ELT 471

• The after sale services which are not optional are includible in the assessable value – State of A.P. Hyderabad Allwyn 78 STC 56 (SC)

• Department Circular dated 30.06.2000 and CBEC manual - optional after sale service includible

Trade discount

• trade discount are allowed as deduction for valuation purposes. Since quantum of trade discount is not payable by buyer to seller, it will not form part of transaction value;

Inclusions in TVFree after sale service and warranty

• Even indirect flow back of consideration is includible in the AV – MarutiSuzuki India V. CCE 257 ELT 226

• The cost of optional after sale service is not includible in the assessable value - Volvo India V. CCE 182 ELT 471

• The after sale services which are not optional are includible in the assessable value – State of A.P. Hyderabad Allwyn 78 STC 56 (SC)

• Department Circular dated 30.06.2000 and CBEC manual - optional after sale service includible

Trade discount

• trade discount are allowed as deduction for valuation purposes. Since quantum of trade discount is not payable by buyer to seller, it will not form part of transaction value;

Section 4 – conti…1. Transaction value is also acceptable even when it is less than cost of manufacture of goods

provided that all the conditions stated in Section 4 (1) (a) are fulfilled – Guru Nanak Refrigeration Corporation 81 ELT 290;

2. However in the case of Fiat India. 283 ELT 161 (S.C.) if goods are sold at loss than the price cannot be the sole consideration

3. For the purpose of Excise valuation each removal is a separate transaction and has to be valued separately. Different prices may be charged for same product at different transactions but price should be the sole consideration –

4. Goods are to be valued on the basis of their condition at the time of removal - UOI V JG Glass Industries 97 ELT 5.

5. Value of processing done outside the factory is not to be included for excise valuation

6. Erection commissioning done at the place of buyer is not includible in AV

Central Excise Valuation (Determination ofPrice of Excisable goods) Rule, 2000

1. Valuation rules are to be referred only when the transaction value cannot be determined in terms of Section 4 (1)(a);

Rule 4 – goods not sold at the time ofremoval• Where goods are not sold at the time of removal

– Then value of the excisable goods

– shall be based on the

– value of such goods sold by the assessee for delivery

– at any other time nearest to the time of the removal of goods under assessment,

• subject, to adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, if necessary.

• The said rule is applied when the excisable goods are not sold by the assessee and price at the time of removal is not available. Ex issue of free samples, replacement under warranty claim.

• Valuation of free sample on the basis of Rule 4 – Circular no.813/10/2005 –CX dated 25-4-2005

• Such goods means those goods which are similar or identical to the goods in question – Indian Drugs Manufactures Assn 222 ELT 22 (Bom)

• Even if free samples of medicines otherwise covered under Section 4A since free samples are not covered under MRP they shall be valued under this rule i.e. sale price of normal medicine

Place of removal

Section 4 (3)(c). "place of removal" means-

i. a factory or any other place or premises of production or manufacture of the excisable goods;

ii. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty,

iii. a depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from the factory.

from where such goods are removed;

• In case of FOR delivery where property in goods remains with seller till possession is handed over to buyer at the destination, there will be no sale at factory gate –Prabhat Zarda Factory Limited 119 ELT 191

• However mere fact that insurance is arranged by seller does not mean that property in goods has not passed on to buyer – Escorts JCB Ltd. 146 ELT 31

• The expression “from where excisable goods are to be sold” has been entered as where the transfer of property takes place

Rule 5 – goods sold for delivery atplace other than place of removal• Where goods are sold for delivery at place other than the place of removal

– then the value shall be deemed to be the transaction value,

– excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods.

• "Cost of transportation" includes -(i) the actual cost of transportation; and

(ii) in case where freight is averaged, the cost of transportation calculated in accordance with generally accepted principles of costing.

• It is clarified that the cost of transportation from the factory to the place of removal, where the factory is not the place of removal, shall not be excluded for the purposes of determining the value of the excisable goods.

Rule 6 – Price is not the soleconsideration• Where the price is not the sole consideration for sale:

– the value of goods shall be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.

• It is clarified that the value of goods and services, supplied by the buyer free of change or at reduced cost, would be added to the extent that such value has not been included in the price actually paid or payable - money value of additional consideration

• Buyer may supply any of the following directly or indirectly at free of cost or at reduced cost:-

(i) value of materials, components, parts and similar items relatable to such goods;

(ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such goods;

(iii) value of material consumed, including packaging materials, in the production of such goods.

(iv) value or engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.

Rule 6 – Price is not the soleconsideration• Cost of material supplied by the buyer to the seller should be added to the transaction value

if the same is not added;

• Cost of mould/ dies/ jigs/ patterns supplied by the buyer to the seller and

• No notional interest on advance payment made by buyer to the seller shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit.

• Illustration 1.- X, an assessee, sells his goods to Y against full advance payment at Rs. 100 per piece. However, X also sells such goods to Z without any advance payment at the same price of Rs. 100 per piece. No notional interest on the advance received by X is includible in the transaction value.

• Illustration 2.- A, an assessee, manufactures and supplies certain goods as per design and specification furnished by B at a price of Rs. 10 lakhs. A takes 50% of the price as advance against these goods and there is no sale of such goods to any other buyer. There is no evidence available with the Central Excise Officer that the notional interest on such advance has resulted in lowering of the prices. Thus, no notional interest on the advance received shall be added to the transaction value.

Time of removal

• Section 4 (3)(cc). "time of removal", in respect of the excisable goods removed from the place of removal referred to in sub-clause (iii) of clause (c) shall be deemed to be the time at which such goods are cleared from the factory.

Rule 7 – Goods are sold from depot/consignment agent

• Where the excisable goods are transferred to a depot, premises of a consignmentagent or any other place or premises (hereinafter to as "such other place") fromwhere the excisable goods are to be sold after their clearance from the place ofremoval

• the value shall be the normal transaction value of such goods sold

• from such other place at or about the same time and,

• where such goods are not sold at or about the same time, at the time nearest tothe time of removal of goods under assessment.

• Example: A transferred the manufactured pens from his factory in Mumbai todepot in Nagpur on 12 May 2013. In the depot at Nagpur such pens are generallysold and on 12 May 2013 such pens are being sold at Rs 1000 per 100 pens to anunrelated buyer where price is the sole consideration. Thus the pens transferredon 12 may 2013 from the factory to depot would be assessed at a price of 1000per 10 pens.

• Normal transaction value is defined under Rule 2(b) as the transaction value atwhich the greatest aggregate quantity of goods are sold;

Rule 7 – Goods are sold from depot/consignment agent

• In case of stock transfer, value adopted is the price prevailing in the depot at thetime of clearance from the factory. There is no need to determine the assessablevalue on the basis of price at which the goods may be sold subsequent to the timeof removal of goods

• The date of removal from the factory would be considered as point of taxation andrate and value would be determined on the basis of such date and not on the basisof the time when the goods are actually sold from the depot

• Freight and insurance from depot to the customer is not includible in theassessable value – Prabhat Zarda V. CCE 146 ELT 497 following Escorts JCB V. CCE

• To apply this rule the goods must be stock transferred and the same should notdispatched or identified for a particular buyer. If the buyer is known or identifiedbefore despatch of goods from the factory the same is sale and not the stocktransfer.

• Goods are to be assessed in the condition in which they are cleared from thefactory. Cost of any processing done at depot should not be included – CCE V.Rajasthan Spinning and Weaving Mills 218 ELT 641 (SC)

Rule 8 – captive consumption

• Where the excisable goods are not sold by the assessee but are used forconsumption by him or on his behalf in the production or manufacture ofother articles,

– the value shall be one hundred and ten per cent of the cost of production ormanufacture of such goods. (110% of the cost of production, Before 5.08.2003it was 115%)

Rule 9 – Sale to related person otherthan ICU• When the excisable goods are not sold by an assessee except to or through a person

who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act,

– the value of the goods shall be the normal transaction value

– at which these are sold

– by the related person at the time of removal, to buyers (not being related person);

– or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail;

• Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8.

Section 4 (3) (b).persons shall be deemed to be "related" if.

i. they are inter-connected undertakings (“ICU”);

ii. they are relatives;

iii. amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor; or

iv. they are so associated that they have interest, directly or indirectly, in the business of each other

Rule 9 – Sale to related person other than ICUelative

• Mere existence of relationship no effect unless price is effected by relationship

• Only individuals can be relatives

• Rule 9 does not apply to ICB

• The term “interest, directly or indirectly, in the business of each other” should be financial interest

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Rule 10 – Sale to ICU

• When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of goods shall be determined in the following manner, namely:-

• (a) If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, then the value shall be determined in the manner prescribed in rule 9.

• Explanation- In this clause "holding company" and "subsidiary company" shall have the sam meanings as in the Companies act, 1956 (1 of 1956).

• (b) in any other case, the value shall be determined as if they are not related persons for the purpose of sub-section (1) of section 4.

Rule 10A – Job work

• 10A. Where the excisable goods are produced or manufactured by a job-worker, on behalf of a person (hereinafter referred to as principal manufacturer), then,-

i. in a case where the goods are sold by principal manufacturer for delivery at the time of removal of goods from the factory of job-worker, where the principal manufacturer and the buyer of the goods are not related and the price is the sole consideration for the sale,

• the value of the excisable goods shall be the transaction value of the said goods sold by the principal manufacturer;

ii. in a case where the goods are not sold by the principal manufacturer at the time of removal of goods from the factory of the job -worker, but are transferred to some other place from where the said goods are to be sold after their clearance from the factory of job-worker and where the principal manufacturer and buyer of the goods are not related and the price is the sole consideration for the sale,

• the value of the excisable goods shall be the normal transaction value of such goods sold from such other place at or about the same time and, where such goods are not sold at or about the same time, at the time nearest to the time of removal of said goods from the factory of job-worker;

Rule 10A – Job Work

(iii) in a case not covered under clause (i) or (ii), the provisions of foregoing rules, wherever applicable, shall mutatis mutandis apply for determination of the value of the excisable goods:

• Provided that the cost of transportation, if any, from the premises, wherefrom the goods are sold, to the place of delivery shall not be included in the value of excisable goods.

• Job worker means a person engaged in the manufacture or production of goods on behalf of a principal manufacturer, from any inputs or goods supplied by the said principal manufacturer or by any other person authorised by him – Rule 10A

Job Worker’s liabilityJob worker is the manufacturer and not the principle manufacture because manufacture is in his control – M.M. Khambatwala (S.C.)

• Price at which goods are sold by the principle manufacturer cannot be the value of goods in the hands of manufacturer (job worker)

• This is so because price of the principle manufacturer includes his marketing expenses and profit.

• Value = Delivered cost of raw material plus job work charges [Ujagar Prints 1989 AIR 516 (S.C.)]

• The above principle diluted by Rule 10A

• If goods are captively consumed by principle manufacturer, valuation would continue to be as per Ujagar prints i.e. delivered cost of raw material plus processing charges

• Job worker cannot escape liability to pay duty on correct valuation of goods –CCE V. Bhilwara Processors 146 ELT 455 and Mandhana Dyeing V. CCE 180 ELT 255

Rule 11 – Best judgment

• If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.

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Section 4A – MRP Valuation

Conditions

1. Applicable on the goods which are notified by Central Government

and

2. in relation to such goods it is required, under any law to declare on the package the retail sale price of such goods

1) Value = MRP less abatements

2) abatement takes into account the amount of duty of excise, sales tax and other taxes, if any, payable on such goods.

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Section 4A – MRP Valuation

"retail sale price" means the maximum price at 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, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole consideration for such sale.

For the purposes of this section,-

a) Where on the packages of any excisable goods more than one retail sale price is declared, the maximum of such retail sale price shall be deemed to be the retail sale price;

b) Where the retail price, declared on the package of any excisable goods at the time of its clearance from the place of manufacture, is altered to increase the retail sale price, such altered retail sale price shall be deemed to be the retail sale price.

c) where different retail sale prices declared on different packages for the sale of any excisable goods in packaged form in different areas, each such retail price shall be the retail sale price for the purposes of valuation of the excisable goods intended to be sold in the area to which the retail sale price relates.

Section 4A – MRP Valuation

• MRP valuation is overriding over valuation under Section 4.

• once a product is covered under MRP provisions, transaction value, trade discount, quantity discount, sale through related person is immaterial.

• Notification No. 49 /2008 – CE (NT) dated 24.12.2008

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Section 3(2) – tariff value

• (2) The Central Government may, by notification in the Official Gazette, fix, for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as chargeable with duty ad valorem and may alter any tariff values for the time being in force.

• If tariff value fixed, section 4 does not apply [Section 4 (2)]

Rate

Calculation of duty

• Once the excisability is established, next question is the amount of duty payable?

• Calculation of duty payable is two step process-– Determining rate (on basis of Classification),

– Valuation

• The rates of excise duty are prescribed in the first Schedule of CETA.

• The rates of special excise duty are prescribed in the second schedule of CETA

• Classification of excisable goods under the appropriate entry of Central Excise tariff is essential to determine the rate of Excise

Classification

• 8 Digit Classification: All goods are classified using 4 digit number which is headings, further 2 digits are for sub-classification which is termed as sub-heading and further 2 digits are sub-sub-classification which is termed as tariff item

• The CETA is divided into 20 sections which gives a broader class of goods

• Each section is divided into various chapters, each contains goods of one class. There are 96 chapters in CETA. Some chapters are further divided in sub-chapters

• Chapter notes are given in the beginning of the chapters to govern the entries in the chapters

• Each chapters and sub-chapters are divided in to heading depending on the different types of goods belonging to same class of goods.

Understanding Classification

Tariff item Description Unit Rate of duty

2711 PETROLEUM GASES AND OTHER GASEOUS HYDROCARBONS

- Liquefied:

27111100 - Natural gas Kg 14%

27111200 - Propane Kg 14%

27111300 - Butane Kg 14%

27111400 - Ethylene, propylene, butylene and butadiene Kg 14%

27111900 - Other Kg 14%

Date of determination of rate of duty

Rule 5 of CER

• The rate of duty or tariff value applicable to any excisable goods , other than khandsari molasses, shall be the rate or value in force on the date when such goods are removed from a factory or a warehouse, as the case may be.

• In case of captive consumption it would be the date on which the goods are issued for captive use

• Once the levy is not there at the time when the goods are manufactured or produced in India, it cannot be levied at the stage of removal of the said goods. The idea of collection at the stage of removal is devised for the sake of convenience - Vazir sultan tabacco

Manner of payment: Rule 8

• Duty relating to removals during a month can be discharged on the monthly basis– within five days of the succeeding month and

– 6th in case of e-payment through internet banking

– except for the month of March when duty is to be payable by 31st

March.

• An assessee, who has paid total duty – of rupees one lakh or more including the amount of duty paid by

utilization of CENVAT credit in the preceding financial year,

– shall thereafter, deposit the duty electronically through internet banking.

Person liable to pay tax

Rule 4 of CER

Manufactured goods• Manufacturer/ producer is liable to pay the excise duty on the

goods manufactured by them;Warehoused goods• Where the goods are stored in warehouse (under Rule 20 of

CER) without payment of duty then duty liability is on the person who stores the goods

Duty liability in case of job worker• Duty liability is on actual manufacturer and not on the raw

material supplier;• However job worker may claim exemption under N/N 214/86

if the raw material supplier undertakes to pay the Excise duty

Procedural aspects

Registration

invoice

return

Assessment

recovery, interest

Refund

Record

Registration

• Section 6 of CEAAny prescribed person who is engaged in—

(a) the production/ manufacture or any process of production or manufacture of any specified goods included in the First Schedule and the Second Schedule to the CETA, or

(b) the wholesale purchase or sale (whether on his own account or as a broker or commission agent) or the storage of any specified goods included in the First Schedule and the Second Schedule to the CETA,shall get himself registered with the proper officer in such manner as may be prescribed.

• If a person has more than one premise, separate registration is required for each premise.

Rule 9 of CER

• Every person:– who produces,

– manufactures,

– carries on trade,

– holds private store-room or warehouse or

– otherwise uses excisable goods or

– an importer who issues an invoice on which CENVAT Credit can be taken,

– shall get registered

People who are exempted from taking central excise registration • Persons who are manufacturing exempted goods or goods chargeable to

tax at nil rate;• Small scale units claiming exemption based on value of clearances;• The persons manufacturing excisable goods by following the warehousing

procedure as required by or under the Customs Act, 1962;• The person who carries on wholesale trade or deals in excisable goods

except first stage dealer or second stage dealer as defined in CENVAT Credit Rules, 2001;

• The person who uses excisable goods for any purpose other than for processing or manufacture of any goods availing benefit of exemption extending concessional rate of duty;

• every job worker, who undertakes job work in respect of final products falling under Ch. 61 or 62 of the First Schedule of CETA, on behalf of any other person who shall pay the duty or duties of excise leviable on the said goods, under sub-rule (3) of rule 4 and comply with all procedural formalities and discharge all liabilities under the CEA

Record

• Manufacturer required to maintain proper records on a daily basis regarding description and quantity of the goods produced or manufactured, opening balance, quantity removed, assessable value, the amount of duty payable and duty actually paid.

• No format prescribed for records.

• Records to be kept in the factory to which they pertains.

• Records to be preserved for 5 years immediately after the year to which the record pertains.

• It applies also to output service provider and input service distributors

Assessment

Rule 6 of CER (self assessment)

• The assessee shall himself assess the duty payable on any excisablegoods

Assessment defined in Rule 2(b)

• "assessment" includes self-assessment of duty made by the assesseeand provisional assessment under rule 7

• Thus under Central Excise the assessee has to himself determineclassification and valuation of goods and pay duty accordingly

• Assess in a taxing statute means the computation of the income ofthe assessee i.e computation of tax payable by assessee, process ofcollecting and recovering the tax.— Bhopal Sugar Industries vs. State of MP, AIR 1979 SC 537

Rule 7: Provisional Assessment

• Where an assessee is unable to determine the assessable value ofthe goods or the rate applicable thereto, he can request Assistant/deputy commissioner of the Central Excise for provisionalassessment as per Rule 7 of the CER, 2002;

• The department itself cannot order for provisional assessment• Once an assessment may be provisional, it is provisional for all

purposes, both for demand and return– Ravi Mardia V CCE 118 ELT 627

• Provisional assessment is provisional for all purposes and not onlyin relation to reason for which it is made provisional– CCE V PMT Machine Tools 55 ELT 592

Procedure: Provisional Assessment

• Firstly assessee should make a detailed request to AC/ DC of CE inwriting stating the Reason for payment of duty on provisional basis;

• Thereafter AC/ DC may pass an order to this effect• The payment of duty on provisional basis may be allowed, if the

assessee executes a bond along with prescribed security;• AC/ DC, shall pass order for final assessment as soon as the relevant

information is received, within the maximum period of six monthfrom the date of order allowing provisional assessment– Such period may be extended on request from the assessee

• Show cause notice is necessary before finalizing provisionalassessment– Principle of natural justice should be followed while finalizing

provisional assessment – Sarda Plywood industry LTD. V UOI 203 ELT381

Invoice – Rule 11

• No excisable goods shall be removed from a factory or a warehouseexcept under any invoice

• Invoice should be serailly numbered and must contain following:– registration number,– address of the concerned Central Excise division,– name of the consignee,– description,– classification,– time and date of removal,– mode of transport and vehicle registration number,– rate of duty,– quantity and value of goods and– the duty payable thereon.

• Invoice should be prepared in triplicate

Return: Rule 12

Form of return Description Who is required to file Time limit for filling

ER-1 Rule 12(1) of CER

Monthly return All manufacturer other than SSI

Within 10th offollowing month

ER-4 Rule 12(2) of CER

Annual financialinformation statement

Assesee paying duty of 1 Cr. Or more per annum through PLA alone

Within 30th nov of succeeding year

ER – 7 Rule 12 (2A) of CER

Annual installed capacitystatement

All assessee expect few exempted

Annually by 30th

April for previous year

ER – 5 Rule 9A (1) and (2) of CCR

Information relation to principal inputs

Assesee paying duty of 1 Cr. Or more per annum through PLA alone

Annually by 30th

April for the current year

Recovery of Duty: Section 11A

• Notice of demand to be served if duty is:– Short levied;– Short paid;– Not levied;– Not paid;– Erroneously refunded

Time limit to issue notice:• 1 one year from the relevant date if the demand is on account of reason

other than of fraud or collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of this Act or of the rules

• Notice of demand to be served in 5 one year from the relevant date if the demand is on account of fraud or collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of this Act or of the rules with an intent to evade payment of duty

Relevant date

relevant date” means,—• in the case of excisable goods on which duty of excise has not been

levied or paid or has been short-levied or short-paid, and no periodical return has been filed, the last date on which such return is required to be filed under this Act and the rules made thereunder;

• in the case of excisable goods on which duty of excise has not been levied or paid or has been short-levied or short-paid and the return has been filed on due date, the date of filing such return

• in any other case, the date on which duty of excise is required to be paidunder this Act or the rules made thereunder;

• in a case where duty of excise is provisionally assessed under this Act or the rules made thereunder, the date of adjustment of duty after the final assessment thereof;

• in the case of excisable goods on which duty of excise has been erroneously refunded, the date of such refund;

No recovery: Section 11A(b)

• No notice where

– the person chargeable with duty may, before service of notice pay on the basis of,—• (i) his own ascertainment of such duty; or

• (ii) duty ascertained by the Central Excise Officer, the amount of duty along with interest payable thereon under section 11AA.

– Such payment is informed in writing to the CEO

Where the amount so paid falls short

• Where the CEO is of the opinion that the amount paid above falls short of the amount actually payable, then, he shall proceed to issue the notice in respect of such amount which falls short and

• period of 1 year shall be computed from the date of receipt of information under sub-section (2).

Recovery of Duty: Section 11A

• Demand can be raised for previous period even if department has approved, accepted the value or rate of tax.– ITW Signode India 158 ELT 403 (SC 3 member bench)

• No res judicata in this matter, the department can change its view and demand for duty– Grasim Industries Ltd. CCE, 2006 (201)ELT 565 (CESTAT)

• No time limit for demands not covered under Section 11A• If a particular provision of excise rules does not contain any limitation,

time limit of one year not applicable: Raghuvar (India) Ltd. 118 ELT 311

Interest on delayed payment: Section 11AA

Section 11AA (1)Notwithstanding anything contained in any judgment, decree, order or direction of the Appellate Tribunal or any court or in any other provision of this Act or the rules made thereunder, the person, who is liable to pay duty, shall, in addition to the duty, be liable to pay interest at the rate specified in sub-section (2), whether such payment is made voluntarily or after determination of the amount of duty under section 11A.

Rule 8(3) of the CERIf assessee fails to pay the duty by due date, he is required to pay the outstanding amount along with the interest for a period starting from the first day after due date till the actual payment. Section 11AA of CEA. 1944

Interest on delayed payment: Section 11AA

• Interest is a civil liability of assessee who has retained amount of public money. Interest is mandatory even if evasion of duty is not malafide or intentional― CCE V Padmashri VV Patil SSk Ltd. 215 ELT 23

• Interest for delayed payment is statutory liability and accrues automatically ― Futnani Steels V CCE 235 ELT 869

• Interest of delayed payment of duty is payable at rates applicable from time to time and not at the rate applicable on the first day of default― MJ Exports 202 ELT 583

No interest is payable

Section 11AA (3)

Notwithstanding anything contained in sub-section (1), no interest shall be payable where,—

(a) the duty becomes payable consequent to the issue of an order, instruction or direction by the Board under section 37B; and

(b) such amount of duty is voluntarily paid in full, within forty-five days from the date of issue of such order, instruction or direction, without reserving any right to appeal against the said payment at any subsequent stage of such payment.

Penalty

• Rule 25 provides that if an assessee removes any excisablegoods in contravention of any of the provisions of these rulesor does not account for any excisable goods produced ormanufactured or stored by him or engages in the manufacture,production or storage of any excisable goods without havingapplied for the registration certificate then, all such goods shall beliable to confiscation and shall be liable to a penalty not exceedingthe duty on the excisable good or rupees ten thousand, whicheveris greater.

• Rules 26 & 27 also provides for similar provisions.

Claim of Refund: Section 11B

• Any person claiming refund of any duty and interest– may make an application

– for refund of such duty and interest

– to the AC/ DC of Central Excise

– before the expiry of 1 year from the relevant date

– in such form and manner as may be prescribed

– and the application shall be accompanied by such documentary or other evidence

– including the documents referred to in section 12A

• Limitation of 1 year will not apply if duty is paid under protest

• "refund" includes rebate of duty of excise on excisable goods exported out of India or on excisable materials used in the manufacture of goods which are exported out of India;

Relevant date means

1. (a) in the case exports (i) the on which ship/ aircraft leaves India (ii) date on which such goods leaves Indian frontier (in case exported by land) (iii) date of despatch by the Post Office to a place outside India;

2. In the case of goods returned for being remade, refined, reconditioned, or subjected to any other similar process, in any factory, the date of entry into the factory for the purposes aforesaid;

3. (c) in the case of goods to which banderols are required to be affixed if removed for home consumption but not so required when exported outside India, if returned to a factory after having been removed from such factory for export out of India, the date of entry into the factory;

4. (d) in a case where a manufacturer is required to pay a sum, for a certain period, on the basis of the rate fixed by the Central Government by notification in the Official Gazette in full discharge of his liability for the duty leviable on his production of certain goods, if after the manufacturer has made the payment on the basis of such rate for any period but before the expiry of that period such rate is reduced, the date of such reduction;

5. in case refund claim filed by purchaser the date of purchase of the goods;6. in the case of goods which are exempt by a special order under section 5A (2), the date of issue of

such order;7. in case where duty of excise is paid provisionally under this Act or the rules made thereunder, the

date of adjustment of duty after the final assessment thereof;8. in case where the duty becomes refundable as a consequence of judgment, decree, order or

direction of appellate authority, Appellate Tribunal or any court, the date of such judgment, decree, order or direction ;

9. in any other case, the date of payment of duty.

Credit of refund

• If AC/ DC is satisfied that the duty and interest paid by the assessee is refundable then he may make an order accordingly and credit the amount to Fund;

• Refund to applicant if following condition are satisfied– rebate on goods exported or on materials used in the manufacture of exported goods;

– unspent advance deposits lying in balance in the applicant's account current

– refund of credit of duty paid on excisable goods used as inputs in accordance with the rules made, or any notification issued, under this Act;

– the duty of excise and interest, paid by the manufacturer, if he had not passed on the incidence of such duty and interest, to any other person;

– the duty of excise and interest, borne by the buyer, if he had not passed on the incidence of such duty and interest, to any other person;

– the duty of excise and interest borne by any other such class of applicants as the Central Government may, by notification in the Official Gazette, specify:

Unjust enrichment

• Refund will only be granted if the burden of duty has not been passed to the buyers. If duty is transferred, the refund will be transferred to the Consumer welfare fund. Therefore, the burden to prove that he has not passed the liability to the consumers lies on the claimant.

– UOI vs. Roplas Ltd. AIR 1989 Bom 183

• This restriction is known as the ‘bar of unjust enrichment

• Doctrined of unjust enrichment applicable even when there if there is no specific provision in law– Sahkari Khand Udyog Mandal 2005 SC 1897

Refund

• Section 11B Applies to only refund of duty or interest

• The excess duty paid cannot be adjusted against the subsequent payment of taxes – CST vs. Hind Lamps, (2008)17 VST 250 (SC)

• assesse cannot take suo motu credit in cenvat or refund in PLA without sanction from proper officer• BDH Industries 2008 (231) ELT 61

• Refund can be claimed within one year claiming reclassification, even if clearance was against approved classification and classification was not challenged earlier– ITC Ltd 34 ELT 473

Miscellaneous issues

Storage and handling losses after production

Transit loss occurred during movement of goods from refineries to export warehouse

Losses after production

Section 5 of CEA

• CG may, by rules, provide for remission of duty of excise leviable on any excisable goods which due to any natural cause are found to be deficient in quantity;

Rule 21 of CER

• Where it is shown to the satisfaction of the Commissioner that goods have been lost/ destroyed by– natural causes or

– by unavoidable accident or

– are claimed as unfit for consumption or for marketing,

– at any time before removal, he may remit the duty payable on such goods,

– subject to imposed conditions

• Thus remission application should be submitted before

Losses after production

Meaning unavoidable accident and natural cause

• It is reasonable to conclude that the term “unavoidable accident” would mean an accident which has not arisen as a result of negligence or wilful omission on the part of the manufacturer and has arisen despite reasonable precautions that he has taken.– Voltas Ltd. V CCE 156 ELT 295

• Expresions “Natural Causes” and “unavoidable accident” required to be given reasonable and liberal meaning - More practical approach required as even in cases of ‘unavoidable accident’ it can always be contended that accident could be avoided by taking recourse to one or more measures – Hindustan Zinc limited 233 ELT 61

Losses after production

• The burden to furnish the evidence of loss is on the assessee

• theft or dacoity not constituting natural cause or unavoidable accident and remission not admissible

– Kisan Sahkari Chini Mills Ltd. 249 ELT 246

• Natural cause has to be understood in the sense of some natural phenomenon i.e. vagary of nature or some act of nature like fire, flood, or a similar calamity... theft or dacoity under the Indian Penal Code cannot be said to be a natural cause...

– Gupta Metal Sheets 232 ELT 796

• Tribunal remitted normal evaporation, storage, handling losses of petroleum products, by calculating on monthly basis to average out the gains and losses

– Indian Oil Corporation v. Collector, 1993 (66) ELT 464 (CEGAT)

credit on input in case of remission

Rule 5C of Cenvat credit rules

(5C).- Where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods and the CENVAT credit taken on input services used in or in relation to the manufacture or production of said goods] shall be reversed

Losses occurred after clearance of goods

• No provision of remission of duty after the goods have cleared from the factory

• No remission of duty is admissible for loss of part of goods during transportation after clearance– Ginni Filaments 188 ELT 45

• Position on whether remission is allowed on in-transit losses occurred during movement of goods from place of removal to export warehouse is disputable

• Favorable

Losses occurred after clearance of goods

Against

• Loss of goods after removal from factory but before export - Remission of duty deniable as loss occurred after removal from factory but held to be treated as goods been cleared in DTA • Meghmani Industries Ltd. 218 ELT 50

• Goods cleared on commercial basis to domestic area may not deserve better treatment in matters of taxation than goods lost/damaged - Matter remanded to consider eligibility to Notification No. 23/2003-C.E. treating loss as equivalent to DTA clearance - Rule 21 of Central Excise Rules, 2002. [paras 5.2, 6]

• Goods were removed from factory and loss had occurred while the goods were in transit from the factory to ICD - Remission of duty sought is not covered in the provision of Rule 21

― Welspring universal 285 ELT 135

THANK YOUPuneet Agrawal, Partner

ATHENA LAW ASSOCIATES

Contact:

puneet@athenalawassociates.com,

+91 9891 898911

8/7/2015