CENTRAL EXCISE

A. SOME IMPORTANT ASPECTS

GENERAL – Central Excise Duty is renamed as “Central Value Added Tax” (CENVAT) w.e.f. 12.5.2000.

1. BASIC CONCEPTS

Basic pre-requisites for levy of Central excise duty – In order to acquire basic working knowledge in relation to law on Central Excise, understanding of some of the basic concepts of Central Excise would be very much essential.

In order to attract levy of excise duty: STEP 1 - There should be production or manufacturer of goods in India: STEP 2 - Such production or manufacturer should result in creation of excisable goods, and STEP: 3 - Such excisable goods should be specified in the Schedule to Central Excise Tariff Act, 1985 (CETA).

2. MANUFATURE

In order to levy central excise duty, it is necessary that a new article should come into existence as a result of manufacturing activity. Unless there is manufacture, excise duty is not payable. (Hawkins Cookers Ltd. V/s Collector – 1997 ELT 507 S.C.). Section 2(f) of the Central Excise Act,1944 (CEA) defines “manufacture” as “manufacture” includes any process: (i) incidental or ancillary to the completion of a manufactured product; and (ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985, as amounting to manufacture, or (iii) which in relation to goods specified in Third Schedule, [MRP Goods] involves packing or repacking of such goods in a Unit container or labeling or rebelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

The statutory definition would indicate that “manufacture” under Central Excise has to be construed in Two ways: (A) “general concept” of manufacture: (B) “deemed concept” of manufacture.

1. General concept- The general concept of manufacture has been a subject matter of discussions in a number of cases by the Supreme Court. Some of the leading case laws on the subject are UOI vs. Delhi Cloth and General Mills Co. Ltd. 1 ELT J 199 (SC), South Bihar Sugar Mills vs. UOI 2 ELT J 336 (SC), Empire Industries Ltd. Vs. UOI 20 ELT 179 (SC), Food Packers 6 ELT 343 (SC), Sterling Goods vs. State of Karnataka 26 ELT 3 (SC), Siddheshwari Cotton Mills P. Ltd. vs. UIO 39 ELT 498 (SC), Mafatlal Fine Spg. & Mfg. Co. Ltd. vs. CCE 40 ELT 218 (SC), State of Maharashtra Vs Mahalaxmi Stores 152 ELT 30 S.C. In the Delhi Cloth Mills case the Apex Court observed that: ‘an activity or process, in order to amount to manufacture must lead to emergence of a new commercial product, different from the one with which the process was started. In other words, it should be article with different name, character and use.’ ‘Manufacture’ implies a change but every change in raw material is not manufacture. Something more is necessary. There must be such transformation of raw material that a new and different article emerges having a distinct name character and use. In the case of Mahalaxmi Stores, the Hon. Supreme Court observed that “Every type of variation of goods or finishing of goods would not amount to manufacture unless it results in emergence of new commercial commodity. Repair or reconditioning of an article does not amount to manufacture because no new goods come into existence.
2. Deemed concept of manufacture- Section 2(f) (ii) and (iii) of CEA, provides for concept of deemed manufacture. If an activity, in relation to specified goods, is specified as amounting to manufacturing activity in the relevant Chapter Notes/Section Notes of CETA, then such activity would amount to manufacture and the resultant products would attract levy of excise duty. [Section 2(f) (ii)]. To illustrate, normally an activity of repacking from a bulk pack to smaller packs would not amount to manufacture under the general concept. However in Chapter 29 such an activity is specified as amounting to manufacture by way of a Chapter Note. Such activity would therefore be deemed to be manufacture in relation to goods falling under Chapter 29 and attract levy of Central Excise duty, irrespective of the principles relating to manufacture under the general concept. Similarly Section 2(f) (iii) provides for a deeming fiction that in relation to goods specified in Third Schedule, [MRP goods] the activities of packing or repacking in a Unit container or labeling or rebelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer, shall amount to “manufacture”.

3. MANUFACTURER

The Excise Duty is payable by a manufacturer. The concept of ‘manufacturer’ is relevant for fixation of liability to Central Excise Duty. Section 2 (f),of the CEA, while defining ‘manufacture’ states that the word ‘manufacturer’ shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

As per the statutory definition there are two categories of the persons who can be termed as a manufacturer. (i) persons who manufacture the goods themselves on their own account (including on job work basis) and (ii) persons who get the goods manufactured through hired labour. If the hired labour is an employee, his employer will be considered as manufacturer. The relationship of servant and master must be established in order to treat the employer as manufacturer.

4. EXCISABLE GOODS

According to Section 2(d) of CEA: “Excisable goods” means goods specified in the first schedule and the second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty and includes salt”.

Thus any manufactured product becomes “excisable goods” as defined under Central Excise Act, 1944.The product or article should be ‘goods’. The term “goods” has not been defined under CEA/CER. Article 366 (12) of the Constitution of India which gives an inclusive definition of the term “goods” states that: “Goods” includes all materials, commodities and articles”.

1. The Hon Supreme Court in DCM case has observed that an article can be called ‘goods’ if it is known to the market as such and ordinarily come to the market for being bought and sold. Actual sale of the article is not important but it must be capable of being bought and sold.
2. The concept of ‘goods’ and test of marketability has been discussed in detail in Supreme Court ruling in the case of Moti Laminates Pvt. Ltd. vs. CCE 76 ELT 241 (SC), wherein it is observed that: “The duty of excise being on production and manufacture which means bringing out a new commodity, it is implicit that such goods must be usable, moveable saleable and marketable. The duty is on manufacture or production but the production or manufacture is carried on for taking such goods to the market for sale. The obvious rational for levying excise duty, linking it with production or manufacture is that the goods so produced must be a distinct commodity known as such in common parlance or to the commercial community for purposes of buying and selling”. An Explanation has been added to Section 2(d) to define the term “goods” as including any article, material or substance which is capable of being bought and sold for a consideration and that such goods shall be deemed to be marketable.
3. It may happen that in the course of manufacture of final products, various other articles arise at intermediate stages which are elementary or unfinished or which are crude, impure or unrefined or which have short shelf life. Such articles not being acceptable to the consumer or being capable of coming to market to be bought and sold are not ‘goods.’
4. Immovable property or articles embedded to earth, buildings and civil structures are also not goods because they can not ordinarily come to the market to be bought and sold.
5. Information technology/intellectual property may be an intangible asset but the moment they are put on a media (paper, cassettes, diskettes, etc.) and supplied on such media, they become chattel or goods.
6. An article or product may fall under a specific heading/sub-heading in the Schedule to CETA but upon application of test of marketability, as applied by the Hon. Supreme Court from time to time, it may not constitute ‘goods’ so as to attract excise duty.

5. CLASSIFICATION -Central Excise Tariff, Classification of excisable goods and general principles of classification.

1. Proper classification of excisable goods is essential for determination of correct Central excise liability. Classification consists of determining the Chapter, Heading and Sub-headings of Central Excise Tariff Act, 1985 under which the goods are covered. Classification is also relevant for determining eligibility to exemptions which are mostly specified with reference to the tariff headings/sub-headings of CETA.
2. The rates of Central Excise duty are specified in the Schedule to CETA which contains the Rules of Interpretation and the Section/Chapter Notes which serve as statutory guidelines for classification. The said Schedule contains 96 Chapters grouped in 20 sections, each section relating to a broad class of goods. With effect from 1.3.2005, Central Excise Tariff (Amendment) Act, 2004 has replaced the 6 digit classification codes by new 8 digit classification codes in Schedules 1 and 2 of the CETA 1985. Accordingly classification of every product now consists of 8 digits. The new coding system is in line with the system adopted for export-import tariff. For the first time, a standard unit of quantity is also specified for each tariff item to facilitate the collection, comparison and analysis of trade statistics.
3. Some of the general principles of classification of goods, laid down by the Supreme Court and other judicial authorities, are explained hereunder in brief.

1. Classification is to be based on statutory definition, if any, and in the absence thereof on trade or common parlance, [CCE vs. Fusebase Eltoto Ltd. 67-ELT 30 (SC): Indian Cable Co. Ltd. Vs. CCE – 74 ELT 22 (SC); Metagraphs Pvt. Ltd Vs. CCE-88 ELT 639 (SC): United Copiex (India) Pvt. Ltd. vs. CST – 94 ELT 28 (SC)]
2. It is an accepted principle of classification that the goods are to be classified according to their popular meaning as understood in the commercial sense and not as per the scientific/technical meaning [Plasmac Machine Mfg. Co. Pvt. Ltd. Vs. CCE 51 ELT 161 (SC)]. However, where the tariff heading/sub-heading itself uses highly scientific and technical terms, the scientific/technical meaning shall take precedence over the commercial/trade parlance [UOI vs. Sahney Steel and Press Works Ltd. 58 ELT 38 (SC)]. Also, classification according to commercial nomenclature or trade understanding should be avoided where the statutory context in which the tariff entry appears requires otherwise. [Akbar Badruddin Jiwani vs. Collector of Customs 47 ELT 161 (SC)].
3. Normally, classification is to be done with reference to the specific wordings of the headings/sub-headings as mentioned in the tariff. However, where the goods in question are capable of being called by more than one name, the classification is to be done with reference to the most appropriate name and for this purpose, the basic functional/character/use would become more relevant. The functional aspect was considered by the Supreme Court in Atul Glass Industries Ltd. vs. CCE 25 ELT 473 (SC): Indian Tool Manufacturers vs. CCE 74 ELT 12 (SC): CCE vs. Kumudam Publication (P) Ltd 96 ELT 226 (SC).
4. Section 37B of CEA empowers the CBEC to issue instructions to field formations for the purpose of maintaining uniformity in the matter of classification. Such instructions / guidelines are neither binding on the assessee nor the Appellate/Adjudicating authorities. However, these are binding on the departmental authorities and the courts may compel compliance with such instructions as are for the benefit of the assessee [British Machinery Supplies Co. Vs. UIO 86 ELT 449 (SC), Ranadey Micronutrients vs. CCE 87 ELT 19 (SC) CCE vs. Koreas (India) Ltd 89 ELT 441 SC].
5. An established practice of classification cannot be changed without cogent reasons, Refer Collector v. Tata Iron & Steel Co. 13 ELT 113 CEGAT. The Civil appeal filed by CCE was dismissed [Refer 94 ELT A133 (SC)]. Any change in classification of goods can take effect prospectively only [CCE. Vs. Cotspun Ltd. 99 ELT 24 (SC)].
6. Section 11A empowers the department re-opening of a decided classification and assessment but re-opening is not permissible on account of mere change of opinion Shahnaz Aruvedics v/s CCE 2004 (173) ELT 337(All). The Department appeal against this judgment is dismissed by the Hon. Supreme Court.

6. VALUATION

Since most of the excise duty rates specified under CETA are on ad valorem basis, valuation is very important for determination of excise duty liability. CEA provides for 3 methods for valuation viz. (a) fixation of Tariff Values u/s. 3 (2) of CEA by the Government (b) Determination of Assessable Value in accordance with provisions of Section 4 of CEA and (c) Determination of value with reference to Retail Sale Price (RSP) of the goods in accordance with provisions of Section 4A of CEA.

6.1. Tariff Value – In respect of few products Tariff Value is fixed by the Central Government. These values are incorporated in the relevant tariff entry itself and the Excise duty for such products are to be paid with reference to the Tariff Values.

6.2 Transaction Value. — W.E.F 1.7.2000 a significant change is made whereby the then existing concept of normal price based valuation is replaced by Transaction Value basis. New valuation Rules are also notified w.e.f. f. 1.7.2000. The new system is explained hereinafter in brief.

1. In respect of almost all the excisable goods (exception being few goods where Tariff Value is fixed in terms of Section 3(2) of CEA), the value is now to be determined on the basis of “transaction value” which is defined very broadly. It includes all elements of cost imparting value to the goods on the basis of the principles enunciated by Supreme Court in the cases of Bombay Tyres International Ltd. and MRF Ltd. It now specifically includes any amounts that a buyer is required to pay in connection with sale or by reason of sale and includes amounts in respect of (a) Advertising & Publicity (b) Marketing & Selling organization expenses (c) Storage (d) Outward handling (e) Servicing (f) Warranty (g) Commission.
2. The concept of normal price based on “wholesale price” is done away with and therefore, each sale now could have a different value based on specific transaction value of that sale transaction. In cases where the sale price is cum duty price, transaction value will be considered as inclusive of excise
3. Department Circular No.354/81/2000 dated 30.6.2000 clarifies that following charges, if separately recovered from buyers, would be includible in value of goods (a) Packing charges, ordinary or special (b) Warranty charges for optional or mandatory warranty (c) Advertising or publicity charges recovered from buyers.
4. In a recent case of CCE v/s Fiat India Pvt Ltd (2012-TIOL-58-SC-CX), the Apex Court has held that where the assessee so arranges to sell his excisable goods for a price which is less than cost of production plus manufacturing profit of such goods, then such loss making price can not be considered to be normal price as contemplated under Section 4(1) (a) of e CEA and valuation has to be done on the basis of Valuation Rules.  

Following would not be includible in determining value.

1. Interest charged on receivable for delayed period, i.e. beyond normal credit period.
2. Discounts – Cash discount, quantity discount, yearend discount and like.

1. Ordinarily, “transaction value” is not applicable in the following circumstances (a) where goods are not sold: or (b) the time of delivery is other than that of “removal”: or (c) the place of “removal” is not the place of delivery or (d) price is not the sole consideration for sale or (e) transactions are between related parties.
2. Difference in time of removal and delivery – The value, in such cases, is required to be determined on the basis of the price at which such goods are sold for delivery at any time nearest to the time of removal of such goods after making reasonable adjustment for the time difference.
3. Difference in place of removal and delivery – In such cases, the actual transport cost incurred for transport of goods from the place of removal to the place of delivery is to be excluded from the transaction value on an average or equalized basis.
4. Clearances to depots, premises of consignment agents or any other premises. – If goods are cleared from place of manufacture or bonded warehouse and transferred to depot, premises of consignment agent or any other place of premises from where they are sold, the value of such goods would be the normal transaction value, i.e. the transaction value at which greatest aggregate quantity of such goods are sold from such place. It there is no sale at the time of removal, the normal transaction value at the time of nearest to the time of removal is required to be adopted.
5. Price not the sole consideration for sale – In such cases, additional consideration flowing directly or indirectly from the buyer is required to be added to the transaction value. It is now clarified, by way of an Explanation, that money value of the following goods and services supplied free of cost or at concessional price for use in connection with manufacture of goods would have to be added to the transaction value if the same is not included in sale price.

• Value of materials, components, parts and similar items relatable to such goods;
• Value of tools, dies, drawings, blue prints, technical maps and charts and similar items used in the production of such goods;
• Value of material consumed, including packaging materials, in the production of such goods;
• Value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and used for the production of such goods.

Such value may be apportioned in appropriate circumstances; e.g. dies may be used in manufacture of number of pieces, in which case, the money value thereof would have to be apportioned over total pieces manufactured by use of such dies.

1. Captive consumption – In such cases, the value is now deemed to be 110% {115% up to 5.8.2003} of the cost of manufacture or production.
2. Sale to or through related person – In cases where the persons are deemed to be related on account of (a) Their being relatives (b) Their being relatives and distributor or sub distributor or such distributor and (c) Their being associated in a manner that they have direct or indirect interest in the business of each other the value would be the price at which maximum aggregate quantity of such goods is sold by such related person to an unrelated person at the time of removal of goods. If, however, the related person does not sell to unrelated person, the value shall be the price at which goods are sold to the related buyer who sells such goods in retail.

If the related person does not sell goods but consumes them captively, the value would be the value of would be 110% of cost of manufacture of such goods.

The same principles would also apply where the relationship is on account of the manufacture and buyer being interconnected undertaking and the two undertakings are related in the manner specified above or are holding and subsidiary.

1. For goods manufactured on job work basis, on behalf of a person, commonly known as principal manufacturer, Rule 10A , inserted w.e.f.1-3-2007, prescribes that value for payment of excise duty would be based on the sale value at which the principal manufacturer sells the goods as against the practice of valuation of such goods as cost of materials plus job charges.
2. In all other cases, the value is required to be determined using reasonable means consistent with the principles and general provisions of the valuation rules and section 4(1) of the CEA.

6.3. RSP based levy--Some of the important features of RSP based assessments are given hereafter in brief.

• Section 4A of CEA (inserted w.e.f. 14.5.1997) empowers Central Government (CEG) to specify goods on which duty will be payable based on ‘retail sale price’.
• The goods should be covered under provisions of Legal Metrology Act, 2009.
• CEG can permit reasonable abatements (deductions) from the ‘retail sale price’. While allowing such abatement, CEG shall take into account excise duty, sales tax and other taxes payable on the goods.
• If more than one ‘retail sale price’ is printed on the same packing, the maximum of such retail price is to be considered.
• The ‘retail sale price’ is the maximum price at which excisable goods in packaged forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commission payable to dealers and all charges towards advertisement, delivery, packing, forwarding charges etc.
• CEG is required to issue a notification in the Official Gazette specifying the commodities for which the provision is applicable and the abatements permissible.

More than 120 commodities are covered under RSP based levy.

The definition of RSP, as mentioned in Explanation I to Section 4A of CEA, covers cases where the governing law on such goods permits declaration of RSP exclusive of any tax, local or otherwise. For example, Drug Price Control Order (DPCO) prescribes for declaration of RSP excluding local taxes in respect of certain medicines falling in its ambit. Provisions of Section 4A of CEA are also amended so as to:

• Provide that in case of affixing higher RSP subsequent to clearance of goods on payment of duty on a lower RSP, the excise duty would be leviable on the basis of such higher RSP affixed later on.
• Assume powers to ascertain the RSP of goods having no RSP declared or the declared RSP being tampered with, obliterated or altered and;
• Assume power to make rules for such ascertainment.

The central Government has notified, w.e.f. 1.3.2008, Central Excise (Determination of Retail Sale price of Excisable Goods) Rules, 2008 to provide for the manner of determination of retail sale price where the same is not declared on the packages or tempered or altered.

6.4. Capacity based levy – Section 3A provides for levy of excise duty on the basis of capacity of production in respect of notified goods. The Central Government is empowered to notify such goods and also the procedure for the payment of duty on such goods.

7. CENVAT

CENVAT Scheme is explained in a concise form for easy understanding;

7.1. CENVAT Scheme is comprised in CENVAT Credit Rules, 2004 notified vide Notification No. 23/2004-C.E. (N.T.) effective from 10.9.2004.

7.2. All final products i.e. excisable goods manufactured or produced by an assessee, in the factory of a manufacturer are eligible for Cenvat Credit. Credit is now allowed in respect of Cenvat and service tax across goods and services.W.e.f.10.9.2004, a manufacturer is allowed to take Cenvat credit of not only excise duty paid on capital goods and inputs but also service tax paid on input service used for manufacturer of final products.

7.3. “capital goods” (CG) eligible for CENVAT Credit are:

1. All goods falling under Chapter 82,84,85,90,and heading No. 6805 and sub-heading No. 6804 of the First Schedule to the CETA;
2. Pollution control equipment;
3. components, spares and accessories of the goods specified at (i) and (ii) above.
4. Moulds and dies, jigs and fixtures
5. Refractory and refractory materials;
6. Tubes and pipes and fittings thereof
7. Storage tank
8. Motor Vehicles other than those falling under Tariff headings 8702,8703,8704,8711 and their chassis.

dumpers or tippers /falling under chapter 87 of the First Schedule to the Central Excise Tariff Act, 1985 Used

1. in the factory of the manufacturer of the final products ;or
2. outside the factory of manufacturer for generation of electricity for captive use within the factory; or
for providing output service.

[Note: “Capital goods” do not include any equipment or appliances used in an office. As far as service providers are concerned, motor vehicles, dumpers tippers etc are capital goods only for certain specific service providers only]

7.4 “inputs” eligible to CENVAT Credit are all goods used in the factory by manufacturer of final products, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacturer of final products or for any other purpose, within the factory of production, and also includes lubricating oils, greases, cutting oils and coolants.

“Inputs” does not include goods used for construction of a civil structure, laying foundation of a building (except for provision of certain taxable services), motor vehicles, and any goods such as food items, goods used in a residential colony, guest houses, when such goods are used primarily for personal use or consumption of any employee or any goods which have no relationship whatsoever with the manufacture of final product.

7.5. Input service - means any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacturer of final products and clearance of final products up to the place of removal and includes services used in relation to  modernization, renovation, or repairs of a factory or an office relating to such factory, advertisement or sales promotion, market research, storage up to a place of removal, procurement of inputs,  accounting, auditing, financing, recruitment, and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outwards transportation up to the place of removal. However, services in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health or fitness centre, life insurance, health insurance, and travel benefits extended to employees on vacation such as leave or home travel concession, when such services are used primarily for personal use or consumption of any employee are excluded from the definition of “input service”

7.6 The Specified Duties (SD) that are eligible for availment of credit under CENVAT Scheme are;

1. The duty of excise specified in the First Schedule to CETA;
2. The duty of excise specified in the Second Schedule to CETA;
3. The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978);
4. The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance)Act, 1957 (58 of 1957);
5. The National Calamity duty leviable under Clause 129 of Finance Act, 2001 as amended by clause 161 of the Finance Act, 2003.
6. The Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act 2004.
7. The additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v), above,
8. The additional duty of excise leviable under section 157 of the Finance Act, 2003.
9. The service tax leviable under section 66 of the Finance Act, 1994.
10. The Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act 2004.
11. The secondary and Higher education Cess on taxable services leviable under section 136 read with Section 140 of the Finance Act, 2007.
12. The additional duty of excise leviable under Section 85 of the finance Act,2005

Paid on any inputs, CG or input service received in the factory on or after the tenth day of September 2004.

7.7 CENVAT Credit can be availed in respect of SD paid on Inputs/CG received and used in the factory. However, no credit of SD paid shall be allowed on CG which is exclusively used in the manufacture of exempted goods.

7.8 CENVAT Credit cannot be availed if a manufacturer claims depreciation under ITA on the SD paid on such CG under ITA.

7.9 CENVAT Credit in respect of inputs can be taken immediately on receipt of inputs in the factory of the manufacturer.

7.10 CENVAT Credit in respect of CG received in a factory can be taken to the extent of 50% of SD paid on such CG in the financial year of receipt of such CG and the balance 50% of credit can be taken in the subsequent financial year(s) subject to the condition that CG (other than components, spares, accessories, refractors and goods of Ch. 68.02/6801.01 CETA) are still in possession and use of the manufacturer in such year. However, an eligible SSI unit can take the 100% Cenvat credit duty paid on of CG goods in the year of installation.

7.11 Credit in respect of input service can be taken on or after the day on which payment is made of the value of input service and the service tax as indicated in bill/invoice.

7.12 The CENVAT Credit may be utilized for payment of any duty of excise on any final products manufactured by the manufacturer or for payment of duty on inputs or CG themselves if such inputs are removed as such or after being partially processed, or such CG are removed as such.

7.13 Credit in respect of SD specified in 7.6 (iii) and (v) as also such duties included in (vi) above shall be utilized only towards payment of respective duties on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves if such inputs are removed as such or after being partially processed.

7.14 Credit in respect of Education Cess can be utilized for payment of education Cess only.

7.15 CENVAT Credit shall be allowed even if any inputs or CG as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final product, or for any other purpose, and it is established form the records, Challans or memos or any other document produced by the assessee availing the CENVAT Credit that the goods are received back in the factory within 180 days of their being sent to a job worker. If the inputs or the CG are not received back within 180 days the manufacturer shall pay an amount equivalent to the CENVAT Credit attributable to the inputs or CG by debiting the CENVAT Credit or otherwise. However, the manufacturer can take the CENVAT Credit again when the inputs or CG are received back in his factory.

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

7.17 In cases where CENVAT Credit of duty paid inputs which are used in manufacture of both, dutiable and exempted FP and separate records are not maintained by such manufacturer then: (i) the manufacturer is required to debit and amount equivalent to the credit availed on inputs at the time of clearance of such FP from the factory; (ii) In other cases ,proportionate Cenvat credit used for manufacture of exempted goods or an amount equal to 6% of total price (excl. taxes) of exempted FP is required to be debited at the time of clearance of such FP from factory.

7.18 The above provisions would not apply to clearances to FTZ, SEZ, EOU, EHTP, STP, for specified international projects, for exports under Bond and gold or silver falling under Chapter 71 of CETA arising in the course of manufacture of copper or zinc by smelting, power projects (subject to conditions).(refer rule 6(6) of CCR 2004

7.19 CENVAT Credit can be taken by the manufacture on the basis of invoice, Bill of Entry or any other specified documents indicating payment of duty. Credit would be admissible even if inputs/CG are purchased from a First Stage/ Second Stage dealer. A list of specified documents for availment of CENVAT Credit is given hereafter.

7.20 Manufacturer of FP is required to maintain proper records for the receipt, disposal, consumption and inventory of inputs/CG in which relevant information regarding value, duty paid, supplier etc. is recorded.

7.21 The manufacturer of FP is required to submit within 10 days from the close of each month a monthly return in the prescribed form.

7.22 Unutilized CENVAT Credit on account of change in ownership or change in site of factory resulting from sale, merger, amalgamation, lease or transfer to a Joint Venture is permitted to be transferred.

7.23 Any amount of credit earned by a manufacturer under CENVAT Credit Rules, 2002; as it existed prior to 10.9.2004 and remaining unutilized on that day, shall be allowable as CENVAT Credit to such manufacturer.

7.24 Credit of SD paid on inputs used in FP cleared for exports can be refunded in cash, under certain circumstances, provided the manufacturer does not avail duty drawback or claim rebate of duty under CER.

7.25 Action for recovery of any CENVAT Credit wrongly availed/utilized can be initiated by CED within 1 year/5 years depending upon the circumstances.

7.26 Mandatory interest is payable at the rate of 13% p.a. from the first day of the month succeeding that in which duty ought to have been paid.

7.27 Under certain circumstances mandatory penalty up to an amount equivalent to the amount of credit disallowed can be levied.

List of eligible documents for availment of CENVAT Credit.

The CENVAT Credit shall be taken by the manufacturer on the basis of any of the following documents, namely;-

1. an invoice issued by –

1. manufacturer for clearances of-

• inputs or capital goods from his factory or from his depot or from the premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer;
• Inputs or capital goods as such;

2. an importer
3. an importer from his deport or from the premises of the consignment agent of the said importer if the said depot or the premises, as the case may be, is registered in terms of the provisions of Central Excise Rules, 2002.
4. a first stage dealer or a second stage dealer, in terms of provisions of Central excise Rules 2002.

2. a supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in terms of the provisions of Central Excise Rules, 2002 from his factory or from his deport or from the premises of the consignment agent of the said manufacturer or importer or from any other premises from where the goods are sold by, or on behalf of, the said manufacturer or importer, in case additional amount of excise duties or additional duty of customs leviable under section 3 of the Customs Tariff Act, has been paid, except where the additional amount of duty became recoverable from the manufacturer or importer of inputs or capital goods on account of any non-levy or short-levy by reason of fraud, collusion or any willful misstatement or suppression of facts or contravention of any provisions of the Act or of the Customs Act, 1962 or the rules made hereunder with intent to evade payment of duty.

Explanation: - For removal of doubts, it is clarified that supplementary invoice shall also include Challans or any other similar document evidencing payment of additional amount of additional duty of customs leviable under section 3 of the Customs Tariff Act:

3. a bill of entry;
4. a certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office.
5. A Challans evidencing the payment of service tax by the person liable to pay service tax under sub clause (iii) and (iv) of clause (d) of sub rule (1) of rule (2) of service tax Rules 1994,
6. An invoice, a bill or Challans issued by a provider of input service on after 10 day of September 2004
7. An invoice, a bill or Challans issued by an input service distributor under rule 4A of the Service tax Rules 1994.
8. Challans for payment of service tax on reverse charge basis.

8. SSI EXEMPTION SCHEME: The Central Excise Notifications granting concessions based on Value of Clearances of units are referred to as “SSI Exemption Scheme”. Presently the major portion of duty exemption/concessions are granted under Notifications 8/2003 dated 1.3.2003 and up to 31.3.2005 by Notification No.9/2003. dated 1.3.2003. {Notification No.9/2003. dated 1.3.2003.is withdrawn from 1.4.2005} The Basic Conditions required to be complied with for availment of benefit of SSI Exemption Scheme are explained hereafter in brief.

8.1 Specified Goods – The benefit is available in respect of excisable goods specified in the relevant Notification.

8.2 For availment of benefit of SSI Exemption Scheme it is essential that the aggregate Value of Clearances of all excisable goods cleared during the year for home consumption in the preceding financial year does not exceed Rs. 400 Lakhs.{Rs 300 Lakhs up to 31.3.2005.} The aforesaid limit will apply to clearances affected by (i) A single manufacturer from one or more factories or (ii) One or more manufacturers from the same factory.

8.3 For the purpose of determining the eligibility limit of 400/300 Lakhs of aggregate value of clearances of all excisable goods for home consumption, the following clearances are not taken into account.

1. any clearances bearing a brand name or trade name of another person, except in the following cases:

*Such specified goods being components or parts of any machinery, equipment or appliances are cleared for use as original equipment by following Chapter X procedure.

* Such specified goods bear brand name of Khadi and Village Industries Commission or a State Khadi & Village Industry Board or National Small Industries Corporation or a State Small Industries Development Corporation or a State Small Industrial Corporation.

* The specified goods are manufactured in a factory located in a rural area. (Specifically defined in Notifications)

* any clearances of the specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods.

* Clearances of strips of plastics used within the factory of production for weaving of fabrics or for manufacture of sacks or bags made of polymers of ethylene.

*Clearances of goods for export.

* Clearances of excisable goods without payment of duty to a unit in FTZ, SEZ, 100% EOU, EHTP or STP or to notified international organization

8.4. Meaning of Value while computing Clearances – For the purpose of these notifications, “Value” means.

1. In respect of specified goods which have been notified under Section 4A of CEA the value as determined in accordance with the provisions of that section.
2. In respect of specified goods other than those referred to in sub-clause (i), the value as determined in accordance with the provisions of Section 4 of CEA or the tariff value fixed under Section 3 of CEA.

8.5. Clearances to Bhutan and Nepal.

“Clearances for home consumption” shall include Clearances for export to Bhutan to Nepal.

8.6. Options available to SSI units –

OPTION I

Avail Exemption under notification 8/2003 w.e.f. 1.4.2003 as under.

Value of clearances Rate of duty CENVAT CREDIT

First clearances up to an aggregate value not exceeding one hundred fifty Lakhs rupees made on or after the 1st day of April in any financial year. Nil Not available in respect of inputs used in manufacture of specified goods cleared for home consumption up to first 100 Lakhs.

OPTION II

Pay full duty at normal rate application on the specified products and avail full CENVAT on eligible/notified inputs and capital goods under 8/2003. Such option shall be exercised before effecting first clearances at the normal rate of duty. Such option once exercised cannot be withdrawn during the remaining part of the financial year. While exercising this option the manufacturer shall inform in writing to the Deputy CCE/ACCE, with a copy to SCE.

8.7. For the purpose of availing exemption of the first clearances of Rs. 150 Lakhs, the following clearances shall not be taken into account.

1. Clearances chargeable to NIL rate of duty or exempted from payment of duty. (other than exemption based on quantity or value of clearances.}
2. clearances bearing brand name or trade name of another person who is not eligible for SSI Exemption Scheme.
3. Clearances of specified goods which are used for captive consumption within the factory.
4. Clearances of strips of plastics used within the factory of production for weaving of fabrics or for manufacture of sacks or bags made of polymers of ethylene or propylene.

9. REGISTRATION

Registration is the first step towards compliance of Central Excise. Other procedures follow thereafter.

9.1 According to Rule 9 of CER, every person, who produces, manufactures, carries on trade, holds private store room or warehouses or otherwise uses excisable goods is required to be registered. CBEC has been empowered to specify persons or class of persons who may not require such Registration.

CBEC has vide Notification No. 36/2001 – CE (NT) dt. 26.6.2001 exempted the following persons from Registration.

1. The persons who manufacture excisable goods which are chargeable to nil rate of duty or remain fully exempt from the whole of the duty of excise leviable thereon subject to conditions specified in that notification and other conditions Viz; (a) the manufacturer makes a declaration in the specified form while claiming exemption under this notification (b) that where the exemption from the whole of the duty of excise leviable on the said goods is granted, based on the value of clearances made in a financial year (hereinafter referred to as, “full exemption limit”), no such declaration shall be filed, if the aggregate value of the said goods cleared: (i) by a manufacturer from one or more factories or (ii) from any factory by one or more manufacturers, for home consumption, was less than the specified limit (Viz, 60 Lakhs up to 31.3.2005 and 90 Lakhs from 1.4.2005)) during the preceding financial year or in case of a new factory or manufacturer, such value of clearances is estimated to remain less than the specified limit during the current financial year.
2. Every manufacturer who gets his goods manufactured on his account from any other person subject to the conditions that the said manufacturer authorizes the persons, who actually manufactures or fabricates the said goods to comply with all procedural formalities under CEA/CER.
3. The persons manufacturing excisable goods by following the warehousing procedure as required by or under the Customs Act, 1962 subject to the specified conditions.
4. The person who carries on wholesale trade or deals in excisable goods except first stage dealer or second stage dealer as defined in CENVAT Credit Rules, 2004;
5. The person who uses excisable goods for any purpose other than for processing or manufacturer of any goods availing benefit of exemption extending concessional rate of duty.
6. Manufacturer exporter and 100% EOU having no clearances for home consumption. Clearances for exports to Bhutan & Nepal are not considered as exports for this purpose.

9.2 In order to avail exemption from registration a one-time declaration is required to be filed in prescribed form. The Application is required to be made online in Form A-1 and a copy of the printout signed by the manufacturer is required to be submitted.

9.3 The application for registration is required to be made prior to or within 30 days of the commencement of manufacture or engaging in the specified activities.

9.4 The application for Registration is required to be made to the jurisdictional SCE, in the prescribed form Viz; Annexure I. Vide Notification 30/2002- CE (NT) dt. 17.9.2002 a new format of Application for Registration has been notified w.e.f. 1.10.2002, which is common for both, manufacturers as well as dealers.

9.5 Other important points

1. Premises – Registration is required to be obtained in respect of premises. If there are more than one premises requiring registration separate registration is required to be obtained for each of the premises. In the context of manufacturers, premises would include factory where manufacturing activity is carried out or god owns where goods are stored.
2. Time limit – Registration is required to be granted within 7 days of receipt of application.
3. Validity – Each Registration Certificate granted shall be valid only for the premises specified in such certificate and the products mentioned therein.
4. Transfer of Business – Upon transfer of business by a registered person to another person, the transferee should obtain a fresh certificate.
5. Change in Constitution – Any change in constitution of a registered person to another person being a Firm, Company or Association of Persons is required to be intimated to the Central Excise office within 30 days of such a change for incorporation in the certificate.
6. De-Registration – Every registered person, who ceases to carry on the operation for which he is registered, shall de-register himself by making a declaration in the form specified in Annexure III and surrender his Registration Certificate with the Supt. Central Excise.
7. Revocation – Any Registration Certificate granted maybe revoked or suspended by the proper officer if the holder or any person in his employment is found to have committed a breach of any conditions of CEA/CER or has been convicted of an offence u/s. 161 r.w. section 109 or 116 of the Indian Penal Code.

10. PENAL PROVISIONS AND INTEREST

10.1. Penalty equivalent to duty payable (100% of duty) is leviable in case of cases involving fraud, or collusion, or willful misstatement, or suppression of facts. If in such cases if during an audit, investigation or verification it is found that duty has not been paid, but transactions to which such duty relates are recorded by the manufacturer in the specified records, then mandatory penalty would be at lower rate of 50 percent of instead of 100 percent of duty payable. ‘Specified records’ means records including computerised records maintained by the person chargeable with the duty, in accordance with any law for the time being in force. Even in cases where the Notice proposes levy of penalty equivalent to duty payable (100% of duty), the Central Excise officer is of the opinion that the transactions in respect of which notice was issued have been recorded in specified records the penalty equal to only 50 % of the duty will be leviable.

10.2. The provisions relating to compounding of penalty are also amended w.e.f.1-4-11 In the cases involving fraud, suppression etc., a person to whom Excise Officer has served the Show Cause Notice, is allowed to pay the duty demanded, interest thereon and compounded penalty equal to 25% of the duty within 30 days of the receipt of the Adjudication order. In such cases, if the person chargeable with duty pays the duty along with interest before the issuance of show cause notice, the penalty would be equal to one percent of such duty per month to be calculated from the month following the month in which such duty is payable, but not exceeding 25 % of such duty. W.e.f. 1-4 2012 the benefit of reduced penalty is available only if the reduced penalty is also paid within the specified period of 30 days.

10.3 W.E.F.1-4-11 where Show Cause Notice issued for extended period of five years in cases involving fraud, suppression etc, if charges of fraud suppression etc, alleged in the Show Cause Notice are not established, the demand for duty interest and penalty fails. It is now provided that in such cases if any appellate authority, tribunal or court concludes that such Notice is not sustainable for the reason that charges of fraud, suppression etc are not established against the person to whom the Notice was issued, the Central Excise officer shall determine the duty of excise payable by such person for the period of one year deeming as if the original Notice was issued for duty demand for one year only.

10.4. In terms of Section 11AA where the duty short levied or short paid etc. is deposited by a manufacturer after the duty is determined by a Central Excise officer he is required to pay interest for delayed payment of duty for a period from the expiry of three months from the date of determination to the date of actual payment of duty. However under section 11AB, if the short levied of short paid duty is deposited by the manufacturer voluntarily before any Notice is issued to him, interest for delayed payment is required to be paid for the period from the first date of the month succeeding the month in which duty is ought to have been paid. Sections 11AA and 11AB are substituted with new Section 11AA which now provides that notwithstanding anything contained in any judgment, decree, order or direction of the Appellate Tribunal or any court or in any other provisions of this Act or the rules made thereunder, the person who is liable to pay duty , shall ,in addition to the duty , be liable to pay interest at the rate as may be specified , from the date on which such duty becomes due up to the date of actual payment of the amount due, whether such payment is made voluntarily or after determination of the amount of duty. Central Government has fixed the rate of eighteen percent per annum vide the Notification No. 6/2011 dt 1^st March 2011. 10.5. First charge on property for Central Excise dues.-Section 11E is inserted in the Act, w.e.f. 1-4-11 to create a first charge on the property of a defaulter for recovery of Central Excise dues subject to the provisions of the Companies Act, 1956, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002. This implies that after the dues, if any, owing under these provisions, dues under the Central Excise Act, shall have first charge.

10.6. Search of Premises: Section 12 F is inserted in the Act to empower Joint Commissioner /Additional Commissioner of Central Excise, either himself or through any Central Excise Officer to search any place if he has reasons to believe that any documents or books or things, which shall be useful for or relevant to any proceedings under the Act are secreted in such place and seize such documents or books or things.

10, 7. Legal Metrology Act, 2009 -The Standards of Weights and Measures Act, 1976 is repealed and in its place ‘The Legal Metrology Act, 2009’ is enacted. Therefore in section 4A, the reference to The Standards of Weights and Measures Act, 1976 is substituted by reference to ‘The Legal Metrology Act, 2009’ with effect from 1^st March 2011.

10.8. Prosecution - Offences committed under CEA/CER could also become liable to prosecution proceedings. Any evasion of duty exceeding Rs. 50 Lakhs is liable for prosecution resulting into imprisonment up to seven years and file. Such an offence is made cognizable and non bailable.

Any evasion of duty not exceeding Rs. 50 Lakhs is also liable for prosecution resulting into imprisonment up to three years and/or file. However it appears that under executive instructions, a monetary limit of Rs. 25 Lakhs has been prescribed by CBEC for initiating prosecution proceedings.

11. CENTRAL EXCISE AUDIT

11.1 Audit Agencies – The Central Excise Audit is normally conducted by two agencies viz. (i) Central Excise Audit Department of Comptroller and Auditor General of India viz., (CAG) and (ii) The Internal Audit Department of the Central Excise and Customs.

11.2. CAG Audit – This audit conducted by the audit party from the office of the Accountant General is, in fact, conducted by the Central Excise Department (CED). It is a system of audit which confines itself to classification and valuation of excisable goods or leakage of revenue on account of misuse of CENVAT Credit. It also undertakes the checks relating to the availment of exemption from Excise Duty by virtue of any exemption notification issued by CED.

11.3. Department Audit – The CED has its internal audit wing which conducts selective audit of the manufacturing concerns. Large-scale assessee are generally subjected to audit once in a year whereas small scale and medium scale units are audited once in two years. The selection as well as frequency of the audit usually depends upon revenue potential and suspect status of the unit. An audit party consisting of one Supt. of Central Excise and two or three Inspectors spend two to seven days in a factory for audit depending upon volume of work involved. The audit party inter alia; (i) Check clearance invoices selectively with private and statutory records of the factory to see generally that valuation and assessment are correct. And (ii) Check statutory records with factory’s private records balance sheet etc.

11.4. New System of Department Audit – The Revenue department his introduced a new system of Central Excise Audit called EA – 2000 using professional, financial, accounting and audit principles to replace current system which is more a mechanical checking of records. A new excise audit manual and audit programme using course material prepared by ICWAI and National Academy of Customs, Excise and Narcotics (NACEN) and Revenue Canada, has been completed. The officers have been trained using the course materials prepared by the above institutes. Professional technique of “Risk Management”; i.e. assessment of risk to revenue in the selection of companies for excise audit has been introduced. New system of audit is based on company private records required to be maintained under the Companies Act as compared to greater reliance on excise records.

One of the significant aspects of new system is to make selection of companies more scientific rather than based on the normal rules of turnover. Various parameters such as excise payment, evasion of duty, goods manufactured, profit profile industry output-input norms, trend analysis and internal control systems would be used to decide whether a company shall be subject to in-depth audit or not. Detailed instructions in regard to New Excise Audit-2000 have been issued vide CBEC Circular No. 491/57/99-CX, dt. 28.10.1999.

11.5. Statutory Audit under CEA – Sections 14A and 14AA have been inserted in the CEA, by the Finance Act, 1995 and Finance Act, 1997, enacting provisions relating to Statutory Audit under specified circumstances.

1. Valuation Audit – Section 14A provides that if at any stage of enquiry investigation or any other proceeding, the Officers not below the rank of ACCE having regard to the nature of the case and interest of revenue is of the opinion that the value of the goods have not been correctly declared or determined by the manufacturer or any other person, he may, with the prior approval of the Chief CCE direct such manufacturer or such person to get the accounts of his factory, office, depot, distribution or any other place audited by the cost accountant/chartered accountant nominated by the Chief CCE. The said cost account and shall submit the report within the period specified by the CCE duly signed and certified by him mentioning therein particulars as may be specified.
2. Special CENVAT Audit – Section 14AA provides that if the CCE has reasons to believe that a manufacturer has availed or utilized credit of duty under the Rules which is not within the normal limit having regard to nature of excisable goods produced or manufactured the type of inputs used and other relevant factors as he may deem appropriate or has availed duty by reason of fraud, collusion or willful misstatement or suppression of facts, he may direct such manufacturer to get the accounts of his establishment audited by a Cost Accountant/chartered Accountant nominated by him. The Cost Accountant so nominated shall submit a report for such audit duly signed and certified by him to the said CCE.

11.6. Internal Audit by Assessee – In view of introduction of reforms in Central Excise procedures and consequent shifting or responsibility from CED to the assessee for determination of correct excise duty liability, conduct of regular audits by an assessee himself has gained increased significance.

Internal Central Excise Audit may be conducted (i) Departmentally by an assessee’s organization itself or (ii) By an independent firm of professional viz. Chartered Accountants/Cost Accountants/Company Secretaries.

Such audits could be carried out: On a continuous basis; On a periodic basis, for a specific area/activity. To illustrate; CENVAT Scheme, New Projects, Exports, Job Work, Inventory Refunds etc.

The types of functional areas which can be subject matter of Audit in relation to Central Excise are Concepts, Exemptions, Valuation, procedures, Documentation and Records.

12. SHOW CAUSE NOTICES/ADJUCATION AND APPEALS

12.1 A SCN is issued when a manufacturer is suspected of evasion or short payment of duty. After providing an opportunity to the assessee to represent his case an order of adjudication is passed raising the demand.

12.2 A manufacturer can file an Appeal to Comm. of CE, (Appeals) against order of CEO. No fees payable for this appeal.

12.3 An appeal against the order of Comm. Of CE (Appeal), is required to be filed before the Customs, Excise, & Service Tax Appellate Tribunal CESTAT. The Fees for filing an appeal to CESTST is Rs. 1000/- if the Demand is for Rs. 5 Lakhs or less. Rs. 5000/- if the demand is for more than 5 Lakhs but not exceeding Rs. Fifty Lakhs. and Rs. 10,000/- if the demand is more than Rs. Fifty Lakhs.

12.4 An appeal against the order of CESTAT is to be filed before the Hon. Jurisdictional High Court if the dispute involves determination of any question pertaining to law other than valuation and classification. In valuation and classification. Dispute appeal to be filed before the Hon. Supreme Court.

13. RETURNS

13.1 Monthly Return ER-1- Manufacturers of excisable goods are required to file monthly Return ER-1. (Excise Return) within ten days after the close of the month. For SSI units also within 10 days of the close of the quarter. This Return basically discloses the quantity manufactured, cleared, assessable value, duty payable Cenvat credit availed and duty paid through PLA etc. This is self assessment by the manufacturer himself. A manufacturer paying excise duty exceeding Rs. 50 lakhs, in cash or through Cenvat credit is required to file the return electronically on internet.

14. Recovery of dues from Third Party.

Section 11  provides that money due  to government from any person other than from whom money is due , can be recovered from that other person, after giving a proper notice, if that other person holds money for or on account of the first person.