Transcript 1) MANUFACTURE AND EXCISIBILITY

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

(i)
(ii)
“Manufacture” includes any process—
Incidental or ancillary to the completion of
a manufactured product;
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….
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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

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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 1-72000
 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 non- lifting 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……
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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
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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…..
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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…..
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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
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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…

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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….
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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
