Constitutional Background

Since Constitution of India is foundation and source of powers to all laws in India, it is necessary to understand general background of Constitution to enable us to understand and appreciate each individual Law. In India, Constitution which came into effect on 26th January 1950 is supreme and all laws and Government actions are subordinate to our Constitution.

INDIA IS UNION OF STATES - Our Constitution generally follows British pattern, though concepts of federal structure are borrowed from American and other constitutions. India is a Union of States. The structure of Government is federal in nature. Government of India (Central Government) has certain powers in respect of whole country. India is divided into various States and Union Territories and each State and Union Territory has certain powers in respect of that particular State. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Territories like Pondicherry, Chandigarh etc.

Taxation under Constitution - In the basic scheme of taxation in India, it is envisaged that (a) Central Government will get tax revenue from Income Tax (except on Agricultural Income), Excise (except on alcoholic drinks) and Customs (b) State Government will get tax revenue from sales tax, excise on liquor and tax on Agricultural Income (c) Municipalities will get tax revenue from octroi and house property tax.

Income Tax, Central Excise and Customs are administered by Central Government. As regards sales tax, Central Sales Tax is levied by Central Government while State Sales Tax is levied by individual State Governments. Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax collected in each State is retained by that State Government itself.

Article 246(1) of Constitution of India states that Parliament has exclusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution. (Called ‘Union List’). As per Article 246(3), State Government has exclusive powers to make laws for State with respect to any matter enumerated in List II of Seventh Schedule to Constitution. Seventh schedule to Constitution (referred to in Article 246) indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].

Union List relevant to taxation - List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :

ENTRY NO. 82 - Tax on income other than agricultural income.

ENTRY NO. 83 - Duties of customs including export duties.

ENTRY NO. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

ENTRY NO. 85 - Corporation Tax.

ENTRY NO. 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

ENTRY NO. 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.

ENTRY 92C - Service Tax (Not yet made effective)

ENTRY NO. 97 - Any other matter not included in List II, list III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)

State list pertaining to taxation - State Government has exclusive powers to make laws in respect of matters in list II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:

ENTRY NO. 46 - Taxes on agricultural income.

ENTRY NO. 51 - Excise duty on alcoholic liquors, opium and narcotics.

ENTRY NO. 52 - Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi).

ENTRY NO. 54 - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.

List III of Seventh Schedule, called “concurrent list”, includes matters where both Central Government and State Government can make laws. This list includes entries like Criminal Law and Procedure, Trust and Trustees, Civil procedures, economic and social planning, trade unions, charitable institutions, price control, factories, etc. In case of entries included in concurrent list, in case of conflict, law made by Union Government prevails. The only exception is that if law made by State contains any provision repugnant to earlier law made by Parliament, law made by State Government prevails, if it has received assent of President. Even in such cases, Parliament can make fresh law and amend, repeal or vary law made by State. [Article 254 of Constitution].

Liability of Central Excise Duty

Nature of Excise Duty

Power to levy excise duty is derived from Constitution. Excise is a duty on excisable goods manufactured or produced in India. Each word of this definition is vitally important to fix liability of Central Excise Duty.

Indian Constitution has given powers to Central Govt. and State Govt. to levy various taxes and duties. Powers of Central and State Govt. are enlisted in Seventh Schedule to our Constitution. Entry No. 84 of list I of Seventh Schedule to the Constitution reads as follows : “Duties of excise on tobacco and other goods manufactured or produced in India, except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics.”

In addition, in some cases, duty is imposed on 'deemed manufacture' also. Hence, central excise duty is presently levied under entry 84 and 97.

Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under entry No. 51 of list II of Seventh Schedule to the Constitution and it is called ‘State Excise’. The Act, Rules and rates for excise on liquor are different for each State (this is the reason why price of liquor varies widely from Goa to MP to Punjab. In some States, it is officially not available.).

Basic conditions of excise liability - Section 3 of Central Excise Act ( often called the ‘Charging Section’ ) states that ‘There shall be levied and collected in such manner as may be prescribed duties on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India - . - . -'. The words ‘goods which are manufactured or produced in India’ are same as those used in Entry No 84 to list I. Thus, the power to levy Central Excise duty is derived from the Constitution. This definition of charging section of Central Excise is vital, because it clearly signifies that there are four basic conditions for levy of Central Excise duty. (1) The duty is on goods. (2) The goods must be excisable. (3) The goods must be manufactured or produced (4) Such manufacture or production must be in India. Unless all of these conditions are satisfied, Central Excise Duty cannot be levied. Each of these requirements needs close scrutiny.

GOODS MANUFACTURED IN SEZ ARE ‘EXCLUDED EXCISABLE GOODS’ – A per section 3(1) of CE Act, duty is leviable on all excisable goods (excluding goods manufactured or produced in Special Economic Zones). Thus, goods manufactured or produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as ‘excluded excisable goods’ [The revised definition is made effective from 15-8-2003].

Taxable Event for Excise Duty - ‘Taxable event’ is that on happening of which the charge is fixed. It is that event, which on its occurrence creates or attracts the liability to tax. Such liability does not accrue at any earlier or later point of time - Goodyear India Ltd. v. State of Haryana (1990) 76 STC 71 (SC) = 1990 UPTC 198 = AIR 1990 SC 781. Tax becomes payable when liability to pay tax arises and liability to pay tax arises by the happening of the taxable event. - Kalwa Devadallain v. UOI (1963) 49 ITR 165

(SC) * M A Co. v. Asstt Commissioner (1964) 15 STC 487 (All HC).

In Re Sea Customs Act, 1878 - AIR 1963 SC 1760 = (1964) 3 SCR 787 (SC 9 member full bench), it was observed - 'Excise duty is not directly on the goods, but manufacture thereof. - . - . - Though both excise duty and sales tax are levied with reference to goods, the two are very different imposts. In one case, the imposition is on the act of manufacture or production, while in the other it is on act of sale. In neither case, therefore, can it be said that the excise duty or sale tax is directly on the goods, for in that event, they will really become the same tax' - confirmed in Shinde Brothers v. Dy Commissioner - AIR 1967 SC 1512 = (1967) 1 SCR 548, where it was held that excise duty is on goods and taxable event is manufacture or production of goods.

It has been held that in Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989 (44) ELT 598 (SC) = 1989(2) SCALE 804 = (1989) 4 SCC 592 that ‘manufacture or production in India’ of an 'excisable article’ is a ‘taxable event’ for Central Excise, though duty can be levied and collected at a later stage for administrative convenience - quoted with approval and followed in Shree Synthetics Ltd. v. UOI 1999(113) ELT 774 (SC 3 member bench). Removal from factory is not the 'taxable event'. In CCE v. Vazir Sultan Tobacco Co. Ltd. - 1996 (2) SCALE 603 = (1996) 13 RLT 291 = JT 1996 (3) (2 ?)112 = AIR 1996 SC 3025 = 1996 AIR SCW 1353 = 63 ECR 359 = 1996 (83) ELT 3 = (1996) 3 SCC 434 (SC - 3 member bench), Supreme Court has confirmed that the levy is and remains upon the manufacture or production alone. Only the collection is shifted to stage of removal. It is also confirmed that the removal of goods is not a taxable event. In Empire Industries v. UOI (1985) 20 ELT 179 (SC) = AIR 1986 SC 662 = (1985) 1 SCALE 1269 = (1987) 64 STC 42 (SC) = (1985) 3 SCC 314 = 1985 Supp (1) SCR 292 = (1986) 162 ITR 846 (SC), it was observed - 'Taxable event in Central Excise is the manufacture of excisable goods. - . - . - The sale or the ownership of the end-product is absolutely irrelevant for the purposes of 'taxable event' under Central Excise'.

Person liable to pay excise duty - Once duty liability is fixed, the duty can be collected from a person at the time and place found administratively most convenient for collection.

THE DUTY LIABILITY IN CASE OF MANUFACTURED GOODS - Rule 4(1) of Central Excise Rules makes it clear that excise duty is payable by the manufacturer or producer of excisable goods. In case where goods are allowed to be stored in a warehouse without payment of duty, the duty liability is of the person who stores the goods. Rule 4(1) makes it clear that goods can be removed from the place where they are manufactured or produced or warehoused, only on payment of duty.

Ownership of raw material is not relevant for duty liability. – CCE v. Mahindra & Mahindra 2001(132) ELT 632 (CEGAT). Duty demand is payable by manufacturer, even if it cannot be recovered from customer. – Snap Chem v. CCE 2001(137) ELT 235 (CEGAT).

DUTY LIABILITY IN CASE OF GOODS STORED IN WAREHOUSE - Rule 20 of CE Rules permit warehousing of certain goods in warehouses without payment of duty. These goods are coffee, petroleum products, benzene, tolune etc. In such cases, the duty liability is on the person who stores the goods.

DUTY LIABILITY IN CASE OF MOLASSES PRODUCED IN KHANDSARI SUGAR FACTORY - The other exception is in case of molasses produced in a khandsari sugar factory, the duty liability is of the procurer (i.e. purchaser) of such molasses. The duty is payable on the date of receipt of such molasses in the factory of procurer. The duty on molasses produced in khandsari sugar factory is payable only when the procurer procures the molasses for use in the manufacture of any commodity. Such commodity may or may not be excisable. [Rule 4(2) of CE Rules].  - - Validity of this rule has been upheld in Ranson Industries v. UOI 2003(151) ELT 53 (J&K HC DB).

DUTY LIABILITY IN CASE OF JOB WORK - Even in case of job work, the duty liability is of actual manufacturer and not of the raw material supplier.- GTC Industries v. CCE 2001(132) ELT 74 (CEGAT). - - However, a job worker manufacturing goods under notification No 214/86 is exempt from excise duty, as the raw material supplier undertakes that he will use these goods further to manufacture final product or clear for export or pay duty on such goods. [The only exception is in case of textile articles, as explained below].

Rate of duty as applicable on date of removal relevant - Though taxable event is 'manufacture', duty payable is as applicable on date of removal i.e. clearance from factory. In Wallace Flour Mills Co. Ltd. v. CCE 1989(44) ELT 598 = 1989(2) SCALE 804 = 186 ITR 440 = 1989(4) SCC 592 (SC), 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. It was held that duty is payable as applicable on date of removal.

State of goods at the time of removal is relevant - Goods have to be classified and valued in the state in

which goods are removed from the factory. Any further processing done after removal is not relevant.

Duty payable even when not collected - An assessee is liable to pay sales tax and the question whether he has collected it from consumer or not is of no consequence. His liability is by virtue of being an assessee under the Act. - American Remedies P Ltd. v. Govt of AP 1999(1) SCALE 30 = 113 STC 400 (SC 3 member bench).

Duty is a manufacturing expense from accounting point of view - Excise duty should be considered as a manufacturing expense and should be considered as an element of cost for inventory valuation, like other manufacturing expenses. Excise duty cannot be treated as a period cost.  - Guidance Note of ICAI on Accounting Treatment for Excise Duty - Chartered Accountant - July 2000.

Types of excise duties - Excise duties are of following types -

DUTIES UNDER CENTRAL EXCISE ACT - Basic duty is levied under Central Excise Act.

BASIC EXCISE DUTY TO BE TERMED AS CENVAT - Basic excise duty (also termed as Cenvat as per section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption notification, if any. – [section 3(1)(a) of CEA].

Basic excise duty is levied u/s 3(1) of Central Excise Act. The section is termed as ‘charging section’. The duty rate is generally 10.30% w.e.f. 27-2-2010including education and SAH cess [ It was 8% w.e.f. 24-2-2009 i.e. total 8.24%. Still earlier, it was 14% i.e. total 14.42%].

Education cess is payable @ 2% of the basic duty and Secondary and High Education Cess is 1% of basic excise duty.

EDUCATION CESS AND SAH EDUCATION CESS ON EXCISE DUTY - If excise duty rate is 8%, education cess will be 0.16% and SAH Education cess will be 0.08%. A provisions of Central Excise Act, including those relating to refunds, exemptions and penalties will apply to education cess and SAH cess.

EXCISE DUTY IN CASE OF CLEARANCES BY EOU – The EOU units are expected to export all their production. However, if they clear their final product in DTA (domestic tariff area), the rate of excise duty will be equal to customs duty on like article if imported in India. [proviso to section 3(1)]. Note that even if rate of customs duty is considered for payment of duty, actually the duty paid by them is Central Excise Duty. The rate of customs duty is taken only as a measure. The EOU unit can sale part of their final products in India at 50% of customs duty or normal excise duty in certain cases.

NATIONAL CALAMITY CONTINGENT DUTY – A ‘National Calamity Contingent Duty’ (NCCD) has been imposed vide section 136 of Finance Act, 2001 [clause 129 of Finance Bill, 2001, w.e.f. 1.3.2001]. This duty is imposed on pan masala, chewing tobacco and cigarettes.  It varies from 10% to 45%. - - NCCD of 1% was imposed on PFY, motor cars, multi utility vehicles and two wheelers   and NCCD of Rs 50 per ton was imposed on domestic crude oil, vide section 169 of Finance Act, 2003.

DUTIES UNDER OTHER ACTS - Some duties and cesses are levied on manufactured products under other Acts. The administrative machinery of central excise is used to collect those taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and collection of these duties / cesses.

DUTY ON MEDICAL AND TOILET PREPARATIONS - A duty of excise is imposed on medical preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.

ADDITIONAL DUTY ON MINERAL PRODUCTS - Additional duty on mineral products (like motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of Excise and Customs) Act, 1958.

CESS - A cess has been imposed on certain products.

Goods

The word “goods” has not been defined under the Central Excise Act. Article 366(12) of the Constitution defines ‘goods’ as ‘goods includes all materials, commodities and articles’. Sale of Goods Act defines that “Goods” means every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. These definitions are quite wide for purpose of Central Excise Act. However, case law on this is well developed and as per judicial

interpretation, the word “goods”, for purpose of levy of Excise duty, must satisfy two requirements i.e. (a) they must be movable and (b) they must be marketable.

Goods must be movable - They must be movable. Thus, immovable property or property attached to earth is not ‘goods’ and hence duty cannot be levied on it - Kailash Oil Cake Industries v. CCE - 1993 (63) ELT 693 (CEGAT). Duty cannot be levied on immovable property - National Radio v. CCE - 1995 (76) 436 (CEGAT).

Goods must be Marketable - The item must be such that it is capable of being bought or sold. This is the test of ‘Marketability’. The goods must be known in the market. Unless this test of marketability is satisfied, duty cannot be levied as these will not be goods. [This is also termed as 'Vendibility Test']. This view, expressed in UOI v. Delhi Cloth Mills - AIR 1963 SC 791 = 1963 (Suppl.) (1) SCR 586 = 1977 (1) ELT (J 177) (SC 5 member Constitution bench), has been consistently followed by Supreme Court in subsequent cases and by all High Courts. It was held that to become ‘goods’ an article must be something which can ordinarily come to market to be bought and sold.

In case of DCM, they were manufacturing ‘Vanaspati’. Raw material was groundnut and til oil. During manufacture, ‘refined oil’ got produced at intermediate stage which was consumed within factory for manufacture of ‘Vanaspati’. Excise department demanded duty on this ‘refined oil’. [During the relevant period, there was no excise duty on ‘Vanaspati’, but ‘refined oil’ was excisable.] This stand was negated by Supreme Court. It was observed that process of deodorisation was not carried out on the ‘refined oil’. In the market, the product is not known as ‘refined oil’ unless it is deodorized. Applying this ‘marketability test’, it was held that the ‘refined oil’ which is not ‘deodorized’ is not ‘goods’. [Deodorisation was carried out in the manufacturing process after hydrogenation only.]

Actual sale is not necessary - Marketability is an essential ingredient in order to be dutiable. Marketability is a decisive test for dutiability. It only means ‘saleable’ or ‘suitable for sale’. It need not in fact be marketed. The article should be capable of being sold to consumers, as it is - without anything more. - Indian Cable Co. Ltd. v. CCE - 1994 (74) ELT 22 (SC) = JT 1994 (6) SC 243 = (1995) 97 STC 307 (SC) = 1994 AIR SCW 4071 = AIR 1995 SC 64 = (1994) 6 SCC 610 = 1994 (4) RLT 437 (SC 3 member bench).

Mere mention in Tariff is not enough - Mere mention of an item in tariff is not enough. Simply because a certain article falls within the schedule (of Central Excise Tariff), it would not be dutiable if the article is not ‘goods’ known to the market. - Bhor Industries Ltd. v. CCE (1989) 40 ELT 280 (SC) = 1989 (1) SCC 602 = 1989(1) SCALE 226 = 1989 (1) SCR 382 = AIR 1989 SC 1153 = (1989) 73 STC 145 (SC) = (1990) 184 ITR 129 (SC) - In this case, it was found that crude PVC films (intermediate product) manufactured by the assessee for captive consumption, for further manufacture of leather cloth were not marketable in that stage and hence not dutiable.

Mere specification in tariff is not proof of marketability. - Ion Exchange (India) Ltd. v. CCE 1999(4) SCALE 345 = 1999 AIR SCW 2606 = AIR 1999 SC 2457 = 1999(112) ELT 746 (SC).

The aforesaid judgments that goods are not dutiable if they are not marketable, even when they are specifically mentioned in Central Excise Tariff, were under review and the matter was referred to large bench in UOI v. Delhi Cloth and General Mills (DCM) 1997(91) ELT 23 = 19 RLT 475 = 1998 AIR SCW 2300 = 1997(2) SCALE 609 = AIR 1998 SC 2917 = 1997(4) SCC 203 (SC 2 member bench). A three member bench in UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC 767 = 109 STC 113 = (1997) 92 ELT 315 = AIR 1997 SC 2429 (SC 3 member bench) has reiterated and confirmed the present view that even if a commodity is specifically mentioned in tariff, duty is not payable if the commodity is not marketable. In this case, it was also observed that the commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable.

Duty leviable on captive consumption - Since excise is a duty on manufacture, duty is leviable even if goods are consumed within the factory and not sold. However, the goods must be marketable in the condition in which they are manufactured and further consumed within the factory.

However, mere fact that goods have been captively consumed (i.e. consumed within the factory) is no evidence of its marketability (or non-marketability). Even transient items can be ‘goods’ provided that the article is capable of being marketed even during that short period. Goods which are unstable can be theoretically marketable if there was market for such transient article - but one has to take a practical view on the basis of available evidence. - Ambalal Sarabhai Enterprises v. CCE (1989) 43 ELT 214 (SC) = JT 1989 (3) SC 741 = 1989 (3) SCR 784 = (1990) 77 STC 190 = AIR 1990 SC 59 = (1989) 4 SCC 112.

Every thing that is sold is not 'marketable' - 'Marketability' implies regular market for a product.

Occasional, stray or distress sales do not mean that the product is 'marketable'.

Marketability to be decided on the basis of the state in which it is produced - The commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable - UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC 767 = (1997) 92 ELT 315 = 109 STC 113 = AIR 1997 SC 2429 (SC 3 member bench) - same view in Wochardt Ltd. v. CCE 1999(105) ELT 573 (CEGAT) * Eastern Coils v. CCE 2001(132) ELT 369 (CEGAT).

What are “Goods” - Some examples will clarify the legal position.

GAS, STEAM ETC. - Gas and Steam are goods as it is a tangible property. - . - It is marketable - Ambalal Sarabhai Enterprises Ltd. v. UOI 1991 (54) ELT 30 (Guj HC). It is held that ‘steam is ‘goods’ as it can be weighted, measured and marketed.

ELECTRICITY – In case of electrical energy, generation or production coincides almost instantaneously with its consumption. Sale, supply and consumption takes place without any hiatus. - - Electricity is movable property though it is not tangible. It is ‘goods’. – State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). The ‘electricity’ is ‘goods’ - CST v. MPEB - (1970) 25 STC 188 (SC) = (1969) 2 SCR 939 = AIR 1970 SC 732 (partly overruled in 2002 only to the extent that it was held in 2002 judgment that electricity cannot be stored). - followed in Indian Oil Corpn v. CTO (1997) 107 STC 463 (Raj TT)

DRAWING, DESIGNS ETC. ARE GOODS – Drawing and designs relating to machinery or technology are ‘goods’, even if payment is made for technical advice or information technology, which is intangible asset. But the moment it is put on a media, whether paper or diskettes or any other things, that what is supplied becomes chattel. – Associated Cement Companies Ltd. v. CC 2001 AIR SCW 559 = 128 ELT 21 = 124 STC 59 = AIR 2001 SC 862 = 2001(1) SCALE 436 = JT 2001(2) SC 141 (SC 3 member bench). Knowledge in the form of drawing and design relating to machinery are ‘goods’ – Prerna Textiles v. CCE 2000(117) ELT 241 (CEGAT) – civil appeal dismissed by SC (2001) 134 ELT A169.

MACHINERY - Will be ‘goods’ if it is in marketable condition at the time of removal from factory of manufacture, even if subsequently, it is to be fastened to earth.

Waste and Scrap are ‘goods’ - In Khandelwal Metal and Engg Works v. UOI - 1985 (Supp) 1 SCR 750 = 1985 (20) ELT 222 (SC) = AIR 1985 SC 1211 = (1985) 3 SCC 620, Apex Court held that scrap would be liable to duty, if it is known in commercial parlance by that name and has an established market - followed in Dhrunal Chhotalal Patel v. UOI - 1993 (63) ELT 27 (Bom HC). In Greysham v. CCE 2000(117) ELT 350 (CEGAT), it was held that waste and scrap of steel arising during manufacture is dutiable as it is marketable and specifically mentioned in tariff.

WASTE AND SCRAP NOT GOODS IF NOT MARKETABLE - Carbide sludge arising in manufacture of acetylene gas is not marketable and hence not liable to duty – CCE v. Bansal Indus. Gases 2003(151) ELT 4 (SC 3 member bench). Spent Nickel Catalyst arising during manufacture of soap is not an excisable commodity as department failed to prove that it is a marketable commodity. – CCE v. Hindustan Lever 2003(151) ELT 10 (SC).

WASTE AND SCRAP EXCISABLE ONLY IF MENTIONED IN CETA - The waste and scrap will not be ‘excisable goods’ unless they are specified in CETA. In CCE v. Carborandum Universal Ltd. 1998(103) ELT 363 (CEGAT), it was held that waste termed as 'dust collector fine' emerging during grinding is merely an industrial waste and even if it fetches some price, it is not 'excisable goods' as there is no tariff entry in CETA.

What are not “Goods” - Some cases where the product was held as not ‘goods’ are illustrated here.

Goods having very short life are not ‘goods’, if not marketable in that short period – Yeast having short shelf life is not ‘goods’ when there is no proof about its marketability, even if the product is specified in tariff. CCE v. Jagjit Industries 2002 AIR SCW 1277 = 141 ELT 306 (SC)

Immovables are not ‘goods’ - Articles which are attached to earth are not goods as goods means a movable property.

Excisability of plant & machinery assembled at site - Plant and Machinery or structure assembled and erected at site cannot be treated as 'goods' for the purpose of Excise duty, if it is not marketable and movable.

The word ‘goods’ applies to those which can be brought to market for being bought and sold, and it is implied that it applies to such goods as are movable. Goods erected and installed in the premises and embedded to earth cease to be goods and cannot be held to be excisable goods. - Quality Steel Tubes (P.) Ltd. v. CCE - 1995 (75) ELT 17 (SC) = 1994(5) SCALE 183 = (1995) 2 SCC 372 = 6 RLT 131 = 1995 AIR SCW 11 = JT 1995 (1) SC 99 = (1995) 56 ECR 209 (SC) - in this case, it was held that tube mill and welding head erected and installed in the premises and embedded in the earth for manufacture of steel tubes and pipes are not ‘goods’.

In Municipal Corporation of Greater Bombay  v. Indian Oil Corporation - JT 1990 (4) SC 533 = 1990(2) SCALE 1140 = AIR 1991 SC 686 = 1991 Supp (2) SCC 18, it was held that if the chattel is movable to another place in the same position (condition?), it is movable property. If it has to be dismantled and re-erected at later place, it is attached to earth and is immovable property.

ASSEMBLY AT SITE IS NOT MANUFACTURE, IF IMMOVABLE PRODUCT EMERGES - In Mittal Engg Works v. CCE - 1996 (8) SCALE 452 = 1996 (88) ELT 622 (SC) = 17 RLT 612 = (1997) 106 STC 201 (SC) = (1997) 1 SCC 203 = JT 1996(10) SC 722, it was held that if an article has to be assembled, erected and attached to the earth at site and if it is not capable of being sold as it is, without any thing more, it is not 'goods'. Erection and installation of a plant is not excisable - followed in CCE v. Hyderabad Race Club - 1996 (8) SCALE 468 = 1996 (88) ELT 633 (SC), where it was held that an article embedded in the earth was not 'goods' and hence excise duty is not leviable.

PRESENT LEGAL POSITION – There were some conflicting judgments. All Supreme Court judgments were of division benches, i.e. 2 member benches. In case of conflicting decisions of coordinate benches (i.e. judgments given by same number of judges), the later judgment prevails. The latest judgment on the issue is of Triveni Engineering judgment dated 8-8-2000, which has been practically accepted by Board vide its circular dated 15-1-2002. Hence, the present legal provision is, as decided in Triveni Engineering, i.e. 'The marketability test requires that the goods  as such should be in a position to be taken to market and sold. If they have to be separated, the test is not satisfied'. Thus, if machinery has to be dismantled before removal, it will not be goods. Following is also clear - (a) Duty cannot be levied on immovable property (b) If plant is so embedded to earth that it is not possible to move it without dismantle, no duty can be levied. (c) If machinery is superficially attached to earth for operational efficiency, and can be easily removed without dismantling, duty is leviable (d) Turnkey projects are not dutiable, but individual component/machinery will be dutiable, if marketable.

Intermediate Product - Captive Consumption - Manufacture is possible at intermediate stage also. If a product which is complete, identifiable and which can be sold in market comes into existence during the manufacturing process at intermediate stage, it will amount to manufacture and will be dutiable even if it is not sold and it is used within the same factory. (In excise terminology, it is called ‘Captive Consumption). (Such intermediate products are exempt from duty if these are used in manufacture of final product which is dutiable. If such exemption is not available, duty liability is certain.) In A S Processors v. CCE 1999(112) ELT 706 (CEGAT), it was observed that once a new product comes into existence at intermediate stage, it is charged to duty if not exempted under any notification. In CCE v. Modern Mills 1999(113) ELT 822 (CEGAT), it was held that duty liability on intermediate product arises as soon as manufacture (of intermediate product for captive consumption) is complete as it is 'deemed to have been removed' under rule 9(1).

Excisable Goods

Other essential requirement is that the goods must be ‘excisable’. Section 2(d) of Central Excise Act defines Excisable Goods as ‘Goods specified in the Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt’. ‘Goods’ includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable [Explanation to section 2(d) of CEA].

Thus, unless the item is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable.

Goods ‘excisable’ even if exempt from duty - ‘Excisable goods’ do not become non-excisable goods merely because they are exempt from duty by an exemption notification -. Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989(2) SCALE 804 = 1989 (44) ELT 598 (SC) = (1989) 4 SCC 592.

If exemption is granted u/s 5A(1) [that time rule 8(1)], goods do not cease to be excisable goods and levy of duty is not erased. – CCE v. Smithkline Beecham Consumer Health Care Ltd. 2003(151) ELT 5 (SC).

Goods not included in CETA are ‘non-excisable goods’ - Some goods like wheat, rice, cut flowers, horses, soya beans etc. are not mentioned in Central Excise Tariff at all and hence they are not ‘excisable goods’, though they may be ‘goods’. These are ‘non-excisable goods’. Similarly, ‘waste and scrap’ will

be ‘excisable goods’ only if specifically mentioned in CETA - CCE v. Amol Decalite Ltd. 1999(105) ELT 222 (CEGAT). In Western India Ceramics P Ltd. v. CCE 1998(9) ELT 425 (CEGAT), it was held that broken glazed tiles are not excisable as there is no specific entry (in Tariff) for it.

Mere mention in CETA not enough - Mere mention in the Excise Tariff will not attract duty, unless these are ‘goods’ i.e. unless test of marketability is satisfied - Bhor Industries Ltd. v. CCE - 1989 (40) ELT 280 (SC) = (1989) 73 STC 145 (SC) = (1989) 1 SCC 602 = (1989) 1 SCALE 226 = (1989) 1 SCR 382 = (1990) 184 ITR 129 (SC) = AIR 1989 SC 1153 = 1989 (21) ECR 273

Further, the ‘excisable goods’ are liable to duty only if they are ‘manufactured’ or ‘produced’.

 Goods excisable even if duty is nil – If by virtue of an exemption notification, the rate of duty is reduced to NIL, the goods specified in the tariff would still be regarded as excisable goods on which NIL rate of duty was payable.

Goods removed under bond are not 'exempted goods' - Under Central Excise, the term 'exempted goods' has specific meaning. 'Exempted goods' means those exempted under notification issued u/s 5A of CEA. Goods removed under bond without payment of duty are neither goods 'exempt from duty' nor 'goods chargeable to Nil rate of duty'. - CBE&C circular No 278/112/96-CX dated 11.12.1996 - relying on law ministry opinion dated 29.10.1974.

Goods manufactured in SEZ are ‘excluded excisable goods’ – As per section 3(1) of CE Act, as made effective w.e.f. 15-8-2003, duty is leviable on all excisable goods (except goods manufactured or produced in Special Economic Zone). Thus, goods manufactured or produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as ‘excluded excisable goods’.

Meaning of 'Goods which have suffered duty' - In some cases, the wording used is 'goods which have suffered duty / tax'. In such case, it has been held that actual payment of tax / duty is necessary. Goods cannot be said to have 'suffered tax' when no tax is paid. - State of MP v. Indore Iron & Steel Mills 1998(4) SCALE 562 also 1998(5) SCALE 467 = AIR 1998 SC 3050 = 111 STC 261 = 1998(6) SCC 416 = JT 1998(6) SC 501.

Manufactured or produced

Excise is a duty on “manufacture or production” of goods. Excise is mainly levied on goods manufactured or produced. Thus, definition of ‘manufactured’ or ‘produced’ is important because excise is a duty on manufacture and if there is no manufacture, there is no liability of payment of Central Excise duty. In Hyderabad Industries Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - (SC 3 member bench), it was held that even if Central Excise Tariff mentions an item, there is no duty liability unless the process is ‘manufacture’, i.e. if new and identifiable product does not emerge after the process.

DIFFERENCE BETWEEN SALES TAX AND EXCISE - Central Excise duty has to be distinguished from Sales Tax. The Sales Tax is a tax on sales and hence can be imposed only when there is a sale. On the other hand, excise duty is a duty on manufacture and the duty liability is fastened immediately after goods are manufactured ; whether these are sold or not is immaterial. For example, if a Company manufactures a machine or fabricates some furniture within the factory for its own use, there will be no sales tax on the machine or furniture manufactured as it is not sold. However, the machine or furniture will be liable to excise duty as it has been manufactured. However, for administrative convenience, the payment of duty may be deferred till removal of goods from the factory.

Produced - The word produced is used to cover items like tobacco, tea, coal, ores etc. which are produced, but no manufacturing process may be carried out. In CIT v. N C Budharaja and Co. - (1993) 204 ITR 412 (SC) = (1993) 91 STC 448 (SC) = AIR 1993 SC 2529 = JT 1993 (5) SC 346 = 1994 Supp (1) SCC 280 = (1993) 70 Taxman 312 = 1993 AIR SCW 3317, it has been held that the word ‘production’ has a wider connotation than the word ‘manufacture’. Every ‘manufacture’ can be characterised as ‘production’, but every ‘production’ need not amount to manufacture. When the word ‘produced’ or ‘production’ is used in juxtaposition with the word ‘manufacture’, it takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all by-products, intermediate products and residual products, which emerge in the course of manufacture of goods. Thus, waste, scrap and by-products are dutiable even if they are not manufactured, as they are ‘produced’.

Thus, the word 'produced' covers (a) Items like coffee, tea, tobacco, coal, dairy products, ores etc. which are 'produced' (b) The word 'produced' can also cover live products like horse, fish, flowers etc. which are 'produced' (c) By-products, scrap etc. which are not really 'manufactured' but they do get 'produced' (d) It

will obviously cover goods 'manufactured'.

Manufacture - Section 2(f) of Central Excise Act merely states that “manufacture” includes any process - (i) incidental or ancillary to the completion of manufactured product or (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, or (iii) which, in relation to goods specified in third schedule to the CEA, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers or declaration or alteration of retail sale price or any other treatment to render the product marketable to consumer. [clauses (ii) and (iii) are called deemed manufacture]. - - Thus, definition of ‘manufacture’ is inclusive and not exhaustive. However, there is ample case law on this issue. ‘Manufacture’ means : (a) Manufacture as specified in various Court decisions i.e. new and identifiable product must emerge or (b) Deemed Manufacture.

‘Manufacture’ as defined by Courts, takes place only when the process results in a commercially different article or commodity. Following would be instances when ‘manufacture’ has taken place (a) manufacture of table from wood (b) conversion of pulp into base paper (c) conversion of sugarcane to sugar.

DEEMED MANUFACTURE – Deemed manufacture is of two types – (a) CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are carried out, goods will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [section 2(f)(ii)] (b) In respect of goods specified in third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003] - - These provisions are discussed later in this chapter.

Manufacture as defined by Courts - Some important Court decisions are discussed here.

New substance having distinct name, character or use must emerge - In Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791 = 1963 Suppl (1) SCR 586 = 1977 (1) ELT (J199) (SC) and 1990 (27) ECR 151 SC]; a five member constitution bench of Supreme Court has held that the manufacture means bringing into existence a new substance. (This is a very important and leading case regarding definition of ‘Manufacture’). Manufacture is end result of one or more processes, through which original commodity passes. Thus, manufacture implies a change but every change is not manufacture. A new and different article must emerge having a distinctive name, character or use.

There is no manufacture and hence no excise duty liability if a new and commercially different identifiable product does not result - Hyderabad Industries Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - SC 3 member bench

 (For example cutting of wood in small pieces or making small pieces of a long steel bars would not amount to manufacture as no new product emerges).

MERE MENTION IN TARIFF DOES NOT MEAN MANUFACTURE – In CCE v. Markfed Vanaspati 2003(153) ELT 491 (SC)., it was held that even if an article is specified in tariff, there is no duty liability unless it is ‘manufactured’.

Trade Parlance is important - The test to be applied is whether a commodity subject to processing retains its original character and identity or whether the processed commodity is regarded in the trade by those who deal in it, as distinct identity from original commodity. Nature and extent of processing may vary. With each process, the original commodity experiences change. But it is only when the change or series of change take commodity to a point where commercially it is recognised as a new and distinct commodity, then it can be said that new commodity has come into being. The test is whether in the eyes of those dealing in the commodity or in commercial parlance, the processed commodity is regarded as distinct in character and identity from the original commodity - Sterling Foods  v. State of Karnataka - 1986 (63) STC 239 = 1986(3) SCC 469 = AIR 1986 SC 1809 = 1986(2) SCALE 106 = 1986 (26) ELT 3 (SC). Similar views in Aditya Mills Ltd. v. UOI (1989) 1 CLA 137 (SC) = (1989) 73 STC 195 = 37 ELT 471 = AIR 1988 SC 2237.

Assembly can be manufacture - Assembly of various parts and components may amount to manufacture if new product emerges, which is movable and marketable.

Manufacture even if final product falls under same tariff - There can be ‘manufacture’ even if both inputs and final product fall under same tariff heading, if a different identifiable commercially known product comes into existence - Laminated Packings (P.) Ltd. v. CCE - 1990 (49) ELT 326 (SC) = 1990 (30) ECR

166 (SC) = 1990(2) SCALE 272 = (1990) 3 JT (SC) 493.

Deemed manufacture - Section 2(f), which defines ‘Manufacture’ has two deeming provisions. Deemed manufacture is of two types – (a) CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are carried out, goods will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [section 2(f)(ii)] (b) In respect of goods specified in third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003].

Thus, the process may not amount to manufacture as per principles evolved by Courts, but these will be liable to excise duty if it is defined as amounting to manufacture under CETA, or if the product is included in third schedule to Act and any of specified process (like re-packing, re-labelling, alteration of retail sale price etc.) are carried out. - - This is called 'deeming provision' or a 'legal fiction'. e.g. process like labelling, re-labelling, re-packing is not 'manufacture' as no new product emerges. However, it will be 'deemed manufacture' and duty will be payable if the process is specified in Central Excise Tariff as 'amounting to manufacture' in relation to any goods. This amounts to charging excise duty on product which is not really manufactured as defined by Courts.

BOTH REPACKING AND LABELLING REQUIRED AND PRODUCT SHOULD BE MADE MARKETABLE  – In many ‘deemed manufacture’ provisions, the wording used is ‘labelling or re-labelling of containers and repacking from bulk packs to retail packs or the adoption of any other treatment to render the products marketable to the consumer’. Since the word used is ‘and’, it can be argued that mere labelling without re-packing is not ‘deemed manufacture’, as activities of labelling/re-labelling and re-packing in small packs are inter-dependent and not mutually exclusive.

MERE RE-PACKING IS NOT MANUFACTURE – The words used in many ‘deeming provisions are ‘repacking from bulk packs to small packs’. Thus, mere re-packing is not ‘deemed manufacture’. If goods returned are re-packed, such re-packing is from one retail pack to another retail pack and hence cannot be termed as ‘manufacture’.  - - Similarly, if goods returned for rectification are re-packed, it is not ‘any other treatment to render the product marketable’, as the product was already marketable.

WHEN 'REPACKING AND LABELLING'’ WILL AMOUNT TO MANUFACTURE - In some cases, goods are bought in bulk and sold in retail. This will not amount to 'repacking'. Generally, the expression 'packing' is considered as a package containing pre-packed commodity and quantity of the product contained therein is also pre-determined. - . - Activity of simply transferring material from one container to another may not come under the description 'repacking and labelling' - . - . - However, facts should be ascertained and decision should be taken based on all relevant facts- CBE&C circular No 342/58/97-CX dated 8.10.1997.

Deemed manufacture in case of goods covered under MRP provisions - In respect of goods specified in third schedule to Central Excise Act, any process which involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on the container or adoption of any other treatment on the goods to render the product marketable to consumer will be ‘manufacture’. [section 2(f)(iii) effective from 14-5-2003].

The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package. Thus, in case of goods on which duty is payable on basis of MRP, if any of the process as specified (like labelling, re-labelling, repacking in unit container, alteration of MRP etc.), it will be ‘manufacture’ and duty will become payable. - - Some times, a manufacturer of goods (which are covered under MRP provisions) clears goods from factory in bulk without putting MRP at the time of clearance. Duty is paid on basis of section 4. The goods are packed and labeled and MRP is put either by the buyer who buys the goods or in some godown or depot or C&F Agent of the manufacturer. Now, the process carried out by the buyer or by C&F Agent or at such depot or godown of manufacturer will be ‘manufacture’. Such depot/buyer/C&F Agent/godown will have to be registered under Central Excise as ‘manufacturer’. It will have to pay duty on the basis of MRP, but will get Cenvat credit of duty paid at the time of clearance from the factory.

Though the section provides that alteration of Retail Sale Price shall be ‘deemed manufacture’, rule 23(7) of Standards of Weights and Measures (Packaged Commodities) Rules, 1997 reads as follows – ‘The manufacturer/packer shall not alter the price on wrapper once printed and used for packing’. - - Thus, in any case, alteration of MRP printed on wrapper is not permissible.

Incidental or ancillary process - Section 2(f), which defines ‘Manufacture’ states that “manufacture” includes any process which is incidental or ancillary to the completion of manufactured product. Incidental means occasional or casual process. Ancillary means auxiliary, i.e. it is integral part of

manufacturing. Manufacture is not complete unless all ancillary and incidental processes are complete. In border line cases, there can be ambiguity whether a particular process is incidental or ancillary process. For instance, painting or polishing may be essential process for manufacture of furniture. However, a machinery may be said to be finished without painting. It has been held that quality checking is not a process ancillary or incidental to manufacture, unless it is legally mandatory.

Manufacturer

The liability to pay duty is on ‘Manufacturer or producer’. Duty cannot be recovered from his purchaser - Mahindra & Mahindra Ltd. v. CCE - (1983) 13 ELT 974 (CEGAT) (though the manufacturer may recover the same from buyer). Hence, Excise demands, if any, are always raised on manufacturer and recovered from manufacturer. Hence, it is essential to decide who is to be termed as ‘Manufacturer’.

Who is the 'manufacturer' - The definition of ‘manufacture’ u/s 2(f) is not exhaustive. Hence, the word ‘Manufacturer’ has to be understood in its natural meaning, i.e. ‘Manufacturer’ is a person who actually manufactures or produces excisable goods, i.e. one who actually brings into existence new and identifiable product.

Person who transforms commodity into another commodity having a distinct name and character is the manufacturer. – Pearl Soap Co. v. CCE (2001) 138 ELT 1317 (CEGAT).

SIMPLE DOMESTIC ILLUSTRATION - One domestic example might be helpful. It is common to send wheat to a Mill to grind the wheat and convert it into ‘Wheat Flour’. Now, even if the ‘wheat’ belongs to you, the ‘Mill Owner’ will be the manufacturer of ‘wheat flour’ as per definition of Central Excise. Thus, ‘ownership’ and ‘manufacturer’ may be different. If the cost of wheat is Rs. 12 per Kg and the Mill Owner charges one rupee as job charges (conversion charges for converting ‘wheat’ into ‘wheat flour’), ‘value’ of wheat flour for Central Excise valuation purposes would be Rs. 13/-. Similarly, when you give cloth to tailor to make shirt, the tailor will be the manufacturer of shirt even if cloth belongs to you and the shirt has been made as per your requirements.

Enlarging definition of ‘manufacturer’ - Section 2(f), which defines the word ‘manufacture’, after defining the word ‘manufacture’ states that “the word manufacturer shall be understood 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.” Here again, the definition is not exhaustive but inclusive. The definition enlarges definition of ‘manufacture’ to two categories of persons, besides actual manufacturers, namely : (a) Persons who get the goods manufactured through hired labour. (b) Persons who engage in manufacture of goods on their own account. - - These may be termed as ‘deemed manufacturers’.

MANUFACTURE THROUGH HIRED LABOUR - A person will be treated as ‘Manufacturer’ if he engages ‘hired labour’ who may be Employee or Contractor for manufacture of excisable goods. A hired labour is one who hires himself out to work for and under control of another for wages. However, if he undertakes manufacture on own account, he cannot be said to have hired himself out to another even if he manufactures for other - Techma Engineering Enterprise v. CCE - 1987 (27) ELT 460 (CEGAT).

Sub-contractor is manufacturer if relation to the main contractor is on principal to principal basis, even when job work is done at site, if relationship between sub-contractor and main contractor is on principal to principal basis. - Voltas Ltd. v. CCE 2002(139) ELT 223 (CEGAT) * Voltas Ltd. v. CCE 2002(144) ELT 108 (CEGAT).

ENGAGES IN MANUFACTURE ON HIS OWN ACCOUNT – The word ‘engages’ has to be read as ‘engages others’. This is because, if he is himself engaged in manufacturer, then he is actually the manufacturer. Extended or enlarged definition is not required to treat him as ‘manufacturer’. ‘On his own account’ has been interpreted to mean as ‘under his direction and control’ in Philips India v. UOI 1980(6) ELT 263 (All HC DB).

Manufacture at site of buyer - In Basti Sugar Mills v. CCE 2000(115) ELT 626 (CEGAT), it was held that an independent contractor who assembles the parts in a factory (assembly of crane in this case) will be the manufacturer and not the owner of factory. [In this case, contractor assembling the parts was independent contractor appointed by supplier of parts of crane. Obviously, he was not 'hired labour' of the factory owner.] – same view in Solid and Correct Engineering Works v. CCE 2002(145) ELT 673 (CEGAT). In this case, the marketing company assembled various parts at the site of buyer. It was held that the marketing company is the manufacturer.

Raw material Supplier is not the manufacturer - It is common in Industry to supply raw material to a Job Worker or Processor and get the goods manufactured from him in his factory e.g. Automobile

Manufacturers like Bajaj, Maruti, Mahindra, Premier Automobiles or Hindustan Motor very often get many parts manufactured from outside on ‘Job Work’ basis. In such cases, they (Maruti, Bajaj etc.) will not be treated as ‘Manufacturer’ even if the Raw Material is supplied by them and right of rejection is retained by them. In Ujagar Prints v. UOI - AIR 1989 SC 516 = 42 Taxman 151 (SC) = 1989 (39) ELT 493 (SC) = (1989) 74 STC 401 (SC) = (1989) 3 SCC 488 = 179 ITR 317 (SC) (5 member constitution bench), it has been held that excise duty is on ‘manufacture and production of goods’ and liability to pay duty is not dependent upon whether the manufacturer is owner or not.

Brand Owner is not the Manufacturer - Some large units get their goods manufactured from others under their Brand Name, instead of manufacturing it themselves. They usually control quality and may even supply the design. e.g. Bajaj Electricals get many electrical goods manufactured from others; Batas procure some foot-wear from others and supply under their brand name. Some large pharmaceutical companies also get the goods manufactured from small scale units under their brand names. In such cases; Bajaj, Bata or the Pharmaceutical Companies will not be treated as ‘Manufacturer’ even if they exercise quality control, or allow use of their brand name, or provide financial help to the small manufacturers, or even supply the raw material, if their relation with the manufacturer is ‘Principal to Principal’  basis. Supreme Court in Cibatul Ltd. v. UOI - 1978 (22) ELT 302 (SC) - have held that if the goods are produced with Customer’s brand name under his quality control, it does not mean that the Customer is the Manufacturer. Same view was reaffirmed in Jt. Secretary to Government of India v. Food Specialities Ltd. - 1985 (22) ELT 324 (SC).

Brand name owner will not be manufacturer even if he supplies raw material. - Philips India Ltd. v. UOI - 1980 (6) ELT 263 (All HC DB) - quoted and followed in Cheryl Laboratories v. CCE - 1993 (65) ELT 596 (CEGAT - 3 member bench order).

Manufacture must be in India

Last operative word of section 3 of Central Excise Act is that excisable goods must be manufactured or produced in India. Thus, excise levy cannot be imposed on imported goods or goods manufactured in Nepal. This is also true if goods are imported in SKD or CKD condition and they are only assembled in India, as no new product emerges - Walchand Nagar Industries  v. CCE - 1995 (79) ELT 485 (CEGAT - 3 member bench order). - same view in Indian Xerographic System Ltd. v. CC, Bombay - (1995) 80 ELT 337 (CEGAT) * CIT v. Telco (1968) 68 ITR 325 (Bom).

However, if goods are classified as per rules of classification as complete machine as per legal fiction, but actually components or sub-assemblies are imported, its assembly in India will amount to manufacture and excise duty will be payable. Case law on this issue has been discussed earlier in this chapter.

Classification of Goods

Central Excise Tariff Act (CETA)

There are thousands of varieties of manufactured goods and all goods cannot carry the same rate or amount of duty. It is also not possible to identify all products individually. It is, therefore, necessary to identify the numerous products through groups and sub-groups and then to decide a rate of duty on each group/sub-group. This is called ‘Classification’ of a product, which means determination of heading or sub-heading under which the particular product will be covered.

Excise is a duty on excisable goods manufactured or produced in India. Unless all these factors are in existence, there can be no duty liability. The liability of payment of excise is on the Manufacturer. Once the liability of payment is established, the next question is what is the amount of duty payable. The two step process is (a) Correctly classify the goods (b) Find its assessable value.

The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 96 chapters (chapter 77 is blank) and specific code is assigned to each item. There are over 1,000 tariff headings and 2,000 sub-headings. This classification forms basis for classifying the goods under particular Chapter head and Sub-head to prescribe duty to be charged on that particular product. Salient features of the tariff are as follows.

As international trade increased, need was felt to have universal standard system of classification of goods to facilitate trade flow and analysis of trade statistics. Hence, International convention of Harmonised System of Nomenclature (HSN), called Harmonised Commodity Description and Coding System, was developed by World Customs Organisation (WCO) (That time called as Customs Cooperation Council). Indian Customs adopted this nomenclature w.e.f. 28.2.1986.

This is an International Nomenclature standard adopted by most of the Countries to ensure uniformity in classification in International Trade. HSN is a multi purpose 8 digit nomenclature classifying goods in 5019 groups of goods. It contains 241 headings at 4 digit level and 5019 at 6 digit level.

Thus, Customs Tariff uses 8 digit nomenclature. Central Excise Tariff is also of 8 digit w.e.f. 28-2-2005.

WCO in its various committees discusses classification of individual products and gives classification opinion on them. Though their opinion is not binding in legal sense, it provides a useful guideline for classifying goods.

Customs Tariff is fully aligned with HSN. Central Excise Tariff (CETA) is also based on HSN. Though CETA generally follows HSN pattern, it is not a copy of HSN. CE Tariff is aligned upto four digit level and at six digit level, proper enumeration and sub-division of products is done in view of the goods that enter the trade, our experience with the concept of manufacture and the level of growth of the indigenous industry. – Chapter 4 Para 3 of CBE&C’s Customs Manual, 2001.

CETA contains two schedules - CETA consists of two schedules - the first schedule gives basic excise duties (i.e. Cenvat duty) leviable on various products, while second schedule gives list of items on which special excise duty is payable. Second schedule contains only few items. It has been clarified that the tariff headings given in second schedule will be interpreted in the same way as those in first schedule. Items included in second schedule are already covered and included in first schedule. Hence, our discussions in this chapter are in respect of first schedule only.

Sections and Chapters of CEA – Central Excise Tariff is divided in 20 sections. (21 sections in case of Customs Tariff). A ‘section’ is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections is related to a broader class of goods e.g. Section I is ‘Animal Products’, Section VII is ‘Plastics and Articles thereof’, Section XI is ‘Textile and Textile Articles’, Section XVII is ‘Vehicles, Aircrafts, Vessels and associated transport equipment, etc. Section Notes are given at the beginning of each Section, which govern entries in that Section. These notes are applicable to all Chapters in that section.

SECTION DIVIDED IN CHAPTERS - Each of the sections is divided into various Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and Textile Articles and within that Section, Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on.

There are 96 chapters out of which chapter 77 is blank. In Customs Tariff, there are 99 chapters out of which only one i.e. Chapter 77 is blank, which is kept reserved for future use.

CHAPTER NOTES - Chapter Notes are given at the beginning of each Chapter, which govern entries in that Chapter.

Groups and Sub-groups within the Chapter - Each chapter is further divided into various headings depending on different types of goods belonging to same class of products. For instance, Chapter 50 relating to Silk is further divided into 5 headings. 50.01 relates to Silk worm cocoons, 50.02 relates to raw silk, 50.03 relates to silk waste, 50.04 relates to silk yarn and 50.05 relates to woven fabric of silk. The headings are sometimes divided into further sub-headings. For example 5004.11 means silk yarn containing 85% or more by weight of silk or silk waste, 5004.19 means containing less than 85% by weight of silk or silk waste.

GROUPING OF GOODS - The tariff is designed to group all goods relating to same industry and all the goods obtained from the same raw material under one Chapter in a progressive manner as far as possible. So far as practicable, Goods are classified beginning with raw materials and ending with finished products within the same chapter. Pattern of arrangement is in following sequence – Natural products, raw materials, semi finished goods and fully manufactured goods / article / machinery etc. - Chapter 4 Para 5 of CBE&C’s Customs Manual, 2001.

EIGHT DIGIT CLASSIFICATION – All goods are classified using 8 digits system. In above example, first two digits i.e. ‘50’ related to the Chapter Number, next two digits e.g. 01 or 02 relate to heading of the goods in that chapter> Next two 2 digits indicate sub-heading and last two digits indicate tariff heading. Thus, a 4 digit code is called as ‘heading’ and 6 digit code is called as ‘sub-heading’ and 8 digit code is called 'tariff entry'. - - In case of Customs, 8 digit classification code has been adopted w.e.f. 1-2-2003. Excise adopted 8 digit classification w.e.f. 28-2-2005.

The same classification will be used by DGFT (Director General of Foreign Trade) and DGCIS (Director

General of Commercial Intelligence & Statistics). The additional 2 digits are to facilitate and provide flexibility in international trade. The common classification will reduce transaction costs and reduce diversion of classification among different agencies.

Coding of Single, Double, triple and quadruple dashes - Single dash (-) at the beginning of description indicates a group, while two dashes (- -) at the beginning indicate a sub-group. The single dash (-) indicates sub-classification of article covered by the heading, while double dash (- - ) is the sub-classification of the preceding article which has single dash (-) i.e. it is a sub-sub-classification. Triple dash (- - -)  and four dashed (- - - -) are used for further classification.

Broad grouping in CETA - Following is broad grouping of goods in CETA:

Animal Products (Section I - Chapters 1 to 5)Vegetable Products (Section II - Chapters 7 to 14)Animal or vegetable fats (Section III - Chapter 15)Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24)Mineral Products (Section V - Chapters 25 to 27) Chemicals, Fertilisers, soap etc. (Section VI - Chapters 28 to 38)Plastics and Rubber and their articles (Section VII - Chapters 39 and 40)Leather and articles (Section VIII - Chapters 41 to 43)Wood, cork, straw and their articles (Section IX - Chapters 44 and 46)Pulp, Paper, Paper-board and articles (Section X - Chapters 47 to 49)Textile and Textile Products (Section XI - Chapters 50 to 63)Footwear, Headgear, Umbrellas, Articles of human hair (Section XII - Chapters 64 to 67).Articles of stone, plaster, ceramic, glass (Section XIII - Chapters 68 to 70)Pearls, precious metals (Section XIV - Chapter 71)Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin etc.). (Section XV - Chapters 72 to 83)Machinery and mechanical appliances, electrical equipments, television etc. (Section XVI - Chapters 84 and 85)Vehicles, Aircrafts, vessels ( Section XVII - Chapters 86 to 89)Optical, photographic, medical, surgical instruments, clocks, musical instruments (Section XVIII - Chapters 90 to 92)Arms and Ammunition (Section XIX - Chapter 93)Misc. Manufactured articles like Furniture, toys etc. (Section XX - Chapters 94 to 96)Works of Art, collectors’ pieces and antiques (Section XXI - Chapters 97 to 99) – This section is only in Customs Tariff and not in Central Excise Tariff.

SPECIAL PROVISIONS IN CUSTOMS TARIFF – Though most of goods are classified as per above system, special classification is used in certain cases - * All goods imported under ‘project imports’ - 98.01 * All laboratory chemicals in packs less than 500 gms or 500 ml - 98.02 * All baggage of passengers or member of crew - 98.03 * Goods for personal use imported by post or air - 98.04 * Stores on board of vessel or aircraft – 98.05. Thus, those goods will be classified in these headings, irrespective of actual classification as per the Customs Tariff.

Rules for Interpretation of CETA

Rules for Interpretation of Schedule are given in the Tariff itself. These are termed as ‘General Interpretative Rules’ (GIR).

Abbreviation ‘%’ in Column 4 indicates that duty is charged ‘ad valorem’ on the value of goods as calculated in section 4 of Excise Act.

Rule 1 of Rules for interpretation of the Schedule states that classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such headings or Notes do not otherwise require, according to other provisions of the rules. It has been held that these rules are required to be applied only if classification is not possible on basis of tariff entry read with Chapter notes and section notes. * Track Parts Corporation v. CC - 1992 (57) ELT 98 (CEGAT) * L M Van Moppes Diamond Tools India Ltd. v. CC 1986 (24) ELT 623 (CEGAT) * Hindustan Gas v. CC 1990(49) ELT 548 (CEGAT) * Netlon India v. CCE 2000(121) ELT 675 (CEGAT).

USE FOR INTERPRETING IMPORT POLICY – Rule of Interpretation cannot be used to interpret provisions of import policy. – S S Appliances v. CCE 1998(100) ELT 429 (CEGAT) * Chan Tronix v. CC 2000(124) ELT 510 (CEGAT).

RULES TO BE APPLIED SEQUENTIALLY – The Rules are to be applied sequentially. - Chapter 4

Para 7 of CBE&C’s Customs Manual, 2001. Classification is to be first tested in light of Rule 1. Only when it is not possible to resolve the issue by applying this rule, recourse is taken to Rules 2, 3 and 4 in seriatim. - Chapter 3 Part II Para 2.1 of CBE&C’s Customs Manual, 2001. [Though rules nowhere state that these should be applied sequentially, the general arrangement and wording does indicate that intention].

These rules are briefly explained below :

Titles are for reference - The titles of sections and chapters are provided for use of reference only, and have no legal importance for purposes of classification. (Rule 1)

Section Notes and Chapter Notes have overriding effect - Classification is to be determined only on the basis of description of the heading, read with relevant section or chapter notes. Since these notes are part of the Act itself, these have full statutory (legal) backing. Tribunal has (very rightly) held that coverage of respective headings has to be determined in the light of respective section notes and chapter notes. In this sense, Section Notes and Chapter Notes have an overriding force over the respective headings and sub-headings. - * Saurashtra Chemicals, Porbunder v. CC - 1986 (23) ELT 283 (CEGAT). * Tractors and Farm Equipments Ltd. v. CC - 1986 (25) ELT 235 (CEGAT).

If the description read with section or chapter notes is not enough to correctly classify the goods, following further rules have been provided :

Classification of Incomplete Goods - Any reference to complete goods also includes incomplete or un-finished goods, if such incomplete or un-finished goods have the essential characteristic of finished goods. [Rule 2(a)]. Some illustrations in HSN Explanatory notes are - * a machine or apparatus normally incorporating an electric motor is classified in the same heading even if presented without motor. * Passenger coach not fitted with seats will still be a passenger coach * Motor vehicle not yet fitted with wheels, battery or tyres * Bicycles without saddles and tyres * Photographic camera without an optical element * Electric supply metre without its totalling device.

RULE 2(A) IS A LEGAL FICTION - In Wipro Medical Systems v. CC 1999(106) ELT 169 (CEGAT), it was held that if some major part is not imported and major assembly / testing work is required to be done in India, the imported goods may be classified as full machine as legal fiction. However, it will be treated as import of parts for purposes of any exemption notification - following CC v. Maruti Udyog Ltd. 1996(16) RLT 646 (CEGAT). – same view in Phoenix International v. CCE (2001) 138 ELT 484 (CEGAT).

Un-assembled finished goods - Rule 2(a) further provides that the heading will also include finished goods removed un-assembled or disassembled i.e. in SKD or CKD packs. [Rule 2(a)]. This provision is essential because some times, goods cannot be despatched in fully assembled condition. These are despatched in SKD (semi knocked down) or CKD (completely knocked down) condition and assembled at site. As we saw in previous chapter, in such cases, assembly at site does not amount to manufacture. The goods are, in fact, fully manufactured in the factory itself. These are sent in SKD or CKD condition only for convenience of transport.

Sub-assemblies of air conditioning machines removed in CKS/SKD packs will be classified as complete machine, if it contains essential elements of air conditioning machine. - – CBEC circular No. 666/57/2002-CX dated 25-9-2002.

In Shirke Construction Equipments P Ltd. v. CCE 1997(95) ELT 644 (CEGAT), it was held that even when bulky goods are cleared in stages, the clearance is still of whole article and not its parts. In this case, bulky crane was cleared in disassembled condition in two consignments. It was held that assessee cleared 'crane in parts' and not 'parts of crane'.

Cycle removed in CKD condition is a ‘cycle’. – T I Cycles v. UOI 1983(12) ELT 681 (Mad HC DB).

Classification of Mixture or Combinations - Any reference in heading to material or substance will also include the reference to mixture or combination of that material or substance with other materials or substance e.g. ‘Article of Gold’ will include an Article which is made partly of Gold. Reference to goods of a given material or substance shall also include reference to goods consisting wholly or partly of such material or substance. [Rule 2(b)]. In Himson Textile Engg v. CCE 1997(95) ELT 519 (CEGAT), it was held that if rule 2(a) covers the goods in dispute, resort cannot be had to rule 2(b). In Union Carbide v. CC 1995(79) ELT 521 (CEGAT), it was held that interpretative rule 2(b) does not deal with composite goods made of different materials and the relevant rule for the same is rule 3(b).

Rule in case of Conflict between various headings - While applying the aforesaid rules, some conflict may arise e.g., (a) a mixture or combination containing more than one material may be classifiable under more than one headings by applying rule 2(b). If it contains two items A and B, one classification may be on the basis of ‘A’ and other on the basis of ‘B’, (b) There may be two descriptions which may both seem possible. In such cases, following rules apply.

Specific Description preferable over general heading - The heading which provides most specific description shall be preferred to heading providing a general description. [Rule 3(a)].

When an article has, by all standards, a reasonable claim to be classified under an enumerated item in the tariff schedule, it will be against the very principle to deny it the parentage and consign it to be an orphanage of the residuary clause. - Dunlop India Ltd. v. UOI - AIR 1977 SC 597 = (1976) 2 SCC 241 = (1976) 2 SCR 98 = 1983 (13) ELT 1566 (SC)].

Classification as per Essential Character - If Mixture and Composite of goods consisting of different materials cannot be classified based on above rule, it should be classified as if they consisted of the material or component which gives it their essential character [Rule 3(b)] e.g. if a set consists of drawing instruments (90.17), pencil (96.09) and pencil sharpener (82.14), put up in a leather case (4201.90); the set will be classifiable under 90.17 i.e. drawing instrument.

Some times, a floppy diskette is attached to a book. Such diskette is supplementary or accessory to the book, which either explains contents of book or supplies some freeware or some tutorials. On the other hand, a manual is supplied along-with software. The manual gives instructions as to how to use the software. In the former case, the 'essential character' of the goods is 'book', while in later case, the 'essential character' is 'software'. Hence, the goods will be classified according to 'essential character' as per rule 3(b). - CBE&C circular No. 528/10 6/93-Cus (TU) dated 24-8-1993.

MEANING OF ‘ESSENTIAL CHARACTER’ - In Bharat Heavy Electricals v. CC 1987(28) ELT 574 (CEGAT 5 member bench), it was held that as per CCCN Notes, factors governing ‘essential character’ will vary as between different kinds of goods and may be determined by the nature of material or component, its bulk, quantity, weight or value or by the role of a constituent material in relation to use of the goods. [It was stated that this principle applies to determine ‘essential character’ under rule 2(a) also].

If both are specific - Later the better - If two or more headings seem equally possible and the dispute cannot be resolved by any of the aforesaid rules, if both the headings appear equally specific, the heading which occurs last in numerical order is to be preferred (i.e. later the better). [rule 3(c)].

Akin Goods - Last Rule of classification - If the classification is not possible by any of the aforesaid rules, then it should be classified under the heading appropriate to goods to which they are most akin. This is only a last resort and a desperate remedy to resolve the dispute as the matter of classification cannot be kept hanging indefinitely [rule 4].

Goods can be compared at the same level only - Sub-Headings can be compared only at the same level [Rule 5]. This means that if one heading contains 5-6 sub-headings, these sub-headings can be compared with each other. However, sub-heading under one heading cannot be compared with sub-heading under a different heading. Thus, first heading has to be decided and then one of the sub-headings within that heading has to be selected.

As we saw earlier, single dash (‘ - ’) indicates sub-classification and double dash (‘- - ’) indicates sub-sub-classification.

Principles of Classification

We have so far seen provisions of Classification as stipulated in Central Excise Tariff Act. Though these provisions are quite elaborate, they are not always adequate to correctly classify a product. Some principles have been evolved by Courts and Tribunals over the years.

Trade Parlance Theory - Criteria for classifications are given in the CETA. However, basic principle of classification, devised over one hundred twenty five years ago by Justice Pollok in Grenfell v. IRC (1876) 1 Ex D 242 continues. As per this principle, a word in statute should be construed in its popular sense and not in the strict or technical sense. ‘Popular sense’ means that which people conversant with the subject matter with which the statute is dealing, would attribute to it. Legislature does not suppose our merchants to be naturalists, geologists or botanists. This has been confirmed by Supreme Court in various cases like ‘Indo International Industries v. CST (1981) 3 SCR 294 = 1981 (8) ELT 325 (SC) = AIR 1981 SC 1079 = 1981 (2) SCC 528 = 1981(1) SCALE 582 = 1981 UPTC 481 = (1981) 47 STC 359 (SC) * Dunlop India

Ltd. v. UOI - (1976) 2 SCC 241 = (1976) 2 SCR 98 = AIR 1977 SC 597 = 1983 (13) ELT 1566 (SC).

PRINCIPLE APPLIES TO TARIFF ALSO - Headings and sub-headings in Central Excise Tariff should be understood not in strict technical sense but in their popular sense, i.e. the meaning assigned to them by those trading and using the product. – Kedia Agglomerated Marbles v. CCE 2003(152) ELT 22 (SC).

CUSTOMER’S IDENTITY WITH FUNCTION - Supreme Court, in Atul Glass Industries (P.) Ltd. v. CCE - (1986) 3 SCC 480 = 1986(2) SCALE 15 = AIR 1986 SC 1730 = 1986 (25) ELT 473 (SC) = 1986 (1) ECC 1 (SC) = 1986 (63) STC 322 (SC), have held that identity of a product is associated in mind of consumer with its primary function. The consumer buys an article because it performs a specific function for him. This mental association with a product is highly important for classification.

Statutory definition overrides Trade parlance - The ‘trade parlance’ is relevant only when Statute does not define the words. If words are defined in the Statute, ‘trade parlance’ is not relevant. - Indo International Industrial v. CST, UP - 1981 (2) SCC 528 = AIR 1981 SC 1079 = (1981) 3 SCR 294 = 1981(1) SCALE 582 = 1981 UPTC 481 = 1981 (8) ELT 325 (SC) = (1981) 47 STC 359 (SC).

Technical term must be understood in technical sense only - If the legislature has adopted a technical term, then that technical term has to be understood in the technical sense and not on basis of market parlance - Reliance Cellulose Products Ltd. v. CCE 1997(93) ELT 646 (SC) = 1997 AIR SCW 3495 = AIR 1997 SC 3414.

HSN and Classification - CETA is based on Harmonised System of Nomenclature (HSN), but Tariff nowhere states that notes in HSN will be applicable for interpreting the tariff. However, Apex Court, in CCE v. Wood Craft Products Ltd. - 1995 (77) ELT 23 = 1995 (57) ECR 417 = (1995) 3 SCC 452 = 1995(2) SCALE 364 = 1995 AIR SCW 1963 (SC - 3 member bench order) - has held that as per Statement of Objects and Reasons of Central Excise Tariff Bill, 1985, new tariff has been introduced, based on HSN to reduce classification disputes. Thus, in case of doubt, HSN is a safe guide for ascertaining true meaning of any expression used in the Act, unless there is an express different intention indicated in the Tariff itself. - confirmed in CC v. Business Forms 2002(142) ELT 18 = JT 2002(1) SC 424 = 50 RLT 375 (SC 3 member bench).

DEPARTMENT IS OF SAME VIEW – In case of difficulty in understanding the scope of the headings / sub-headings, reference should be made to supplementary texts like the Explanatory Notes to HS. - - WCO (World Customs Organisation) gives classification opinion on classification of individual products. Such information, though not binding in nature, provide a useful guideline for classifying the goods. – Chapter 4 Paras 4 and 10 of CBE&C’s Customs Manual, 2001.

End Use relevant only in limited cases - Generally, a product can be used for various purposes and it is not correct to classify the goods on the basis of its final use. Supreme Court in Dunlop India v. UOI - 1983 (13) ELT 1566 (SC) = (1976) 2 SCR 98 = (1976) 2 SCC 241 = AIR 1977 SC 597 have held that end use is irrelevant for interpretation, unless definition so requires.

End use to be considered if classification is related to function of goods - If the tariff demands, classification can and should be as per end use. Articles of Plastic are classifiable under Chapter 39.26. However, a plastic article specially designed as automobile part will be classified as ‘Part of Motor Vehicle’ and not as ‘Article of Plastic’. If an article has alternate uses, its predominant use is highly relevant.

Summary of decisions - In the opinion of author, there cannot be any general and universal rule that end use can be considered or cannot be considered. It depends on nature of goods, description used in tariff and other relevant factors. In CC v. Kumudam Publications 1997(96) ELT 226 (SC) also, it was observed that it cannot be said that in no case the end use or function is relevant for classification. (i.e. in suitable cases, end use can be considered).

Machinery independent even if it can be attached to another - A machinery can be independent even if it is connected to another machinery. Mere fact that a machinery can be connected to another machinery does not change its character to accessory - Nirulas Corner House P Ltd. v. CC 1999(108) ELT 332 (SC) = 1999 AIR SCW 1712 = AIR 1999 SC 2008.

Condition at the time of import/clearance relevant - Condition of the material at the time of importing is a material factor for purpose of classification as to the head under which goods will be classified - Dunlop India Ltd. v. UOI - 1983 (13) ELT 1566 (SC) = (1976) 2 SCR 98 = (1976) 2 SCC 241 = AIR 1977 SC 597.

Dictionary meaning/technical literature - Apex Court in Indo International Industries v. CST, UP - AIR 1981 SC 1079 = (1981) 3 SCR 294 = 1981(1) SCALE 582 = 1981 (2) SCC 528 = (1981) 47 STC 359 (SC) = 1981 UPTC 481 = 1981 (8) ELT 325 (SC) - held “In interpreting items in statutes like Excise Tax Act or Sales Tax Act, where diverse products, articles and substances are classified, resort should be had, not to the scientific and technical meaning of terms and expressions used, but to their popular meaning i.e. the meaning attached to them by those dealing with them. If any term or expression has been defined in the enactment then it must be understood in the sense in which it is defined, otherwise, common parlance or commercial parlance has to be obtained.”

Exemption Notification/ Valuation principles cannot determine classification - Classification of a product is to be decided on basis of relevant heading and section and chapter notes. Classification cannot be decided on basis of exemption notification - CCE v. Roha Dyechem (P.) Ltd. - (1989) 22 ECC 140 - quoted with approval in CCE v. Gujarat State Fertilisers Co. Ltd. - (1996) 13 RLT 222 = (1996) 83 ELT 624 (CEGAT 3 member bench).

Other aspects of classification

Steps of classification - Following are the steps of classification.

(1) Refer the heading and sub-heading. Read corresponding Section Notes and Chapter Notes. If there is no ambiguity or confusion, the classification is final and you do not have to look to classification rules or trade practice or dictionary meaning.

(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be established, find technical or dictionary meaning of the term used in the tariff. You may also refer to BIS or other standards, but trade parlance is most important.

(3) If goods are incomplete or un-finished, but classification of finished product is known, find if the un-finished item has essential characteristics of finished goods. If so, classify in same heading. Rule 2(a).

(4) If ambiguity persists, find out which heading is specific and which heading is more general. Prefer specific heading.- Rule 3(a).

(5) If problem is not resolved by Rule 3(a), find which material or component is giving ‘essential character’ to the goods in question. - Rule 3(b).

(6) If both are equally specific, find which comes last in the Tariff and take it - Rule 3(c).

(7) If you are unable to find any entry which matches the goods in question, find goods which are most akin. - Rule 4.

In case of mixtures or sets too, the procedure is more or less same, except that each ingredient of the mixture or set has to be seen in above sequence. As per rule 2(b), any reference to a material or substance includes a reference to mixtures or combinations of that material or substance with other material or substance.

Classification of Parts - Classification of parts is subject to notes in Sections and Chapters. Question of classification of parts is relevant for parts of machinery, electrical equipment, vehicles, instruments, arms, furniture and toys (Chapters 82 to 96).

In Electrosteel Castings v. CCE 1989(43) ELT 305 (CEGAT), it was observed that 'part' is a component whose absence will disable a machine or appliance. It must be regarded as an essential ingredient or part of that machine.

Broadly, parts suitable solely for a particular machine generally fall in the same heading number in which main item falls. However, there are many exceptions.

Parts of General Use - Parts of general use are defined as (a) tube and pipe fittings, stranded wire, ropes, cables, chains, nails, screws, bolts, springs (other than clock springs) of base metal i.e. Iron and Steel, Copper, Aluminium, Tin, Nickel, Lead, Zinc etc. or of plastic (b) Padlocks, locks; mountings and fittings suitable for furniture, doors, windows etc.; clasps, buckles, eyelets; sign-plates, name plates; frames of pictures; mirrors; of Iron and Steel, Copper, Aluminium, Tin, Nickel, Lead, Zinc etc. or of plastic.

These parts are to be classified in their respective heading and not as part of the machine or equipment

e.g. a bolt used in a vehicle will be classified as ‘bolt’ and not as ‘motor vehicle part’.

Part of part is part of whole - A part of part is part of whole e.g. tyre is a part of cycle. ‘Valve’ is a part of the tyre. Hence, ‘valve’ will be treated as part of ‘cycle’.

Ayurvedic, Unani, Homoeopathic medicines - Ayurvedic, unani, siddha and homoeopathic medicines prepared strictly as per formulae in authoritative texts are fully exempt from duty, if these are sold under the name as per text book. [Refer chapter heading 3003.31 in CETA]

Valuation under Central Excise

Basis of calculation of duty payable

After duty liability is established and after the product is correctly classified, the next question is ‘What is the Excise Duty payable ?’ If you refer to CETA, you will find that some rates are fixed on per Kg or per quintal basis, while some rates are based on ‘%’ basis. This percentage is the % of ‘Assessable Value’ of goods fixed as per section 4 of Central Excise Act.

Excise duty is payable on one of the following basis :

Specific dutyDuty as % of Tariff Value fixed under Section 3(2).Duty based on annual production capacity under section 3ADuty based on Maximum Retail Price printed on carton after allowing deductions - section 4A of CEA Duty as % based on Assessable Value fixed under Section 4 (ad valorem duty)

Specific Duty - It is the duty payable on the basis of certain unit like weight, length, volume, thickness etc. For example, duty on Cigarette is payable on the basis of length of the Cigarette, duty on sugar is based on per Kg basis etc. In such cases, calculation of duty payable is comparatively easy. In view of the simplicity, many goods were earlier covered under ‘specific duty’. However, the disadvantage is that even if selling price of the product increases, revenue earned by Government does not increase correspondingly. Frequent revisions of rates have to be done, which is a slow and time consuming process. Hence, now most of the goods are covered under ‘Ad valorem’ duty. Presently, specific rates have been announced for - (a) Cigarettes (length basis) (b) Matches (per 100 boxes / packs) (c) Sugar (per quintal basis) (d) Marble slabs and tiles (Square meter basis) (e) Colour TV when MRP is not marked on the package or when MRP is not the sole consideration (Based on screen size in cm). (f) Cement clinkers (per tonne basis) (g) Molasses resulting from extraction of sugar (Per ton basis)

Duty on basis of production capacity - Section 3A of Central Excise Act provides for payment of duty on basis of production capacity, without any reference to actual production. Pan masala and gutkha and chewing tobacco are covered under these provisions.

Tariff value - In some cases, tariff value is fixed by Government from time to time. This is a “Notional Value” for purpose of calculating the duty payable. Once 'tariff value for a commodity is fixed, duty is payable as percentage of this 'tariff value' and not the Assessable Value fixed u/s 4. This is fixed u/s 3(2) of Central Excise Act. Government can fix different tariff values for different classes of goods or goods manufactured by different classes or sold to different classes of buyers.

When tariff value is prescribed under the law, that value will form the basis for assessment (and not any other value) – S Chakravorty v. CCE 2001(129) ELT 797 (CEGAT).

Value based on Retail Sale Price

Section 4A of CEA empowers Central Government to specify goods on which duty will be payable based on 'retail sale price'. The provisions are as follows - (a) The goods should be covered under provisions of Standards of Weights and Measures Act (b) Central Government can permit reasonable abatement (deductions) from the 'retail sale price'. While allowing such abatement, Central Government shall take into account excise duty, sales tax and other taxes payable on the goods (c) If more than one 'retail sale price' is printed on the same packing, the maximum of such retail price will be considered (d) The 'retail sale price' should be 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. (e) Central Government has to issue a

notification in Official Gazette specifying the commodities for which the provision is applicable and the abatements permissible.

For example, Government had issued a notification No. 18/97-CE(NT) and 19/97-CE (NT) both dated 19.6.97 to the effect that excise duty on 'cosmetics and toilet preparations' will be payable on the basis of MRP printed on retail carton after allowing abatement of 50%. In such case, if MRP printed on carton is Rs 50 and if the duty on 'cosmetics & toilet preparations' is 20%, the duty @ 20% will be payable on Rs 25 (i.e. after allowing 50% abatement on MRP of Rs 50). Thus duty payable per pack will be Rs 5.00.

MRP provisions are overriding provisions – Section 4A(2) uses the words ‘notwithstanding section 4’. Hence, when section 4A is applicable, provisions of section 4 for determination of assessable value are not applicable. In Mona Electronics v. CCE (2001) 135 ELT 1293 (CEGAT), it was held that provisions of section 4A are mandatory and assessee has no choice to determine ‘value’ u/s 4.

CVD DUTY RATE ON IMPORTED GOODS WHEN PRODUCT COVERED UNDER MRP -  If goods covered under MRP provisions are imported, CVD will be payable on basis of valuation u/s 4A i.e. on basis of MRP printed on carton.

Provision applicable only when product is statutorily covered both under Weights and Measures Act and notification issued under CEA - It has been clarified that provisions in respect of payment of duty on MRP are applicable only in cases where specific notification has been issued and manufacturer is statutorily required to put MRP under Weights & Measures Act. The provisions do not apply in cases where manufacturer voluntarily affixes MRP on the product - CBE&C circular No 411/44/98-CX dated 31-7-1998. It is further clarified that where provisions of Weights & Measures Act do not apply, duty is payable on basis of AV as per section 4 - Chandigarh Commissionerate TN 16-CE/99 dated 5-5-1999.

Provision applicable even if goods manufactured on job work basis - Normally, if assessee is engaged in manufacture on job work basis, he has to pay duty on material cost plus job charges. However, if a product covered under MRP provisions is manufactured on job work basis, duty will be payable as per provisions of section 4A, i.e. on basis of MRP less abatement and not on basis of material cost plus job work charges. This is because section 4A has overriding effect over section 4.

Provision when more than one retail price declared - MRP printed on package is required to be inclusive of taxes. Rate of taxes vary from State to State.  Hence, in some cases, a manufacturer may print different prices for different States. In some cases, manufacturer earmarks different packages for different areas and marks different prices for different areas.

If a package bears more than one retail sales price, maximum out of these will be deemed to be retail price for purpose of section 4A.   [Explanation 2(a) to section 4A]. If retail price declared on the package at the time of removal is subsequently altered to increase the price, such increased retail price will be retail price for purpose of section 4A.   [Explanation 2(c) to section 4A]. Where different retail sale prices are declared on different packages, each such retail price shall be the 'retail sale price' for purposes of valuation of excisable goods intended to be sold in area to which the retail price relates. [Explanation 2(c) to section 4A]. Thus, if different prices are printed on different packages, each such price will be 'retail price'.

If retail price not indicated or wrongly indicated at the time of removal - If retail price is not declared on the package at the time of removal, or retail price is declared which is not the retail price as required to be declared as per provisions of Central Excise Law or any other law, the goods are liable to confiscation. [section 4(4)(a)]. In such case, the ‘retail sale price’ will be ascertained in the prescribed manner and duty will be payable as per the retail price so determined.

What is 'retail sale price' – As per Weights and Measures Act, retail price indicated on the retail package should be inclusive of all taxes. However, in case of drugs, the retail price to be indicated is required to be exclusive of taxes. Section 4A provision can be made applicable in either case.

MRP INCLUSIVE OF ALL TAXES - Explanation 1 to section 4A(4) of Central Excise Act defines 'retail sale price' as the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole consideration for such sale. - - It may be noted that under Weights & Measures Act, 'Maximum Retail Price' (MRP) has to be printed on packaged commodity for retail sale. The 'MRP' has to be inclusive of all duties and taxes, including local taxes. In view of different rates of taxes in different States, a manufacturer can print different rates for sale in different States / areas. A retailer can sell the goods below MRP printed on the package.

RETAIL PRICE EXCLUSIVE OF TAXES – As per proviso to Explanation 1 to section 4A(4), if as per provisions of any other law, retail price excluding taxes (local or otherwise) is required to be declared on the package, such retail price will be the ‘retail price’ for purpose of section 4A. - - In case of scheduled drug or formulation covered under Drug Price Control Order (DPCO), price is required to be displayed as ‘Retail price not to exceed  .                 .   local taxes extra’. In such cases, the retail price declared as per provisions of DPCO will be the ‘retail price’ for purpose of section 4A. [In case of non-scheduled formulations (i.e. on which there is no price control), price is required to be displayed as ‘Maximum Retail Price  .                 .  inclusive of all taxes’].

Increase in retail price after clearance from factory - If retail price declared on the package at the time of removal is subsequently altered to increase the price, such increased retail price will be retail price for purpose of section 4A.   [Explanation 2(c) to section 4A]. It may be noted that the provision applies only when retail price is ‘increased’ after clearance. However, as per section 2(f)(ii), putting label of altered price will be ‘deemed manufacturer’ and hence excise duty will become payable. - - Really, as per rule 23 of Packaged Commodities Rules, alteration of MRP on the package is prohibited.

Deemed manufacture in case of goods covered under MRP provisions - In respect of goods specified in third schedule to Central Excise Act, any process which involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on the container or adoption of any other treatment on the goods to render the product marketable to consumer will be ‘manufacture’. [section 2(f)(iii) effective from 14-5-2003].

The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package. Thus, in case of goods on which duty is payable on basis of MRP, if any of the process as specified (like labelling, re-labelling, repacking in unit container, alteration of MRP etc.), it will be ‘manufacture’ and duty will become payable. [This aspect has been discussed in earlier chapter].

Products covered under the scheme - So far, 98 articles have been covered under this scheme.

Ad valorem Duty

Fixing specific duty or tariff value is possible only for few selected items like Sugar, pan masala, consumer goods, Cigarette etc. Generally, it is not practicable to fix specific duty or tariff value for numerous products produced. Similarly, paying duty on the basis of MRP is possible only in respect of a few selected commodities. In other cases, Central Excise is payable on the basis of value. This is called “ad valorem duty”. The 'assessable value' is arrived at on the basis of Section 4 of the Central Excise Act and duty is payable on the basis of such value.

Assessable Value (AV) - Assessable Value (AV) is the ‘Value’ on which duty is payable as a percentage. Generally, by ‘Value’, we understand the price as mentioned in Bill or Invoice. However, for excise purposes, it is not possible to fully rely on such price as (a) Duty is payable even if goods are not sold (b) It is desirable to have uniform policy in fixing the AV (c) Chances of manipulation in such price should be minimum.

Basis of Assessable Value - As per new section 4 w.e.f. 1st July, 2000, excise duty is payable on basis of 'transaction value', if the goods are sold at the factory gate to an unrelated buyer when price is the sole consideration. If these requirements are not satisfied, valuation will be done as per Valuation Rules. - section 4(1)(b)

Earlier, Assessable Value was fixed, as per old section 4, on the basis of ‘Normal wholesale price to independent buyer/s at the factory gate, inclusive of packing cost, but exclusive of (a) all taxes and duties payable (b) Trade Discounts and (c) Cost of durable and returnable containers’.  However, the section has been replaced by entirely new section 4 w.e.f. 1-7-2000.

The basic provisions of new Section 4(1)(a) state that 'assessable value' when duty of excise is chargeable on excisable goods with reference to value will be 'transaction value' on each removal of goods, if following conditions are satisfied -

The goods should be sold at the time and place of removal. Buyer and assessee should not be relatedPrice should be the sole consideration for the sale.Each removal will be treated as a separate transaction and 'value' for each removal will be separately fixed.

Cost of Manufacture not relevant - It may be noted that Central Excise Valuation can be below

manufacturing Cost. If there is no allegation of flow-back of money from buyer to assessee, if price is the sole consideration and if dealings between assessee and buyer are at arm’s length, Assessable Value will be decided on basis of selling price, even if it is below manufacturing cost.

Full intrinsic value should be considered, ownership is irrelevant - In Burn Standard Co. Ltd. v. UOI - AIR 1991 SC 1784 = 60 ELT 671 (SC) = 35 ECR 289 = 1991(3) SCC 467, it was held that cost of material supplied free by buyer has to be added to arrive at full intrinsic value of goods. It was observed, ‘The fact that the petitioners are not the owners of the end-product are irrelevant. Taxable event is manufacture - not ownership’.

Time and Place of removal – Section 4(1)(a) states that transaction value shall be assessable value when goods are sold by assessee, for delivery at the time and place of removal.

TIME OF REMOVAL - As per section 4(3)(cc), in case of sale from depot/place of consignment agent, ‘time of removal’ shall be deemed to the time at which the goods are cleared from factory.

PLACE OF REMOVAL - 'Place of removal' has been defined in section 4(3)(c). Since this concept is related to ‘outward freight’ this aspect has been discussed later.

Goods must be sold at the time and place of removal - Transaction Value is relevant for valuation only when goods are 'sold' at the time and place of removal.

State in which goods are removed is relevant for valuation - Goods are to be assessed at the time of removal from factory. Thus, the stage in which they are removed is highly relevant for valuation.

Essentials of valid sale - As per section 2(h) of CE Act, 'sale' and purchase' within their grammatical variations and cognate expressions, means any transfer of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration.

Note that ‘consideration’ can be paid by or to third party also. The definition does not say that consideration must be paid to the assessee himself.

Sale under Central Excise would include hire purchase and lease. When goods are given on hire purchase, there is transfer of possession for consideration but there is no transfer of property.

However, 'sale' will not include job work, stock transfer, branch transfer or free samples.

Buyer should not be known in stock transfer - It may be noted that 'stock transfer' or 'branch transfer' envisages dispatch of goods of standard size and specifications to the depots / branches. Goods should not be dispatched or identified for a particular buyer. If the buyer is identifiable before removal of goods from the factory (e.g. in case of tailor made goods), it is a sale and not a stock transfer, even if goods are dispatched to depot and sold from depot.

Price must be sole consideration - Price should be sole consideration of sale. Price is the consideration given for purchase of a thing.

Transaction Value as Assessable Value

New section 4(3)(d) defines ‘transaction value’ as 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 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. Thus, following are main requirements of ‘transaction value’.

Price actually paid or payablePrice is for the goodsIt includes any amount that the buyer is liable to pay to, or on behalf of assessee. Thus, payment made by buyer to another person, on behalf of assessee, will be includible. Thus, payment made by buyer to third party is includible only if it is made on behalf of assessee.The payment should be ‘by reason of, or in connection with the sale’. As explained later, these terms have always been construed strictly in judicial interpretation.The amount may be payable at the time of sale or at any other time. Such time may be before or after sale. However, normally, it should be quantifiable at the time of removal, as goods are normally

expected to be assessed before clearance from the factory.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 is includible. However, these expenses are includible only when aforesaid conditions are satisfied i.e. (a) The amount should be paid or payable to assessee or on behalf of assessee and (b) Payment should be by reason of sale or in connection with sale. Amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods is to be excluded while calculating ‘transaction value’. The amount may be ‘payable’ any time in the future.

Amount payable by buyer to or on behalf of assessee - Any amount that the buyer is liable to pay to the assessee or to a third person on behalf of assessee is includible in ‘transaction value’.

Payment should be ‘By reason of or in connection with' - The payment by the buyer should be by reason of or in connection with sale of goods which are under assessment.

BY REASON OF - As per Black’s Law Dictionary 1979 edition, ‘by reason of’ means ‘because of, by means, acts or instrumentality of’. As per Concise Oxford Dictionary, ‘reason’ means motive or cause. This indicates a cause and effect relationship.

IN CONNECTION WITH - ‘Connect’ means ‘join’. ‘Connection’ means ‘act of connecting’ or ‘state of being connected’ - Concise Oxford Dictionary. As per Black’s Law Dictionary 1979 edition, ‘connection’ means the state of being connected or joined, union by junction, by an intervening substance or medium, by dependence or relation, or by order in a series. The term ‘in connection with’ has always received a strict interpretation from Court. - - The term ‘connected with’ means that connection must be direct and clear as between cause and effect and not remote and doubtful. ‘Connected with’ must be considered to imply a substantial or direct connection and not a fanciful or highly problematical connection. - Basudev v. Rex 1949 ALJ 397 = AIR 1949 All HC FB 513 - view confirmed in Rex v. Basudeva AIR 1950 FC 67 ( 5 member bench).

Connection is required - mere relation not enough - The legislature has used the terms ‘by reason of’ and ‘in connection with’ and not ‘in respect of’ or ‘in relation to’. Both these phrases viz. ‘by reason of’ and ‘in connection with’ have always received a strict construction. Thus, for inclusion in ‘transaction value’, there should be direct and immediate connection with the price paid / payable and the sale of goods. Mere ‘relation’ is not enough - ‘connection’ is required. A 'casual relation' is not enough, there should be 'cause and effect' type connection between the price paid / payable and the sale of goods.

Inclusions in Transaction Value

'Transaction Value' as defined in section 4(3)(d) states that any amount charged for (by assessee to buyer), or to make provision for (presumably by buyer), advertising or publicity, marketing and selling organisation expenses, storage, outward handling, servicing, warranty, commission or any other matter; is includible in 'transaction value'. However, the payment or provision will be includible only if (a) Buyer is liable to pay to assessee or on behalf of assessee and (b) It is by reason of or in connection with the sale.

Packing charges - New section 4 has made no specific provision for packing charges. Cost of normal packing will be covered, as in most cases, it is 'in connection with' or 'in respect of' sales.

Packing supplied by buyer should also be includible, just like cost of any other material supplied by buyer to seller is includible. CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that cost of packing supplied by buyer should be added. In case of durable packing supplied by buyer, which can be used repeatedly, cost will have to be amortised over the life span of the packing material.

Department, vide its circular No. 354/81/2000-CE dated 30-6-2000 has confirmed that all packing charges, whether normal or special, will form part of the transaction value. Same view is reiterated in Chapter 3 Part III Para 2.5(vi) of CBE&C’s CE Manual, 2001 and CBE&C circular No. 643/34/2002-CX dated 1-7-2002.

Design and Engineering Charges - Design and Engineering Charges are essential for purpose of manufacture and hence have to be included in Assessable Value.

Consultancy charges relating to manufacturing - These were includible under old section 4 and should be includible in new section 4 as well, as such payment is 'by reason of sale'.

Compulsory after Sales Service / service in warranty period is includible - The heads 'servicing' and

'warranty' have been specifically included in definition of payments includible in 'transaction value'.

Manufacturers often give free after sale service during warranty period. Though these are called ‘ free services’, cost of such services is already included in the price of product. Promise for provision of after sale service certainly increases its marketability, it is in connection with sale and its cost is includible.

Loading and handling charges within the factory - These are in by reason of sale and are includible. These were includible earlier also.

Price at the Time of Removal - Price relevant is ‘at the time of removal’. Thus, any subsequent increase or reduction in prices after goods are cleared from the factory is not relevant.

Question : Price of a machine was Rs. 3 lakhs on 28th September, 2002 when the machine was removed from the factory at Pune and sold to a buyer. The buyer refused to take delivery of the machine. In the meanwhile, the machinery manufacturer increased the price of machinery to Rs 3.30 lakhs w.e.f. 1st October, 2002. The machinery manufacturer then sold the machine to another buyer on 12th November, 2002 at increased price of Rs 3.30 lakhs. What is the excise duty payable. The excise duty rate is 15%. (The prices are exclusive of all taxes)

Answer : The price prevalent at the time of removal was Rs. 3 lakhs. Hence, duty payable is Rs. 45,000. The duty is payable on 28th September 2002 when the machine was removed from the factory after manufacture.

Additional consideration should be added to the price paid by buyer to assessee - The additional consideration flowing directly or indirectly from the buyer shall be added to the price actually paid to assessee. This will be cum-duty price. The cum-duty price, exclusive of sales tax and other applicable taxes, if any,  will be deemed to include the duty payable on such goods. – Explanation to section 4(1) [inserted w.e.f. 14-5-2003].

Thus, additional consideration will be added to the price paid by buyer to assessee. This will be treated as cum-duty price and assessable value will be worked back after allowing admissible deductions (i.e. by back calculations). – confirmed and clarified in CBEC DO letter No. 334/1/2003-TRU dated 28-2-2003 issued on Budget day to all Excise Commissioners.

Exclusions from Transaction Value

Section 4(3)(d) of Central Excise Act provides that 'transaction value' does not include amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. Moreover, any other payment made by buyer to assessee will be includible only if it is by reason or sale or in connection with sale.

Deduction of Taxes from AV – Any tax which  is payable ‘in connection’ with sale, is includible in Assessable Value. However, definition of transaction value specifically provides that sales tax, Excise duty and other taxes payable on finished product are to be excluded for purpose of valuation. [This was allowable as deduction under old section  also, and earlier case law discussed below is fully relevant].

If any excise duty or other tax is paid (payable ?) at concessional rate for a particular transaction, the amount of excise duty or tax actually paid at concessional rate shall only be allowed to be deducted from price. - Chapter 3 Part III Para 2.5(v) of CBE&C’s CE Manual, 2001.

EQUALISED DEDUCTION NOT PERMISSIBLE – Since each clearance is a separate transaction for assessment, tax deduction on basis of average taxes paid is not permissible. CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has also stated that taxes are deductible only on actual basis and not on average basis.

Formula for calculation of AV - In GOI v. MRF Ltd. - 1995 (77) ELT 433 (SC) = JT 1995(4) SC 512 = 1995 (58) ECR 385 (SC) = 1995 AIR SCW 2654 = (1995) 3 SCALE 299 = (1995) 4 SCC 349 (SC 3 member bench), it was held that Assessable Value = (Cum Duty price - Permissible Deductions) / (1 + rate of duty)

Trade Discounts - Trade discounts are allowable as deduction for valuation purposes. Trade discount means discount usually expressed as a percentage deduction given to wholesale buyers. Since quantum of trade discount is not payable by buyer to seller, it will not form part of 'transaction value'. Note that 'commission to agent' will not be allowed as deduction, while trade discount given to buyer is not a 'commission'. It will not be added for purpose of Central Excise Valuation.

It is clear that 'transaction value' is only after deducting the trade discount as 'transaction value' means price actually paid or payable for goods. Thus, 'trade discount' is allowable as deduction. It can also include cash discount, turnover discount or any other discount. There is no condition or provision that such discount should be known at the time of removal of goods from factory. Definition of 'transaction value' vide section 4(3)(d) makes clear that payment by buyer to assessee can be at the time of sale or at any other time. (i.e. it may be either before or after the sale).

CASH DISCOUNT PERMISSIBLE - Department has confirmed that cash discount is allowable as deduction, if actually passed on to buyer, if transaction is on principal to principal basis. CBE&C circular No. 643/34/2002-CX dated 1-7-2002 .

Any trade discount permissible - The trade discount need not be uniform. Trade discount may be called by different names like cash discount, quality discount, turnover discount, etc. Such discount will be allowed on actual basis.

Discount can be given at any time - There is no provision that discount should be known or given at the time of removal of goods. Definition of 'Transaction Value' makes it clear that any amount the buyer is liable to pay to assessee at the time of sale or at any other time is includible in 'Assessable Value'. Such 'any other time' can be either before the sale or after the sale. Thus, year end discount or turnover discount given on basis of turnover achieved during a prescribed period should be allowable as deduction.

DEPARTMENT'S CLARIFICATION - Department, vide its circular No. 354/81/2000-TRU dated 30-6-2000 that and has clarified as follows - The duty is chargeable on the net price paid or payable and discount of any description actually given will not be includible in transaction value. Thus if in any transaction a discount is allowed on declared price of any goods and actually passed on to the buyer of goods as per common practice, the question of including the amount of discount in the transaction value does not arise. Discount of any type or description given on any normal price payable,  e.g. quantity discount for goods purchased or cash discount for the prompt payment etc.  will, therefore, not form part of the transaction value for the goods. Differential discount is also permissible. Where the assessee claims that the discount of any description for a transaction is not readily known but would be known only subsequently e.g. year-end discount, the assessment for such transactions may be made on a provisional basis. However, the assessee has to disclose the intention of allowing such discount to the department and make a request for provisional assessment. Same view is reiterated in Chapter 3 Part III Para 2.5(iv) of CBE&C’s CE Manual, 2001.

Commission to Selling Agents not allowed as deduction - ‘Commission’ means a percentage paid to the agent from the profits of goods sold or business obtained - Concise Oxford Dictionary.  Sometimes, goods are sold directly to a buyer and overriding commission is paid to selling agents/commission agents. Sometimes (particularly in international transactions), buyer is asked to make payment of commission directly to the agent. Such commission is not deductible from 'transaction value'. If it is paid separately by buyer, it is clearly includible, as obviously, it is paid by buyer on behalf of seller.

Outward handling, freight and transit insurance charges – As per section 4(1)(a), ‘transaction value is considered as ‘value’ if goods are ‘sold’ at ‘place of removal’.

PLACE OF REMOVAL - 'Place of removal' means - (i) a factory or any other place or premises of production or manufacture of the excisable goods from where such goods are removed or (ii) A warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty from where such goods are removed  or (iii) A depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from factory. [section 4(3)(c)].

Thus – (i) If excisable goods are removed for sale from factory of manufacture or place of production, that will be 'place of removal'. (ii) If goods are cleared for sale from warehouse where goods were allowed to be kept without payment of duty, that will be the 'place of removal'. (iii) If goods are cleared from factory to depot or branch or place of consignment agent, then such depot/branch/place of consignment agent will be ‘place of removal’.

Department has clarified that if any value addition is done by assessee by processing the goods after removal from factory, cost of such processing is not to be added in Assessable Value, if such process does not amount to ‘manufacture’ – CBE&C circular No. 138/08/2000-CX.4 dated 3.1.2001.

DEPOT SALE - In case goods are sold from depot/place of consignment agent, goods will have to be valued on the basis of price prevailing at the depot, but on the date of removal from factory of manufacture.

Sale at factory gate - If the contract is for delivery at the factory gate, sale is complete at the factory gate itself, as the transporter gets ‘possession’ of goods on behalf of buyer as the transporter will be ‘agent’ of buyer. The buyer will be incurring the expenditure on transport and insurance charges. However, the expenditure will be on his own and not 'on behalf of the assessee' as required vide definition of 'transaction value' u/s 4(3)(d). Moreover, the payment is not 'in connection' with sale or 'by reason of' sale as the sale is completed at the factory gate itself. The payment made by buyer will be on his own and 'by reason of' or 'in connection with' outward handling charges.

Delivery and sale at other place - It is possible that contract is ex-destination or FOR destination and assessee is under obligation to deliver the goods to destination. In such case, there is no ‘sale’ at factory gate and hence, valuation cannot be done on basis of transaction value.

As per explanation 2 to rule 5 of Central Excise Valuation Rules, if goods are sold at a place other than the place of removal (factory gate is normally considered as place of removal), cost of transportation from place of removal upto place of delivery of such goods will not be includible.

EQUALISED FREIGHT – Some times, manufactures fix uniform all India price of the goods. The actual cost of transport will obviously vary from place to place. In such case, though the invoice shows the uniform price, deduction will be available on the basis of average freight i.e. equalized freight.

Notional Interest on security deposit/advances - The manufacturer may often ask for advance/deposit from buyers. The purpose may be to ensure security of payment from buyers and/or to get working capital. Such deposit may be with or without interest. Such advance is 'in relation to sale'. If the advance obtained is without interest or with lower quantum of interest, there will be benefit to the buyer by way of reduction in his cost. The 'connection' between the selling price and reduced cost by way of reduction in interest cost is only 'indirect'. Thus, 'notional interest' on advances may not be includible if relation between advance and selling price is only casual. There is 'relation' but no 'connection'. 'Cause and effect' relationship is absent.

However, if there is evidence that selling price has been lowered due to receipt of advance / deposit, then price is not the 'sole consideration of sale', as required u/s 4(1)(a). In such case, there is 'cause and effect' relationship. There is 'connection' between advance received and the price charged. In such cases, notional interest on advance should be includible.

Explanation 2 to rule 6 of Valuation Rules (inserted w.e.f. 1-3-2003) provides that notional interest on advances is includible in assessable value only if there is evidence with Central Excise Officer that such advance has influenced the fixation of prices by way of charging lower price or by offering a special discount to the buyer who has made the advance deposit.  Thus, when the price is same to all buyers whether they have paid advance to seller, notional interest is not includible in assessable value. - - As per Illustration 2 to Explanation 2, even in cases where there is only one buyer from whom advance has been obtained and comparable price to other buyer is not available, notional interest is includible only if there is evidence with Central Excise Officer that such advance has resulted in lowering the prices. - - In other words, burden of proof that price has been lowered or special discount has been offered on account of receipt of advance from buyer, is on the department.

Installation and Erection Expenses - Installation and erection expenses are incurred after the goods are removed from the factory. There may be an independent contract for erection or even a composite contract. In the opinion of author, erection and commissioning charges should not be includible. [However, now 8% service tax is being imposed vide Finance Act 2003, on erection and commissioning charges].

CLARIFICATION BY CBE&C – The Board has clarified as follows – (a) If final product is not excisable, question of including erection and commissioning charges does not arise. (b) If a machine is cleared from a factory on payment of appropriate duty and later taken to premises of the buyer for installation/erection and commissioning into an immovable property, no further duty will be payable (c) If parts/components are brought to site and the machine is erected/installed and commissioned, if the product (generator as per Board circular) is excisable commodity, cost of erection, installation and commissioning would be included in assessable value. In other words, if the expenditure on erection, installation and commissioning has been incurred to bring into existence any excisable goods, these charges would be included. If these costs are incurred to bring into existence some immovable property, they will not be included in the assessable value of such resultant property. -CBE&C circular No. 643/34/2002-CX dated 1-7-2002 . [The clarification indeed confirms many of  the views expressed above].

Interest on Receivables - The manufacturer may recover interest from buyer, if he does not make payment as per agreed terms. Such interest should not be includible.

DEPARTMENTAL CLARIFICATION - Department has confirmed that delayed payment charges will not be includible, if shown or indicated separately in invoice and charged over and above the sale price. – CBE&C circular No. 643/34/2002-CX dated 1-7-2002. Departmental circular No. 354/81/2000-TRU dated 30-6-2000 has clarified that interest on delayed payment shall not be regarded as part of the assessable value provided that: (a) the interest charges are clearly distinguished from the price actually paid or payable for the goods; (b) the financing arrangement is made in writing; and (c) where required, assessee demonstrates that such goods are actually sold at the price declared as the price actually paid or payable. Same view is reiterated in Chapter 3 Part III Para 2.5(iii) of CBE&C’s CE Manual, 2001.

Bank charges for collection of sale proceeds - The principle discussed above will apply in respect of bank charges for collection of sale proceeds and these should not be includible.

Some areas where no case law under new section 4

New section 4 of Central Excise Act is radically different from old section 4. Thus, most of case law in respect of earlier section 4 has become redundant and all settled law has been unsettled. In some cases, principles of earlier section can be applied, but in many cases, disputes seem inevitable.

Some areas where presently there is neither case law nor any specific provisions in new provisions are discussed below.  Author’s view in respect of each head are also given. These areas will get settled through case law in due course.

Advertisement and sale promotion Expenses incurred by buyer - Manufacturer incurs advertisement expenditure. These are obviously built in the cost for determining his selling price. In addition, often dealers also advertise the product at their own cost.

Definition of 'transaction value' includes charges for 'advertisement, publicity and marketing expenses'. However, these are includible only if buyer is liable to pay the amount to assessee or on behalf of assessee. Thus, advertisement and Sales promotion expenses incurred by dealer/distributor, if done on his own, are not to be included, if transaction between buyer and seller is on principal to principal basis. This is because the buyer is not incurring these expenses 'on behalf of the assessee'.

Training charges to customer - Training charges to customer will be includible if they are in connection with sale or by reason of sale. If the transaction of providing training to employees of customer is an independent transaction, it may be 'in relation to sale', but not 'in connection with sale'

Inspection charges / addition testing charges paid by buyer - Assessee carries out his own inspection and its cost is obviously included in his selling price. However, sometimes, customer carries out additional inspection either himself or through another inspection agency. Some times, expenses of such additional inspection / testing are borne by assessee while, in other case, the expenses may be borne by the buyer himself. This inspection is in addition to normal inspection and quality checks of the manufacturer himself. Following points need consideration.

If the inspection charges are to be borne by assessee and goods can be sold only if approved by the inspection agency, the payment is in connection with sale and by reason by sale. It should be includible.If such testing is a mandatory requirement, it should be includible whether borne by assessee or buyer. This is because there is no sale without such testing.If assessee has agreed that buyer can reject the goods if not approved by the testing agency, the payment will be 'by reason of sale' and should be includible, whether paid by assessee or buyer.If the inspection is done by buyer on his own only to satisfy himself about quality of the product, the cost should not be includible, as in such case, the payment made by buyer or expenditure incurred by buyer is not 'on behalf of assessee' but on his own.This was held as not includible under earlier case law. However, in view of the changed definition, validity of the earlier decisions seem doubtful.

Subsidy / Rebate obtained by assessee - A general subsidy / rebate is obviously not be includible as it has no connection with individual clearances of goods.

Profit earned on post removal activity - Profit earned on post removal activity is not to be added unless there is any deliberate attempt to divert a part of the genuine price and show it as other charges - ratio of Empire Industries Ltd. v. CCE 1997(95) ELT 653 (CEGAT). In Baroda Electric Meters Ltd. v. CCE 1997(94) ELT 13 (SC 3 member), it was held that profit earned by manufacturer on transportation cannot be included in Assessable Value. - followed in S R Jhunjhunwala v. CCE 1999(114) ELT 890 (CEGAT) - also in Sri Kaliswari Fireworks v. CCE 1998(98) ELT 93 (CEGAT) in respect of insurance charges.

Manufacture under brand name of others - Some Companies get the goods manufactured from others

and sell them under their brand name (e.g. Batas get chappals manufactured from small units, Bajaj Electricals get their electrical products manufactured from other units, Philips/Crompton and others get many products manufactured under their brand name). In such cases, selling price of Bajaj or Bata will naturally be higher than the purchase price. Normally, the buyer will get the goods manufactured as per his specifications and will inspect the final product to ensure that quality is maintained. Even then, the buyer, who is a brand name owner, is not the actual manufacturer.

Naturally, the brand name owner sales the goods at higher rates. Even then, 'value' for purpose of excise will be based on the price at which the manufacturer sales the goods to brand name owner. The actual manufacturer and brand name owner cannot be termed as 'related person' as long as relations between them are on 'principal to principal' basis and price is the sole consideration.

If the manufacturer of product manufactures goods with 'MRP' printed on the goods at the time of removal and if goods are covered under section 4A, duty will be payable on basis of MRP printed on the product, as section 4A has overriding effect over other provisions in respect of valuation. However, if the goods are cleared in bulk, without printing 'MRP', the goods will not be covered under section 4A i.e. MRP provisions and duty will be payable on basis of section 4, i.e. 'transaction value'.

Valuation Rules to determine Assessable Value

Section 4(1)(b) of the Central Excise Act states that if Assessable Value’ cannot be determined u/s 4(1)(a), it shall be determined in such manner as may be prescribed by rules. Under these powers, Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 have been made effective from 1-7-2000. These rules are discussed below.

Value nearest to time of removal if goods not sold - If goods are not sold at the time of removal, then value will be based on the value of such goods sold by assessee at any other time nearest to the time of removal, subject to reasonable adjustments. [Rule 4]. This rule applies when price at the time of removal is not available as the goods are not sold by the assessee at the time of removal. Thus, this rule should apply in case of removal of free samples or supply under warranty claims. In case of removal of samples or free replacement under warranty claims, duty will be payable on price of identical goods sold by assessee near about the time of removal of the samples.

This rule should not apply in respect of depot transfer or branch transfer or in case of sale to ‘related person’ as specific provisions have been made. This provision should also not apply for ‘job work’ as indeed in case of ‘job work’ there is no ‘sale’ of goods.

In case of free parts supplied during warranty period, excise duty is payable on the parts but not on labour cost involved in fitting such free parts. [case law discussed in this chapter at another place].

VALUATION OF SAMPLES – CBE&C has clarified that in case of samples distributed free, valuation should be done on basis of rule 11 along with rule 8 i.e. cost of production plus 15%. [In the opinion of author, rule 8 applies to captive consumption. In case of free samples, rule 4 seems to be more appropriate, i.e. value of similar goods cleared at or around the same. Of course, the difference in many cases may be negligible and not worth fighting. In some cases (like pharmaceutical samples), it is reported that it is, in fact, advantageous to assessee to value samples on the basis of cost of production plus 15%].

Goods sold at different place - Some times, goods may be sold at place other than the place of removal e.g. in case of FOR delivery contract. In such cases, actual cost of transportation from place of removal upto place of delivery of the excisable goods will be allowable as deduction. Cost of transportation can be either on actual basis or on equalized basis. [rule 5]. - . – This aspect has already been discussed earlier.

Provision when price is not the sole consideration - If price is not the sole consideration for sale, the ‘Assessable Value’ will be the price charged by assessee, plus money value of the additional consideration received. The buyer may supply any of the following directly or indirectly, free or at reduced cost.

(i) Materials, components, parts and similar items

(ii) Tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used

(iii) Material consumed, including packaging materials

(iv) Engineering, development, art work, design work and plans and sketches undertaken elsewhere than

in the factory of production and necessary for the production of the goods

In such cases, value of such additional consideration will be added to the price charged by assessee to arrive at the ‘transaction value’. [Rule 6].

Valuation in case of job work - Some times, the buyer (trader) supplies raw materials and manufacturing operations are carried out by Job worker/processor as per requirements of buyer/trader and the material is returned to buyer after job work/processing. (Note : The term Job Work is used in Engineering Industry while the term processing is used in Chemical/Textile industry). Since excise is a duty on ‘such goods’, it is immaterial who has supplied the raw material.

No specific provision has been made in case of job work. Strictly speaking, there is no ‘sale’ in case of job work and rule 6 should not apply. Even rule 4 or rule 5 cannot apply as goods are not sold by assessee in case of job work.

In Ujagar Prints v. UOI - 1989 (38) ELT 535 (SC) = 1989 (21) ECR 1 (SC) = 42 Taxman 151 (SC) = AIR 1989 SC 516 = (1989) 74 STC 401 (SC) = (1989) 3 SCC 488 = 1988(2) SCALE 1115 = 179 ITR 317 (SC 5 member bench), [further clarified in 1989(39) ELT 493 = 21 ECR 1 = AIR 1989 SC 972 = 1989(3) SCC 531 = 1989(1) SCALE 195] - followed in Pawan Biscuits v. CCE 2000(5) SCALE 263 = 2000 AIR SCW 2690 = AIR 2000 SC 2565 = 120 ELT 24 (SC), it was held that the ‘Assessable Value’ will be equal to cost of the raw material plus value of job work done plus manufacturing profits. It is necessary to include processor’s (job worker’s) expenses and profit, but not the trader’s profit, who gets the goods manufactured. It is necessary to include processor’s (job worker’s) expenses and profit, but not the trader’s profit, who gets the goods manufactured - explained same way in CCE v. Pharmasia Ltd. - (1996) 13 RLT 1 = 63 ECR 380 (CEGAT).

Though these judgments are under old section 4, CBE&C has clarified that valuation under new section 4 will be done on the same principle as laid down in Ujagar Prints, i.e. on basis of cost of raw material plus job charges. Assessable Value will not include profit or expenses (like advertisement, publicity, overheads) incurred by buyer, who is supplier of raw material. Valuation will be done on basis of rule 11 read with rule 6 – CBE&C circular No. 619/10/2002-CX dated 19-2-2002 – view reiterated in CBE&C circular No. 643/34/2002-CX dated 1-7-2002 .

In a further circular No. 65/2002 dated 30-9-2002 issued by Commissioner of CE, Mumbai-IV, it has been clarified that question of adding any further amount towards profit (of 15%) does not arise. If there is shrinkage of gray fabrics, value of raw material will be suitably enhanced on basis of ‘shrinkage factor’.

Thus, raw material supplied by the buyer will be considered as ‘additional consideration’ and will be added to job charges, as provided in Rule 6.

Job worker is responsible for payment of correct duty – In CCE v. Bhilwara Processors 2002(146) ELT 455 (CEGAT 3 member bench), it was held that job worker cannot escape liability to pay duty on correct valuation of goods. Revenue is not bound by the value of inputs declared by the raw material supplier, if found to be mis-declared.

Duty payable on MRP basis if product covered under MRP provisions - Normally, if assessee is engaged in manufacture on job work basis, he has to pay duty on material cost plus job charges. However, if a product covered under MRP provisions is manufactured on job work basis, duty will be payable as per provisions of section 4A, i.e. on basis of MRP less abatement and not on basis of material cost plus job work charges, as section 4A overrides provisions of section 4.

Sale at depot / consignment agent – Section 4(3)(c)(iii) [amended w.e.f. 14-5-2003] provides that in case of sale at depot/consignment agent, the depot/place of consignment agent will be the ‘place of removal’. As per section 4(3)(cc), in case of sale from depot/place of consignment agent, ‘time of removal’ shall be deemed to the time at which the goods are cleared from factory. - - In other words, in case of sale from depot/place of consignment agent, duty will be payable on the price prevailing at the depot as on date of removal from factory. Price at which such goods are subsequently sold from the depot is not relevant for purpose of excise valuation.

When goods are sold through depot, there is no ‘sale’ at the time of removal from factory. In such cases, price prevailing at depot (but at the time of removal from factory) shall be the basis of Assessable Value. The value should be ‘normal transaction value’ of such goods sold from the depot at the time of removal or at the nearest time of removal from factory. [rule 7 of Valuation Rules].

For example, if an assessee transfers a consignment of paper to his depot from Delhi to Agra on 5-7-2000, and that variety and quality of paper is normally being sold at the Agra depot on 5-7-2000 at transaction value of Rs. 15,000 per tonne to unrelated buyers, where price is the sole consideration for sale, the consignment cleared from the factory at Delhi on 5.7.2000 shall be assessed to duty on the basis of Rs. 15,000 per tonne as the assessable value. If assuming that on 5-7-2000 there were no sales of that variety from Agra depot but the sales were effected on 1-7-2000, then the normal transaction value on 1-7-2000 from the Agra depot to unrelated buyers, where price is the sole consideration shall be the basis of assessment. [Illustration given in the departmental circular dated 30-6-2000].

In short, price ruling at the depot, but at the time of removal from the factory will be relevant. It does not matter if subsequently the goods are actually sold from depot at higher or lower price.

Meaning of 'normal transaction value' - As per Valuation Rule 2(b), “normal transaction value” means the transaction value at which the greatest aggregate quantity of goods are sold. The term 'GREATEST AGGREGATE QUANTITY' is used in rule 7 of Customs Valuation Rules. This rule states that while considering selling price of imported goods in India, unit price at which greatest aggregate quantity of identical or similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the basis for valuation. This principle should apply in deciding 'normal transaction value' under rule 2(b) also.

Freight and insurance from depot onwards is not includible – In Prabhat Zarda v. CCE 2002(146) ELT 497 (SC), it was held that freight and insurance from depot to the customer is not includible. [The Counsel of Assessee agreed that freight and insurance from factory to depot is includible in Assessable Value and hence SC did not decide the issue].

Valuation in case of captive consumption - In case of captive consumption, valuation shall be done on basis of cost of production plus 10% (Rule 8 of Valuation Rules). Captive consumption means goods are not sold but consumed within the factory.

CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that if same goods are partly sold by assessee and partly consumed captively, goods sold have to be assessed on basis of transaction value and goods captively consumed should be assessed on basis of rule 8. The reason is, as per new section 4, transaction value has to be determined separately for each removal.

In case goods are supplied to a ‘related person’ but consumed by the related person and not sold, valuation will be done on the basis of cost of production plus 15%. [Proviso to rule 9]. - - CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that this proviso applies when goods are transferred to a sister unit or another unit of the same factory for captive consumption in their factory.

The simplified provision has been probably made as in most of the cases, the buyer will be able to get Cenvat credit of duty paid on inputs and there is hardly any incentive to avoid any payment of duty.

Thus, the formula for determining value is simple. If the cost of production based upon general principles of costing of a commodity is Rs. 10,000 per unit, the assessable value of the goods shall be Rs. 11,500 per unit.

Principles of cost analysis – Institute of Cost and Works Accountants of India (ICWAI) has issued Cost Accounting Standard CAS-4 titled ‘Cost of Production for Captive Consumption’. The standard deals with determination of cost of production for captive consumption. CBE&C, vide circular No. 692/8/2003 dated 13-2-2003, has clarified that in case of captive consumption, cost calculation should be as per CAS-4 standard only.

Best judgment Assessment - If assessment is not possible under any of the foregoing rules, assessment will be done by ‘best judgment’. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. [Rule 11]

Bought out goods / spare parts supplied along with own manufactured goods

Often some articles are supplied along with the goods, which are bought out, i.e. not manufactured by the assessee. These bought out components broadly fall in following categories -

Components / parts which are essential for functioning of the main product. However, these are not manufactured by the assessee. These are bought out and supplied along with the main product. e.g. a

manufacturer of UPS buys a battery and supplies it along with his product. These should be addible in Assessable Value.Consumables which are required for use of the equipment e.g. ribbon for typewriter. These get used up in due course by the buyer.Some times, essential spares are supplied along with main product. Some of these may be bought out.Often manufacturer supplies some bought out accessories along with main product. These accessories are not essential for functioning of the main product, but do help in better and efficient use of the product or add to its beauty / utility. e.g. seat cover for car seats. Some times, buyer supplies an article and expects manufacturer to fit / assemble his product on the article supplied by him so that he gets assembly duly tested - e.g. buyer supplies tractor and asks manufacturer of compressor to fit the compressor on the tractor.As per earlier case law, value of essential bought out components was required to be added to 'Assessable Value', but value of bought out accessories or consumables was not required to be added. The same principle will apply in new valuation rules also.

Following need consideration - (a) Excise is a duty on manufacture. Duty should not be levied on an activity which is not manufacturing activity, unless it is incidental or ancillary to main manufacturing process. (b) There is no levy on 'trading activity'. (c) Goods are to be assessed in the stage in which they are cleared from the factory of production. (d) Any payment by buyer to assessee 'in connection with' or 'in respect of' sale is includible, while payment which is only 'in relation to' the sale is not includible. (e) Principles of classification or Cenvat are not directly relevant for valuation u/s 4.

Value of essential bought out items - Value of essential bought out items, fitted to the main article at the time of removal should be includible in assessable value, as (a) Goods should be assessed in the stage in which they are removed. (b) Payment for such item is 'in connection with' the sale and the main article cannot work without this bought out part. (c) Value of essential part or component should be added even if it is supplied by buyer. The reason is that if such part is supplied by buyer, 'price' is not 'sole consideration'. Thus, the additional consideration, i.e. value of parts supplied by buyer should be includible, as per rule 6 of Central Excise Valuation Rules, 2000.

Value of optional bought out items - Some times, some bought out items are supplied on optional basis. These are not essential parts of the main article. Value of these should not be includible as - (a) It is a purely trading activity. Even reasonable profit of sale of such items should be permissible. (b) Supply of such bought out item may be 'in relation' to sale but not 'in connection' with sale or 'by reason' of sale. The sale of main article is independent of sale of optional bought out items.

Profit earned on such bought item should not be includible in Assessable Value of manufactured product, in view of Triveni Engineering v. CCE 2000(122) ELT 386 (CEGAT).

Case of computer software – where bought out item required for main article but considered as an independent article - Some times, manufacturer supplies some bought out items as a composite contract. This bought out item is necessary for functioning of main article, but has a different identity of its own. e.g. software supplied duly loaded on computer. Here, the hardware (computer) cannot function without software, but still 'software' is not part of 'hardware'.  It has been held that cost of software is not includible in value of software even if loaded at the time of delivery from factory.

Bought-out goods supplied with manufactured equipment, but no manufacturing activity - Some times, manufacturer supplies some bought out parts with his own manufactured parts - may be as assembly or as a set. However, there is no manufacturing activity. In such case, duty should not be leviable.

Value of bought out consumables supplied with main Article - A 'consumable' is not 'essential part' of main article, even if the main article cannot function without such consumable. Value of such consumables should not be includible. The reasoning would be same for non-inclusion of optional bought out articles.

Cost of bought out Accessories supplied with main article - If the aforesaid principles are valid, value of bought out accessories supplied along with main article should not be includible.

Profit earned on such bought accessory will not be includible in Assessable Value of manufactured product, in view of Triveni Engineering v. CCE 2000(122) ELT 386 (CEGAT).

Sale to a ‘Related Person’

Transaction Value' can be accepted as 'Assessable Value' when buyer is not related to buyer. As per section 4(3)(b), persons shall be deemed to be 'related' if - (i) They are inter-connected undertakings (ii) They are relatives (iii) Amongst them, buyer is a relative and a distributor of assessee, or a sub-distributor of such distributor or (iv) They are so associated that they have interest, directly or indirectly, in the

business of each other.

The definition of 'related person' includes 'inter connected undertaking'. Only 25% control is enough to make to buyer and assessee as inter connected undertakings. This would have affected many assessees. However, the provisions in respect of  'inter connected undertaking' have been made almost ineffective in valuation rules. Now, the 'inter connected undertakings' will be treated as 'related person' only if they are holding and subsidiary or they are 'related person' under any other clause. In other cases, they will not be treated as ‘related person'. If they are not treated as related person, price charged by assessee to buyer will be accepted as 'transaction value'.

Thus, for all practical purposes, previous definition of 'related person' continues, which was any way totally ineffective.

Inter Connected Undertakings - Buyer and seller are 'related' if they are inter-connected undertakings, as per section 2(g) of Monopolies and Restrictive Trade Practices Act, 1969 (MRTP). - Explanation (i) to section 4(3)(b) of Central Excise Act.

As explained above, provisions in respect of 'inter connected undertaking' as 'related person' have been made almost ineffective in the Valuation Rules, 2000.

INTERCONNECTED UNDERTAKING - Section 2(g) of MRTP Act gives definition of interconnected undertaking. It is possible to have inter-connection between two Companies, two firms, a Company and a firm, a Company and a trust, etc. Just 25% common control is sufficient to call two units ‘inter connected undertakings’.

Interest in business of 'each other' - As per section 4(3)(b)(iv), buyer and seller are 'related' if they are associated that they have interest, directly or indirectly, in the business of each other. It is not enough if only buyer has interest in seller or seller has interest in buyer. Both must have interest, directly or indirectly, in each other - Atic Industries Ltd. v. UOI (1984) 3 SCR 930 = 1984 (17) ELT 323 (SC) = AIR 1984 SC 1495 = (1984) 3 SCC 575. If buyer holds shares of manufacturer assessee, but the assessee does not hold shares in the buyer company, there is no mutual interest. - CCE v. Kersons Mfg Co. of India Ltd. 1998(100) ELT 194 (CEGAT) * Beacon Neyrpic v. CCE 2001(133) ELT 590 (CEGAT).

Relative and a distributor of Assessee  - Hon Supreme Court, in Bombay Tyre International  v. UOI (1984) 1 SCR 347 = 1983 (14) ELT 1896 = (1984) 1 SCC 467 = AIR 1984 SC 420 = 1983 ECR 1627D = 1984 (2) ECC 102 (SC) = (1986) 59 Comp Cas 460 - (Para 44 of order) held that all distributors are not to be treated as ‘relatives’. The term ‘relative and distributor’ should be ‘read down’ and understood to mean as ‘distributor who is a Relative’ of assessee. In commercial parlance, Distributor is one who acts as agent of manufacturer for purpose of distribution of goods. The distinction between distributor, dealer or agent is not clear cut and often these words are inter-changeably used. Generally, distributor is not a buyer of goods from manufacturer on his own account. Distributor has more obligations towards principal and a specified territory may be assigned to him. However, if the relations between manufacturer and buyer are on ‘Principal to Principal’ basis and if the buyer buys the goods outright, he cannot be treated as Distributor.

DEFINITION OF 'RELATIVE' IS AS PER COMPANIES ACT - The term ‘Relative’ carries the same meaning as in Companies Act. [Explanation (ii) to section 4(3)(b) of Central Excise Act]. As per Companies Act, relative means (a) Members of HUF (Hindu Undivided Family) (b) Husband and Wife (c) Any of the 22 relations defined in the Act (like Father, Mother, Son, Son’s wife, Daughter, Father’s Father, Son’s Son etc.). It is clear that only an individual can be a relative of other. If the manufacturer or distributor is a Company or a partnership firm, it cannot be a relative as naturally a Company or partnership firm cannot be wife, husband, etc. of somebody else !

Valuation when sale is through related person - If sale is made through ‘related person’, price relevant for valuation will be ‘normal transaction value’ at which the related buyer sales to unrelated buyer.

As per Valuation Rule 2(b), “normal transaction value” means the transaction value at which the greatest aggregate quantity of goods are sold. The term 'GREATEST AGGREGATE QUANTITY' is used in Rule 7 of Customs Valuation Rules. This rule states that while considering selling price of imported goods in India, unit price at which greatest aggregate quantity of identical or similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the basis for valuation. This principle should apply in deciding 'normal transaction value' under rule 2(b) also.

Goods sold exclusively through ‘related person’ other than ‘'inter-connected undertaking'’ - As explained

above, definition of ‘related person’ has four sub-clauses i.e. (i) Inter-connected undertaking (ii) Relatives (iii) Relative and Distributor or (iv) Interest in each other. If goods are sold by assessee exclusively to or through ‘related person’ as defined in clause (ii), (iii) or (iv) above (i.e. except ‘inter connected undertaking'), relevant price will be ‘normal transaction value’ of the related person to unrelated buyer. The ‘normal transaction value’ shall be considered as on date of removal from the factory. Thus, the actual price at which such goods are sold later by related person will not be relevant. The price of related person ruling at the time of removal from factory of assessee will be relevant.

Goods sold only through inter-connected undertakings - If goods are sold only through inter connected undertaking, as per rule 10, the provision applies only when sale is to ‘inter connected undertaking’ which is a holding or a subsidiary, or it is ‘related person’ under other provisions of section 4(3)(b). In other cases, it is treated as sale to unrelated person.

Thus, even if buyer and assessee are ‘inter connected undertaking’, price charged by assessee to buyer will be the ‘transaction value’ if (a) the buyer is not a holding or subsidiary of assessee or (b) if it is not related as per sub-clause (ii), (iii) or (iv) above.

Price charged by buyer to an unrelated person will be considered only if (a) the buyer is a holding or subsidiary of assessee or (b) if it is related as per sub-clauses (ii), (iii) or (iv) above. In such cases, price will be ‘normal transaction value’ of buyer to unrelated person as per provisions of rule 9.

Central Excise Procedures

Background of Procedures under Excise

All assessees have to register with Central Excise authorities. They have to maintain proper production and stock registers. Goods can be removed from factory only under cover of an Invoice. Excise duty has to be paid through PLA or Cenvat credit on monthly basis. Large assessees have to submit monthly return, while SSI units have to submit quarterly returns.

The procedures prescribed under Central Excise Rules, 1944, have been considerably simplified vide new rules w.e.f. 1.7.2001, which were later supplemented by CBEC’s Central Excise Manual released on 1.9.2001.

Overall scheme of new rules - The old rules of 1944 were all combined, i.e. the rules contained all the provisions in respect of all the procedures. However, in case of new rules, separate rules are made in respect of separate procedures. In some cases, powers have been delegated to Central Government or CBE&C (Board) to issue notifications. Thus, many provisions contained in old rules are now contained in different rules and notifications. Thus now each separate rule is small, but assessee will have to keep track of many rules and notifications. The new rules are as follows -

Central Excise Rules, 2002 Cenvat Credit Rules, 2004Central Excise (Appeal) Rules, 2001Central Excise (Settlement) of Cases) Rules, 2001Central Excise (Removal of Goods & Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001

Various notifications Nos 35/2001-CE(NT) to 56/2001-CE(NT) have been issued during the period 21-6-2001 to 29-6-2001. All these are effective from 1-7-2001.

CBE&C’s Central Excise Manual – In the Budget Speech on 28-2-2001, Finance Minister had stated ‘A new Manual of Procedures on Central Excise and Customs would be brought out by 1st September, 2001. The emphasis would be on simplicity, brevity and transparency. I also propose to simplify the central excise rules to make them user friendly’.

Accordingly, new rules were made effective on 1.7.2001. Later, CBE&C has issued new ‘Central Excise Manual’ on 1.9.2001. This is mainly a compendium of previous instructions given through trade circulars from time to time. The Manual is simple and comprehensive. For an assessee, it is easier to keep track of one Manual rather than innumerable trade notices and circulars.

The forwarding letter dated 31.8.2001 to the Manual states as follows, ‘If there are instructions which have not been expressly covered by this Manual, the same will remain applicable, unless they are repugnant to provisions of the new Rules. It is clarified that provisions of CE Act and Rules (including notifications issued thereunder) shall precede. [It should be ‘prevail’]’. It is stated that the Manual will be revised / updated in September every year.

Rule 31 of CE Rules authorises Board, Chief Commissioner and Commissioner to issue written instructions providing for any supplemental matters arising out of the rules.

Thus, the instructions in the manual have statutory significance, though these instructions cannot override provisions of Act or Rules. Some times, the rules / notifications issued under rules state that procedure shall be prescribed by Board. In such cases, the procedures prescribed in the Manual (or any other trade circular issued by CBE&C) will be normally held as binding. In other cases, the instructions in manual / trade circular are not strictly binding on assessee, though it is highly advisable to follow them.

General provisions in respect of procedures – Some general provisions in respect of procedures are as follows –

PRIVATE RECORDS BY ASSESSEE – Earlier, rules specified various records to be maintained in prescribed formats. Now, most of the ‘statutory records’ have been abolished, except a few like records by EOU. In some cases, like Daily Stock Account (DSA) or Cenvat credit, requirements of records have been prescribed but format is not prescribed. However, this does not mean that no records are required. It only means that assessee can maintain his own private records as long as the requirements as specified in the rules are satisfied. The records should be kept in the factory to which they pertain. The records should be preserved for five years immediately after the financial year to which such records pertain. Non maintenance of records as specified in rules will mean contravention of specified rules and will attract penal action. - Chapter 6 Part I Paras 2.1 and 2.4 of CBE&C’s CE Manual, 2001.

SELF PRE-AUTHENTICATION – The DSA and even other records pertaining to Central Excise shall be pre-authenticated by assessee on first and last page of the book / register. - Chapter 6 Part I Para 2.1(v) and (vi) of CBE&C’s CE Manual, 2001. - - Naturally, such pre-authentication is possible only if records are kept in book form. Pre-authentication is not possible if (a) Records are maintained on computer (b) Records are maintained in loose leaf form. Note that there is no statutory requirement that the records must be kept in book form only.

SUBMISSION OF LIST OF RECORDS – Every assessee should submit a list in duplicate, of all records prepared or maintained by him for accounting of transactions in regard to receipt, purchase, manufacture, storage, sale or delivery of goods including inputs and capital goods to visiting Central Excise officer. [Rule 22(2) of Central Excise Rules].

SUBMISSION OF RECORDS – The assessee is required to submit to his range officer duly empowered by Commissioner or audit party or audit persons of C&AG the following, for scrutiny – (a) Records maintained or prepared in terms of rule 22(2) (b) Cost Audit Report u/s 233B of Companies Act (c) Income Tax Audit Report u/s 44AB of Income Tax Act

MEANING OF ‘RECORD’ – The term 'record' means all records prepared or maintained by assessee for accounting of transactions in regard receipt, purchase, manufacture, storage, sales or delivery of goods including inputs and capital goods. All accounts, agreements, invoice, price list, return, statement or any other source document, whether in writing or in any other form shall be treated as ‘records’. 'Source document' are those documents which form basis of accounting transactions. These include sales invoice, purchase invoice, journal voucher, delivery challan and debit or credit notes. - Chapter 6 Part I Para 2.2 of CBE&C’s CE Manual, 2001.

ELECTRONIC MAINTENANCE OF EXCISE RECORDS – Provisions is specified in Chapter 6 Part  III of CBE&C’s CE Manual, 2001.

EXCISE AND CUSTOMS ON E-MAIL AND INTERNET - Information about excise is available on internet at website –http://www.cbec.gov.in and http://www.finmin.nic.in . Notifications, Act, rules, Board circulars etc. in respect of Central Excise, Customs and Service Tax are available on the site. Surprisingly, they are reasonably up-to-date (though not always – certainly you cannot expect that from Government). Budget can be seen on finmin site.

Another Government site http://indiacode.nic.in gives text of many Central Government Acts.

UPDATES ON INDIRECT TAXES – Many internet sites are available which provide regular updates on Indian laws. You may visit http://www.dateyvs.com to get regular updates on Indian Indirect Taxes and Corporate Laws. The site provides * up-to-date information about changes in law * Basic information about important laws * Links to various useful sites. Free replies to queries are given.

Summary of Procedures - Some procedures are basic, which every assessee is required to follow.

Besides, some procedures are required to be followed as and when required.

Basic Procedures

(1)     Every person who produces or manufactures excisable goods, is required to get registered, unless exempted. [Rule 9 of Central Excise Rules]. If there is any change in information supplied in Form A-1, the same should be supplied in Form A-1.

(2)     Manufacturer is required to maintain Daily Stock Account (DSA) of goods manufactured, cleared and in stock. [Rule 10 of Central Excise Rules]

(3)     Goods must be cleared under Invoice of assessee , duly authenticated by the owner or his authorised agent. In case of cigarettes, invoice should be countersigned by Excise officer. [Rule 11 of Central Excise Rules]

(4)     Duty is payable on monthly basis through GAR-7 challan / Cenvat credit by 5th/6th of following month, except in March.  SSI units have to pay duty on monthly  basis by 15th/16th of following month. Assessee paying duty through PLA more than Rs 50 lakhs per annum is required to make e-payment only [Rule 8].

(5)     Monthly return in form ER-1 should be filed by 10th of following month. SSI units have to file quarterly return in form ER-3. [Rule 12 of Central Excise Rules] - - EOU/STP units to file monthly return in form ER-2 – see rule 17(3) of CE Rules 

(6)     Assessees paying duty of Rs one crore or more per annum through PLA are required to submit Annual Financial Information Statement for each financial year by 30th November of succeeding year in prescribed form ER-4 [rule 12(2) of Central Excise Rules].

(7)     Specified assessees are required to submit Information relating to Principal Inputs every year before 30th April in form ER-5, to Superintendent of Central Excise. Return for 2004-05 was required to be submitted by 31-12-2004 [rule 9A(1) to Cenvat Credit rules inserted w.e.f. 25-11-2004]. Any alteration in principal inputs is also required to be submitted to Superintendent of Central Excise in form ER-5 within 15 days [rule 9A(2) to Cenvat Credit rules inserted w.e.f. 25-11-2004]. Only assessees manufacturing goods under specified tariff heading are required to submit the return. The specified tariff headings are – 22, 28 to 30, 32, 34, 38 to 40, 48, 72 to 74, 76, 84, 85, 87, 90 and 94; 54.02, 54.03, 55.01, 55.02, 55.03, 55.04. Even in case of assessees manufacturing those products, only assessees paying duty of Rs one crore or more (either through current account or Cenvat credit) are required to submit the return.

(8)     Assessee who is required to submit ER-5 is also required to submit monthly return of receipt and consumption of each of Principal Inputs in form ER-6 to Superintendent of Central Excise by tenth of following month [rule 9A(3) to Cenvat Credit Rules inserted w.e.f. 25-11-2004]. Only those assessees who are required to submit ER-5 return are required to submit ER-6 return.

(9)     Submit Annual Installed Capacity Statement in form ER-7 every year before 30th April.

(10)  Every assessee is required to submit a list in duplicate of records maintained in respect of transactions of receipt, purchase, sales or delivery of goods including inputs and capital goods, input services and financial records and statements including trial balance [Rule 22(2)].

(11)  Inform change in boundary of premises, address, name of authorised person, change in name of partners, directors or Managing Director in form A-1. [Refer Instructions given below form A-1]

 

These are core procedures which each assessee has to follow. There are other procedures which are not routine.

The non-core procedures are as follows -

(a)      Export without payment of duty or under claim of rebate [Rules 18 and 19 of Central Excise Rules]

(b)     Receipt of goods for repairs / reconditioning [Rule 16 of Central Excise Rules]

(c)      Receipt of Goods at concessional rate of duty for manufacture of Excisable Goods.

(d)     Payment of duty under Compounded Levy Scheme

(e)      Provisional Assessment [Rule 7 of Central Excise Rules]

(f)      Warehousing of goods.

(g)      Appeals and settlement.

 

Following are the returns to be filed

Following are the returns to be filed

Form of Return

Description Who is required to file

Time limit for filing return

ER-1

[Rule 12(1) of Central Excise Rules]

Monthly Return by large units

Manufacturers not eligible for SSI concession

10th of following month

ER-2

[Rule 12(1) of Central Excise Rules]

Return by EOU

EOU units 10th of following month

ER-3

[Proviso to Rule 12(1) of Central Excise Rules]

Quarterly Return by SSI

Assessees availing SSI concession

20th of next month of the quarter

ER-4

[rule 12(2) of Central Excise Rules]

Annual Financial Information Statement

Assessees paying duty of Rs one crore or more per annum  either through PLA or Cenvat or both together (Till 29-9-2008, the provision was applicable only when payment through PLA alone was more than Rs one crore).

Annually by 30th November of succeeding year

ER-5

[Rules 9A(1) and

Information relating to Principal Inputs

Assessees paying duty of Rs one crore or more

Annually, by 30th April for the current year

9A(2) of Cenvat Credit Rules]

per annum (either through PLA or Cenvat or both together) and manufacturing goods under specified tariff headings (Till 29-9-2008, the provision was applicable only when payment through PLA alone was more than Rs one crore).

(e.g. return for 2005-06 is to be filed by 30-4-2005].

ER-6 [Rule 9A(3) of Cenvat Credit Rules]

Monthly return of receipt and consumption of each of Principal Inputs

Assessees required to submit ER-5 return

10th of following month

ER-7 [Rule 12(2A) of Central Excise Rules]

Annual Installed Capacity Statement

All assessees Annually, by 30th April for the current year.

Form as per Notification No. 73/2003-CE(NT) [Rule 9(8) of Cenvat Credit Rules]

Quarterly return of Cenvatable Invoices issued

Registered dealers

By 15th of following month

ST-3 [Rule 9(9) of Cenvat Credit Rules and rule 7(2) of Service Tax Rules]

Half yearly return of taxable services provided

Person liable to pay service tax

Within 25 days from close of half year

ST-3 [Rule 9(10) of Cenvat Credit Rules]

Hal yearly return of Cenvat credit distributed

Input Service Distributor

Within one month from close of half year

 

These are core procedures which each assessee has to follow. There are other procedures which are not routine. These are as follows -

(a)      Export without payment of duty or under claim of rebate [Rules 18 and 19 of Central Excise Rules]

(b)     Receipt of goods for repairs / reconditioning [Rule 16 of Central Excise Rules]

(c)      Receipt of Goods at concessional rate of duty for manufacture of Excisable Goods.

(d)     Payment of duty under Compounded Levy Scheme

(e)      Provisional Assessment [Rule 7 of Central Excise Rules]

(f)      Warehousing of goods.

(g)      Appeals and settlement

Administrative set up of Central Excise

Rules and procedures often prescribe designations of various officers of Excise and it is essential to have an idea of administrative set up of department to understand the powers and status of these authorities. Administration of Central Excise is under Ministry of Finance, Government of India.

Board - CBE&C - A Central Board of Excise and Customs (CBE&C - called ‘Board’) has been formed with headquarters at New Delhi. The Board is formed under Central Boards of Revenue Act, 1963. This Board, consisting of six/seven members, headed by Chairman, has powers to administer the Excise Act. Chairman of Board is empowered to distribute work among himself and other members and specify cases which will be considered jointly by Board.

Rule 3(1) of Central Excise Rules authorises Board to appoint Central Excise Officers. Board can exercise all powers conferred on these officers under the Central Excise Act.

Similarly, section 4(1) of Customs Act authorises Board to appoint officers of customs. As per section 4(2) of Customs Act, Board can authorise Chief Commissioner, Commissioner of Customs, Joint/Deputy/Assistant Commissioner to appoint officers below Assistant Commissioner.

Section 37B of CEA [parallel section 151A of Customs Act] authorises Board to issue orders, instructions and directions to Central Excise Officers for purposes of uniformity in the classification of excisable goods or with respect to levy of excise duties on such goods. Rule 31(1) of Central Excise Rules (Previous Rule 233) authorises CBE&C, Chief Commissioner and Commissioner to issue written instructions providing for any supplemental matters arising out of the rules. These administrative orders are binding on lower officers.

DEPARTMENTAL CIRCULARS AND TRADE NOTICES NOT BINDING BUT DEPARTMENT CANNOT TAKE A STAND AGAINST TRADE NOTICES - View of Supreme Court is that departmental circulars and trade notices are not binding on assessee or quasi-judicial authorities. However, department itself, which has issued the circular, cannot take a stand contrary to the circular. Department can withdraw the circular, but with prospective effect - view confirmed in Commissioner of Sales Tax v. Indra Industries 2000(6) SCALE 392 (SC 3 member bench)].

Chief Commissioner of Central Excise - Country is divided in several zones. Each ‘zone’ is under supervision of ‘Chief Commissioner of Central Excise’. Rule 3(2) of Central Excise Rules authorised Board to specify jurisdiction of Chief Commissioner, Commissioner or Commissioner (Appeals).

Posts of 34 Chief Commissioners have been sanctioned vide Notification No. 14/2002-CE(NT) dated 8-3-2002 read with 14/2002-Cus(NT) dated 7-3-2002. [23 in Excise and 11 in Customs]. The notifications have been made effective w.e.f. 1-11-2002.

In the interior i.e. non-coastal areas, Chief Commissioner of Central Excise looks after customs work also.

Commissioner of Central Excise - Each ‘zone’ covers various Commissionerates and Commissioner of Central Excise (CCE) is Administrative in-charge of the ‘Commissionerate’.

As per Notification No. 14/2002-Cus(NT) dated 7-3-2002 (made effective from 1-11-2002), there are 92 Commissioners and 71 Commissioner (Appeals).

Rule 3(1) empowers CBE&C to confer on any officer the powers of conferred by Central Excise Rules by issue of notification.

There are 35 Commissioners of Customs [Notification No. 15/2002-Cus(NT) dated 7-3-2002] and 19 Commissioner of Customs (Appeals) [Notification No. 16/2002-Cus(NT) dated 7-3-2002]. These notifications are effective from 25-10-2002.

In the interior i.e. non-coastal areas, Commissioner of Central Excise look after customs work also.

Additional Commissioner of CE - There may be one or more Additional Commissioner in a Commissionerate. Appeal against order of Commissioner lies with CESTAT while appeal against order of Additional Commissioner lies with Commissioner (Appeals). Restrictions on powers of Additional Commissioner have been placed through administrative instructions. Commissioner has unlimited powers of adjudication, while Addl Commissioner has restricted powers of adjudication.

Joint Commissioner - This post has been created in May, 1999, subsequent to implementation of report of fifth pay commission. [The post is equivalent to earlier Dy Commissioner]

Deputy Commissioner, Assistant Commissioner and Superintendent - Each Commissionerate of Central Excise is divided into divisions and each division is under administrative control of ‘Deputy Commissioner' or 'Assistant Commissioner of Central Excise’. Assistant Commissioner (Senior Scale) is designated as 'Deputy Commissioner'. However, both Assistant Commissioner and Deputy Commissioner have same powers. The post of Dy Commissioner has been created in June 1999, subsequent to implementation of report of fifth pay commission [Previous Dy Commissioners have been elevated as 'Jt Commissioners'].

The division under each Deputy / Assistant Commissioner of Central Excise is further divided into various ranges and each range is under control of Superintendent of Central Excise, who is of the rank of a Gazetted Officer. Inspectors work under Superintendent and some powers have been delegated to them. Inspector is not a Gazetted Officer.

Registration of factory/warehouse

As per section 6 of CEA, registration is compulsory for (a) every manufacturer or producer of excisable goods (b) warehouse where goods are stored without payment of duty.

As per Rule 9 of Central Excise Rules (Earlier rule 174), every person who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods shall get registered. The rule also authorises Board to issue notifications (a) specifying conditions and procedures for registration and (b) granting exemption to person or class of persons from provisions of registration.

Registration is compulsory as both section 6 of CEA and rule 9(1) use the words ‘shall’. It has been clarified that registration granted in earlier old rule 174 will be valid under new rules.

Application for registration should be made in prescribed form A-1 issued vide notification No. 35/2001-CE(NT). The requirements for registration, as contained in Notification No. 35/2001-CE(NT) are -

Separate registration is required for each separate premises, if person has more than one premises. [However, in case of textile and textile articles, if a person has more than one premises within the jurisdiction of one Commissioner, he can obtain a single registration].Registration is not transferable. If business is transferred, fresh registration has to be obtained by the transferee.  Registration certificate shall be granted within seven days of receipt of duly completed application. Registration Certificate will be issued in prescribed form ‘RC’. [Earlier form R-2] Change in constitution of partnership firm or Company should be intimated within 30 days of change. In case of such change, fresh registration is not required.If the manufacturer ceases to carry on operations for which he is registered,  he should apply for de-registration. Registration can be revoked or suspended if the holder of registration or any person in his employment commits breach of any of the provisions of Central Excise Act or Rules or has been convicted under section 161 of Indian Penal Code.If there is any change in information given in form A-1, the change should be informed in form A-1 itself.

REGISTRATION OF DEALERS - As per Cenvat rules, dealers / importers can issue invoices for Cenvat purposes, i.e. buyer can avail Cenvat on basis of such invoices. Dealers who intend to issue Cenvatable Invoices need registration. Other dealers (i.e. those who do not intend to issue Cenvatable Invoice) are exempt from registration.

Procedure for obtaining registration. - Procedure for registration has been prescribed vide CBE&C circular No. 662/53/2002-CX dated 17-9-2002 and notification No. 35/2001-CE(NT) dated 26-6-2001.

Application for registration in form A-1 duly completed and signed should be submitted in office of jurisdictional Assistant/Deputy Commissioner in duplicate. In case of EOU located in port towns,

application should be submitted to DC/AC Customs, who is administrative in-charge of the EOU. 

EOU units procuring goods from DTA or supplying goods to DTA are required to be registered. EOU unit having no inter-linkage with domestic economy through sale or purchase of goods need not register. [There will be hardly such a unit]. Unit in SEZ is not required to be registered under Central Excise.

Application should be accompanied by self-attested copy of PAN issued by Income Tax department. If PAN is not available, copy of application made for PAN should be submitted. Temporary 15 digit registration number can be issued which will later be converted into permanent number based on PAN.

The application will be scrutinized by inspector in the office of AC/DC and if found in order, it shall be fed into computer through website SACER (System for Allotment of Central Excise Registration). Suitable entry will be made of the action taken in the record to be maintained. Registration Certificate bearing the 15 digit PAN based registration number will be generated by computer system, which will be delivered to assessee on the spot. Registration Certificate should be ready within 30 minutes on completion of data entry. If it is not possible to issue Registration certificate immediately, acknowledgment of application will be given on the spot. Later, registration certificate shall be either sent by post or handed over personally to assessee on the next working day.

After grant of registration certificate, original copy will be retained by divisional office and duplicate copy will be sent to Range Superintendent for post facto verification. The Range Officer and Sector Officer (i.e. Superintendent and Inspector) shall verify the declared address and premises within 5 working days. If found in order, it will be certified on the duplicate copy and sent to Divisional Office for record. Name of officer doing verification and date of verification will be entered into system. In case of EOU, verification is already done while granting Customs private bonded warehouse. Hence, post facto verification may not be required.

Major variation like fake address, non-existence of factory etc. shall be intimated to AC/DC for revoking the registration, after giving opportunity of hearing.

In case of company / partnership firm, the name of company / firm should be mentioned as ‘legal name of business’ and not of the person who is signing the application.

Exhibition of registration certificate – The registration certificate or a copy thereof shall be exhibited by registered person in a conspicuous part of registered premises. - Chapter 2 Part  I Para 7.3 of CBE&C’s CE Manual, 2001.

Registration of different portions of same factory - Often a factory has different portions located in adjoining premises, or premises separated by road, railway line or canal. In such case, Commissioner can allow single registration, subject to proper accountal of movement of goods from one premise to other and other conditions and limitations as he may specify. - Para 3 of notification No. 36/2001-CE(NT) dated 26.6.2001.

Excise Control Code - ECC to assessee - Each registered person is given an assessee code (Excise Control Code - ECC). New ECC code has been introduced w.e.f. 1-1-2000.

In the new system, PAN of Income Tax will be common identifier by various agencies like excise, customs, DGFT, RBI etc. PAN is a 10 digits alpha numeric code and can identify upto 96 crores business entities. It is generated centrally by the computer system. Advantage of the code is that it is not dependent upon office of registration of the company. Common identifier by all departments will facilitate linkages, exchange of information and verification. Assessee will have to obtain and quote only one number to all departments.

Exemption from registration - Rule 9(2) of Central Excise Rules authorises Board to grant exemption from registration in certain cases. Under these powers, Notification No. 36/2001-CE(NT) grants exemption from registration, in various cases as explained below.

When manufacturer is completely exempt from duty - If products of a manufacturer are completely and unconditionally exempt from duty, he is required to file a declaration in prescribed form to CE authorities. Mercifully, such declaration is required to be filed only once and not every year.

Exemption from registration if goods conditionally exempt - Some goods are exempt on basis of value of clearances e.g. goods manufactured by small scale units are exempt upto turnover of Rs 100 lakhs. Such units are also exempt from registration. An SSI unit has to submit a declaration in prescribed form, only in cases where its turnover is more than 'specified turnover’ of Rs 90 lakhs. If clearances are more than

'specified turnover' (Rs 90 lakhs), a declaration has to be submitted. However, they do not have to register with excise authorities. They do not have to follow any excise procedures. Such declaration has to be filed only once and not every year.  SSI units whose clearances are less than Rs 90 lakhs in a financial year are not required to submit any declaration. While calculating limit of Rs 90 lakhs, export turnover is not required to be considered, as the limit of Rs 90 lakhs is only in respect of clearances for home consumption.

EXPORT TURNOVER NOT TO BE CONSIDERED FOR PURPOSE OF EXEMPTION FROM REGISTRATION - As per earlier instructions, while calculating turnover of Rs 100 lakhs for exemption from registration, export turnover was not to be considered. Thus, if clearance for home consumption (i.e. excluding export turnover), are less than Rs 100 lakhs, it is not necessary to take registration and follow excise procedures. - CBE&C circular No 284/118/96-CX dated 31.12.1996. Since para (1)(b)(ii) of notification No 36/2001-CE(NT) dated 26.6.2001, which grants exemption from registration, uses similar words as per earlier notification, the instructions are still valid.

Exemption if goods got manufactured from others - If a person gets goods manufactured on his account from others, he is the ‘manufacturer’ and has to obtain registration. However, he can be exempted from registration if (a) He authorises actual manufacturer to comply with all excise procedural formalities (b) Agrees to furnish information regarding selling price for determination of Assessable Value.

In case of textile and textile articles, the duty liability is on the raw material supplier. Hence, he is not exempted from registration, unless the job worker himself, at his option, agrees to register himself and pay excise duty.

Special provision in respect of textile articles including readymade garments - The exception is that in case of textile articles (yarn and fabrics) and readymade garments or made up textile articles, duty liability is on raw material supplier, even if he is not really the manufacturer. He will have to register with central excise and pay duty. [Rule 12B(1)] of Central Excise Rules].

Wholesale and retail traders and dealers - Persons carrying on wholesale trade or dealers in Excise require registration only if they intend to issue Cenvatable Invoice. Otherwise, they are exempt from registration.

‘Factory’ under Central Excise - Section 2(e) define ‘factory’ as any premises, including the precincts thereof, wherein or in any part of which, excisable goods are manufactured; any part of manufacturing process connected with production of these goods is ordinarily carried on. Thus, whole premises will be ‘factory’ if in any of its part, excisable goods are manufactured or manufacturing process connected with production is carried out. - Bongaigaon Refinery and Petro Chemical Ltd. v. CCE - 1992 (57) ELT 383 (Cal HC). In Grauer Weil (I) Ltd. v. CCE - (1995) 1 SCC 77, it was held that ‘any premises including precincts thereof’ covers all buildings with its surroundings which form part of the unit. In Superintending Engineer v. CCE 1992(59) ELT 610 (CEGAT), it was held that 'premises' is not restricted to buildings, but it covers open land also.

CENVAT ALLOWED ONLY IF INPUTS / CG USED WITHIN FACTORY - Cenvat credit is allowed only if inputs or capital goods are used within the factory as defined in section 2(e). Hence, definition of 'factory' is very important for Cenvat purposes. See case law under Cenvat.

Storage and Accounting of Goods

Since excise is a duty on manufacture of goods, duty liability is fastened as soon as goods are manufactured. However, under Rule 4(1) of Central Excise Rules, goods cannot be removed from the place they are produced or manufactured without payment of duty. Thus, finished goods can be stored in place of manufacture without payment of duty. This only defers the liability till clearance of goods from factory.

There is no time limit within which goods must be removed from the place of manufacture or production (that time it was store room). Duty is payable only when goods are removed and hence duty cannot be demanded in respect of goods accounted for and lying in the store room. - Tirupati Cigarettes v. CCE 1998(101) ELT 426 (CEGAT).

Daily Stock Account of stored goods - A daily stock has to be maintained by every assessee. [Rule 10(1) of Central Excise Rules]. [earlier rule 53(1)]. [Till 30-6-2000, the record was required to be maintained in prescribed form termed as RG-1 register. That register has been scrapped. However, records are required to be maintained].

The records should be maintained on daily basis, in a legible manner, indicating particulars regarding (a) Description of goods manufactured or produced (b) Opening Balance (c) Quantity produced or manufactured (d) Inventory (i.e. stock) of goods (e) Quantity Removed (e) Assessable Value (f) Amount of duty payable (g) Particulars regarding amount of duty actually paid.

The first page and last page of such account book shall be duly authenticated by the producer or manufacturer or his authorised agent. All such records shall be preserved for 5 years.

Note that concept of ‘store room’ and ‘stock taking’ has been abolished w.e.f. 1.7.2001. Thus, now there is no restriction in storage of final products in factory and these can be stored anywhere.

When entry is required in DSA - As soon as goods are manufactured, these should be deposited in store room. In the opinion of author, the correct legal position is that entry in Daily Stock Account (DSA) should be made only after goods are fully manufactured, duly tested and packed by assessee.

Storage for trading - Some manufacturers may like to trade from their factory in goods not manufactured by them. Manufacturers of consumer goods wish to maintain a retail sale shop near the factory, which is open to public. So far, there were restrictions, as the old rule 51A of Central Excise provided that no duty paid goods shall be allowed to enter or retained in any part of premises of factory, except with general or special order of Board or Commissioner. Now, that rule has been deleted and there is no corresponding provision in new rules. Hence, in the opinion of author, there is now no prohibition if manufacturer wants to trade in goods from his factory. Of course, proper records will have to be maintained. The fact should be disclosed in part II of form A-1 which is application for registration. However, as per the present form of registration certificate (RC), amendment to registration certificate is not required.

If the manufacturer intends to issue Cenvatable Invoice, separate registration certificate as ‘dealer’ should be obtained. Separate series of Invoices may be used as ‘Dealer’s Invoice’ and this fact should be informed to department.

Department has clarified that a manufacturer can bring duty paid goods in the registered premises for trading activity and permission from excise department is not required. However, a factory cannot receive goods from outside which are identical to those manufactured by assessee, without permission from Commissioner. – CCE, Pune II instruction No. 2/2001 dated 12.11.2001 – similar CCE, Indore TN 29/2002-CE dated 7-10-2002. [The instruction that identical goods should not be brought without permission does not seem to have any legal backing, in absence of any statutory provision].

Remission of duty on lost/destroyed goods - Goods which are fully manufactured and entered in Daily Stock Account (DSA) are liable for duty. However, if these are lost or destroyed in storage, by natural causes or by unavoidable accident or are unfit by consumption for marketing, remission of duty can be given by Commissioner on application. ‘Remission’ means waiver or cancellation of excise duty legally payable. Section 5 of CEA provides that Central Government can provide for remission of duty of excise payable on excisable goods, which due to any natural cause, are found to be deficient in quantity, by making rules in that behalf.

If the goods were not entered in 'daily stock account' as they were not fully manufactured, question of remission of duty does not arise at all as there is no duty liability.

The application for remission has to be made before removal of the goods from factory. [Rule 21 of Central Excise Rules].

Penalty for not maintaining records - Not accounting for excisable goods manufactured, produced or stored by assessee is an offence under Rule 25(1)(b) of Central Excise Rules. Penalty upto duty payable on goods can be imposed and offending goods can be confiscated.

Goods can be confiscated and penalty can be imposed if DSA (daily stock account - that time RG-1 register) is not maintained upto date and there is overwriting and cutting in the accounts - Hawkins Cookers Ltd. v. CCE 1997(12) ELT 255 (CEGAT SMB).

Difference in stock as per DSA and physical stock - Though the concept of store room and stock taking have been deleted in new rules, not maintaining proper records of excisable goods is an offence under rule 25(1)(b) of Central Excise Rules. As per this rule, all such (contravening) goods are liable to confiscation, plus penalty upto duty on the excisable goods in respect of which contravention has been committed or Rs 10,000 whichever is more, can be imposed. Hence, in the opinion of author, if difference is found between physical stock and book stock or if finished goods are not entered in Daily Stock Account, penalty can be imposed and goods in respect of which contravention is done can be confiscated.

Clearance of Goods from factory

'Clearance' means removal from the factory of excisable goods. Rule 11 of Central Excise Rules [earlier rule 52A] provides that excisable goods can be removed from factory only under an ‘Invoice’.  Requirements of Invoice are as follows :

CONTENTS OF INVOICE - As per Rule 11(2) of Central Excise Rules, invoice shall contain (a) Registration Number (b) Name of consignee (c) Description and classification of goods (d) Time and date of removal (e) Quantity and Value of goods (f) Rate of duty (g) Duty payable on the goods. [Obviously, other details like name and address of assessee and consignee should be mentioned. Mode of transport may also be indicated though not mandatory].

SERIAL NUMBERED - Invoice should be serially numbered.  Earlier rule provided for ‘Printed Serial Number’. Now, the word ‘printed’ has been removed. However, the serial number can be given either by printing or by franking machine. Hand written serial numbers shall not be accepted. The serial number should start from 1st April and will continue for the whole financial year. - Chapter 4 Part I Paras 3.1 and 3.2 of CBE&C’s CE Manual, 2001.

INVOICE IN TRIPLICATE WITH SUITABLE MARKS - Invoice should be in triplicate and should be marked as follows (i) Original shall be marked ‘ORIGINAL FOR BUYER’ (ii) Duplicate copy shall be marked ‘DUPLICATE FOR TRANSPORTER’ (iii) Triplicate shall be marked ‘TRIPLICATE FOR ASSESSEE’.

Each copy should be distinctively marked as aforesaid. In some cases, it is observed that the copies are either stamped or all copies are printed with all the four descriptions and one of them is ticked. This practice is illegal and should be stopped forthwith to avoid detention of consignments or denial of Cenvat credit - Pune Commissionerate TN 122/95 dated 3-1-1996.

ADDITIONAL COPIES OF INVOICE – Assessee can make more copies of invoice for other requirements. These should be clearly marked as ‘NOT FOR CENVAT PURPOSES’.

SERIAL NUMBERS TO BE INFORMED - Before making use of the invoice book, serial numbers shall be intimated to Range Superintendent. It is not necessary to obtain dated acknowledgment. Hence, intimation though post, e-mail, fax or hand delivery is sufficient. [What he does with that information is a mystery and closely guarded secret].

ONE SET OF INVOICE BOOK AT A TIME, BUT SEPARATE SERIES FOR EXPORT PERMITTED - There should be only one invoice book in use at a time. Separate sets of invoices can be maintained with different serial numbers, with permission of Assistant / Deputy Commissioner. He can permit use of more than one invoice books of each type in special circumstances of each case. The Invoices should have different numeric serial numbers for different sets.

However, general permission has been granted to use two different invoice books – one for removals for home consumption and other for removal for export. Assessee has to just intimate AC / DC. No permission is required. - Chapter 4 Part I Para 5.2 of CBE&C’s CE Manual, 2001.

ROUNDING UP OF DUTY - As per section 37D, duty, interest, penalty etc. should be rounded off to nearest Rupee. Part less than 50 Ps shall be ignored.

PRE-AUTHENTICATION OF INVOICE - Each foil of the Invoice shall be pre-authenticated by the assessee - by owner, working partner, Managing Director or Secretary or any person duly authorised for this purpose, before being brought into use. [Rule 11(5) of CE Rules]. The company, owner or working partner can authorise any person to authenticate the Invoice. Copy of letter of authority should be submitted to Range Office. - Chapter 4 Part I Para 6.1 of CBE&C’s CE Manual, 2001.

INVOICE SHOULD BE IN BOOK FORM – Rule 11(4)  of Central Excise Rules [earlier rule 52A(7)] refers to ‘Invoice Book’. Hence, invoices should be in book form i.e. bound form. Original and duplicate should be delivered to the consignee and triplicate copy should be retained in the Invoice Book. The invoices can be ‘loose leaf’ only if Invoices are computerised. Rule 11(3) [earlier rule 52A(3)] states that Invoice shall be marked as ORIGINAL FOR BUYER etc.

CENVAT CREDIT CANNOT BE DENIED FOR MINOR DEFECTS – Cenvat credit cannot be denied for minor defects in invoice.

Provisions in respect of computerisation of Invoices - Computerisation of Invoices is freely permitted

and no permission is required. If running stationary is used, the stationary should be pre-printed with distinctive names and marks of the assessee. After invoices are prepared, triplicate copy shall be retained in bound book form. - Chapter 4 Part I Para 5.4 of CBE&C’s CE Manual, 2001.

If invoices are prepared on computer, generation of serial number by computer at the time of printing of invoice on blank stationery of computer is permitted. However, this is so only if the software is such that computer automatically generates number and same number cannot be generated more than once. - Chapter 4 Part I Para 3.3 of CBE&C’s CE Manual, 2001.

Supplementary Invoice for differential duty - Assessee may have to pay differential duty as his assessment was provisional or he got price escalation from buyer later or duty was short paid through mistake or for any other reason. In such cases, he has to pay differential duty by preparing supplementary invoice. Buyer can avail Cenvat credit on basis of such supplementary invoice, except when such differential duty payment was on account of fraud, suppression of facts, collusion or wilful misstatement. [Rule 7(1)(b) of Cenvat Credit Rules].

Though rules do not specify, such supplementary invoice should be from same series of invoice. It should give cross reference to the original invoice under which the goods were cleared.

Relevant Date for determination of duty and tariff valuation – Rule 5 of Central Excise Rules [earlier rule 9A] provides that rate of duty and tariff valuation applicable for excisable goods shall be decided as follows :

DATE OF ACTUAL REMOVAL FROM FACTORY OR WAREHOUSE – Duty will be payable at rate and valuation as applicable at the time of actual removal from factory or warehouse, except in case of khandsari molasses.

DATE IN CASE OF KHANDSARI MOLASSES – Rate of duty applicable in case of khandsari molasses shall be the rate in force on date of receipt of such molasses in the factory of the procurer of such molasses. [The provision has been made as in case of khandsari molasses, duty is payable by procurer and not the manufacturer] - Rule 5(2) of Central Excise Rules. - - Validity of this rule has been upheld in Ranson Industries v. UOI 2003(151) ELT 53 (J&K HC DB).

DATE WHEN GOODS CLEARED FOR CAPTIVE CONSUMPTION – If excisable goods are used within the factory (captive consumption), the date of removal will be the date on which the goods are issued for such use within the factory. – Explanation to Rule 5(2) of Central Excise Rules.

GOODS CLEARED FOR EXPORT BUT NOT EXPORTED – There is no specific provision. As per rule 5, relevant date is date of removal from factory. Hence, it appears that if goods cleared from factory are not exported, rate of duty or tariff value applicable will be rate or value in force on the dates when the goods were removed from the factory. Same principle should be applicable to goods cleared to be re-warehoused at another place, but sold without re-warehousing.

DATE WHEN GOODS ARE CLANDESTINELY REMOVED – New rules do not make any provision in respect of cases when goods are clandestinely removed. Thus, it will be necessary to estimate the dates/period during which the goods might have been removed and apply rate as applicable during that period.

Payment of duty

Goods have to be cleared from factory (or under bond for export or Chapter X procedure without payment of duty), under an Invoice. Duty is payable on  monthly basis. Duty can be paid through current account (PLA) and/or Cenvat credit. [Till 31-3-2000, duty was required to be paid on daily basis or consignment basis through PLA / Cenvat credit, before removal of goods from factory].

Goods have to be cleared from factory, under an Invoice. Duty is payable on  monthly basis. [Rule 8 of Central Excise Rules]

SPECIAL PROVISIONS FOR MONTH OF MARCH - Since Government accounts close on 31st March, special provisions are made for payment of duty in March. Duty in respect of clearances in the month of March are payable by 31st March only and not in the following month.

CENVAT CREDIT AVAILABLE INSTANTLY - Even if the manufacturer pays duty on monthly basis, the buyer of goods is entitled to get Cenvat credit as per Cenvat rules as soon as goods are received in the

factory, as if the duty has been already paid on the goods. - Rule 8(2) of Central Excise Rules.

PAYMENT BEFORE REMOVAL EACH TIME IS ALSO PERMISSIBLE - Till 31-3-2000, assessee was required to make payment of duty before clearance of goods. If assessee wants to pay duty on daily basis or consignment basis, he is allowed to do so– Chapter 3 Part V Para 1.2 of CBE&C’s CE Manual, 2001.

EOU/SEZ HAVE TO PAY DUTY EACH TIME BEFORE CLEARANCE – For some unknown and obscure reasons, the facility of monthly payment of excise duty is not available to EOU/SEZ units. They have to pay excise duty every time before clearance of goods, as per clear provisions of rule 17 of Central Excise Rules.

recovery of duty self assessed under rule 6 and interest payable under rule 8(3) [Rule 8(4)]. [Section 11 provides for recovery of amount due from assessee by attachment and sale of excisable goods or by certification proceedings].

Maintenance of PLA – Assessee should pay duty through account current (Popularly known as PLA – Personal Ledger Account). Any assessee who has obtained 15 digit ECC number from Superintendent can operate a current account. No specific permission is necessary.

The PLA is credited when duty is deposited in bank by TR-6 challan and duty is required to be paid by making a debit entry in the PLA on  monthly basis. PLA and Cenvat credit should be used only for payment of excise duty and not for other payments like rent, fines, penalties etc.

PLA contains following details : (a) Serial No. and date, (b) details of credit like TR-6 challan number, date and amount - separately for each subhead of excise duty like basic duty, special duty, additional duty etc. (c) details of debit and (d) balance. PLA has to be maintained in triplicate using indelible pencil and both sided carbon. Each entry should be serially numbered and should be made on a separate line. The running serial number should start from 1 every financial year. Both debit and credit entry should not be on same line and there should be separate line for each debit or credit entry. Mutilations or erasures of entries once made in PLA are not allowed. If any correction is necessary, the original entry should be neatly scored out and attested by assessee. Two copies of PLA and copies of TR-6 receipted challans shall be submitted along with monthly / quarterly ER-1 return.  Form of PLA has been prescribed in Annexure 8 of CBE&C’s CE Manual, 2001.

It is not necessary that there must be some minimum credit balance in PLA. It is sufficient if there is balance at the time of debit in PLA on monthly basis. - Chapter 3 Part V Para 3.4 of CBE&C’s CE Manual, 2001.

Debit to PLA is payment of duty -   It has been held that debit of duty to PLA is effective payment of duty and not mere adjustment entry - Samrat International (P.) Ltd. v. CCE - 1992 (58) ELT 561 (SC) = AIR 1991 SC 369.

TR-6 Challan - The prescribed challan form TR-6 should be filled in giving details like name and 15 digit ECC code number of manufacturer, code number of Excise Commissionerate/Division/range and code of branch of Bank. The challans should be serially numbered, from 1st April onwards - Belgaum Commissionerate TN 129/95 dated 13.12.1995.

Four copies are submitted to authorised Bank. These should be marked as Original, Duplicate, Triplicate and quadruplicate. Two copies of challan are returned by bank duly stamped after amount is paid and two copies are retained by bank. One copy is to be submitted to excise authorities along with monthly return. (Out of two copies retained by Bank, one copy is sent to Excise authorities directly for their accounting and cross verification of the credit entries made by assessees.) If cash is deposited, receipted challan is given immediately by bank. However, if payment is made by cheque, challan is given duly receipted only after cheque is realised. Credit of amount deposited in Bank can be taken only after the bank issues receipted challan.

COLUMNS IN TR-6 CHALLAN - The TR-6 challan requires details like (a) serial number (b) Name, address and code number of assessee (c) Excise Commissionerate, Division and Range (d) PLA number, name of commodity (e) Account head of duty - this is computer code decided by Excise department (e) Amount deposited in cash/cheque/demand draft.

COUNTERSIGNATURE OF EXCISE OFFICER NOT NECESSARY - Amount under TR-6 challan for credit in PLA can be paid in bank with signature of authorised officer of assessee. Countersignature of

excise officer is not necessary - Meerut Commissionerate Trade Notice No. 98/88 dated 18-7-88.

Account Head Code - The account head code has to be mentioned in TR-6 challan. Major accounting head code is 0038 for Central Excise, 0037 for Customs duties and 0044 for Service Tax. Some of the minor account head codes normally required are as follows : * Basic Excise Duty - 00380003 * Additional excise duties in lieu of sales tax - 00380335 * Other Receipts – 00380453 * National Calamity Contingent Duty - 00380106

In case of customs, minor account heads are : * Import duty - 00370002 * Export duty - 00370052 * National Calamity Contingent Duty – 00370060 * Other Receipts - 00370107 * Fees, fines, forfeitures and misc. items - 00370114.

Cenvat credit only of inputs received upto end of month - Duty can be paid through PLA and/or Cenvat credit. Excise duty is payable on monthly basis. Duty for clearances during the month is payable by 5th of following month. In case of SSI units, the duty for whole month is payable by 15th of following month.

Proviso to rule 3(3) of Cenvat Credit Rules states that Cenvat credit available at the end of the month only can be availed, even if duty is payable by 5th or 15th of following month. Thus, even if some inputs / capital goods are received after end of the month, only Cenvat credit available as on last day of the month can be utilised for payment of duty, while paying duty by 5th or 15th of the following month.

Payment of rent, fines or penalties – The account current (PLA) can be used only for payment of excise duty. Other payments like rent, penalty, fine etc. should be paid directly through TR-6 challan. Particulars of payments, account heads should be specified in TR-6 challan. Such challan need not be countersigned by CE officer (even if there is a column in TR-6 challan). If such dues are required to be paid through current account, a separate account current under the group minor head ‘E- Miscellaneous –1 Miscellaneous’ may be opened with permission. - Chapter 3 Part V Para 4.1 of CBE&C’s CE Manual, 2001.

Accounting Treatment of PLA - When the amount is deposited in Bank by TR-6 challan, it is an excise deposit, hence ‘Excise Deposit’ account in General Ledger should be debited and Bank/Cash Account should be credited. When duty is debited in PLA on monthly basis, it is effective payment of duty. Hence, ‘Excise Duty Paid’ account should be debited and ‘Excise Deposit’ account should be credited. After this entry, balance in ‘Excise Deposit’ account and closing balance in your PLA must tally. Such entry may be passed twice in the month when PLA is debited. At the year end balance in ‘Excise Deposit’ account will be reflected as ‘Current Asset’, while amount in ‘Excise Paid’ account will be transferred to P and L account.

Periodic returns

Vide Rule 12 of Central Excise Rules a monthly return, is to be submitted to Superintendent of Central Excise of production and removal of goods, by 10th of the following month. [SSI unit availing concession on basis of annual turnover and small units in textile sector manufacturing yarn, unprocessed fabrics and readymade garments have to file return on quarterly basis within 20 days from close of quarter]. As per Notification No. 48/2001-CE(NT) dated 26.6.2001, the return is required in quintuplicate, in form ER-1. [Earlier form RT-12]. Assessee will have sixth copy as his record copy.

The return should be accompanied by (a) Two copies of PLA (b) Relevant TR-6 challans evidencing payment of duty. Since duty is required to be paid by 5th/15th of following month, PLA extract should be submitted upto 5th/15th i.e. till payment of duty of the relevant month. A summary extract could be put at end of PLA extract indicating (a) Opening balance after discharging duty liability of previous month (b) Credits during the month and upto 5th of following month (15th in case of SSI) (c) Total duty discharged during the month (d) Closing balance after discharging duty liability - Chapter 6 Part II Paras 2.3 and 2.7 of CBE&C’s CE Manual, 2001.

In addition, Cenvat Credit record in prescribed form is required to be submitted by 10th of the following month. Hence, both ER-1 and Cenvat Credit return may be submitted simultaneously.

EOU unit has to file return in form ER-2. [Earlier form RT-13]

If there is delay in payment of duty, interest should also be deposited before filing ER-1 return.

This return is acknowledged by Superintendent of Central Excise and one copy duly acknowledged is returned to assessee.

REQUIREMENTS OF RETURN - Following are the requirement of returns -

1. Product description should tally with description actually used in invoices. 2. Production and removal details must be given for each commercially separate product / group of

products of similar nature falling under same sub-heading having same rate of duty, based upon data maintained under DSA (Daily Stock Account). For product group having separate classification / rate of duties, separate entries must be given. Commissioner can relax this requirement by a general or special order.

3. Duty liability will be consolidated adjustment in current account (PLA) and Cenvat credit account, as may be decided by assessee. [Thus, he can show pro rata through PLA and Cenvat credit or in some products he can show full payment through PLA and in some other products, he can show full payment through Cenvat credit].

4. If same product is cleared under different rates of duty under different notifications, the details are required to be given separately.

5. Goods received for repairs , reconditioning or export return are required to be shown in appropriate column.

6. Fine, penalties and interest cannot be paid through Cenvat credit. It must be paid through PLA only. [In fact, they should be paid through TR-6 challan as PLA is meant only for payment of duty].

7. If there is delay in payment of duty, interest should also be paid and details of interest calculations should be shown along with return.

8. If duty on some invoices is paid under protest or on provisional basis, the details are required to be given in the ER-1 return.

Other excise procedures

Export Procedures in Central Excise

In relation to Central Excise and customs, following are the concessions/incentives for exports : (1) Exemption from duty on final products (or refund of duty paid). (2) Exemption/Refund of excise and customs duties paid on inputs.

INPUTS FREE OF DUTY - Exporting units need raw materials without payment of customs/excise duty, to enable them to compete with world market. Government has devised following schemes for this purpose : (a) Special Economic Zones at various places where inputs are allowed to be imported without payment of duty and finished goods are exported. (b) Export Oriented Undertakings (c) Permission to avail Cenvat on inputs for other similar products (d) Refund of duty on inputs if Cenvat credit cannot be used (e) Duty Drawback Scheme. Elaborate procedures have been prescribed for the above, to ensure that the benefits are not misused.

EXPORTS FREE OF DUTY ON FINISHED PRODUCT - Exports of almost all excise goods except hides, skin and leather and salt and exports to all countries except to Nepal and Bhutan are exempt from Central Excise Duties. Exports to Nepal and Bhutan do not qualify for export incentives as payment is received in Indian rupees. However, export rebate can be obtained if export to Nepal is made ( a) on payment of free convertible foreign exchange or (b) for specified capital goods to Government of Nepal against global tender, even if payment is received in Indian currency.

Even inputs received by the factory can be exported as such without payment of excise duty. If manufacturer had availed Cenvat credit of duty on such inputs, it need not be reversed [The Cenvat credit can be utilised for payment of duty on products cleared for home consumption].

Export can be made without payment of all types of duties like basic, special, ADE(GSI) and ADE (TTA) – - Chapter 7 Part I Para 1.1 of CBE&C’s CE Manual, 2001.

EXPORT PROCEDURES FOR EXCISE - There are basically two procedures for dispatching the goods out of India. (a) In the first procedure, duties are paid and subsequently rebate (refund) is claimed after exportation of such goods. Alternatively, rebate is granted of duty paid on inputs used in the exported final product. (Rule 18 of Central Excise Rules). (b) Another procedure is to export goods under bond without payment of excise duty. On actual exportation of goods and on presentation of necessary proofs regarding exports, the bond is released. Regular Exporters can have a running bond for this purpose. (Rule 19 of Central Excise Rules).

CBE&C has clarified that exports under 'claim of rebate' and 'export under bond' are at parity, since intention of both the procedures is to make duty incidence 'Nil'. - CBE&C circular No. 283/117/96-CX

dated 31-12-1996.

General procedures for exports – Export can be under bond without payment of duty or after payment of duty and then claiming rebate. Some procedures are common. These are discussed first.

Documents for export - The goods have to be cleared from factory under Invoice. In addition to the Invoice, a prescribed form ARE-1 has to be filled in by Exporter. [earlier AR-4].

INVOICE FOR EXPORT – Invoice for export can be from same series from which goods for home consumption are cleared or a separate series of invoice can be maintained for export. General permission has been given to maintain separate series of Invoice for export purposes. The Invoice should be prominently marked as ‘FOR EXPORT WITHOUT PAYMENT OF DUTY’.

COPIES AND COLOUR OF ARE-1 FORM - The copies of ARE-1 form should have following colour : (i) Original : White. (ii) Duplicate : Buff (iii) Triplicate : Pink (iv) Quadruplicate : Green. Assessee can optionally have quintuplicate form which can be used for claiming other export incentives. - - It is sufficient if copies of ARE-1 (that time AR-4) contain a colour band on the top or right hand corner as per the aforesaid colour scheme. Thus, it is possible to take out copies on plain/computer stationery and affix colour band.

The 'Assessable Value' as per section 4 of CEA should be mentioned on ARE-1 and the Invoice. In view of new section 4, 'Transaction Value' is Assessable Value. Hence, strictly legally, the ‘value’ can be equal to, less or more than FOB Value. [Practically, FOB Value is usually accepted as ‘value’]. The running bond account should be debited by ‘value’ as shown in the Invoice and ARE-1.

HANDLING OF ARE-1 FORMS - If export consignment is cleared under supervision of Excise Superintendent or Inspector, the excise officer will make endorsement on all copies of ARE-1. He will return original and duplicate copies to the exporter-assessee. He will send triplicate copy of ARE-1 directly to officer to whom bond was executed or letter of undertaking was given. This copy can also be handed over to the exporter in a tamper proof sealed cover to be submitted to the authority. Quadruplicate copy will be retained by excise officer. Exporter can have optionally quintuplicate copy which will be dealt with in same manner as the original copy.

At the time of export, original, duplicate and quintuplicate (optional) will be submitted to customs officer, along with the goods. These will be examined and then export will be allowed. He will make endorsement of export on all copies of ARE-1. He will cite shipping bill number and date and other particulars of export on ARE-1. Original and quintuplicate (optional) will be returned to exporter. The duplicate copy will be sent directly by customs officer to the officer with whom bond was executed or to whom letter of undertaking was given. The duplicate copy can be sent either by post or by handing over to the exporter in tamper proof sealed cover.

Thus, the officer where bond is executed will get two copies – one from Superintendent of Central Excise when goods are cleared from factory and other from customs officer after export. This will enable him to keep track to ensure that all goods cleared from factory or warehouse without payment of duty are actually exported.

If the goods are sent under self sealing and self certification, the export goods along with original, duplicate and quintuplicate (optional) copies of ARE-1 will be sent after self sealing and self certification to the port for export. [There will be no endorsement of excise officer on these copies]. Triplicate and quadruplicate copies will be submitted to Superintendent or Inspector of Central Excise within 24 hours after clearance from the factory. The excise officer will make endorsement on both the copies and then hand over triplicate copy to exporter in sealed envelope for submitting the same to authority to whom bond or letter of undertaking was given. Further procedure at the port will be same as above.

In case of export after payment of duty, under claim of rebate, the basic procedure is same as above, except that the triplicate copy (by excise officer) and duplicate copy (by customs officer) will be sent to the officer to whom rebate claim is filed. If claim of rebate is by electronic submission, these copies will be sent to excise rebate audit section at the place of export.

SIGNING OF ARE-1 FORM – The ARE-1 form is required to be signed by manufacturer. If the export is under bond executed by Merchant Exporter, the form should be signed by both manufacturer as well as Merchant Exporter.

Sealing of goods for export - Goods can be cleared from factory duly sealed. Goods can be cleared for export without sealing also. Self sealing and self certification is also permissible.

CLEARANCE WITH SEAL OF CENTRAL EXCISE - In this method, export goods are examined before despatch by Central Excise Officers. In such case, the goods are not examined by Customs Officers at the port or airport of shipment, unless seals are found to be tampered or if there is specific information.

The CE officer will verify the goods, DSA and documents. If these are in order, he will seal the consignment. Sealing can be done of each package or container. Individual packages may be sealed by using wire and lead seals. An all side container may be sealed by using one time lock / bottled seals. The officer will then make necessary endorsement on ARE-1.

FACTORY STUFFING OF CONTAINERS - Now most of the exports are through containers. Goods can be stuffed in containers at inland container depots (ICDs) situated in various places. Stuffing of containers inside the factory, under supervision of central excise officers is also permissible. Pre-shipment quality inspection, where required, should be carried out before stuffing. After the inspection by Central Excise Inspector and Superintendent, samples will be taken out as per guidelines. Then, the container is sealed.

The Superintendent of Central Excise shall send an examination report of factory sealed packages/containers in form Annexure C1 as given in CBE&C circular No. 6/2002-Cus dated 23-1-2002. It has been reiterated that the examination report must accompany the export goods to port/airport of export. – CBE&C circular No. 630/21/2002-CX dated 27-3-2002.

After such sealing, the containers are not normally opened at the port, unless the seal is found to be tampered with or there is specific intelligence, in which case, permission of AC/DC is required before checking.

CONSOLIDATION OF CARGO OF DIFFERENT EXPORTERS – Often export goods of more than one manufacturers is required to be consolidated. For this, export goods of one factory have to be taken to another factory. This is permissible if done under supervision of excise authorities. - Chapter 7 Part V Para 4.1 and chapter 8 part IV para 3 of CBE&C’s CE Manual, 2001.

CLEARANCE WITH SELF-SEALING -. Any exporter who is a manufacturer or owner of warehouse can clear export consignment with self sealing and self certification. Such sealing should be done under supervision of owner, working partner, managing director or Company Secretary or a person duly authorised by such owner, working partner or Board of Directors of the company.

He should certify on all copies of ARE-1 that goods have been sealed in his presence. If such certification is not done, the packages may be opened at port for detailed customs examination. – CCE, Rajkot TN 91/2001 dated 25.10.2001.

At the gateway port, examination will be carried out as per norms.  It is clarified that self-certification and self-sealing is permissible, but these will be examined at the port of export on the basis of examination norms prescribed under circular No. 6/2002-cus dated 23-1-2002. – MF(DR) circular No. 31/2002-Cus dated 7-6-2002. - - The permission for factory stuffing will be given on permanent basis and need not be renewed every 6 months. – CBE&C circular No. 60/2001-Cus dated 1.11.2001.

SELF SEALING EVEN IF EXPORT THROUGH MERCHANT EXPORTER – Self sealing is permitted even when goods are exported through merchant exporter. The sealing will be done by manufacturer following the same procedure as above.

Removal under bond without payment of duty – The basic procedures for removal of goods without payment of duty under rule 19 are – (a) Execute a bond (in case of merchant exporter) or issue letter of undertaking (in case of manufacturer exporter) (b) Clear goods from factory under bond without payment of duty (c) Export the goods and obtain certificate of export on ARE-1 from customs authorities. Submit the proof of export and get self-credit in Running Bond Account. - - The procedures are prescribed in Notification No. 42/2001-CE(NT) dated 26.6.2001.

ALL DUTIES EXEMPT INCLUDING NCCD – CBE&C has clarified that National Calamity Contingent Duty (NCCD) is also exempt when goods are exported under bond. It is policy of Government to grant relief from domestic taxes on goods which are exported.  – CBEC circular No. 641/32/2002-CX dated 26-6-2002.

BOND BY MERCHANT EXPORTER  – Merchant exporter is required to execute a bond. The bond can be executed by merchant-exporter in form B-1. Merchant exporter registered with recognised Export Promotion Council and Status Holders (Export House, Trading Hose etc.) do not have to furnish any security/surety while executing bond, unless they have come to adverse notice of department. – CBE&C circular No. 613/4/2001-CX dated 31-1-2002, confirmed in CBE&C circular No. 711/27/2003-CX dated

30-4-2003. - - -  If bond is executed by merchant exporter, he will obtain certificates in form CT-1 from Superintendent of Central Excise.

The exporter shall ensure that debit in bond does not exceed the credit available in the bond any time. Goods can be cleared by manufacturer on the strength of this certificate, without payment of duty. Forms of bond, letter of undertaking and CT-1 certificate have been given in Notification No. 42/2001-CE(NT). If export is through merchant exporter, ARE-1 form should be signed both by manufacturer as well as merchant exporter.

TYPES OF BOND FOR EXPORT - The exporter has to execute B-1 bond. The bond can be with surety or security or only guarantee. The bond should be at least equal to the duty chargeable on the goods, with such surety or security as the excise officer may approve. [For instructions about security / surety etc. see under ‘Bonds’]

WHERE BOND CAN BE EXECUTED – The bond can be executed with any one of the following – (a) Maritime Commissioners (b) Asstt. / Dy Commissioner under whose jurisdiction the factory is situated. (c) Assistant / Deputy Commissioner (Export) as officer authorised by Board.

The ARE-1 should clearly indicate the full postal address of authority before whom the bond is executed, so that documents are submitted / transmitted to him for proof of export.

PROCEDURE OF CT-1 CERTIFICATE – The merchant exporter can obtain CT-1 forms in lot of 25. Part I of the form is certified by Superintendent of CE regarding bond executed. It is not necessary to obtain CT-1 for each consignment separately. CT-1 forms in lot of 25 should be issued to merchant exporter covering period of one to three months, depending on his track record. The merchant exporter shall send CT-1 form to the manufacturer from whom goods are to be procured for export. Before sending CT-1, the merchant exporter should debit estimated amount of duty liability. This amount is required to be specified in part II form CT-1. On the basis of this CT-1, the manufacturer can clear goods for export without payment of duty by making suitable entries in part II of CT-1. This provisional debit will be converted into ‘actual debit’ after the goods are cleared from the place of manufacturer. - Chapter 7 Part II Para 6.2 and 6.2-1 of CBE&C’s CE Manual, 2001.

LETTER OF UNDERTAKING - The manufacturer exporter can furnish a letter of undertaking (LUT) in form UT-1 as given in Annexure II of Notification No. 42/2001-CE(NT). The manufacturer exporter need not execute a bond. The LUT once given is valid for 12 calendar months. It is not necessary to submit LUT for each consignment. Though manufacturer exporter is not executing bond, submission of proof of export is required. If the manufacturer exporter repeatedly fails to comply with conditions of LUT, he can be asked to furnish B-1 bond with security / surety. The LUT will not be discharged unless proof of export is submitted or duty is paid upon deficiency with interest. - Chapter 7 Part II Paras 3.3 and 3.5 of CBE&C’s CE Manual, 2001.

PROCEDURE AT THE TIME OF EXPORT - The exporter or his agent will submit copies of ARE-1 form to customs officer at the time of export. These will be endorsed by him certifying export of goods. This will service as ‘proof of export’.

RUNNING BOND ACCOUNT – The merchant exporter will maintain a ‘Running Bond Account’ (RBA). Once bond is executed, the RBA will be credited by the bond amount i.e. the amount for which bond is executed.

A manufacturer exporter does not execute a bond and hence need not maintain Running Bond Account. However, he should maintain similar record and submit proof of export following same procedure.

EXPORT WITHIN 6 MONTHS - Goods must be exported within 6 months from date of removal from the factory, unless extension is granted. Extension can be granted by AC / DC / Maritime commissioner. - Chapter 7 Part II Para 2.2(i) of CBE&C’s CE Manual, 2001.

PROOF OF EXPORT – The exporter will get copy of ARE-1 with certificate from customs authorities certifying export of goods. The duplicate copy of ARE-1 will be obtained in sealed envelope to be submitted to the authority with whom the bond is executed. The exporter is required to submit a statement at least once a month to the authority with whom bond is executed. If bond was executed with jurisdictional AC / DC, the statement should be submitted to him through range office. The statement will be in form as given in Annexure 19 of CBE&C’s CE Manual, 2001. Assessee should submit duly certified copy of ARE-1, self attested copy of Bill of Lading and self attested copy of Shipping Bill (export promotion copy). This statement will be immediately acknowledged by office of bond accepting authority. On submission of the statement, the assessee can take credit in his running bond account. It is not necessary to wait for their approval or permission. The excise office will verify the correctness of

statement and match ARE-1 sullied by range office with triplicate copy which is already with them. If goods are not exported within 6 months or extended period permitted, action for recovery should be initiated. - Chapter 7 Part II Paras 13.1 to 13.6 of CBE&C’s CE Manual, 2001.

CONTROL OF BOND - Control over bond is exercised by the authority before whom the bond is executed and all proofs of export have to be submitted to that authority. Any demand for duty in case goods are not exported will have to be raised by authority before whom the bond is executed. – Bombay Dyeing and Mfg Co In re 2001(134) ELT 591 = 45 RLT 860 (GOI) – quoted and followed in Supreme Industries Ltd. In re 2002(144) ELT 729 (GOI).

CHANGE OF DESTINATION OR BUYER – If exporter intends to change destination or buyer or port / place of export after goods were cleared for export, he can do so. He should submit details to authority with whom bond was executed and make necessary changes in ARE-1 and Invoices. Alternatively, he can cancel previous invoice and ARE-1 and prepare fresh invoice and ARE-1 with permission and authentication by bond / LUT accepting authorities. The serial number and date of initial documents are endorsed on the fresh documents. - Chapter 7 Part V Para 1.2 of CBE&C’s CE Manual, 2001.

Export under claim of rebate - The rebate of excise duty paid on exported goods is granted under rule 18. The procedure has been prescribed in Notification No 40/2001-CE(NT) dated 26.6.2001, supplemented in Chapter 8 Part I of CBE&C’s CE Manual, 2001.

The rebate is available on all exports except exports to Nepal and Bhutan. In case of Nepal, the rebate is granted to Government of Nepal. In case of export to Nepal, Invoice in prescribed form has to be prepared and prescribed procedure has to be followed.

CLEARANCE WITHOUT BOND, BUT UNDER FORM ARE-1 - Export under claim for rebate should be made under ARE-1 form. Since the goods are being cleared after full payment of duty, execution of any bond is not necessary. Copies of ARE-1 form and its distribution is same as that for export under bond. Export can be under seal of Central Excise or without seal. Procedure for export and distribution of copies of ARE-1 after export is also identical.

REBATE CLAIM - The rebate claim can be filed with Maritime Commissioner (if there is one for the port/airport/post). As per section 11B of CEA, claim must be filed within one year from date of export. Rebate claim can also be lodged with jurisdictional Assistant / Deputy Commissioner of Central Excise. Authorities are expected to point out deficiencies in application within 15 days. Rebate claim below Rs 500 is not acceptable. No form has been prescribed for submitting application for rebate. Application on letter head is sufficient. - - Supplementary Rebate Claim can also be filed, but that claim also must be within time limit. - Chapter 8 Part IV of CBE&C’s CE Manual, 2001.

DUTY CAN BE PAID BY CASH OR CENVAT CREDIT - It is not necessary that rebate can be obtained only if duty is paid by cash. Duty on final products can be paid either through cash or PLA or Cenvat credit ( that time RG23A part II or RG23C part II) - CBE&C Circular No 262/96/96-CX 6 dated 6.11.1996.

RESTRICTIONS ON GRANT OF REBATE - The rebate will not be granted if (i) The market price of goods exported is less than the amount of rebate. (ii) The amount of rebate of duty is less than Rs. 500.

WHEN REBATE PROCEDURE MAY BE USEFUL - It is naturally advisable not to pay duty, than to pay it and then wait for refund from Government. However, in following situations, it may be beneficial to pay duty and claim rebate -

If assessee has balance of duty in Capital Goods Cenvat Credit Account, it will be advisable to pay duty and claim refund, as balance in Capital goods Cenvat Credit Account is never refundable. This may happen when duty paid on capital goods is heavy and assessee may not be able to utilise the credit.

An SSI unit may pay 60% duty and claim rebate, as getting refund of Cenvat credit of inputs is not an easy procedure. Moreover, he is not entitled to get refund of duty paid on capital goods.

When duty paid goods are proposed to be exported.

DUTIES ELIGIBLE FOR REBATE – Following duties are eligible for rebate –(a) Basic Duty paid under Central Excise Act (b) Special excise duty (c) ADE (GSI) and (d) ADE (TTA). – Explanation I to Notification No. 40/2001-CE(NT).

Rebate of duty on inputs used in manufacture of export goods - Some times, final goods may be exempt from duty. In such case, the exporter can claim rebate of duty paid on excisable materials used in manufacture of export goods, except in case of export to Nepal and Bhutan. Provision for granting such

rebate is made in rule 18 of CE Rules.

Input output ratio has to be informed to AC/DC. Goods can be procured at concessional rate of duty by following procedure prescribed under Central Excise (Removal of Goods at concessional rate of duty for manufacture of excisable goods), Rules. Inputs can be sent outside for job work and return. Export is required to be made under form ARE-2. After export, rebate claim should be filed. Procedure and form has been specified in Notification No. 41/2001-CE(NT) dated 26.6.2001.

Inputs free of Central Excise duty - A manufacturer of export goods can get his inputs without payment of Central Excise Duty. Input output ratio should be informed to Assistant / Deputy Commissioner. Goods can be procured without payment of duty by following procedure prescribed under Central Excise (Removal of Goods at concessional rate of duty for manufacture of excisable goods), Rules. Inputs received can be sent outside for job work and return. Final product has to be exported. Clearance for export is required to be made under form ARE-2. See Notification No. 43/2001-CE(NT) and Chapter 7 Part VI of CBE&C’s CE Manual, 2001 for detailed procedure.

Exports to Nepal/Bhutan - India has Rupee trade with Nepal and Bhutan and hence export incentives are not available if goods are exported to Nepal/Bhutan. The clearance should be on normal Invoice on payment of duty. Invoice should mention ‘For Exports to Nepal/Bhutan’ (as the case may be) and make declaration in prescribed form. Extra copy of Invoice should be made, which is to be used at India-Nepal border. After the goods are exported to Nepal, rebate is given to Government of Nepal (and not to the exporter). There is no rebate system for export to Bhutan.

Detailed procedure has been prescribed in para 4 of Notification No. 40/2001-CE-NT dated 26.6.2001 supplemented in Chapter 8 Part II of CBE&C’s CE Manual, 2001.

Invoice in prescribed form has to be prepared in quadruplicate. This will be endorsed by excise officer. Its copies should be submitted at land customs station at Nepal border. Then, the goods along with Invoice will be handed over to Nepalese customs officer. The Nepalese customs Officer will have to endorse details of effective rate of duty if goods are imported from country other than India and the amount of import duty assessed. After his endorsement on the Invoice, the duplicate copy will be sent to Indian customs office who will then forward it to Director General of Inspection, Customs & Central Excise (Nepal Refund Wing), New Delhi. After verification, the rebate will be paid to His Majesty’s Government of Nepal (and not to the exporter).

Exports to Nepal / Bhutan without payment of duty - Export to Nepal/Bhutan are allowed under bond without payment of duty if (a) payment is to be received in convertible foreign exchange or (b) Export of specified capital goods exported to Nepal against global tender issued by Government of Nepal or export against some specified projects. The procedure and conditions are given in Notification No. 45/2001-CE(NT) dated 26.6.2001. It is further elaborated in Chapter  7 Part IV of CBE&C’s CE Manual, 2001.

Export incentives through Cenvat - Cenvat credit availed on inputs used for exported goods can be used for payment of duty on other similar products cleared for home consumption (i.e. within India). If it cannot be used, refund can be obtained. This aspect has been discussed under ‘Cenvat’.

Certificate regarding Non-availment of Cenvat on inputs if duty drawback to be claimed – (a) If the manufacturer-exporter or supporting manufacturer of merchant exporter is registered with Central Excise, fact of non-availment of Cenvat credit can be verified from ARE-1 form furnished (b) If the manufacturer-exporter or supporting manufacturer of merchant exporter is not registered with Central Excise, they have to submit self-declaration about non-availment of Cenvat. – MF(DR) circular No. 8/2003-Cus dated 17-2-2003.

The drawback rate consists of two components - customs portion (consisting of basic customs duty, surcharge and SAD) and excise portion (consisting of basic excise duty, special excise duty and CVD). The Cenvat credit is only in respect of central excise. Hence, it has been clarified that even if Cenvat credit has been availed, duty drawback in respect of customs portion will be available.

Export procedures by exempt SSI units and manufacturers of readymade garments - Small Scale Industries and manufacturers of readymade garments which are exempted from Central Excise Duty on account of their turnover below prescribe limit, do not have to follow ARE-1 and bond procedure. However, they have to follow ‘simplified procedure’ as specified in Chapter 7 Part III Paras 1 to 4 of CBE&C’s CE Manual, 2001. [The ‘simplified procedure’ is really quite complicated].

The simplified procedure is applicable to exporters of readymade garments, i.e. they can clear under their own documents and ARE-1 procedure is not required. – CBE&C circular No. 705/21/2003-CX dated 8-4-

2003.

(a) Clearance should be under own invoice of the SSI unit. The SSI unit need not have separate series of Invoice for export (b) The Invoice should be machine serial numbered (or by franking machine) starting from 1 from 1st April every year (c) Invoice should be pre-authenticated by the SSI unit himself (d) Invoice should indicate name and address of buyer, destination, description, value, progressive total of total value of excisable goods cleared for home consumption since beginning of financial year, transport vehicle number, date and time of removal of goods from his factory. (e) If the export is direct, the SSI unit should mention "FOR EXPORT" on top and his own Export-Import Code Number, if any. If export is through merchant exporter, manufacturer should mention at top of Invoice - 'EXPORT THROUGH MERCHANT EXPORTER'. Export Import code No. of such merchant exporter should be mentioned in such case.

The SSI unit should maintain a simple record of production and clearance. Entries in production record should be made at close of the day or beginning of next day. No entry is necessary on the days when there is no production. The SSI unit should file a quarterly statement to jurisdictional Range Superintendent in prescribed form given in Annexure 20 of CE Manual, 2001.

Bringing goods for repairs, re-making etc.

It is often necessary to bring the final products for various purposes like refining, repairs, re-making, reconditioning, testing etc. Rule 16 of Central Excise Rules make provisions in this regard.

Procedure for receipt and clearance - As per the provisions, if the goods are brought for being re-made, refined, re-conditioned or for any other reason, assessee should take Cenvat credit of duty paid as if such goods are received as inputs under Cenvat Credit Rules.

Goods can be brought ‘for any other reason’. Thus, if goods are returned to assessee by buyer as they were in excess or if buyer refuses to accept the goods, the goods can be brought back. There is no time limit for bringing goods for repairs and goods can be brought any time.

GOODS MANUFACTURED BY OTHERS CAN ALSO BE BROUGHT FOR REPAIRS ETC.  - Rule 16 uses the words, ‘brought to the factory’. Thus, the goods brought for repairs/reconditioning /refining need not have been manufactured by assessee. Goods manufactured by any other person can be brought in the factory for repairs etc. However, if such goods brought are not accompanied by duty paying document, permission from Commissioner under rule 16(3) will be required.

DOCUMENT FOR AVAILING CENVAT CREDIT - If the person sending the goods sends goods under his invoice after payment of duty, Cenvat credit can be taken on the basis of that invoice. However, such credit can be taken even on the basis of own Invoice which was raised when the goods were originally cleared. In Gujarat Containers Ltd. v. CCE 2000(125) ELT 495 (CEGAT), it has been held that assessee can take Cenvat credit on basis of his own invoice on returned goods.

In the opinion of author, Cenvat credit can be availed even on the basis of triplicate copy of invoice which is in record of assessee. The reason for the view is that ‘triplicate’ copy is also an ‘invoice issued under Central Excise Rules’. [However, a Xerox copy is not an ‘invoice issued under Central Excise Rules’].

REMOVAL AFTER REPAIRS / RE-MAKING ETC. - At the time of clearance, duty should be paid under Invoice as follows - (a) If the process carried out on the goods brought amounts to manufacture, assessee should pay duty at the rate applicable on date of removal. Value shall be determined under section 3(2), 4 or 4A as applicable. (b) If the process does not amount to manufacture, an ‘amount’ equal to Cenvat credit taken at the time of receipt of final product is payable. The buyer can avail Cenvat credit of this ‘amount’. [rule 16(2)]. - - The Cenvat credit available with assessee can be utilised for payment of ‘duty’ payable under rule 16(1) or ‘amount’ payable under rule 16(2). [Cenvat Credit Rule 3(3)(d)].

GOODS CAN BE SENT TO ANYONE AFTER REPAIRS - Note that after repairs, reconditioning etc., goods can be sent to any one. There is no requirement that goods must be sent only to the person from whom these were received.

GOODS BROUGHT THEMSELVES MUST BE REPROCESSED – Note that the goods brought must themselves be reprocessed and then sent. If the goods brought are scrapped and fresh goods are sent, it is new manufacture. Fresh duty is payable and Cenvat credit of goods returned cannot be availed.

CENVAT CREDIT OF ‘AMOUNT’ – The buyer can avail Cenvat credit of ‘amount’ paid under rule

16(2) – Explanation to Rule 16(2).

If above procedure cannot be followed - At times, it may not be possible to follow aforesaid procedure. e.g. (a) the Invoice on which original goods were cleared may not be available, or (b) the invoice may be for full machine, out of which only some components might have been brought back for repairs / reconditioning.

There might be any other reason too. If there is any difficulty in following the procedure, permission has to be obtained from Commissioner for bringing the goods for repairs, reconditioning etc.

PROCEDURE PRESCRIBED – The assessee should obtain prior permission in obtaining such goods. If obtaining prior permission is not possible, intimation about receipt of goods should be given to Range Superintendent within 24 hours and then apply for permission through Range Superintendent in triplicate, indicating reasons for not applying in advance. Proper records should be maintained. The goods should be re-cleared within six months or the extended period as may be permitted by Commissioner. - CCE Pune-I TN 66/2001 dated 5.10.2001 * CCE, Ahmedabad II TN 20/2003 dated 6-2-2003 [152 ELT T46]

Bonds under Central Excise

The word ‘bond’ is used quite often in excise and customs e.g. manufacture under bond, clearance under bond, export under bond etc. ‘Bond’ means an undertaking given by the assessee to Government for due fulfilment of certain obligation e.g. export under bond means a ‘bond’ that goods cleared without payment of duty from factory for export will be exported and if not, appropriate duty will be paid.

Bond is an instrument by which the obligation to pay money is created expressly. It is also a legal agreement whereby a person undertakes to do or not to do anything subject to conditions stipulated in the agreement. Primary purpose of the bond is to secure due compliance with the rules and procedures laid down under CE Law. A bond is a collateral security, which the department is securing to ensure payment of appropriate duty, in addition to the statutory provisions available. - Chapter 14 Para 1.1 of CBE&C’s CE Manual, 2001.

NATURE OF BOND - Bond is an agreement where a person executing a bond undertakes to fulfil certain conditions as per agreement. Bond does not need registration unless it relates to immovable property. Primary purpose of bond under excise is to secure due compliance with rules and procedures as per Act and Rules and to provide for payments to be made if the conditions are not complied with. Bond is a supplementary security which the Central Excise department can take in addition to provisions of duty payment. Thus, duty can be recovered under law even if bond is not executed or bond amount is not adequate.

Execution of Bonds - Assessee has to execute bond under various provisions of Act. Form of bond has been standardised by excise department and numbers have been given for identification. Bonds should be executed on a non-judicial stamp paper. If adhesive stamps are affixed to any instrument chargeable to duty, the stamps shall be cancelled so that it cannot be used again. Such cancellation may be done by drawing two lines across or by signing on the stamp or in any other effectual manner [If not cancelled, the instrument is treated as ‘unstamped’].- - Amount of stamp depends on the State in which it is executed. Indian Stamp Act authorises each State to prescribe stamp duty chargeable on various documents and hence it varies from State to State.

Bond should be executed in favour of and in name of President of India.

SIGNING OF BOND - If the assessee is a Company, bond can be signed by a person authorised by the Board of Directors by a resolution. In case of registered partnership firm, any partner can sign on behalf of the firm.

ACCEPTANCE OF BOND – As per earlier instructions, bond should be executed before Superintendent of Central Excise or officer above that rank or Notary public or Magistrate. Bond should be accepted by Assistant/Deputy Commissioner of CE. [Presumably, the instructions are still valid].

RELEASE OF BOND – Bond will be preserved by excise officers till all the obligations are not discharged. After discharge of obligation, the bond can be got released if the terms of bond are fulfilled. Securities offered can be released and then encashed by guarantor. He can also get interest accrued on such securities.

Forms of Bonds - Bonds are of different nature and for various purposes. Forms of bond etc. have been standardised. The main bonds are as follows :

B-1 GENERAL BOND - The bond is for due dispatch of excisable goods removed for export without payment of duty. The bond can be with surety or security. New form of B-1 bond has been given in Annexure-I of Notification No. 42/2001-CE(NT) dated 26.6.2001.

An exporter-manufacturer can execute simple ‘Letter of Undertaking’ (LOU) in form UT-1 without executing any bond. The UT-1 form is given in Annexure-II of Notification No. 42/2001-CE(NT) dated 26.6.2001. It is clarified that if export is through merchant exporter, execution of bond is necessary. Export on basis of LUT of the manufacturer is not permissible in such case. - Chapter 7 Part II Para 5.4 of CBE&C’s CE Manual, 2001.

B-2 BOND - This is a General Bond for provisional assessment. It can be with security or surety.

B-4 BOND - The bond is for provisional release of seized goods. It can be only security bond. Bond should be for whole value of seized goods. Amount of security will be as determined by adjudicating authority taking into consideration of gravity of offence (normally 25% ). [Earlier B-11 bond]. [The name B-4 has been mentioned in Chapter 14 para 2.2 of CE Manual, 2001, but actually, no form has been prescribed. Chapter 17 para 3.2 states that old form under previous rules may be used. This para mentioned B-8 bond. Later it is clarified that it should be read as ‘B-11’ – CBE&C circular No. 686/2/2003-CX dated 2-1-2003.].

B-8 BOND - This bond is for obtaining goods at Nil or concessional rate of duty under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules. A bond is required to be executed under these rules. Since no form of bond has been prescribed, earlier  form B-8, which was prescribed under earlier Chapter X procedure may be used after making necessary changes.

B-11 BOND – This is not prescribed under new rules. However, it has been clarified that the old B-11 form should be used to clear seized goods on provisional basis. – CBE&C circular No. 686/2/2003-CX dated 2-1-2003. [Then what is ‘B-4’ bond which is mentioned but not printed anywhere ?] – or departmental instructions, read under B-4.

B-17 BOND - This is a general surety / security bond to be executed by EOU, EHTP/ STP  units. It is for provisional assessment of goods for export of goods to foreign countries without payment of duty and for accountal / disposal of excisable goods procured without payment of duty.

Types of Bond - Bonds are either surety or security type. Surety bonds are covered under provisions of Contract Act. Under Surety Bond, another person stands as surety to guarantee the performance on the part of obligor. Surety should be for full value of bond and the person standing as surety should be solvent to the extent of bond amount. Under the Contract Act, the liability of surety is co-extensive with that of the principal debtor and hence the department is at liberty to enforce the recovery of dues either from the obligor or from the surety. – - Chapter 14 Paras 2.1 of CBE&C’s CE Manual, 2001.

Security Bond - Security Bonds are executed where security is offered instead of guarantee. Security can be in nature of Post Office saving deposit, National Saving Certificate or similar realisable Government papers of Central or State Government. Bank deposit receipt of large scheduled banks is also acceptable. Interest on such securities will accrue to person making such deposit. Security can also be furnished by cash deposit, but no interest will be receivable on such cash deposit (and hence it is advisable to provide security by way of NSC, Bank FD etc.). Cash should be deposited by way of TR-6 challan mentioning proper account head and other details. - Chapter 14 Para 7.1 of CBE&C’s CE Manual, 2001.

Bank Guarantee as surety/security - Form of bank guarantee has been prescribed, both for scheduled and un-scheduled banks. Bank guarantee form when Court orders release of goods against bank guarantee has also been prescribed.

LEGAL POSITION OF BANK GUARANTEE - The bank guarantee is given is respect of some contract. Such contract is called 'underlying contract', e.g. in case of excise bond, the bond executed by assessee is the 'underlying contract'. Supreme Court has consistently held that bank guarantee is independent of the underlying contract. The bank must honour the bank guarantee except in case of fraud or irretrievable injustice. The fraud should be of beneficiary and not of some one else. If Banks do not honour their guarantees, trust in commerce would be irreparably damaged.

Further, even if bank guarantee specifies a limited period for enforcement of bank guarantee (e.g. one year etc.). The bank guarantee can be enforced any time during the period of limitation, which is usually three years in most of the cases.

One sided conditions in Bond - Many of the conditions in the standard form of bond are totally one

sided, i.e. favouring revenue. Some times, the conditions are even against the provisions of law. The assessee has to sign the bond as per standard format as he has no option. These are dotted line contracts or contracts of adhesion. Normally, standard forms of contract are binding on the person even if the person has not read them. However, if the contracting parties do not have equal bargaining power, these are often one sided. Such contracts are ‘Adhesion Contracts’. These are standardised form of contract form offered on essentially ‘take it or leave it’ basis without affording consumer realistic opportunity to bargain. Court can grant relief if clauses in such contract are unreasonable and unconscionable. The aggrieved person can approach Courts for relief in case of such one sided contracts [see discussions and case law under ‘General Principles of Law’].

Receipt of Goods at concessional rate of duty

Some users of excisable goods can obtain goods at nil or lower rate of duty, subject to certain conditions. If they are entitled to obtain excisable goods at nil or concessional rate of duty, they are required to follow prescribed procedure. The provisions are contained in Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001.

PROCEDURE PRESCRIBED IN SOME EXEMPTION NOTIFICATIONS - Some exemption notifications prescribe that procedure as contained in Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules shall be followed. In such cases, the exemption will be available only if the required procedure is followed.

Procedure for availing the benefit - The manufacturer intending to avail the benefit of exemption notification issued u/s 5A shall apply to Assistant / Deputy Commissioner in quadruplicate in form specified at Annexure I to Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules. Separate application shall be filed for each supplier.

BOND TO BE EXECUTED - A bond in prescribed form should be executed with surety or security. Bond amount will be prescribed by Assistant / Deputy Commissioner, considering duty liability estimated to be involved at any given time. Form of new bond has not been prescribed. Hence, earlier B-8 bond form may be used with suitable modifications. [See under ‘Bonds’ for instructions about B-8 bond].

CERTIFICATE BY AC/DC - The AC / DC will countersign the application submitted, certifying that necessary bond has been executed.

SUBSEQUENT PROCEDURE - Copy of this application duly signed by AC/DC will be sent to supplier-manufacturer. [The earlier procedure of CT-2 certificate has been discontinued].  The supplier can clear goods on receipt of the certificate duly countersigned by AC / DC. The removal details will be recorded on the application by the supplier-manufacturer.

ACCOUNTS AFTER RECEIPT OF GOODS - Goods obtained by the manufacture at concessional rate of duty should be properly accounted for and should be used only for the purpose for which they are brought. Simple account indicating quantity and value of subject goods, quantity consumed for intended purpose and quantity remaining in stock shall be maintained invoice wise.

CLEARANCE TO ANOTHER UNIT – Goods received without payment of duty can be sent to another eligible unit/manufacturer under the same procedure. However, the another unit/manufacturer should be registered under rule 3 of Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. [CBE&C circular No. 617/8/2002-CX dated 6-2-2002].

RETURN OF GOODS TO SUPPLIER – It may happen that goods received under the rules without payment of duty, may be found to be defective, damaged, unsuitable or surplus to the needs of manufacturer. In such case, the manufacturer can return the goods to supplier, i.e. original manufacturer. The original manufacturer will add this to his non-duty paid stock (in Daily Stock Account) and then deal with it. [Proviso to rule 6 of Removal of Goods at Concessional Rate of Duty Rules].

MONTHLY RETURN - A monthly return in prescribed form should be submitted by 10th of following month. Form of monthly return has been prescribed in Annexure II to Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules.

Goods received at concessional rate not used for intended purpose - If the material received at concessional rate of duty is not used for intended purpose, manufacturer is liable to pay differential duty along with interest.

DUTY PAYABLE IF GOODS LOST OR DESTROYED DURING TRANSPORT - It has been clarified

that if the goods are lost or destroyed by natural causes or by unavoidable accident during transport from place of procurement to the manufacturer’s premises or from place of manufacturer to the place of procurer (if goods are returned), during handling or storage in the manufacturer’s premises, it will not be treated as ‘used for intended purpose’. In other words, in such case, differential duty and interest will become payable. - Explanation to rule 6.

INTENTION TO USE IS NOT ENOUGH - ACTUAL USE NECESSARY  - Goods should be used for intended purpose. Mere intention to use is not sufficient. If the goods are not used for intended purpose, duty is payable by the consignee along with interest. Provisions of sections 11A and 11AB shall apply. Thus, demand has to be raised within period prescribed u/s 11A.

LIABILITY IS OF CONSIGNEE - The bond is executed by consignee. He has to give undertaking to pay differential duty. Thus, the duty liability is of the consignee.

No Cenvat to buyer in respect of goods received under the procedure - Since goods are cleared by supplier-manufacturer without payment of duty, the buyer will not be entitled to any Cenvat credit. - [Board Circular No. 33/33/94-CX-8 dated 4-5-1994 in respect of earlier Chapter X].

Moreover, supplier will have to pay 8% ‘amount’ of goods are removed at ‘Nil’ rate of duty. This ‘amount’ cannot be utilised for Cenvat purposes.

Thus, the procedure of sending material at concessional rate of duty is not of use if buyer wants to avail Cenvat on inputs.

Reversal of Cenvat on inputs or payment of 8% amount - If the final product is cleared under Chapter X procedure, Cenvat credit taken on inputs will have to be reversed or ‘amount’ of 8% of price will have to be paid as per Cenvat provisions. The buyer cannot avail Cenvat credit of this ‘amount’ as Cenvat credit can be taken only of ‘duty’. Hence, in the opinion of author, if buyer is in a position to avail Cenvat credit, it is advisable to pay full duty instead of availing the concession.

Rewarehousing certificate not required - In some cases, range superintendent having jurisdiction over manufacturer's factory insist on rewarehousing certificate from the user (to whom goods were despatched at concessional rate of duty). Rules do not provide for any such requirement.

Warehousing

Normally, goods are removed from factory on payment of duty. However, in respect of certain goods, provision has been made to store the goods in warehouses without payment of duty. - - The provisions are also available for goods cleared for export on payment of duty under claim for rebate of duty under rule 18 of CE Rules.

As per Rule 20 of Central Excise Rules, facility of warehousing can be extended for removal of excisable goods from factory of production to a warehouse or from one warehouse to another warehouse without payment of duty. CBE&C can prescribe conditions, limitations and safeguards. The rule clarifies that responsibility for payment of duty on the goods removed from factory or warehouse to another warehouse is that of consignee. However, if goods do not reach the destination warehouse, the duty liability is that of consignee.

At present, these provisions are applicable to following -

(i) Petroleum products (ii) benzene, toluene and xylene (iii) Goods transferred to customs bonded warehouse as ‘Stores’. [These goods are cigarettes, aerated waters, prepared and preserved foods, Aluminium foil covers, stainless steel cutlery, butter and cheese]. These ‘stores’ are issued to foreign going vessels without payment of duty - Notification No. 47/2001-CE(NT) dated 26-6-2001.

Goods removed by export houses or star trading houses for subsequent exports under rule 18 or rule 19 of Central Excise Rules - Notification No. 46/2001-CE(NT) dated 26-6-2001.

The warehouses can be public or private. Permission for such warehouses has to be obtained from Commissioner. The goods are in custody of officer-in-charge of the warehouse. Goods can be removed from warehouse on payment of duty plus penalty, godown rent etc. Transfer from one warehouse to another without payment of duty is also permissible. Goods can be stored for maximum period of 3 years. [It may be noted that provisions of customs bonded warehouse also exist in respect of imported goods. That facility is available for all imported goods.]

PROCEDURES TO BE FOLLOWED - Procedure, as prescribed in CBE&C circular No. 579/16/2001-CX dated 26-6-2001 supplemented in Chapter 10 Part I of CBE&C’s CE Manual, 2001, is briefly as

follows -

1. Warehouse should be registered by Excise Commissioner.

2. Consignor is required to prepare application in quadruplicate  in form attached to aforesaid notification. [Earlier AR-3]. He is also required to prepare invoice as required. Three copies of application and duplicate of invoice should be sent along with goods to consignee.

3. On arrival at destination, rewarehousing certificate will be sent duly countersigned by Range superintendent to his counterpart at the end of consignee.

4. If rewarehousing certificate is not received within 90 days, consignor shall pay the duty.

5. Proper accounts shall be maintained at the warehouse. He will be responsible for payment of duty, penalty etc.

6. Registered person can keep only goods belonging to him and not to someone else. He can keep other’s goods only with permission of Commissioner.

7. Owner of warehouse can sort, pack or repack the goods in warehouse and make such alterations as may be necessary for preservation, sale or disposal thereof.