Excise clearance and

Procedures
Madan Lal

MANUFACTURE AND EXCISABILITY

Section 3 of Central Excise Act, 1944.

Basis of Levy.
What is Manufacture?.
CE Law gives only a truncated
definition for manufacture Includes
Deemed Manufacture.
Widest definition is available in
Foreign Trade Policy but that is not
applicable to CE Law.

contd

The statutory definition of

manufacture in central excise act

Manufacture includes any process

(i) Incidental or ancillary to the

completion of a manufactured
product;
(ii) Which is specified in relation to any
goods in the section or chapter
notes of the First Schedule to the
central excise tariff as amounting to
manufacture

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

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

contd

Leading cases Decisions of

Supreme Court.
- Formation of a new Article
Vide Hawkins Cookers Ltd Vs
Collector [- 1997 (96) ELT 507 SC.
- A new distinct and commercial
commodity.
Vide TISCO V U.O.I [2004(164) ELT
372 SC.

The accepted wisdom about

manufacture in central excise
Manufacture implies a change; but
not every change is a manufacture. A
new product should emerge from the
raw material stage with a new name,
new use and marketability.

2) Ingredients of
excisablity
Fact of Manufacture.
Entry availability in CE Tariff.
Marketability.

Manufacture in central
excise
Two concepts
Actual substantive manufacture &
Deemed manufacture
Actual substantive manufacture
does it include mere processing? Yes,
if it leads to manufacture of a
product
Deemed manufacture

What is deemed
manufacture?
Process or activity specified in section
or chapter notes for example:
Labeling or re labeling of containers
Repacking from bulk packs to retail
packs
Adoption of any other treatment to
render the product marketable to the
consumer

Continued.
Addition of chemicals and other
ingredients to certain products of tariff
heading 3808
In relation to products of heading no 3920
& 3921 process of metallization or
lamination or lacquering
In relation to some products of heading
7013 the process of printing , decorating
or ornamenting

Continued.
In relation to flat-rolled iron & steel
products under chapter 72 the
process of hardening or tempering
In relation to articles of iron and steel
under chapter 73 the process of
galvanization

Continued.
In relation to motor vehicles under
chapter no 87 building a body or
fabrication or mounting or fitting of
structures or equipment on the
chassis falling under 8706

4]Valuation The Crux of the matter

Tending to become more like an opinion
poll.
Section 4 and 4A/ Valuation Rules 2000.
What is Transaction value?.
Requirements for acceptance of Transaction
Price
Sale of goods.
For Delivery, at the time and place of
removal
Seller and Buyer not related.
Price is the sole consideration for sale.
The legal fiction created by the definition of
time of removal let us note this

A tour of the valuation rules

2000
The official name for the rules is this
Central Excise Valuation ( Determination of
price of excisable goods) Rules, 2000
These rules apply when any of the
ingredients of transaction value is missing
The rules are used for ascertaining the
normal transaction value at which the
greatest aggregate quantity of goods are
sold

The valuation rules.

They are 11 rules in all
Rule 1 name & entry into force from
1-7-2000
Rule 2 definitions
Rule 3 exhortation to decide the
value (when the transaction value is
unavailable or unacceptable)

The valuation rules.

Rule 4 ascertainable equivalent
price of such goods nearest in time
to the time of removal of goods from
the factory margin adjustment on
account of differences in dates of
delivery allowed
Rule 5 cases when the delivery of
goods is at a place other than the
factory

The valuation rules..

Rule 6 when there is additional
consideration to the sale not reflected
in the transaction price charged
solution: monetize the additional
consideration and add it up to the tax
value
Rule 7 Depot / branch sales
solution: adopt the nearest prevailing
depot price

Valuation rules.
Rule 8 captive /self
consumption/use solution: tax value
is 110% of the cost of production of
the goods (as per CAS 4)
Rule 9 sales to related persons
solution: resale price of related
person / 110% of the cost where the
related person does not resell but
consumes or uses for self

Valuation rules.
Rule 10 sales to inter-connected
undertakings /holding company
/subsidiary company solution:: do
as per rule 9 above.
Rule 10A job work on behalf of a
principal manufacturer solution:
resale price of the principal
manufacturer
Rule 11 residual method

5) Exclusions From Value

-By Statute
Excise Duty.
Sales Tax.
Other taxes such as Octroi, entry tax.
-By Court / Tribunal Decisions
Trade Discount.
Cash Discount/ Prompt Payment
discount.
Turn over discount.
Quantity discount.
Year end/ Bonus discount.
contd

contd

Freight and Freight insurance, including

equalised Freight.
Bought out items [not integral/ critical to
Product].
Carry bags for Laptops.
Syringe bought out and supplied with P & P
medicines.
Computer Software ( discuss with NCR case)
Third party Inspection charges at the
instance of and borne by the buyer.
Excess of Freight collected over actual
expenditure on freight.
Interest on receivables

contd

contd

Erection, Commissioning charges if

products emerge as immovable property.
Free items supplied with products.
Advertising charges borne by the client
buyer on his own account.
Additional warranty charges.
Notional interest on Advances/ deposits
from buyers not influencing the price.
Straw supplied with Juice.
Rental paid on durable and returnable
container
Liquidated damages received for nonlifting of molasses

6) Inclusions into Value

-By Statute
Advertising.
Publicity.
Marketing/ Sales Promotion.
Storage/ Outward handling.
Servicing.
Warranty.
Commission.
-By Tribunal/ Court Decisions
Dharmada.
Design/ Development/ Engineering.
contd

contd

Royalty.
Amortised Cost of tools/ dies/
moulds received from buyers.
Interest on inventory.
Value of waste retained by
Jobworker.
Packing.
Cost of material supplied by
Customer.

9) MRP based Valuation

Section 4A/ weights & Measurements
Act.
MRP minus prescribed abatement is the
assessable value.
Region wise MRP accepted
If different MRPs are printed, the
maximum MRP will be taken as the
basis.
Sale of phones with MRP fixed, to
customer, by phone companies U/S 4A
only.
Multi Piece Packages.

10) Refunds & Rebates

Section 11B/ Rule 18/ cenvat Rule 5/
Section 11BB.
One year time limit / Provision for
Interest.
Theory of unjust enrichment.
Refund claim thro credit notes
permissible Mafatlal Industries Vs U.O.I.
L&T Sargent Lundy Ltd Vs CCE

Returns in central excise

ER 1 monthly due by the 10th of
the following month
ER 2 monthly, for EOU due by the
10th of the following month
ER 3 quarterly for SSI units due by
the10th of the following quarter

Continued.
ER 4 Annual financial statement for
units paying INR I crore in excise
due by the 30th of November of the
following year
ER 5 CENVAT Annual Return of
information relating to principal
inputs due by 30th April of the
following year some class of
manufacturers given exemption

Continued
ER 6 monthly return of principal cenvat
inputs due by the 10th of the following
month some class of manufacturers
given exemption
ER 7 Annual Installed capacity statement
due by the 30th April of the following year
ER 8 Quarterly Return for assesses
clearing goods at 1% duty

Important procedures in
central excise
Issue of invoice under Rule 11 of central
excise rules 2002
Provisional assessment under Rule 7 &
finalization
Time and manner of payment of duty
under Rule 8
Remission of duty under Rule 21 for
damaged/defective/unfit/unmarketable
goods

Important procedures in
central excise
Credit of duty paid on sales returns
under Rule 16
Rule 16-A removal of any inputs as
such or partially worked outside the
factory for testing, repair etc
Rule 16-B removal of semi-finished
products for further work / finishing
and return

Important procedures in
central excise
Rule -16C removal of finished goods
outside for test etc & return
Export without payment of duty as
well under claim for rebate of duty
LUT (UT1), Bond, ARE
Removal of excisable goods without
duty for export warehousing under
Rule 20

Penal provisions in central

excise
Prosecution for select offenses under
section 9 of the Act
Demand of duty under section 11A
with normal time limit of one year
and 5 years for cases where
suppression of facts by the assesses
is alleged

Penal provisions in central

excise
Interest for delayed payment under
section 11AB
Penalty equal to duty under section
11AC in cases involving suppression of
facts.
Penalty under Rule 25 maximum
upto duty or Rs 2000/-whichever is
greater, with confiscation of the goods

Penal provisions in central

excise
Rule 26 penalty for abettors ,
transporters, issuers of false invoices
max upto duty or Rs 2000/whichever is greater
Rule 27 general penalty where no
penalty is specified for any offense in
the rules, max of Rs 5,000/- with
possible confiscation of the goods

Penal provisions in central

excise
Tax default penalty under rule 8
daily clearance on payment of duty
in cash, plus prohibition of using
cenvat credit, till dues are paid up.
Rule 12CC blanket powers given to
the department to impose
restrictions on Manufacturers and
Dealers involved in tax evasion

Penal provisions in central

excise
Section 11DDA power to order
provisional attachment of property to
protect Revenue during he
pendency of proceedings
Section 14 power to issue summons
Section 13 power to arrest

CENVAT CREDIT
The foundation of the value-added
tax system
Avoids cascading effect of tax on tax
on tax
Integrates goods and services
Cenvat credit Rules 2004 apply to
Manufacturers & Service providers

Cenvat credit rules what is

the gain?
Input stage duty relief in the form of
tax credit to
Capital goods
Inputs
Input services

Cenvat credit Capital

goods
All goods falling under the following
chapters
Chapter 82 tools etc
Chapter 83 miscellaneous articles
of base metals
Chapter 84 machinery, equipment
etc

Capital goods..
Chapter 85 electrical / Electronic
machinery & equipment etc
Chapter 90 optical, photographic,
medical , checking, measuring equipment
etc
Abrasives under heading no 6805
Grinding wheels & the like under heading
6904

Capital goods
Pollution control equipment
Components, spares & accessories of
the goods for the above two
categories
Moulds, dies , jigs and fixtures
Refractories, and Refractory materials
Tubes, pipes and fittings thereof
Storage tank

Capital goods
Used in the factory of the
manufacturer of final products, but
does not include any equipment or
appliance used in the office
Or, used for providing output service
Motor vehicles registered in the name
of the following service providers are
allowed courier agency, GTA, Rent a
cab operator , tour operator, outdoor
caterer

Capital goods.
Ownership of capital goods is not
required for a manufacturer or service
provider except for the motor vehicle
credit
Credit to be taken for 50% of the duty
in the first year and the rest in any
subsequent year
Depreciation under Income tax
prohibited

Capital goods..
The 50% restriction does not apply to
special CVD of 4% paid on imported
capital goods
Removal of capital goods requires reversal
of credit 2.5% depreciation on credit for
every quarter of use
Removal on scrapping of capital goods
requires payment of duty on transaction
value

Capital goods.
Provision for removal of capital goods
for test, repair etc
Moulds, dies , jigs and fixtures can be
deployed at the premises of the job
worker
Capital goods can be produced and
used in the factory of production for
manufacture of excisable goods
duty exempt

Capital goods.
Capital goods on which credit is
taken should not be solely used in
the manufacture of exempted goods
Capital goods which are not defined
in the CCR but used in the factory of
production will qualify for credit as
Inputs. Benco Products Vs CCE
CESTAT larger bench decision

INPUTS
New definition in the CCR
Inputs means all goods used by the
manufacture of final products
Includes accessories cleared with the final
products, if their value is included in the
assessable value
All goods used for generation of electricity
or steam for captive use

Inputs.
All goods used for providing any
output service:
But excludes Light diesel oil, high speed diesel oil
and petrol
Any goods used for construction of
a building or a civil structure or part
thereof

Inputs
Or, for laying foundation or for making of
structures for support of capital goods
Capital good themselves unless these are
parts and or components in the
manufacture of the final product
Motor vehicles
Any goods for the personal consumption of
the employees, primarily
Any goods unrelated to manufacture

Input services

For manufacturers:
Any service used by a manufacturer
Whether directly or indirectly
In or in relation to the manufacture of
final products
And clearance of final products upto
the place of removal

Input services..
For service providers:
Any input service used by a provider
of output service for providing an
output service

Input services allowed to both

manufacturers & service providers

Services used in relation to

Modernization
Renovation
Repairs
Of a factory or the premises of the
service provider

Common services.
Or an office relating to such factory
or the premises
Advertisement
Sales promotion
Market research
Storage upto the place of removal
Procurement of inputs

Common services.

Accounting
Auditing
Financing
Recruitment and quality control
Coaching and training

Common services.

Computer networking
Credit rating
Share Registry
Security, business convention, legal
services
Inward transportation of inputs & capital
goods
Outward transportation upto the place of
removal

Important features of cenvat

credit
Input credit can be availed
immediately on receipt of the goods
accompanied by the relevant invoice
No one-to-one correlation between
input and output
Cenvat credit is a legal and vested
right

Important features of cenvat

credit
Input service tax credit should be
taken only after settling the service
supplier invoice with value and tax
Transfer of credit on transfer of
business allowed
Transitional credit

Important features of cenvat

credit
Importance of new rule 6 in CCR
2004
Options there under
Maintain separate accounts
Or pay 5% on the value of exempted
goods and exempted services

Important features of cenvat

credit
Or take credit proportionate to the
taxable turnover as per formula
prescribed
Inputs & capital goods & input services
should not be exclusively utilized in the
manufacture / provision of exempted
goods or exempted services
Clearances to EOU/SEZ/BTP/STP/EHTP &
exports will not require reversal of credit

Important features of cenvat

credit
Storage of inputs outside the factory
allowed subject to applying for the
same
Significance of tax invoice in CENVAT
credit system
First stage dealer/second stage
dealer/input service distributor