Rapid Revision on Central Excise For CA Final (Nov 2014 Exams)

By

THARUN RAJ B.Com, ACMA

For Queries – cma.tharunraj@gmail.com

[2] © Tharun Raj

CHAPTER - 1 TAXABLE EVENT FOR EXCISE

RE: WALLANCE FLOOR MILLS LTD. CASE Goods were fully manufactured and packed when goods were exempt from duty. These were cleared after the exemption was withdrawn and goods became liable to duty. Held that the duty is payable.

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

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

1. DEFINITION OF ―GOODS‖ UNDER EXCISE

Based on Sale of Goods Act Goods must be “Movable” Based on UOI V. DCM Goods must be “Marketable” Explanation to Sec. 2(d) of Excise Goods includes any article, material or substance which

is capable of being bought or sold for a consideration [I.e. Deemed Marketability]

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Actual sale is not necessary to prove marketability

Either marketability/deemed marketability must be satisfied

Goods having short shelf life are excisable, if they are capable of being sold during that short

shelf life – Nicholas Piramal India Ltd. Case

Waste and scrap is dutiable either if it has an established market or it is sold for consideration

Levy Point of

payment

Collection

Sec. 3 –

Manufacture

or

production

of excisable

goods in

India

Rule 4 of

Central

Excise

Rules, 2002

– Date of

actual

removal of

goods

Rule 8 of Central Excise Rules, 2002

In case of SSI

NNoorrmmaall ppaayymmeenntt - 5th of the month following every quarter

EE PPaayymmeenntt -- 6th of the month following every quarter

In case of others

NNoorrmmaall ppaayymmeenntt - 5th of the month following every month

EE PPaayymmeenntt - 6th of the month following every month

Note: For the month ending march and quarter ending march, the due date of

payment is March 31st. For the purpose of e-payment ,the above amount of ₹10 lakhs

has been revised to ₹ 1 lakh vide notification No. 15/2013—CE

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1.1 Is waste and scrap goods and excise duty payable?

1.2 When Deemed marketability will not be applicable?

• Deemed marketability implies that goods are marketable if they are sold for consideration. • If the intermediate goods are captively consumed, it cannot be sold as such for consideration

and hence, deemed marketability does not apply. • In case of captive consumption only marketability [Not deemed marketability] test should be

applied to make intermediate product dutiable

2. DEFINITION OF ―MANUFACTURE‖

SC decision in Union of India Vs. Delhi Cloth and General Mills co. Ltd. 1977

Manufacture is a process, but every process is not a manufacture

Manufacture implies a change & every change does not amount to manufacture.

Taxability of Waste and scrap (4 M‟s has to be satisfied)

If Marketable

Waste and Scrap is dutiable

If Not Marketable

If it is Deemed to be

Marketable (i.e. Sold for a

Consideration)

Waste and Scrap is Dutiable

If it is not deemed to be marketable

Waste and Scrap is Not

Dutiable.

Manufacture - Sec. 2(f)

Process -Incidental/

ancilliary for the completion of main product

Land Mark Case

- UOI V. DCM

Deemed Manufacture

Any process amounting to

manufacture as specified in

section notes/ chapter notes

Labelling (or) Re-labelling, Packing/

repacking from bulk packs to retail packs and adoption of any

other process to make Schedule III

products marketable and saleable

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By virtue of a process, a new & different article must emerge having a distinctive name,

character and use.

The new product must be commercially different, identifiable product, and then only

manufacture has taken place.

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

2.2 What is the acid test to determine, who is manufacturer?

2.3 Case Laws on Manufacture:

Case Judgment

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

Even though Drugs and Cosmetics Act, 1940 bars the sale of physician‟s samples, however, excisability of a product is not dependent on its saleability. Excise duty is a levy on production or manufacture and is payable whether or not the goods are sold.

Further, such prohibitions on sale of physician‟s samples under Drugs Act does not affect the marketability of such samples. Restrictions under Drugs Act cannot affect imposition of excise duty under the Central Excise Act thereby causing loss of revenue. Therefore, physician‟s samples are liable to excise duty.

Nicholas Piramal India Ltd. V. CCE

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

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

2 tests should be satisfied

Identity Test

A new and distince commercial product should come into

existance

Utility Test

Such new product must serve a distince purpose than that of

raw material

2 tests should be satisfied

Relation ship Test

If the relationship between raw material supplier and

job worker is on principal to principal basis, then JOB

WORKER is the manufacturer

Profit test

If the entire profit is enjoyed and retained by raw material supplier,

then the RAW MATERIAL SUPPLIER will be the

manufacturer

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(2010) (SC) 3. Shelf-life of a product would not be a relevant factor to test the marketability of a product unless it was shown that the product had absolutely no shelf-life or the shelf-life of the product was such that it was not capable of being brought or sold during that shelf-life.

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

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

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

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

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

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

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

to which it is attached. If machine is attached 1½ feet deep, intended to provide stability to the

working of the plant and prevent vibration or wobble free operation does not qualify for being described as attached to earth under any of the three clauses above and hence not an immovable property

Commissioner V. Steel Authority of India Ltd. (2012) (SC)

Process of washing of iron ore for removal of foreign materials from such ore does not bring into existence a new and different article having a distinctive name, character or use. The use of iron ore as mined or iron ore after the process undertaken by the assessee remained the same. Hence, the said process is not manufacture.

Comment: Both Identity test and utility test not satisfied in the present case.

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

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

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

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

CCE V. TARPAULIN INTERNATIONAL (2010) (SC)

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

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

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

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

Balrampur Chini Mills Ltd. v. Union of India 2014 (All.)

Bagasse which is a marketable product but not a manufactured product is not subjected to excise duty.

The High Court concluded that though bagasse is an agricultural waste of sugarcane, it is a marketable product. However, duty cannot be imposed thereon simply by virtue of the explanation added under section 2(d) of the Central Excise Act, 1944 as it does not involve any manufacturing activity.

CBEC issued a Circular dated 28-10-2009 clarifying that „bagasse‟ and other like materials would be covered under the definition of excisable goods and chargeable to payment of excise duty post Finance Act, 2008. The Circular

further clarified that in case, the rate of duty in respect of such products is „nil‟ or they are exempted from duty vide any notification and if CENVAT credit has been taken on the inputs which are used for manufacture of dutiable and exempted goods and no separate accounts have been maintained in this regard, then in terms of rule 6(3) of CENVAT Credit Rules, 2004 (CCR), proportionate credit would be reversed or 5% (now 6%) amount would be paid.

However, Supreme Court in the case of Balrampur Chini Mills Ltd. in Civil Appeal No. 2791 of 2005, decided on 21-7-2010 held that bagasse is a waste and not a manufactured product.

The high court held that Bagasse is never manufactured, but it only emerges as a waste from the crushing of sugarcane for the manufacture of final product, namely, sugar and thus, rule 6(2) and rule 6(3) would not be applicable.

High court also held that Explanation added to section 2(d) deems the goods, which are capable of being bought and sold, to be marketable. Earlier also, bagasse was being bought and sold for a consideration and even after the amendment in 2008 it is being bought and sold for a consideration. Hence, it was marketable earlier also and no difference has been made about the marketability of bagasse on account of addition of explanation to section 2(d) of CEA, 1944 inasmuch as it does not cease to be waste and it does not become a manufactured final product for the purposes of rule 6 of CENVAT Credit Rules.

The High Court quashed the CBEC‟s Circular

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CASE LAWS ON INTERPRETATION:

How will a cream which is available across the counters as also on prescription of

dermatologists for treating dry skin conditions, be classified if it has subsidiary

pharmaceutical contents - as medicament or as cosmetics?

CCE V. Ciens Laboratories (2013) (SC)

Facts of the Case:

The assessee manufactured a cream called as „Moisturex‟ which was prescribed by dermatologists for treating dry skin conditions. However, the same was also available in chemist or pharmaceutical shops without prescription of a medical practitioner. The pharmaceutical content of the cream included urea (10%), lactic acid (10%) and propylene glycol (10%). The assessee classified the cream as medicament under Heading 30.03 of the Central Excise Tariff.

The Department contended that the product „Moisturex‟ is mainly used for care of the skin and thus, the same ought to be classified as cosmetic or toilet preparations under Heading 33.04. The assessee on the other hand contended that the very presence of pharmaceutical

substances changes the identity of the product since such constituents are not used for care of the skin, but for cure of certain diseases relating to skin. Decision:

When a product contains pharmaceutical ingredients that have therapeutic or prophylactic or curative properties, the proportion of such ingredients is not invariably the decisive factor in classification. The relevant factor is the curative attributes of such ingredients that render the product a medicament and not a cosmetic.

Though a product is sold without a prescription of a medical practitioner, it does not lead to the immediate conclusion that all products that are sold over / across the counter are cosmetics. There are several products that are sold over-the-counter and are yet, medicaments.

Prior to adjudicating upon whether a product is a medicament or not, it ought to be seen as to how do the people who actually use the product, understand it to be. If a product‟s primary function is "care” and not "cure”, it is not a medicament.

Medicinal products are used to treat or cure some medical condition whereas cosmetic products are used in enhancing or improving a person's appearance or beauty.

A product that is used mainly in curing or treating ailments or diseases and contains curative ingredients, even in small quantities, is to be treated as a medicament.

The Supreme Court held that owing to the pharmaceutical constituents present in the cream „Moisturex‟ and its use for the cure of certain skin diseases, the same would be classifiable as a medicament under Heading 30.03.

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CCE V. CONNAUGHT PLAZA RESTAURANT P. LTD. (2012) (SC)

An extract from CETA:

Heading Sub-Heading

Description of Goods Rate of duty

21.05 2105.00 Ice-cream and other edible ice, whether or not containing cocoa

16%

21.08 Edible preparations, not elsewhere specified or included

2108.91 Not bearing a brand name Nil

04.04 Other dairy produce, edible products of animal origin, not elsewhere specified or included

- Ghee

0404.11 Put up in unit containers and bearing a brand name

Nil

0404.19 Other Nil

0404.90 Other Nil

Under which heading ―Soft serve‖ served at McDonalds India be classified? What is

the applicable rate of duty?

Assessee‘s Submission Whether supreme court is justified with this submission?

What is supreme court‘s argument?

1. As per the definition of “ice cream” under Prevention of Food Adulteration Act, 1955 the milk fat content of “ice cream” shall not be less than 10%. But the fat content of “Soft serve” contains 5% milk fat

No The definition of one statute (i.e. PFA, 1955) should not be applied mechanically to another statute (i.e. CEA, 1944). The object of Excise Act is to raise revenue for which various goods are differently

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content. Hence “Soft serve” is not “Ice cream” as per PFA Act, 1955.

classified in the Act whereas the provisions of PFA are for ensuring quality control. Hence, this submission is not acceptable by apex court.

2. “Soft serve” shall not be considered as “ice cream” as it was marketed throughout the world as “Soft serve”

No The manner, in which a product might be marketed by a manufacturer, did not necessarily play a decisive role in affecting the commercial understanding of such a product. What matters was the way in which the consumer perceived the product notwithstanding marketing strategies. Customers in general treat the said product as “Ice cream”

3. In the matters pertaining to classification of a commodity, technical and scientific meaning of the product was to prevail over the commercial parlance meaning

No None of the terms in the headings has defined “ice cream” or “Soft serve”. SC based on various judgments concluded that in the absence of a statutory definition or technical description, interpretation ought to be in accordance with common parlance principle and not according to scientific and technical meanings.

4. As per Rule 3(a) of General Interpretative Rules, Specific heading should be preferred over general heading. Therefore, “Soft serve” would fall under heading 04.04 since it was a specific entry.

No Ice cream under heading 21.05 could not be classified as dairy product under heading 04.04. Heading 21.05 was clearly a specific entry

Decision: In light of the aforesaid discussion, the court decided that “Soft serve” was

classifiable under heading 21.05 as “ice cream: and not under heading 04.04 as “Other dairy

produce”

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CHAPTER - 2 VALUATION UNDER EXCISE

1. MRP BASED VALUATION (4A)

AV = MRP – Abatement

1.1 When a product is covered under MRP based Valuation?

a) The product must be covered under third schedule to CETA, 1985

b) The product must be covered under the provisions of Legal Metrology Act, 2009

c) The product must be notified by CG under sec. 4A with a rate of abatement.

1.2 When Retail Selling Price Rules, 2008 will be applicable?

1. Clearing goods without declaring RSP 2. By declaring RSP, which is not the RSP required to be declared 3. By declaring RSP but obliterating (i.e. removing) the same after their removal 4. Tampering/ altering RSP after their removal.

Consequences: a) Such goods are liable for confiscation. b) RSP shall be deter-mined as per the said rules.

1.3 When MRP based valuation not applicable?

4A not applicable to institutional and industrial sales.

When different MRP‟s are marked on the same pack, highest MRP shall be considered.

When different MRP‟s are marked on different packages, every MRP w.r.to such sales are considered.

Free samples not packed along with main product are also liable for MRP based valuation.

MRP based valuation equally applicable for quantity discounts.

Crossed out MRP does not have any relevance in valuation.

1.4 Determination of Retail Selling Price (RSP) rules, 2008

Rule 4(i): When goods are removed without RSP or wrong RSP or obliteration of RSP, RSP

of identical goods sold within one month prior or later of the goods in question shall be

considered. [If more than one RSP is ascertained, highest RSP is taken into account]

Rule 4(ii): When RSP cannot be ascertained as per above rule, enquires in retail market should be conducted to ascertain RSP. [If more than one RSP is ascertained, highest RSP is taken into account]

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

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2. TRANSACTION VALUE [4(3)(d)] 2.1 What is the definition of transaction value? MEANS Price paid or payable by the buyer to the assessee or any other person on assessee‟s behalf

The above payment should be by reason of sale (or) in connection with sale.

The above payment can be made before sale, at the time of sale, after sale.

Includes all other pay-ments made indirectly, which is charged by assessee in the form of expenses.

But the above value does not include taxes

EXCLUSIONS: 1. All taxes, duties, cess by whatever name called. 2. Trade discount and regional discount, if these are in the normal course of business. 3. All transportation costs after place of removal and post removal expenses incurred by

assessee and later collected from buyer (i.e. Carriage outwards) 4. Interest on advance, if assessee is not charging lower price to those buyers giving advance. 5. Interest collected from buyer on account of delayed payment. 2.2 Whether all items are included in the transaction value other than those excluded? Special points on inclusions: 1. All packing costs will be included, except durable and return-able packing as such. [But its

amortized cost is included] 2. Optional warranty charges is not included, when buyer does not opt for warranty. 3. Dharmada charges incurred as per statutory provisions is not included. 4. Loading and unloading charges incurred by buyer on his own account is not includible.

Note: While deciding as to inclusions, check whether buyer has made any payment and it is in by reason of sale i.e. that payment will not arise, if there is no sale. 2.3 Whether all bought out items are included in transaction value?

Bought out items

Parts/ Components

Which are essential for the functioning of

the main product and are supplied along with the main

product

Accessories

Which are not essential for the functioning of main product, but adds value

to the main prodcut

Optional bought out items

These are neither

essential parts nor accessories but supplied as

a trading activity

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Product – Two Wheeler

Parts/components - Tyres

Accessories – Seat Cover/Side stand

Optional bought out items – Grease/ Engine oil

These are essential and hence INCLUDED in the Assessable value

These are not essential and hence NOT INCLUDED in the Assessable value

These are trading activity and NOT COVERED under excise duty but covered under sales tax

3. VALUATION RULES: (CENTRAL EXCISE VALUATION RULES, 2000)

Price nearest to the time of removal when goods are not sold Rule 4

When goods are sold at buyers premises, transportation cost should be deducted from TV at buyers premises

Rule 5

Money value of consideration to be included in AV, when price is not sole consideration

Rule 6

For goods removed to depot/branch - Price prevailing there at the time of removal from place of removal.

Rule 7

For, captive consumption, AV is cost of Production + 10% Rule 8

When goods are sold to interconnected undertakings other than H&S, normal TV shall be taken

Rule 10

When goods are sold to other related per-sons (not covered in rule 10), AV shall be price at which such goods are sold to unrelated buyer by such related persons, on that date. (Related wholesale buyer is also considered as unrelated buyer)

Rule 9

In case of goods under job-work, AV shall be price at RM supplier place at the time of removal from factory of JW. If goods are sold directly from JW factory, that TV is AV.

Rule 10 A

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4. CAS on Cost of production for captive consumption (CAS – 4)

Particulars Total Cost (in ₹)

Cost per unit (in ₹)

1 Material Consumed (See note 1 below) XXX XX

2 Direct Wages and Salaries (see note 2

below)

XXX XX

3 Direct Expenses XXX XX

4 Works Overheads XXX XX

5 Quality Control Cost (see note 3 below) XXX XX

6 Research & Development Cost (see

note 4 below)

XXX XX

7 Administrative Overheads (relating to

production activity)

XXX XX

8 Subtotal (1 to 7) XXX XX

9 Add : Opening stock of Work - in –

Progress

XXX XX

10 Less : Closing stock of Work -in-

Progress

(XXX) (XX)

11 Subtotal (8+9-10) XXX XX

12 Less: Credit for Recoveries/Scrap/By-

Products / misc income

(XXX) (XX)

13 Add: Packing cost (see note 5 below) XXX XX

14 Cost of Production (11-12+13) XXX XX

15 Add: Inputs received free of cost (see

note 6 below)

XXX XX

16 Add: Amortised cost of Moulds, Tools,

Dies & Patterns etc received free of cost

XXX XX

17 Cost of Production for goods produced

for captive consumption

XXX XX

Notes to above computation:

1) Cost of material consumed INCLUDES – Purchase cost, duties and taxes,

carriage inwards, insurance and other direct attributable expenditure, but

DOES NOT INCLUDE – Discounts, rebates, Duties and taxes paid which is

available as CENVAT credit or Input tax credit or duty drawback.

2) Direct wages and salaries INCLUDES all allowances and payments to THOSE

EMPLOYEES DIRECTLY engaged in MANUFACTURING ACTIVITY.

3) Quality control costs are the expenditure incurred relating to quality control

activities for adhering to quality standard. These expenses shall include

salaries and wages relating to employees engaged in quality control activity.

4) R&D cost of existing product or improvement in the processing of existing

product should be considered.

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5) If product is transferred/dispatched duly packed for captive consumption, cost

of such packing shall be INCLUDED.

6) In case any input material, whether of direct or indirect nature, including

packing material is supplied free of cost by the user of the captive product, the

LANDED COST OF SUCH MATERIAL SHALL BE INCLUDED in the cost of

production.

5. CASE LAWS ON VALUATION:

Tata Motors Ltd. V. UOI (2012) (Bom HC)

The Pre delivery inspection (PDI) and free after sales service charges could be

included in the transaction value only when they were charged by the assessee to

the buyer.

Point of doubt: What about the cost of after sales service charges and pre-delivery inspection (PDI) charges, incurred by the dealer during the warranty period? Clarification: Since these services are provided free by the dealer on behalf of the assessee, the cost towards this is included in the dealer‟s margin (or reimbursed to him). This is one of the considerations for sale of the goods (motor vehicles, consumer items etc.) to the dealer and will therefore be governed by Rule 6 of the Valuation Rules on the same grounds as indicated in respect of Advertisement and Publicity charges. That is, in such cases the after sales service charges and PDI charges will be included in the assessable value – Circular No. 681/72/2012

CCE V. Xerogrpahic Ltd. (2010) (SC)

Merely because two parties are related persons, the transaction value cannot be rejected. In order to reject transaction value between related persons, it should be shown that the price at which the goods were sold to related persons was not the normal price at which the goods were sold to other distributors/dealers, or was less than the market price at which it was being sold in the market, or, that there was any extra commercial consideration in fixing the price to such related persons. In absence, thereof, the price discharged from the related persons shall be acceptable.

CCE V. Cadbury India Ltd. (2006) (SC)

Advertising, insurance and other expenses of the final products shall not be added to determine the value of intermediate goods.

Royal Enfield V. CCE (2011) (SC)

Facts & issue involved: Whether the packing charges incurred to avoid scratch and breakage to motor cycles form part of Assessable value? Will the position be same if the said expenditure is separately collected from the buyer? Decision: Any Expenditure incurred upto the place of removal and any amount paid by the

buyer by reason of sale or in connection with sale shall be included in the value of taxable service. Packing charges shall be included if it is necessary in the ordinary course of trade. (My Opinion)

In case of motor cycles cleared in packed condition from the factory to the depot, the packing charges incurred to avoid scratch and breakage to motor cycles form

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part of the AV because such packing is necessary for putting the excisable goods (i.e. Motor cycles) in saleable condition.

Even though such packing charges are separately reimbursed by the buyer, the same are includible in the value for the purpose of payment of excise duty.

Electronics and Controls Power system P. Ltd. V. CCE (2011) (SC)

Facts & Issue involved: Whether the value of bought out batteries supplied along with uninterrupted power supply system (UPSS) as an option item should be included in the Value of UPS system for the purpose of charging excise duty as these batteries are part of UPS system? Decision: Even if UPS cannot function without battery for conditioning power, but battery is

the essential pre-requisite. The source of power to the UPS system is the battery which is an essential and

integral part. Hence, the value of bought out batteries is includible in the value of UPS system. Conclusion: Battery is not an accessory but an essential part, which needs to be

included in the value of Final product (i.e. UPS system). However, the manufacturer can take the excise duty paid on the batteries as CENVAT credit for the purpose of payment of excise duty on UPS system as the amended definition of “Inputs”.

MARUTI

SUZUKI INDIA

LTD. V. CCE

2010 (TRI. –

LB)

Cost of after sale service and PDI charges incurred by dealer during warranty period is includible. There need not be direct flow back of consideration to assessee. Even indirect benefit is includible in assessable value.

Essel propack Ltd. V. CCE (2011) (SC)

Facts: Assessee, a manufacturer of plastic tubes. It was receiving supply of plastic caps from its customers and after fitting them

onto the plastic tubes, it was supplying the cap-fitted tubes to the customers. The assessee was paying duty on the value of plastic tubes, while the department

includes the value of caps in the value of tubes and demanded duty accordingly. Decision: If caps are manufactured separately and not in the same factory in which the

tubes are being manufactured, the caps cannot form integral part of the assessable value of the tubes, manufactured and cleared from the factory, such caps are merely accessory.

Since, in the present case, the caps are not manufactured in the factory of the assessee but are being supplied by the customers of the assessee, the value of caps will not form part of the assessable value of the tubes manufactured by the assessee.

[Note: Caps is not packing material supplied by the customers]

CCE V. Fiat India P. Ltd. (2012) (SC)

When goods are sold at a price less than their cost of production, price could not be considered as the sole consideration for sale. Supreme court held that o prudent business person would continuously suffer huge loss only to penetrate market. They are expected to act with discretion to seek reasonable income, preserve capital and in general avoid speculative investments. Hence, the selling price could not be accepted as transaction value

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CCEx v. Super Synotex (India) Ltd. 2014 (301) E.L.T. 273 (S.C.)

Facts: Assessee was a manufacturer of manmade fibre yarns which were chargeable to excise duty. The assessee availed the benefit of Sales Tax New Incentive Scheme for Industries, 1989 („State Incentive Scheme‟) whereby he could retain 75% of the total sales tax collected from buyer and pay only remaining 25% to the State Government. Point of dispute: While computing the „transaction value‟ for the purpose of payment of excise duty, assessee claimed 100% deduction of sales tax collected from buyer. Department objected to this as effectively, the assessee did not pay excise duty on the additional consideration received towards sales tax collected but not deposited with the State exchequer. Observations of the Court: Supreme Court observed that amount paid or payable to the State Government towards sales tax, VAT, etc. is excluded as it is not an amount paid to the manufacturer towards the price, but an amount paid or payable to the State Government for the sale transaction. Accordingly, the amount paid to the State Government is only excludible from the transaction value. What is not payable or to be paid as sales tax/VAT, should not be charged from the third party/customer, but if it charged and is not payable or paid, it is a part and should not be excluded from the transaction value. This is the position after amendment w.e.f. 01.07.2000 of section 4 of Central Excise Act, 1944, where “actually paid” is significant. Supreme Court further observed that unless the sales tax is actually paid to the Sales Tax Department of the State Government, no benefit towards excise duty can be given under the concept of "transaction value" under section 4(3)(d) of Central Excise Act, 1944, for it is not excludible. As is seen from the facts, 25% of the sales tax collected had been paid to the State exchequer by way of deposit and the remaining amount had been retained by the assessee. Decision: The Apex Court held that such retained amount has to be treated as the price of the goods under the basic fundamental conception of "transaction value" as substituted with effect from 1.7.2000 and therefore, the assessee is bound to pay excise duty on the said sum. Note – This case establishes that retention of the specified sales tax amount under the relevant State Sales Tax Incentive Schemes ought to be treated as additional consideration and subjected to central excise duty since deduction of sales tax is available only when it is actually paid to the Sales Tax Department (in terms of the definition of transaction value as introduced from July 1, 2000). In other words, the Apex Court has negated the idea that such amounts are in the nature of a subsidy and do not form part of the sale proceeds. The issue of includibility, or otherwise, of sales tax collected and retained, in terms of Incentive Schemes, in the assessable value has been dealt in the context of both old (existing prior to July 1, 2000) and new section 4 (effective from July 1, 2000) in the above-mentioned case law. However, in the above summary only the

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observations and conclusion involving new section 4, based on transaction value, have been discussed and the ones relating to old section 4, based on normal price, have been avoided. With effect from July 1, 2000 the definition of 'transaction value' reads as under: (d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.

CASE STUDIES ON VALUATION 1 Mr. Hanuman Prasad sold excisable goods to Ram Ltd. for ₹ 28,090

(inclusive of excise duty @ 12.36%) on 19.08.2013. The buyer, Ram Ltd., is related to Mr. Hanuman Prasad in terms of section 4(3)(b) of the Central Excise Act, 1944. It did not sell the goods, but used the same as intermediary product for the manufacture of final product. The cost of production of the said goods determined as per CAS-4 was ₹ 20,000. Determine the assessable value in the given case. What will be the assessable value, if in the aforesaid case, Ram Ltd. is not related to Mr. Hanuman Prasad? [RTP – May 2014]

Ans: Case a) ₹ 22,000 Case b) ₹ 25,000

2 M/s. Hiphop Ltd. is engaged in the manufacture and sale of Pressure cooker “Hit”, notified under section 4A of the Central Excise Act, 1944. The notified rate of abatement for the pressure cooker is 25%. Determine the central excise duty payable by M/s Hiphop Ltd. from the following details:-

a) 500 pieces having retail sale price (RSP) of ₹ 1,200 per piece are sold in retail packages to a wholesale dealer at ₹ 1,000 per piece.

b) 100 pieces having two RSPs of ₹ 1,100 and ₹ 1,200 are sold in retail packages to ultimate consumers.

c) 1,000 pieces having RSP of ₹ 1,200 per piece are sold in retail packages, but buyer is charged for 900 pieces only at ₹ 1,000 per piece (100 pieces have been given free as quantity discount).

d) 25 pieces were given away as free samples, without any RSP on the pack.

e) 400 multi-packs were cleared at ₹ 1,100 per pack, each containing one pressure cooker and one kg free rice (without any RSP on it). Each Pressure cooker had RSP of ₹ 1,200, which was scored out and each multi-pack had RSP of ₹ 1,500.

Ans: a) AV = ₹ 4,50,000 b) AV = ₹ 90,000 c) AV = ₹ 9,00,000 d) AV = ₹ 22,500 e) AV = ₹ 4,50,000

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Make suitable assumptions wherever required and show the calculations with appropriate notes. [RTP – May 2014]

3 Raj & Co. furnish the following expenditure incurred by them and

want you to find the assessable value for the purpose of paying

excise duty on captive consumption. Determine the cost of production

in terms of rule 8 of the Central Excise Valuation (Determination of

Price of Excisable Goods) Rules, 2000 and as per CAS-4 (cost

accounting standard)

(i) Direct material cost per unit (incl. of ED at 12%) - ₹1,320

(ii) Direct wages - ₹250

(iii) Other direct expenses - ₹100

(iv) Indirect materials - ₹75

(v) Factory Overheads - ₹200

(vi) Administrative overhead (25% relating to production

capacity) - ₹100

(vii) Selling and distribution expenses - ₹150

(viii) Quality Control - ₹25

(ix) Sale of scrap realized - ₹20

(x) Actual profit margin - 15%.

4 Thilagam Turbines Ltd. manufactured a steam turbine for Mr.Prem,

who supplied special steel purchased by him from wholesale market

(Cost ₹ 10,00,000 plus Central Excise ₹ 1,33,000).

The normal price of such material is ₹ 12,00,000 plus Central Excise

₹1,48,320. Mr.Prem is eligible to claim CENVAT Credit. Thilagam

Turbines Ltd. incurred manufacturing cost of ₹ 23,00,000.

What is assessable value of the turbine? Briefly touch upon the issues involved

5 Surat Cloth Mills delivered 1000 meters of cloth to Purvanchal

Readymade Garments on 10.01.2012 from its depot located at

Ahmedabad @ ₹ 110 per meter. The goods were dispatched to the

depot from the factory located in Surat on 05.01.2012. Ex-factory

price on 05.01.2012 was ₹ 90 per meter. The sales of identical

variety of cloth effected from Ahmedabad depot on the two relevant

dates is as follows:-

On 05.1.2012 On 10.1.2012

Cloth sold in

meters

Rate per

meter (₹)

Cloth sold in

meters

Rate per

meter (₹)

100 135 200 120

850 125 1000 110

500 120 550 115

450 115 375 108

Calculate the AV of 1,000 meters of cloth sold by surat cloth mills.

6 Having regard to the provisions of section 4 of the Excise Act, 1944,

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compute/derive the assessable value of excisable goods, for levy of duty of excise, given the following information:

Cum-duty wholesale price incl. sales tax of ₹ 2,500 - ₹15,000 Normal secondary packing cost - ₹1,000 Cost of special secondary packing - ₹1,500 Cost of durable and returnable packing - ₹1,500 Freight - ₹1,250 Insurance on freight - ₹200 Trade discount (normal practice) - ₹ 1,500

Rate of C.E. duty as per C.E. Tariff is 12% Ad-valorem. State in the footnote to your answer, reasons for the admissibility or otherwise of the deductions.

7 Compute the assessable value under the Central Excise Act, 1944 in the following case : (i) Production : 2,000 units on 1.1.2012 (ii) Quantity sold : 450 units @ ₹ 200 per unit, 650 units @ ₹ 190 per unit, Samples clearances 50 units (iii) Balance in Stock - 850 units (at the end of factory day for 1.1.2012). Assume that the rate per unit is exclusive of Central Excise duty

8 Cool Drinks Ltd. manufactured three health drinks viz. A, B and C. A

was sold only to M Ltd., a subsidiary company of Cool Drinks Ltd. B

was sold to N Ltd., where the Managing Director of Cool Drinks Ltd.

was a manager. C was sold to O Ltd. who was the sole distributor of

Cool Drinks Ltd. and was coming under the management of Cool

Drinks Ltd.

Determine the transaction value of the three products in the hands of

Cool Drinks Ltd. on the basis of the following information:

Price of Cool Drinks Ltd. to M Ltd. ₹200

Price of Cool Drinks Ltd. to N Ltd. ₹150

Price of Cool Drinks Ltd. to O Ltd. ₹120

Price of M Ltd. to Consumer ₹220

Price of N Ltd. to Consumer ₹160

[21] © Tharun Raj

CHAPTER - 3 CENVAT CREDIT

INTRODUCTION: For manufacturing any good (or) for providing any service, it requires inputs (Raw materials), capital goods (machineries), input services (consultancy, etc.,)

The excise duty paid on Inputs and capital goods and service tax paid on input services is

availed (i.e. taken) as credit, which can be utilised (i.e. Setoff) for payment of Excise duty on

finished goods and Service tax on output services.

1. AVAILMENT & UTILISATION OF CREDIT 1.1 How to compute net excise duty payable? Gross excise duty payable on finished goods (+) Gross service tax payable on output services (-) Excise duty paid on Inputs (-) Service tax paid on Input services (-) Excise duty paid on capital goods 1.2 When credit is available and what is the % of credit?

Inputs Immediately on receipt of inputs into factory of manufacturer or any premises by service provider

100% of duties paid available as credit on the basis of invoice

Input Services

Immediately on receipt of invoice, even if payment is not made by service recipient1

100% of service tax mentioned in the invoice2

Capital Goods

Immediately on receipt of inputs into factory of manufacturer or any premises by service provider

Upto 50% in the first financial year of purchase and balance in the subsequent years

1.3 What are the duties available as Credit? Even Additional customs duty paid u/s. 3 (1) (known as CVD) of customs and additional duty paid u/s. 3 (5) (known as SAD) of CTA, 1975 is available as CENVAT credit.

1 If payment towards invoice is not made within 3 months, credit should be reversed 2 If part payment is made by SR, proportionate credit is available.

Inputs

Process

Capital goods

Process

Finished goods

Output service

Input service

Process

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1.4 What are the restrictions on utilization of credit?

EC availed should be utilized only for payment of EC.

SHEC availed should be utilized only for payment of SHEC. SAD cannot be utilized for payment of service tax. NCCD should be utilized only for NCCD. As per Prag Bosimi Synthetics ltd. Case (2013), HC

held that it does not mean credit of any other duty cannot be utilised for payment of NCCD. Therefore CENVAT Credit w.r.to BED, CVD, Service tax etc., can be utilised for payment of NCCD.

No restrictions on utilization of CVD. In case of SSI units, 100% credit on capital goods available in the same financial year.

2. NON AVAILMENT & REVERSAL OF CREDIT

In case the capital goods are re-moved as such, CENVAT credit of 100% can be availed and reversed accordingly.

If inputs are destroyed/ damaged after issuing it to production, CC on inputs available.

If inputs are destroyed /damaged before issuing it to production and if it is normal loss, CC on inputs available

If inputs are destroyed /damaged before issuing it to production and if it is abnormal loss, CC on inputs not available.

If capital goods are destroyed, CC on capital goods available

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―If output is dutiable,

credit available on

Input. If output is

exempted/not

dutiable, credit not

available on Input‖

3. INPUTS/INPUT SERVICES & CAPITAL GOODS USED FOR EXEMPTED OUTPUT

When Inputs, Input services and capital goods are exclusively used for dutiable finished goods/ taxable services, CC available.

When Inputs, Input services and capital goods are exclusively used for exempted finished goods/ exempted services and if they are preferential removals, CC available.

When inputs, input services and capital goods are exclusively used for exempted finished goods/ exempted services and if they are other than for preferential removals, CC not available.

3.1 What are preferential removals? 1. Exports to countries other than Nepal and Bhutan [Credit avail-able by way of refund] 2. SEZ/EOU/EHTP/STP/UN or International organization and to projects funded by them 3. Foreign diplomatic missions, consular missions, career consular officers 4. International competitive bidding 5. Power project through competitive bidding

3.2 What are exempted goods? “Exempted goods” means goods ex-empted as per exemption notification, nil rated goods and goods tax-able as per notification 1/2011 3.3 What are exempted Services? Exempted services means ser-vices exempted under mega ex-emption notification, negative lost

services, Abatement services, Ser-vices under composition scheme

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4. REVERSAL OF CREDIT IN CASE OF REMOVAL OF INPUTS AND CAPITAL GOODS

Note: The amount calculated above or duty calculated on transaction value, whichever is higher shall be the amount to be reversed or paid accordingly.

4.1 What is the treatment in case of capital goods removed as waste and scrap?

With effect from 27.09.2013, if the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value. 4.2 Whether Credit is payable along with interest? In the following cases, recovery provisions under Rule 14 (i.e. recovery of CENVAT credit

wrongly availed along with interest) will be applicable.

Removal of

Inputs - as such

Amount equal to CENVAT credit availed shall be paid

[See note below]

Capital goods

As such After use (i.e. as second hand machinery BUT NOT as waste and

scrap)

Amount equal to CENVAT credit taken on capital goods

(-) percentage points calculated by straight line method for each quarter of a year or part thereof from

the date of taking the CENVAT credit

% points calculated by straight line method

In case of Computers & Computes peripherals

For each quarter in 1st year - 10%

For each quarter in 2nd year - 8%

For each quarter in 3rd year - 5%

For each quater in 4th and 5th year - 1%

[See note below]

In case of other capital goods

2.5% for each quarter

[See note below]

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Inputs or capital goods removed as such from the factory/ premises of the output

service provider – Rule 3(5)

Capital goods removed after being used, whether as capital goods or as scrap or waste

– Rule 3(5A)

Inputs/ capital goods before being put to use written off fully or partially – Rule 3(5B)

5. REFUND OF CENVAT CREDIT

The provisions are contained in new Rule 5 of CENVAT credit rules, which is as follows:

5.1 What is ―Net CENVAT credit‖? Total CENVAT credit availed on inputs and input services as reduced by amount reversed when inputs removed as such. 5.2 What is the meaning of export turnover of services? Payments received in respect of services exported (+) Advance received in respect of services to be exported and provision of services is complete (-) Advance received in respect of services to be exported and provision of services is not complete.

5.3 Will the refund be available, if duty drawback is allowed under customs? No refund of credit shall be allowed if the manufacturer or provider of output service avails the drawback allowed under the customs and excise drawback rules, 1995 or claims rebate under export of services rules, 2005

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PROCEDURE, SAFEGUARDS, CONDITIONS AND LIMITATIONS PRESCRIBED FOR REFUND OF

CENVAT CREDIT TO SERVICE PROVIDERS COVERED UNDER PARTIAL REVERSE CHARGE [RULE

5B VIDE NOTIFICATION NO. 12/2014 – CE]

Services Covered under ―Partial Reverse Charge Mechanism (PRCM)‖?

The following are the services covered under Partial reverse charge mechanism in lieu of Sec.

68(2) of Finance Act, 1994

a) renting of a motor vehicle designed to carry passengers on non abated value, to any

person who is not engaged in a similar business

b) supply of manpower for any purpose or security services (or)

c) service portion in the execution of a works contract

Amendments in CENVAT Credit Rules, 2004

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What is available as Refund?

CENVAT Credit availed and unutilized w.r.to

Excise Duty paid on inputs used in the above mentioned services

Services tax paid on input services used in the above mentioned services

What is the periodicity of Refund claim3?

The claimant shall submit only one claim of refund under this notification for every

half year. The refund claim shall be filed after filing of service tax return as

prescribed under rule 7 of the Service Tax Rules for the period for which refund is

claimed.

What is the amount of refund available?

The refund of unutilized CENVAT credit shall not exceed an amount of service tax liability paid

or payable by the recipient of service [REMEMBER! It is not the service tax paid by the service

provider BUT the service tax paid by the service recipient] with respect to the partial reverse

charge services provided during the period of half year for which refund is claimed

How to compute unutilized CENVAT Credit?

Proportionate CENVAT Credit on inputs and input services

CENVAT Credit takenon inputs and input services

during the half year

X

Turnover of output service underpartial reverse charge during

the half yearTotal turnover of goods and services

during the half year

Less: Service tax paid by the service provider for such partial reverse charge services during the half year

(XXX)

= Unutilised CENVAT credit taken on inputs and input services during the half year for providing partial reverse charge services

XXX

Accounting treatment for refund?

The service provider providing services under reverse charge mechanism can claim CENVAT Credit on inputs and input services

Purchases A/c ---- Dr. CENVAT Credit Receivable A/c ---- Dr. To Accounts payable A/c

3 The Refund shall be admissible for the CENVAT Credit taken on input or input services received after 1/07/2012

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Service Charges A/c ----- Dr. CENVAT Credit Receivable A/c ---- Dr. To Accounts payable A/c

The amount claimed as refund shall be debited by the claimant from his CENVAT credit account at the time of making the claim

Refund Receivable A/c ---- Dr. To CENVAT Credit Receivable A/c

In case the amount of refund sanctioned is less than the amount of refund claimed, then the claimant may take back the credit of the difference between the amount claimed and the amount sanctioned

Cash A/c ---- Dr. CENVAT Credit Receivable A/c --- Dr. To Refund Receivable A/c

What is the procedure for claiming refund?

* The last date of filing of application in Form A, for the period 1.7.2012 to 30.9.2012 shall be

30.6.2014, so that refund shall be claimed within 1 year from 30.6.2014 for the credit

pertaining to 2012.

Illustration:

Black panthers security agency is engaged in providing security services to various Companies,

business entities, Individuals and with respect to some of the services, it is liable to pay service

tax under partial reverse charge mechanism to the tune of 25% if tax liability. During the

financial year 2014-15, it has provided services to HDFC Financial Services Ltd. and to other

entities where partial reverse charge mechanism is not applicable. It is eligible to take CENVAT

Application in Form A (along with return pertaining to the said half year, documents and encl.) to jurisdicational AC/DC of excise WITHIN 1 year from the due date of filing of return* for the half year

AC/DC may call for any document in case he has reason to believe that information provided in the refund claim is incorrect or insufficient and funther enquiry is necessary to sanction refund claim

Sanction of Refund claim by AC/DC (After getting himself satisfied about the corectness of the refund claim)

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credit w.r.to service tax paid on manpower supply services, telecommunication services,

Advertisement services etc.,

Category of service provider Scenario – I Scenario - II

A Value of service provided to HDFC Financial Services Ltd., attracting reverse charge, in an half year

₹15,00,000 ₹10,00,000

B Value of service provided to others, where reverse charge is not applicable

₹1,00,000 ₹1,00,000

C Total Value of taxable services provided by Blank panthers security agency

₹16,00,000 ₹11,00,000

D CENVAT credit availed during the half year

₹2,00,000 ₹1,00,000

E Service tax payable by the service provider for (A) above (25 % of the liability)

₹15,00,000 X 12.36% X 25% =

₹46,350

₹30,900

F Service tax payable by the service provider for (B) above –entire liability

₹12,360 ₹12,360

G Total service tax payable by the service provider (D) + (E)

₹58,710 ₹43,260

H Unutilized CENVAT credit, after making service tax payments as above (C) – (F) [For all services including reverse charge]

₹1,41,290 ₹56,740

I Unutilized CENVAT credit as per Rule 5B = D X A/C – E [with respect to reverse charge]

₹1,41,150 ₹60,009

J Maximum amount available for refund = Service tax paid by service recipient w.r.to partial reverse charge subject to (I) above

₹15,00,000 X 12.36% X 75% =

₹1,39,050

₹56,7404

PROVISIONS RELATING TO DISTRIBUTION OF CREDIT IN CASE OF INPUT SERVICE DISTRIBUTOR

AMENDED [RULE 7 VIDE NOTIFICATION NO. 5/2014 - CE] With effect from 01.04.2014, rule 7 has been amended to simplify the mechanism of

distribution of CENVAT credit in case of input service distributor as under:

4 Even though the maximum refund is subject to proportionate unutilized credit, but the balance in CENVAT credit is less compared to the proportionate unutilized credit.

[30] © Tharun Raj

S.

No.

Position as per

erstwhile rule 7

Position as per the

amended rule 7

Impact of such

amendment

1 In case of a unit

exclusively engaged in

manufacture of

exempted goods/

providing exempted

services, service tax

paid on input services

used IN such a unit

was not allowed to be

distributed as

CENVAT credit.

In case of a unit

exclusively engaged in

manufacture of exempted

goods/ providing

exempted services,

service tax paid on input

services used BY one or

more such units will not

be allowed to be

distributed as CENVAT

credit

With the substitution

of

word „IN‟ with „BY‟,

credit of services,

which

have been used by

such

units though not

actually consumed

within such units,

would

also not be

distributed.

2 Credit of service tax

attributable to service

used wholly IN a unit

was to be distributed

only to that unit.

Credit of service tax

attributable to service

used wholly BY a unit

shall be distributed only to

that unit.

Substitution of word

„IN‟

with „BY‟ would

increase

the scope of services

pertaining to which

credit could be

distributed to a unit.

Resultantly, credit for

services like good

transport agency

services, rent-a-cab

service, testing and

analysis of the

product

etc. would now be

available to the unit

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availing them.

3 Credit of service tax

attributable to service

used IN more than one

unit was to be

distributed pro rata on

the basis of the turnover

during the relevant

period of the concerned

unit to the sum total of

the turnover of all the

units to which the

service related during

the same period.

Credit of service tax

attributable to service

used BY more than one

unit shall be distributed

pro rata on the basis of

the turnover of such units

during the relevant period

to the total turnover of

all its units, which are

operational in the

current year, during the

said relevant period.

In case of common

input services,

amount

of CENVAT credit

attributed to a unit

may

be reduced as now

turnover of all

operational units has

to

be taken in

denominator

instead of only the

units

to which the service

relates.

4 Relevant period was

the month/quarter

previous to the

month/quarter during

which the CENVAT

credit was distributed.

In case of an

assessee who did not

have any total

turnover in the said

period, the input

service distributor was

to distribute any credit

only after the end of

such relevant period

Relevant period shall be

the „financial year‟

preceding to the year

during which credit is to

be distributed for month/

quarter provided

assessee has turnover in

such preceding financial

year.

If the assessee does not

have turnover for some/

all the units in the

preceding financial year,

relevant period shall be

the last quarter for which

Distribution of credit

is

now based on

previous

financial year‟s

turnover

instead of previous

month‟s/quarter‟s

turnover.

[32] © Tharun Raj

wherein the total

turnover of its units

was available.

details of turnover of all

the units are available,

previous to the month/

quarter for which credit is

to be distributed.

CENVAT CREDIT TAKEN ON INPUT SERVICES TO BE REVERSED IF DUTY PAID ON FINAL

PRODUCT REMITTED [RULE 3(5C) VIDE NOTIFICATION NO. 1/2014] Earlier, where on any goods manufactured or produced by an assessee, the payment of duty

was 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 was required to be

reversed. Thus, earlier, reversal was only required in respect of inputs and not for input

services.

Rule 3(5C) has been amended to provide that CENVAT credit taken on input services used in or

in relation to the manufacture or production of said goods is also required to be reversed.

AMOUNT PAYABLE UNDER SUB-RULES (5), (5A), (5B) AND (5C) OF RULE 3 TO BE PAID ON

OR BEFORE THE 5TH DAY OF THE FOLLOWING MONTH BY UTILIZING CENVAT CREDIT OR

OTHERWISE As per explanation 1 inserted after rule 3(5C), the amount payable under following sub-rules of

rule 3 shall be paid by the manufacturer of goods or the provider of output service

(i) Rule 3(5) Reversal of credit in case of removal of inputs or capital goods as such from the

factory/premises of the output service provider

(ii) Rule 3(5A) Reversal of credit in case of removal of capital goods after being used,

whether as capital goods or as scrap or waste

(iii) Rule 3(5B) Reversal of credit in case of full or partial writing off of the value of input or

capital goods before being put to use

(iv) Rule 3(5C) Reversal of credit in case of remission of duty on final product

• by debiting the CENVAT credit or otherwise

• on or before the 5th day of the following month except for the month of March, where such

payment shall be made on or before the 31st day of the month of March.

[33] © Tharun Raj

FAILURE TO REVERSE THE CREDIT TAKEN ON INPUTS AND INPUT SERVICES USED IN GOODS ON

WHICH DUTY IS ORDERED TO BE REMITTED ALSO TO ATTRACT RECOVERY PROVISIONS UNDER

RULE 14 [EXPLANATION 2 TO RULE 3(5C)] Hitherto, as per explanation occurring after proviso to rule 3(5B), recovery provisions under rule

14 of the CENVAT Credit Rules, 2004 were applicable if the manufacturer of goods or the

provider of output service fails to pay the amount payable under sub-rules (5), (5A) and (5B) of

rule 3.

The said explanation has been omitted and a new explanation 2 has been inserted after rule

3(5C). As per the new explanation 2, in addition to sub-rules (5), (5A) and (5B) of rule 3,

recovery provisions under rule 14 will also apply to sub-rule (5C) of rule 3.

In other words, even in a case where the manufacturer of goods or the provider of output

service fails to reverse the CENVAT credit taken on inputs and input services used in goods on

which duty has been ordered to be remitted, it would be recovered, in the manner provided

under rule 14, for recovery of CENVAT credit wrongly taken.

Case Laws on CENVAT CREDIT:

KCP Ltd. V. CCE (2013) (SC)

Can CENVAT credit be availed on machineries purchased for being used in setting up a sugar plant in foreign country when (i) the same are not used in the factory premises and (ii) no duty is paid on final product viz., the sugar plant?

The Supreme Court explained that if duty is not levied on the final product, question of grant of any relief would not arise as in that case there would not be any cascading effect on the duty imposed on inputs.

The Supreme Court pointed out that since the sugar plant was set up in Vietnam, it could not be said that the plant was manufactured in the factory of the assessee. Thus, no duty was paid by the assessee on the final product i.e., on sugar plant which had been set up in Vietnam. Therefore, there would not be any question of availing credit of the duty paid on the inputs

The Supreme Court further observed that the bought-out machinery was not used by the assessee in the manufacture of the machinery (which had been transported along with bought-out machinery to Vietnam for

[34] © Tharun Raj

setting up the sugar plant) as the same was not even unpacked or tested, and transported in exact condition along with machinery manufactured by the assessee. The assessee, therefore, merely acted as a trader or as an exporter in relation to the machinery purchased by it, which had been exported and used for setting up a sugar plant in a foreign country.

The Supreme Court held that CENVAT credit could not be allowed to the assessee as no duty was paid on sugar plant set up in a foreign country. Further, since the bought-out machinery was not used in the assessee‟s factory premises, the necessary condition for availing CENVAT credit on capital goods could not be fulfilled.

CCE V. Tata Advanced Materials Ltd. (2011) (HC)

Issue Involved: The capital goods purchased were destroyed by fire after 3 years from the date of purchase. The Insurance Company reimbursed the amount to the assessee, which included the excise duty, which the assessee had paid on the capital goods and availed as CENVAT credit. Excise Department demanded the reversal of the CENVAT credit by the assessee on the ground that the assessee had availed a double benefit. HC Decision: As per CENVAT Credit Rules, 2004, CENVAT credit taken irregularly stands

cancelled and CENVAT credit utilised irregularly has to be paid for. In the instant case, the Insurance Company, in terms of the policy, had

compensated the assessee. Merely because the Insurance Company had paid the assessee the value of

goods including the excise duty paid, it would not render the availement of the CENVAT credit wrong or irregular.

It was not a case of double benefit as contended by the Department. The High Court therefore answered the substantial question of law in favour of

the assessee and against the Revenue.

Sintex Industries Ltd. V. CCE (2013) (HC)

The High Court held that credit could be availed on eligible inputs utilized in the generation of electricity only to the extent the same were used to produce electricity within the factory registered for that purpose (textile division). However, credit on inputs utilized to produce electricity which was supplied to a factory registered as a different unit (plastic division) would not be allowed. The High Court rejected the contention of the assessee that separate registration of two units situated within a common boundary wall would not make them two different factories.

CCE V. Prime health care products (2011) (HC)

[35] © Tharun Raj

The process of packing and re-packing the input, that was, toothbrush and

tooth paste in a unit container would fall within the ambit of “manufacture” [as per section 2(f)(iii) of the Central Excise Act, 1944].

Further, the word “input” was defined in rule 2(k) of the CENVAT Credit Rules, 2004 which also included accessories of the final products cleared along with final product.

There was no dispute about the fact that on tooth brush, excise duty had been paid. The toothbrush was put in the packet along with the tooth paste and no extra amount was recovered from the consumer on the toothbrush.

Considering the definition given in the rules of “input” and the provisions contained in rule 3, the High Court upheld the Tribunal‟s decision that the credit was admissible in the case of the assessee.

CCE V. Bhuwalka steel Industries Ltd. (2010) (Tri – LB)

Tribunal held that each case had to be decided according to merit and no hard and fast rule can be laid down for dealing with different kinds of shortages. Various factors have been laid to decide the denial. Whether the goods under question – Have been diverted to other place or received and used in the factor Are hygroscopic (i.e. absorbs but will not evaporate) or prone to evaporation Are countable in terms of packages or pieces and have been received and

accounted Differs in weight on account of different scales and dispatch and receiving

ends. Tolerances in respect of hygroscopic, volatile and such other cargo has to be allowed as per industry norms excluding, however, unreasonable and exorbitant claims. Similarly, minor variations arising due to weighment by different machines will also have to be ignored if such variations are within tolerance limits.

CCE V. Stelko Strips Ltd. (2010) (HC)

The high court held that CENVAT credit can be taken on the strength of private challans provided

Same were not found to be fake AND There was proper certification that duty had been paid

Ashok Kumar H. Fulwadhya V. UOI (2010) (HC)

It was held that words “any person” used in rule 15(1) of the CENVAT Credit Rules, 2004 clearly indicate that the person who has availed CENVAT credit shall only be the person liable to the penalty.

The Court observed that, in the instant case, CENVAT credit had been availed by the company and the penalty under rule 15(1) was imposable only on the person who had availed CENVAT credit [company in the given case], who was a manufacturer.

The petitioners-directors of the company could not be said to be manufacturer availing CENVAT credit.

CCE v. Satish Industries 2013 (298) E.L.T. 188 (Bom.)

Facts of the case: In the instant case, the assessee availed 100% CENVAT credit on capital goods in the year of purchase, i.e. in first year itself. However, he utilized only 50% of the CENVAT credit so availed in the first year. As per Revenue, assessee was entitled to avail 50% of the credit of duty paid on capital goods in the first financial year and avail the balance 50% credit in subsequent financial year.

[36] © Tharun Raj

Decision: The High Court held that if 50% CENVAT credit on capital goods pertaining to subsequent financial year which had been wrongly availed in the first year had not been not utilized till the commencement of the subsequent financial year, no prejudice was caused to the Revenue and thus, the same could be upheld.

DEFINITION OF INPUT SERVICE - CCE V. CADILA HEALTH CARE LTD. (2013) (HC) -

IMP. CASE

ISSUE INVOLVED:

The assessee was engaged in the manufacture of medicaments.

Since, the medicament could be manufactured only upon approval of the regulatory

authority after the product undergoes technical testing and analysis, the assessee

availed the services of various technical testing and analysis agencies for testing of

clinical samples prior to commencement of commercial production.

These samples were manufactured in small trial batches and removed after payment of

excise duty.

The assessee availed CENVAT credit of service tax paid by it on such testing services.

Further, the assessee also availed CENVAT credit of service tax paid by it on

commission paid to foreign agents for the sale of such medicaments. Credit was

taken as per the inclusive part of the definition of input service, which included services

in relation to sales promotion.

[37] © Tharun Raj

DECISION:

Service Departments argument High Court Observation & Decision

Technical

testing and

analysis

Services

unless goods reached

the commercial

production stage,

CENVAT credit was not

admissible

The activity of testing and analysis of the trail batches

was in relation to manufacture of final product as

unless such trail batches were tested and approval from

regulatory authority was obtained, the final product

could not be manufactured. Hence, the said

services prior to commencement of commercial

production are eligible for CENVAT Credit

Services

provided

by

foreign

commission

agents

The said services of foreign commission agents neither

used directly or indirectly in or in relation to manufacture

of final products or clearance of final products upto

the place of removal nor the sad activities are

mentioned in the illustrative activities mentioned in the

definition i.e. accounting, auditing etc., Hence,

CENVAT Credit not available on the said activities

DEFINITION OF INPUTS - FLEX ENGINEERING LTD. CASE (2012) (SC) - V. IMP CASE

[38] © Tharun Raj

ISSUE INVOLVED: o The assessee, was engaged in the manufacturing of various types of packaging machines,

marketed as Automatic Form Fill and Seal Machines („F&S machines‟).

o The machines were „made to order‟, in as much as all the dimensions of the

packaging/sealing pouches, for which the F&S machine is required, are provided by the

customer.

o The purchase order contained following clause - “Inspection/trial will be carried out at your

works in the presence of our engineer before dispatch of equipment for the performance of

the machine.”

o The testingmaterial to be used was Flexible Laminated Plastic Film in roll form & Poly

Paper which were duty paid.

o As the machine ordered was customer specific, if after inspection by the customer it was

found deficient in respect of its operations for being used for a particular specified

packaging, it could not be delivered to the customer, till it was re-adjusted and tuned to

make it match with the required size of the pouches as per the customer‟s requirement.

o On completion of the above process and when the customer was satisfied, the machine

was declared as manufactured, ready for clearance.

o The assessee claimed the CENVAT credit of the material used for testing of the packaging

machines. However, the Department contended that credit could not be availed and

denied the CENVAT credit on the same.

DECISION:

The Supreme Court observed that the process of manufacture would not be complete if

a product is not saleable as it would not be marketable and the duty of excise would not

be leviable on it.

The Supreme Court was of the opinion that the process of testing the customized F&S

machines was inextricably connected with the manufacturing process, in as much as,

until this process is carried out in terms of the afore-extracted covenant in the purchase

order, the manufacturing process is not complete; the machines are not fit for sale and

hence, not marketable at the factory gate.

The Court was, therefore, of the opinion that the manufacturing process in the present

case gets completed on testing of the said machines.

Hence, the afore-stated goods viz. the flexible plastic films used for testing the F&S

machines are inputs used in relation to the manufacture of the final product and would

be eligible for CENVAT credit.

[39] © Tharun Raj

CASE STUDIES: 1 Vikram, a manufacturer, purchased 40 kgs of inputs @ ₹ 500 per kg on

01.10.2012. Excise duty of 12% and 3% education cesses were paid on the inputs over and above ₹ 500. On the day of receipt itself, inputs were sent to the job worker for further processing. Job worker sent back 50% of the processed inputs on 01.04.2013 and balance 50% on 31.05.2013. Vikram received the processed inputs on the same day. He utilized such processed inputs in the manufacture of goods „X‟. Vikram also purchased moulds and dies worth ₹ 1,00,000 on 01.10.2012 and paid excise duty of ₹ 12,360 on the same. Such moulds and dies were sent to another job worker for the production of goods „Y‟ according to his specifications. However, such moulds and dies were not received back by Vikram. Calculate the CENVAT credit that can be availed or required to be reversed on relevant dates and net availment and reversal in the financial years 2012-13 and 2013-14. Vikram is not entitled to the benefit of exemption available under Notification No.8/2003 CE dated 01.03.2003.

Ans: Net CENVAT Credit availed in FY 2012-13 = ₹ 6,180 Net CENVAT Credit availed in FY 2013-14 = ₹8,652

2 [CENVAT – Removal of Capital good after use] XYZ Ltd. Purchased

capital goods of ₹17,16,300 (inclusive of excise duty @ 12.36%) on

1.4.2013. CENVAT credit attributable on such capital goods was duly

accounted for on the same day. You are required to compute the amount

of CENVAT credit to be reversed in the following cases:

(a) If machinery is removed as such on 25.7.2014

(b) If machinery is being removed, after being used on 2.4.2015

(c) If machinery is removed as waste and scrap for ₹5,00,000 on 28.7.2016

3 M/S Tips and Toes Ltd. manufacture 4 nail polishes namely sweety, pretty, beauty, tweety. The company has availed CENVAT credit of ₹ 4,00,000 on the common inputs used in the manufacture of nail polishes. During the financial year 2012-13, the company manufactured 1000 liters of each type. The CENVAT availed input was used in equal proportion in all the four types of products. The following additional data is available. Discuss eligibility of CENVAT credit availed by him. Advise assessee what steps he should take under CENVAT credit rules.

Product Nature of sale Sale price excluding

sales tax and other

local taxes

Sweety Sale to home consumption ₹30 per 20ml bottle

Pretty Sold to a 100% EOU ₹40 per 20ml bottle

Beauty Fully exported ₹50 per 20ml bottle

Tweety Supplied to defence canteen

under exemption

₹60 per 20ml bottle

4 Maharaja, a manufacturer of dutiable as well as exempted goods,

furnishes the following information for the month of January, 2007 :

[40] © Tharun Raj

(i) Assessable value of dutiable goods ₹250 lakh (rate of duty 16%);

(ii) Price of exempted goods cleared from the factory ₹200 lakh;

(iii) CENVAT credit of input X (used only in the manufacture of

exempted goods)₹10 lakh;

(iv) CENVAT credit of input Y (used only in the manufacture of dutiable

goods)₹15 lakh;

(v) CENVAT credit of input Z (used commonly in manufacture of

exempted as well as dutiable goods but no separate accounts are

maintained in respect of such input Z) ₹20 lakh; and

(vi) CENVAT credit of capital goods (used partly for manufacture of

exempted goods also) ₹ 2.5 lakh (total amount of duty).

Compute the amount of excise duty and any other amount payable by Maharaja for the month of January, 2007.

[41] © Tharun Raj

CHAPTER - 4 SSI EXEMPTION

NOTIFICATION NO. 8/2003: The SSI exemption during the CY is available when the turnover of the assessee during the PY

is ≤ 400 lakhs.

The exemption is upto 150 lakhs of turnover during the CY. For turnover > 150 lakhs excise

duty payable.

The credit as standing on the first day of the financial year in which the exemption is availed

shall be lapsed.

CENVAT credit on inputs purchased, Input services received not available upto the date when

turnover is ≤ 150 lakhs. Thereafter, credit available.

CENVAT credit on capital goods is available but can be utilized only when turnover crosses 150

lakhs.

The assessee can opt to pay normal duty and can avail CENVAT credit.

Manufacturer of excisable goods (other than Tea, pan masala, some tobacco products, sandal

wood oil, weapons, travel sets for toiletries etc.) are eligible for SSI exemption.

The option once availed, will be applicable for entire turn- over of a financial year.

Computation of Small Service provider Exemption for the year _________:

S.No Particulars

Dutiable goods

Exempted goods

Non dutiable goods

With SSI exemption

Without SSI Exemption

1 Clearance of goods for domestic consumption

XXX

2 Clearance of goods with own brand name for domestic consumption

XXX

3 Clearance of goods with the brand name of others - In urban area (not eligible for exemption)

XXX

4 Clearance of goods with the brand name of others - In Rural Area

XXX

[42] © Tharun Raj

5

Clearance of plastic bottles and plastic containers manufactured under the brand name of others (Even though manufactured with the brand name of others, exemption available provided they are used as packing material)

XXX

6 Export to countries other than Nepal and Bhutan

XXX

7

Exports to Nepal and Bhutan (Though exports to Nepal is treated as normal exports, the SSI exemption notification has not been amended)

XXX

8 Sale to SEZ/EOU/EHTP/STP/ UN or International organisations

XXX

9

Outright sale to a buyer, who then exports i.e. Penutimate sale - Sale before export sale is exempted under CST but not under excise

XXX

10 Export under bond to merchant exporter

XXX

11 Sale of non exsiable goods XXX

12

Value of intermediate product when final product is eligible for SSI exemption (If final product is eligible for SSI exemption, it is dutiable before SSI exemption and as per notification no. 67/95, intermediate product is exempted)

XXX

13

Value of goods captively consumed for manufacture of final product which is exempted under a notification other than SSI Exemption notification.

XXX

14

Value of job work done under notification no. 214/86, 83/94 and 84/94 (In this case, the raw material supplier will pay excise duty)

XXX

15 Job work or any process which does not amount to manufacture

XXX

Total XXX XXX XXX XXX

[43] © Tharun Raj

Less: Small Service provider

exemption

(XXX) Not available Already

Exempted, hence no

duty payable

Not dutiable,

hence duty not leviable

Turnover on which excise

duty payable XXX XXX

Notes to above:

When the goods are already exempted/not taxable, it is not considered for SSI ex- emption.

When final product is covered under SSI exemption, intermediate product is already included

in it, so don't include again for exemption. When final product is exempted under other

notifications, intermediate product is taxable as per Notification. No. 67/95, but assessee can

avail SSI exemption on such intermediate product.

If the manufacturer has more than one factory, the clearances of all such factories will have

to be clubbed together.

If more than one manufacturer clears goods from the same factory, all clearances from the

factory will have to be clubbed together.

CASE LAWS ON SSI EXEMPTION:

CLUBBING PROVISIONS - CCE V. DEORA ENGINEERING WORKS (2010) (HC)

Decision of the case:

The High Court held that indisputably, in the instant case, that the partners of both the firms

were common and belonged to same family. They were manufacturing and clearing the

goods by the common brand name, manufactured in the same factory premises,

[44] © Tharun Raj

having common management and accounts etc. Therefore, High Court was of the

considered view that the clearance of the common goods under the same brand name

manufactured by both the firms had been rightly clubbed.

COMPUTATION OF SSI EXEMPTION - BONANZO ENGG. & CHEMICAL P. LTD. CASE (2012) (SC)

The Supreme Court opined that the value of clearances in the SSI exemption

notification needs to be computed after excluding the value of exempted goods.

Merely because the assessee by mistake paid duty on the goods which were exempted

from the duty payment under some other notification, did not mean that thegoods

would become goods liable for duty under the Act.

Further, merely because the assessee had not claimed any refund on the duty paid

by him would not come in the way of claiming benefit of the SSI exemption.

Accordingly, the high court allowed assessee to exclude exempted goods for

computation of SSI exemption.

BRAND NAME RESTRICTIONS - ELEX KNITTING MACHINERY CO. (2010) (HC)

ISSUE INVOLVED:

The assessee was engaged in the manufacture of flat knitting machines. They had

been availing the SSI exemption.

They were found using the brand name “ELEX” on those machines. The said brand

name belonged to M/s. Elex Engineering Works. The proprietor of Elex Knitting

Machinery Co. was a partner in M/s Elex Engineering Works.

The Department denied the benefit of the SSI exemption notification solely on the

ground that they had manufactured and cleared the goods under the brand name

“ELEX” which belonged to M/s. ELEX Engineering Works.

DECISION:

Held that the appellant was eligible to claim benefit of the SSI exemption as the

proprietor of Elex Knitting Machinery Co. was one of the partners in Elex

Engineering Works.

Thus, being the co-owner of the brand name of “ELEX”, he could not be said to have

used the brand name of another person, in the manufacture and clearance of the goods

in his individual capacity.

[45] © Tharun Raj

CCE V. Australian Foods India (p) Ltd. (2013) (SC)

Facts & Issues involved:

The assessee was engaged in the manufacture and sale of cookies from branded retail outlets of "Cookie Man".

The assessee had acquired this brand name from M/s Cookie Man Pvt. Ltd, Australia. The assessee was selling some of these cookies in plastic pouches/containers on which the brand name described above was printed.

No brand name was affixed or inscribed on the cookies. Excise duty was duly paid, on the cookies sold in the said pouches/containers.

However, on the cookies sold loosely from the counter of the same retail outlet, with plain plates and tissue paper, duty was not paid.

The retail outlets did not receive any loose cookies nor did they manufacture them. They received all cookies in sealed pouches/containers.

Those sold loosely were taken out of the containers and displayed for sale separately.

The assessee contended that SSI exemption would be available on cookies sold loosely as they did not bear the brand name.

Decision:

(i) Physical manifestation of the brand name on goods is not a compulsory requirement. Goods

would continue to be branded good, as long as its environment conveys so viz.,

packaging/wrapping, accessories, uniform of vendors, invoices, menu cards, hoardings and

display boards of outlet, may convey that goods is a branded one.

(ii) The test of whether the goods is branded or unbranded, must not be the physical presence

of the brand name on the good, but whether it is used in relation to such specified goods for

the purpose of indicating a connection in the course of trade between such specified goods and

some person using such name with or without any indication of the identity of the person.

(iii) Once it is established that a specified good is a branded good, whether it is sold without

any trade name on it, or by another manufacturer, it does not cease to be a branded good of

the first manufacturer. Therefore, soft drinks of a certain company do not cease to be

manufactured branded goods of that company simply because they are served in plain glasses,

without any indication of the company, in a private restaurant.

(iv) The supreme court held that it is not necessary for the goods to be stamped with a trade

name or brand name to be considered as branded goods for the purpose of SSI exemption. A

scrutiny of surrounding circumstances is necessary to decide. In the present case, the SSI

exemption not available on account of brand name restrictions.

[46] © Tharun Raj

Where clearances of a dubious company are clubbed with clearances of the original

company, whether penalty can be imposed on such dubious company if all the

clearances have been made by the original company?

CCEx v Xenon 2013 (Jhar.)

Facts & Issue Involved:

The Department found that the assessee had set up a dubious company of another

company to mis-utilize the benefits of SSI exemption notification.

It was established that the dubious company did not manufacture and clear any goods

and that all the transactions shown by it were, in fact, the transactions undertaken by

the original company.

Thus, the manufacture and clearances shown by the two units separately were clubbed

together as manufacture and clearances of a single unit viz. original company in terms

of the applicable SSI exemption notification and the differential duty and penalty was

imposed on such original company.

At the same time, penalty was also imposed on the dubious company.

Decision:

The High Court observed that merely because the dubious company was in existence, it

could not be said that it undertook the transactions.

Its existence could not itself create any liability; the liability could arise only when the

transactions were actually undertaken by the dubious company.

If the transactions shown by the dubious company were not undertaken by the same

but by the original company, then such transactions would be taken to be the

transactions of the original company and clubbed with the transactions of the original

company.

The High Court held that when it had been established that dubious company did not

undertake any transactions, penalty could not be levied on the same for the transactions

undertaken by the original company. The High Court emphasized that penalty could not

be imposed upon the company who did not undertake any transaction.

CASE STUDIES: 1 Chinu Ltd. started manufacturing excisable goods in June, 2013. It

availed small scale exemption in terms of Notification No. 8/2003 C.E. dated 1-3-2003 as amended for the financial year 2013-14. The following details are provided by Chinu Limited:

₹18,000 kg of inputs purchased @ ₹ 985.60 per kg (inclusive of central excise duty @ 12.36%)

1,77,40,800

Capital goods purchased on 24.07.2013 (inclusive of excise duty at 12.36%)

45,15,000

Finished goods sold [at uniform transaction value (exclusive of excise duty) throughout the year]

3,00,00,000

Ans: Excise duty payable in cash after availing CENVAT Credit is ₹3,81,558

[47] © Tharun Raj

Calculate the amount of excise duty payable by Chinu Ltd. in cash, if any, during the year 2013-14. Rate of duty on finished goods sold may be taken at 12.36%. There is neither any processing loss nor any inventory of input and output. Show your workings and notes with suitable assumptions as required.

2 [SSI Exemption] SSI & Co. is eligible for exemption in terms of

Notification No. 8/2003 for the year 2010-11. It provides the

following particulars with regard to the clearances of goods effected

during the said year. Determine the duty payable in respect of the

year 2010-11:

Value of domestic clearances of goods

with own brand name

₹120 lakhs

Value of clearances of goods with the

brand name of others (including₹30

lakhs in respect of goods manufactured

in a rural area)

₹100 lakhs

Value of clearances for exports ₹50 lakhs

Value of clearances for captive

consumption

₹40 lakhs

Value of clearances of exempted goods ₹20 lakhs

Show your workings with explanations where required

3 [Computation of eligibility for SSI exemption]Aggarwal&

Company is a manufacturing company. In the financial year 2011-12,

the details of its clearances of excisable goods are as follows:-

Total exports (including for export to Bhutan

₹50 lakhs)

₹600 lakhs

Clearances of excisable goods without

payment of duty to a 100% EOU

₹10 lakhs

Job work under Notification No. 84/94-CE

dated 11.4.94

₹50 lakhs

Job work under Notification No. 214/86-CE

dated 25.3.86

₹50 lakhs

Clearances of goods bearing brand name of

National Small

Industries Corporation

₹100 lakhs

Clearances of corrugated boxes bearing the

brand name of Sugar & Spice Confectioners.

Sugar & Spice Confectioners use these

corrugated boxes for packing the bakery

products produced by them.

₹200 lakhs

On the basis of above information, you are required to ascertain the eligibility of Aggarwal and Company for exemption based on value of clearances in terms of Notification No. 8/2003-CE dated 1.3.2003 as amended for the financial year 2012-13. [May 12 –CA RTP]

[48] © Tharun Raj

CHAPTER - 5 PROCEDURES UNDER EXCISE

1. REGISTRATION

Who is

required to get

registered?

Every person who produces, manufactures, carries on trade, holds private

store room or warehouse or otherwise uses excisable goods

Who are

exempt from

registration?

Notification No.

36/2001

· Manufacturers of exempted goods

· SSI Units availing exemption and having a turnover < 90 lakhs

· Exemption notification no. 214/86, were in raw material supplier is

required to get registered

· Persons manufacturing goods under customs warehousing procedures,

if all their products are exported

· Dealers in excisable goods who do not issue CENVATable invoice

· Unit in SEZ

· EOU having no inter-linkage with domestic economy through sale or

purchase of goods

· Temporary exemption has been granted from registration under excise

for premises used solely for affixing a sticker/ re-printing/ re-labelling/

re packing of pharmaceutical products falling under chapter 30 to

comply with the notification issued under Drugs (Prices control) Order,

2013

What is to be

registered?

Premises - Factory/Warehouse (But not the name of manufacturer)

Procedure for

registration?

1. Application in Form A-1 along with appropriate documents

2. Within 30 days from the date of commencement of business

3. With Jurisdicational AC/DC in duplicate

4. A Certificate of Registration will be generated which contains 15 digit code.

First 10 digits – PAN

Next 2 digits – Word “XM” in case of manufacturer, “XD” in case of dealer

Next 3 digits – character numeric code (001,002,003 etc.).

[49] © Tharun Raj

2. ASSESSMENT UNDER EXCISE:

What is Assessment?

Assessment means determining the tax liability. It is of two types a) Self assessment b) Provisional assessment

What is self assessment?

The assessee himself has to determine classification and valuation of goods and pay duty accordingly.

But in case of cigarettes, the superintendent or inspector shall assess the duty payable before removal of goods

The return submitted by assessee has to be along with ‘Self Assessment Memorandum’, in which assessee declared that a) The particulars in ER-1/ER-2/ER-3 are correctly stated b) Duty has been assessed as per the provisions of the Act.

What is provisional assessment?

When, a) Assessee is unable to determine the value of excisable goods on account of non

availability of any document or information or b) Assessee is unable to determine rate of duty applicable He will pay the duty on provisional basis and later on pay/receive the differential duty, if any

2.1 PROCEDURE FOR SELF ASSESSMENT:

2.1.1 What is scrutiny of return? To check whether the information contained in the return is complete, prima facie valid and internally

consistent. Required action will be taken based on the scrutiny by superintendent, to safeguard the revenue. A detailed check list for the scrutiny has been given in Annexure-1 of the circular No.

818/15/2005.

Assessment

Self-Assessment [Rule 6] Provisional Assessment [Rule 7]

Assessee shall submit return along with 'Self assessment memorandum'

Scrutiny of returns by 'Proper officer'

Scrutiny of assessment

(Some returns will be selected on minirisk parameter basis)

Every assessee shall make available to proper officer all documents and records for verification as and when required

If assessment is found to be in order

'Self assessment' is final

If the officers are of opinion that there is short payment, show cause notice cum

demand will have to be issued.

The officers will not assess the duty i.e. assessment order is not issued

[50] © Tharun Raj

2.1.2 Are all returns to be scrutinized? Circular No. 818/15/2005, provided manner of scrutiny of ER-1/ER-3 returns.

2.1.3 Who will do scrutiny of returns? Range superintendent and will be assisted by Inspectors.

2.1.4 What is scrutiny of assessment? After initial scrutiny of returns, 5% of returns will be selected for detailed scrutiny i.e. Scrutiny of

assessment. This will be done on the basis of „Negative impact on revenue for the maximum number of parameters‟. The modus operandi will be such that in annexure-2 of circular No. 818/15/2005, specifies 8 parameters. Units having maximum number of negative parameters showing abnormal trends will be selected for

detailed scrutiny of assessment.

2.1.5 What is the time limit for completion of this scrutiny? Both scrutiny of returns and scrutiny of assessment should be completed within 3 months from the date of receipt of return.

1.2 PROCEDURE FOR PROVISIONAL ASSESSMENT:

Assessee has to request for provisional assessment in writing and also giving reasons thereof to AC/DC

AC/DC shall specify the rate or value at which the duty will be paid on provisional basis

AC/DC may by order allow payment of duty on provisional basis

Assessee has to execute a bond for payment of differential duty

Within 6 months from the date of order of provisional assessment, AC/DC should pass order for final assessment

(The period can be extended by further 6 months by commissioner and further without any timelimit by cheif commissioner)

Interest is payable, in case differential amount is payable by assessee

If excess amount was paid, it is refundable with interest. The refund is subject to provisions of

unjust enrichment

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2.2.1 Can department order for provisional assessment? If central excise officer finds that self assessment is not in order, he can as assessee to produce additional documents, records and other information and then issue demand notice. If the above is not possible, Best judgement assessment is resorted. But the department cannot order provisional assessment.

2.2.2 If AC/DC is of the opinion that provisional assessment is not necessary. What is the guideline available? AC/DC may ask assessee to appear before him on the appointed day. After the hearing, he may order that provisional assessment is not necessary.

2.2.3 What is the value for which bond is executed? The difference has to be calculated on the basis of probable duty payable applying the highest rate/ value applicable to such goods for a period of 3 months.

2.2.4 The return should be usually accompanied with ‗self assessment memorandum‘. What if, in case of provisional assessment? The monthly/ quarterly return and invoices should be marked as „PROVISIONALLY ASSESSED vide order No. ____ dated ____‟. There is a declaration in ER-1/ER-2/ER-3 where assessee has to mention the goods under „Provisional assessment‟.

2.2.5 AC/DC is required to pass order of final assessment within 6 months. If assessment cannot be finalised within 6 months, what is the remedy available? The cases must be submitted to commissioner with request letter of assessee, through AC/DC indicating reasons for non-finalisation and amount of differential duty for future clearances before the expiry of period of 6 months.

2.2.6 Explain the phrase ‗Refund subject to provision of unjust enrichment‘? Refund will be granted to manufacturer if he has not passed on incidence of duty to another person.

2.2.7 What is the rate of interest payable in case of differential duty payable? Interest as specified in Sec. 11 AA (i.e. 18%) will be payable by assessee FROM – First day of the month succeeding the month for which such amount is determined. TILL – Date of payment of differential duty. Note: Interest is payable from first day of next month after clearance of goods, as the word used is „for‟. Eg: If goods were cleared in July 2000, entire duty is paid in September 2001 and assessment is finalised in March 2007, interest will be payable from 1st august 2000 to September 2001.

ILLUSTRATION ON PROVISIONAL ASSESSMENT:

Value of goods cleared during July 2014 = 10 lakhs

Duty provisionally assessed on 8th August 2014 @ 10.3% = 1,03,000 and the said duty is paid

immediately.

Duty finally assessed on 25th Jan 2015 @ 12.36% and the differential duty paid on 5th Feb 2015.

Amount of differential duty = 1,23,600 - 1,03,000 = 20,600

Period for which interest payable = 1st August 2014 to 5th Feb 2015 = 189 days

Interest = 20,600 X 18% X 189/365 = 1,920

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2.2.8 What is the rate of interest receivable in case of refund of differential

amount?

The rate is as specified in Sec. 11 BB (i.e. @6%) will be receivable by assessee. FROM – The date immediately after the expiry of 3 months from the date of receipt of refund application5 TILL – The last date of refund. Note: The interest is payable by department not from the date of finalisation of provisional assessment, but from the month next to the month on which duty was provisionally paid.

G.I.S Cotton mills Ltd. case (2013) (HC) Refund would arise only after provisional

assessment has been finalized and not prior thereto. Thus, until AC/DC passes an order for

final assessment, no refund application can be filed by the assessee.

In the above example, if refund is available and refund application can be filed only after 25th

Jan 2015 and if application is made on 31th Jan 2015, Interest will start from 1st May 2015

only i.e. after expiry of 3 months from the date of filing refund application.

CASE STUDY: 1 M/s Sharda Zarda Makers is engaged in manufacturing zarda with the

brand name „Aanand‟. It clandestinely cleared „Aanand‟ zarda and stored the same with Balram Trading Co. for further sales. Balram Trading Co. were allegedly the related concerns of M/s Sharda Zarda Makers. The Commissioner of Central Excise has imposed a penalty under rule 25(1)(c) of the Central Excise Rules, 2002 on Balram Trading Co. on the ground that it has engaged in the storage of excisable goods without having applied for the required registration certificate. Examine with the help of a decided case law whether penalty under rule 25 of the Central Excise Rules, 2002 can be imposed on such firm? [RTP – May 2014]

Ans: Penalty under Rule 25 could not be imposed on Balaram Trading Co. The facts of the case is similar to the case of Balaji Trading Co. (2013) (HC)

OTHER AMENDMENTS IN CENTRAL EXCISE RULES, 2004:

Rule 20 The facility of removal without payment of duty provided under rule 20(1) of the

Central Excise Rules, 2002 has been extended to all excisable goods intended for storage in

godown/retail outlet of a Duty Free Shop in the Departure Hall/Arrival Hall of International

5 Notification No. 02/2013 dated 1.3.2013

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Airport, appointed/licensed as „warehouse‟ under sections 57 or 58 of the Customs Act, 1962

and for sale therefrom, against foreign exchange to passengers going out of India or to the

passengers or members of crew arriving from abroad.

Note: Hitherto only foreign goods were sold in Duty Free Shops located in the International

Airports. A passenger going abroad or coming from a foreign country could buy foreign goods

without customs duty and the incoming passenger could clear those goods without duty within

his available limits as per the baggage rules.

The Central Government has now allowed excise duty-free sale of goods manufactured in India

to international passengers or crew arriving from abroad at the DFS located in the arrival halls

of international airports. Such exemption from excise duty is subject to limitations, conditions

and safeguards as may be specified by the CBEC. Therefore, now a passenger arriving from

abroad shall have the choice to buy either duty-free imported goods or duty-free indigenous

goods within his overall permissible baggage allowance.

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EXPORT PROCEDURE: Where any goods are exported, rule 18 of the Central Excise Rules, 2002 empowers the Central

Government to grant by way of a notification a rebate of duty paid on such excisable goods or

on materials used in the manufacture or processing of such goods. The rebate is subject to

such conditions or limitations, if any, and the fulfilment of such procedure as may be specified

in the notification. Notification No. 19/2004 CE (NT) dated 06.09.2004 as amended has been

issued by the Central Government to grant rebate under rule 18.

The procedure prescribed under the said notification in relation to preparation of ARE-1, its

distribution and filing of rebate claim is summarized below:

Export under a claim of rebate – Under supervision of superintendent or Inspector (Rule 18 read with Notification No. 19/2004)

Preparation of Invoice

The Invoice should be in Triplicate The assessable value should be mentioned in the Invoice The Invoice should be prepared which can be from same series from which goods for home

consumption are cleared. A separate series of Invoice can also be maintained for export

Preparation of ARE-1 form

ARE-1 form has to be prepared in quadruplicate and should be as follows ORIGINAL – White TRIPLICATE – Pink DUPLICATE – Buff QUADRUPLICATE – Green QUINTUPLICATE - Optional (It is sufficient if there is colour band on the top or right hand corner as per aforesaid colour scheme)

It should be signed by manufacturer The Assessable value should be mentioned in the ARE-1 forms

Sealing of goods for export at factory

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Export goods are examined before despatch by central excise officers Sealing normally done by Inspector, Superintendent under export schemes and AC/DC in

exceptional cases The sealing of each package or container shall be as specified by commissioner. The excise officer will make endorsement on all copies of ARE-1

The excise officer may send the triplicate copy either by post or by handing over to the exporter in a tamper proof sealed cover.

Clearance of goods for export by customs officer (At the place of export)

The goods after Sealing by excise officers are taken to customs port. When export goods are examined before despatch by excise officers, the goods are not

examined by customs officer at port or airport of shipment, unless seals are found to be tampered.

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper proof sealed cover

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Filing rebate claim

It must be filed within 1 year from the date of export. Application on letter head claiming rebate along with

a) Original ARE-1 b) Invoice c) Self attested copy of shipping bill d) Self attested copy of bill of lading e) Disclaimer certificate where claimant is other than exporter.

The market price of excisable goods at the time of exportation should not be less than the amount of rebate of duty claimed

Rebate claim below Rs. 500 is not acceptable.

Rebate will be granted Note: Where the rebate is claimed by EDI system, the duplicate copy of ARE 1 is sent to the Excise Rebate Audit section at the place of export. The officer for rebate claim could be AC/DC or Maritime commissioner.

Can export rebate claim be denied merely for non-production of original and

duplicate copies of ARE-1 when evidence for export of goods is available?

UM Cables Limited v. Union of India 2013 (293) ELT 641 (Bom.)

The High Court, therefore, held that the procedure cannot be raised to the level of a mandatory

requirement. Rule 18 itself makes a distinction between conditions and limitations subject to

which a rebate can be granted and the procedure governing the grant of a rebate. It was held

by the High Court that while the conditions and limitations for the grant of rebate are

mandatory, matters of procedure are directory.

The High Court ruled that non-production of ARE-1 forms ipso facto cannot invalidate rebate

claim. In such a case, exporter can demonstrate by cogent evidence that goods were exported

and duty paid and satisfy the requirements of rule 18 of Central Excise Rules, 2002 read with

Notification No. 19/2004 CE (NT).

Rule 18 of the Central Excise Rules, 2002 provides that where any goods are exported,

the Central Government may, by notification, grant rebate of duty paid on such excisable goods

OR duty paid on materials used in the manufacture or processing of such goods and the rebate

shall be subject to such conditions or limitations, if any, and fulfilment of such procedure, as

may be specified in the notification.

In case of export of goods under rule 18 of the Central Excise Rules, 2002, is it

possible to claim rebate of duty paid on excisable goods as well rebate of duty paid

on materials used in the manufacture or processing of such goods?

Rajasthan Textile Mills v. UOI 2013 (298) E.L.T. 183 (Raj.)

Decision: Under rule 18 of the Central Excise Rules, 2002, grant of rebate of duty paid is

available either on excisable goods or on materials used in the manufacture or processing of

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such goods i.e. on raw material. Thus, it is open to claim the benefit of rebate either on

manufactured/finished goods or on raw material, but not on both.