Monday, December 12, 2005
Overview of Central Excise In India
Overview of Central Excise Law & Procedures
Madhukar N. Hiregange FCA,ISA(ICAI)
This article is addressed to the uninitiated to understand the concepts of central excise. The article has adopted a modular approach and has been broadly broken into two parts a) The excisability of the product and the other legal aspects. This has been examined step wise b) The procedures required to be complied with for a normal assessee stage wise.
The suggested steps/ stages have been deliberately kept free of the sections and case laws to serve the purpose of being reader friendly. Once Excisability has been confirmed then the procedural compliance to avoid demands and dispute is essential. The important definitions, case laws and explanations are available at the end of this article.
Central Excise Law
The duty of excise is leviable on removal of excisable goods manufactured in India for home consumption at rates specified in the Central Excise Tariff at values as applicable for the class of goods and payment for the same can be made after adjusting the cenvat credit suffered on the inputs and capital goods used in relation to the manufacture of the said goods.
Step 1 : Examine whether “goods” exist. Under the Sale of Goods Act 1930 items that are movable are said to be goods. Movable property is anything that is not immovable. Immovable property has been defined as anything that is permanently embedded/ fastened to the earth, or anything permanently attached to such embedded item. ( Refer definition in Exp-1) Marketability is an equally important criterion. Most items, which are known are marketable with the exception of damaged machinery, transient chemicals, intermediate goods which are not known to be sold, garbage and few exceptional products.
Once an item is goods and it finds a place in the Central Excise Tariff then it is excisable goods. The goods need not be subject to a duty rate. Even if it were exempted or subject to Nil rate of duty they would be excisable goods.
Step 2: Examine Whether in State List or Central : The Products under List II ( State List) or List III( Concurrent List) of the VII schedule of the Constitution of India are not covered by Central Excise. The products like opium, narcotic drugs, alcoholic liquors for human consumption are outside the scope of Central Excise. The excise duty on medicinal and toilet items, which contain alcohol would be collected by the State Government.
Step 3: Classify the product with reference to the broad category and then specific coverage within the broad entry of the Central Excise Tariff 1985. Where the entry is not clear or more than one classification appears to be correct then reference is to be made to the rules of interpretation of the First Schedule contained in the Central Excise Tariff Act 1985 . Even when this is not helpful the recourse to the Harmonised System of Nomenclature maybe made. The confirmation of such classification could also be done by reference to the case laws with regard to the products if any, which could be a valuable indicator. Where an alternative with a lower rate is chosen, the justification of the choice should be clear and legally defendable.
The classification is important to ensure that the appropriate rate is chosen as higher rate will make the product uncompetitive and lower rate may end up with a demand which will have to be met out of pocket. Secondly the valuation under MRP is dependent on the classification. The exemptions are also in a majority of cases based on the classification.
Step 4 : The chapter notes to the chapter under which the product falls should be perused to ensure that deemed manufacture concept does not apply. In the case of such products even if process/ activity (like packing, labeling, repacking etc) understood in normal course as NOT amounting to manufacture are undertaken, the activity is DEEMED to be manufacture and the central excise provisions would apply. (For definition see Exp - 2) Where for the product the processes carried out are not specifically set out, they will not be covered by the deeming fiction. This would require to know the list of activities chapter wise to which deemed manufacture concept applies. This leads to a situation where the trader of certain goods may be liable for payment of central excise duty. Consequently they would also be eligible for the credit on the incoming products and the exemptions provided under law for a manufacturer. The products which are notified as being valued based on the Maximum Retail Price (MRP) are deemed to be manufactured by any person who either declares the MRP or alters the MRP. The upward revisions is only liable for the deeming fiction. Such a person also would be liable to register under central excise and pay the differential duty.
Step 5: In case the product is not covered by the deemed manufacture concept, the process should be examined whether amounting to manufacture.( For definition of manufacture see Exp – 2) Since the definition is not very clear, the meaning is to be understood by referring to the judicial pronouncements. The tests which can be applied are that the incoming material and the final outgoing material are to be compared with respect to their name, character or use. If the final product is distinct and different with regard to the three criterion then manufacture has taken place as understood under central excise. The name refers to what is the product called in common parlance (generic) and does not refer to the brand name. The condition of use is to be applied in a broad manner as every change will bring about some restriction to the use. If the use has not altered, then it would be advisable to seek an opinion from experts in the field or err on the side of revenue. There have been a large number of decisions of the Tribunal and the courts with regard to manufacture of innumerable products, which may shed light (See Exp - 2). The elaborate nature of the processing has nothing to do with the process of manufacture and consequently the simple process also may amount to manufacture. Ex. Assembly has been held to be manufacture.
However it should be ensured that processes not amounting to manufacture are not described as manufacture as the department may at a later date take the view that there is no manufacture. This could result in denial of credit along with consequent demand for interest and penalty. The recent move of expanding the scope of service tax to job works not amounting to manufacture indicates that if a process is NOT amounting to manufacture then, it would be liable for service tax. If amounting to manufacture liable for excise duty subject to the exemption based on value of clearances or other exemption.
The excise law lays down that the person who does the manufacturing process
Step 6: We now have an excisable product manufactured in India. The next examination is whether the manufacturer wishes to avail the exemption if any, which is available. This should depend on the type of product/ customers orders. If the final product is being sent to the consumer then exemption should be claimed. If the item is an intermediate product then availing credit on the inputs and paying duty on the finished goods would be preferable as long as the customer is eligible for credit. The orders if generally received as basic + taxes as applicable would mean that the manufacturer would benefit by opting for duty payment. A comparative analysis of the two situations( opting for registration and opting for exemption ) could highlight the benefits. The manufacturer doing very low value addition may also find opting for registration preferable. In the course of doing this the impact of service tax credits and payments may also be considered.
Step 7: The exemption notification if any is to be examined carefully as non following of the substantive conditions could lead to a denial of the benefit. The exemption based on the value of clearances for units who have had clearances not exceeding Rs 400 Lakhs also called the SSI Exemption is available for specified products which maybe confirmed by reference to the Notification 8/2003 dt. 1.3.2003. Here it has to be noted that this exemption is not available for Branded Goods of another. Therefore a manufacturer of branded goods of another would be required to register and pay duty from day one. However if such a manufacturer is situated in a rural area, manufactures for Khadi Board or is an Original Equipment Supplier then the exemption would still be available. The notification also sets out that the exemption is applicable to :-
A manufacturer from one or more factories
A factory of one or more manufacturers
Manufacturers who set up new concerns by splitting the company, setting up one more company with financial, managerial, production, marketing dependence may attract the clubbing provisions where the whole group would be considered as one entity. Generally the start of the litigation is due to proximity and the decision on clubbing due to establishment of financial flowback.
If the manufacturer is eligible for the exemption he can claim the exemption upto a clearance value of Rs.100 Lakhs. Clearance has to be differentiated from turnover.
Step 8: The product maybe so competitive that it cannot bear any duty of excise. In such cases location at specified areas of Kutch in Gujrat or North East of India is an option, which can be examined. The recent addition of Himachal Pradesh, Uttaranchal and Chattisgarh have been popular destinations for the MNCs and the FMCG products. The exemption is available only to specified products, which are set up in the specified location/ places. There are also some investment criterion, which have to be met.
Step 9. The decision for registering as a manufacturer maybe made at this point where no other option exists or registration is mandatory or when the same is preferable economically.
Step 10 : The trader who wishes to pass on the duty paid on goods traded by him to customers who can avail the credit for the same could also be registered. The trader who deals in intermediate products for the industry or capital goods used by excisable units or to service providers who are liable for service tax would find that he has an advantage if he is registered. Consequently the trader who deals in final consumer products and exempted goods would not have any advantage.
Central Excise Procedures at a Glance
The manufacturer would know that points of law and interpretations are considerably less frequent than the day to day queries. Under Central Excise there have been hundreds of Circulars and Trade Notices, which could be used for specific purposes as long as they are not repugnant to the rules. It is the experience of the paper writer that almost all possible commercial transactions / requirements have a specified procedure available in Central Excise. The older the procedure the more cumbersome it would be. The manufacturer opting for registration and duty payment goes through some common procedures which are set out in sequence below:-
Stage (1) : The decision to register should be made a little prior to crossing Rs. 100 Lakhs which is the exemption or immediately if due to budget changes as the product has become excisable or manufacturer opting for the same. The application is to be submitted complete in all respects. The registration is generally issued within a period of 7 days. The registration number is based on the PAN no. The large scale manufacturers may find that obtaining a registration in the early stages would enable the availing of cenvat credit on the capital goods which would go to reduce the cost of the project. Even exporters may sometimes find opting into registration preferable if they are under the DEPB scheme or wish to obtain duty free imports.
Stage (2) : The manufacturer who has registered is to provide a declaration of the books of account, stocks, returns and documents maintained for the recording and control of the stocks and of monetary transactions. The law enjoins on a manufacturer to keep record of quantity of goods manufactured , removed, value of removal and the inventory. The inputs similarly require the account of receipt, disposal, consumption and inventory. In case the accounts and registers are computerised the details of the software along with the sample reports maybe submitted to the department.
Stage (3): The inputs or semi finished goods could be sent for job work on payment of duty where the job worker could avail the credit and discharge the duty at the time of removal. Generally inputs are removed for job work without payment of duty as the facility is available under the Cenvat credit Rules 2002. This requires a quantitative account / record to be maintained. The control on the delivery documents used for this purpose would be wise( separate series)
Stage (4): The invoice has now become a vital document of control and therefore whenever invoices are brought into use a declaration of the numbers is to be made after authentication of the first and last pages of the invoice book. The contents of the invoice as per law and recommended is provided in Exp – 4.
Stage (5): The valuation of goods under central excise is mainly under three main methods. First the transaction value or the value at which the goods are sold to independent customer on principal to principal basis where no additional consideration accrues over a period in future. Here the clarity of the order and its independence with other orders to the same client could play a vital role. The place and time of delivery is also important. In these cases the invoice value would be the proper value. Most of the goods fall into this category. Secondly the MRP method of valuation requires that the value at the time of removal be the MRP printed on the commodity less the abatement allowed under the law. This figure could be more or less than the value on which the duty is discharged. MRP based valuation is applicable to specified goods. The FMCG as well as a few other products find a place in the list. It is to be noted that excise duty is payable on removal. Therefore third method applies when the goods sold are tainted by the vice/ bias ( consumed, sold to relatives, additional consideration exists, sold by the depots) and removals other than sale such as samples, warranty repairs, donations, captive consumption etc. In this case reference to the Valuation Rules 2000 would be required. The manufacturer who is unable to determine the value of the final products at the time of removal can also opt for provisional assessment and discharge the balance of duty / claim a refund on final assessment. It is expected that most of the litigation in the future would be concentrated in this area as the definition of transaction value appears to be impractical as well as unreasonable.
Stage (6): The duty paid on almost all inputs (Exp – 3 for definition), which are used in the manufacture of final products leviable to duty is available. This is called the cenvat credit (earlier Modvat). This amount can be used in lieu of cash to discharge the central excise duty ( now also called the cenvat ). The credit can be availed on receipt of the inputs, which do not require to be owned by the manufacturer. The conditions in this regard are that the inputs must be used for final products on which duty is chargeable, received under a valid invoice or bill of entry and a known source.( For conditions see Exp – 3). The inputs can be removed on payment of duty at any value when removed as such and the duty credit availed is required to be reversed. They can also be removed without payment of duty for job work under a delivery document and are to be returned in a period of 180 days. In case of delay the duty debit is required for which a re-credit is permissible on receipt.
Similarly the cenvat credit on specified capital goods( see definition in exp - 3) is available. The credit could be taken @ 50 % in the year of receipt and the balance in any subsequent year in which the same are in possession of the manufacturer. The total amount of all the input credits (as per valid invoices) and the capital credit is to be included in the ER –1 filed monthly or quarterly in a prescribed format.
The service tax credit has also been allowed for the manufacturer where the services, which are used for the manufacture would be eligible for cenvat credit. There is no need to have any taxable service for availing the credit of service tax.
Stage (7): The payment of duty may become necessary where the cenvat credits are not sufficient. The payment of duty should be into the assessee account with Central Excise called the PLA( Personal Ledger Account). The requirement of payment is that for the removals for the month, the payment should be made by the 5th of the subsequent month. The manufacturers who are claiming the concession as SSIs can pay the whole months duty by the 15th of the subsequent month. This payment is net of the cenvat credit for inputs and capital goods received upto the relevant dates. The delay in expensive and attracts Rs.1000/- per day or 2% of the amount outstanding whichever is more. The date of payment would be the date of submitting to the bank provided that the cheque is honoured. The account of the payments and utilisation of the PLA could be maintained in the normal financial accounts of the concern.
Stage (8): The removal of goods for export can be done without payment of duty as duty is leviable only for home consumption. This can be done on the basis of a yearly undertaking to the jurisdictional Assistant/ Deputy Commissioner. The alternative routes to this are as under:-
To cash out the inputs credit by applying for a rebate on inputs in manufacture of export product. ( Consumption questions would have to be fended)
To pay the duty at the time of export after availing credit on the inputs by utilising the credit balances and claiming a refund of the duty paid also called the exports under rebate claim.
To claim the drawback under excise and customs as applicable to the product. (Generally opted for where the All Industry Rate is available)
The exporters could also opt for registration and receipt of inputs without payment of duty wherever advantageous. Exporters also require to have a close look at alternative import methods / benefits like advance licence , DEPB, EPCG, 100% EOU, STP, EHTP etc.
Stage (9): Rejections/ Repairs/ Return of goods supplied could be received under an invoice, delivery challan, original invoice set of supplier, letter of customer. The new rules prescribe that credit can be taken on the invoice of the customer or on own invoices similar to inputs. If the goods are sold without any further process amounting to manufacture the duty originally paid is to be debited. In case goods are re-manufactured the duty would be payable on the transaction value/ MRP and at the rate as applicable at the time of removal. The important point to be noted is that third party evidence for rejection and cross link to the invoice under which it was received by the supplier himself would ensure the credit is not interfered with.
Stage (10) : ER- 1: Excise returns for manufacturers which provides the information on the manufactured products. The opening balance, quantity manufactured, quantity removed either on payment of duty or otherwise, the value at which removed, duty payable and the closing balance. It also provides an abstract of the duty credits available and used as well as the PLA available and used. In the absence of number if intimations and declarations this return is now scrutinised in great detail.
Stage (11): The scrutiny powers of the Range Officers has been curtailed by the removal of the provisions relating to the same. However details required maybe asked for while verifying the ER-1 as per the Supplementary instructions. However the real check would be only by way of an audit conducted by the Internal audit party of the Division/ Commissionerate, preventive wing or the Accountant Generals Office. The EA-2000 has ushered in an era of more professional and in depth methods of verification. The records perused in an excise audit now cover the entire gamut of financial records as well as the stock records. Therefore the reconciliation between the returns and the finance becomes crucial. The Act also provides for Special audit by Cost Accountants where credit of duties or valuation adopted are suspect.
Stage (12): The assessee may at the time of an internal audit (internally or by professionals) or while preparing the reconciliation observe that short payment/ no payment has taken place. In such cases it is advisable that the duty so short discharged be debited by way of a supplementary invoice indicating the errors as well as the cross reference to the transaction where the same took place. The customer if under excise would be admissible to duty credit on such supplementary invoice. However if the same is issued consequent to a show cause notice, invoking the extended period, then the duty credit would not be admissible to the customer.
Stage (13): The demands for non payment or short payment of duty could be within a period of 1 year or 5 years . The latter is where the allegation of fraud, collusion, suppression of fact, willful misstatement , or contravention of the provisions of the Act with intention to evade duty exists. In this case the extended period of 5 years from the relevant date can be invoked. The demands by the department are to be preceded by a show cause notice and should quantify the amount payable and the basis for reaching the allegations. The show cause notices have to be authorised by the Commissioner of Central excise. In case of extended period the show cause notice is to be issued by the Joint Commissioner/ Additional Commissioner or the Commissioner. The assessee is advised to provide all the facts and grounds at this stage so as to avoid the appeal stage. In the event the demand is confirmed by the adjudicating officer the assessee can opt to pay up. At this point he could opt to pay 25 % of the penalty if the same is paid within a period of 30 days of communication of the order. The interest liability starts three months from the date of the order for normal cases. Where the extended period of limitation has been invoked the interest would be reckoned from the first date of the month following the month in which duty was to be paid.
Stage (14): The adjudication order can be appealed against by the assessee or the department within a period of 60 days to the Commissioner(Appeals) where the orders are passed by an officer junior to Commissioner. In case of the manufacturer filing the appeal, it should also be accompanied by an application of waiver of pre deposit pending disposal of the appeal. The order of the Commissioner (Appeals) could be further appealed against to the Tribunal. The adjudication order of Commissioner also can be appealed against to the Tribunal. The requirement of pre deposit exists here also. Most cases culminate at this stage. However where there is a question of law the high court and further appeal to the Supreme Court could be examined. There is also a settlement procedure envisaged under the Act.
Stage (15): The penalty under Section 11AC of the CEA 1944 envisaged a maximum limit equal to amount of demand. This however is not mandatory and could be lower depending on the circumstances in each case. The requirement of mens rea ( mala fide/ premeditation/ deliberation ) prove that the intent was faulty and penalty should be charged. In case of bona fide belief then there should be no penalty or nominal penalty.
Explanations:
Explanation - 1 : Immovable Property
Definitions :
Section 2(26) of the General Clauses Act 1897 defines Immovable property as under :
“Immovable Property” shall include land, benefits to arise out of land, and things attached to the earth,, or permanently fastened to anything attached to the earth..
Sec2(7) of Sale of Goods Act 1930 defines goods:- “Goods” means every kind of movable property( other than actionable claims and money) and includes stock shares, growing crops and things attached to or forming part of land which was agreed to be severed before sale or under a contract for sale
Judicial Decisions on Immovable Property
Plant and machinery embedded in the earth, structures, erections and installations are not goods since they do not pass the twin test of being capable of being bought to the market. – Tube Mill
Quality Steel Tubes P Ltd Vs CCE 1995(75) ELT 17(SC)
Totaliser System installed in the race club being embedded in earth is not goods hence not liable to duty.
Hyderabad Race Club 1996(88) ELT 633 (SC)
Projects by itself being an immovable property not goods and not liable.
Tata Robins Fraser Ltd Vs CCE 1990(46)ELT 562 (T) maintained in 84 ELT A 108 (SC)
Embedding Paper making machine in a concrete base to ensure wobble free operation does not make it immovable property. Just because a plant and machinery are fixed in the earth for better functioning, it does not automatically become an immovable property.
This decision is under review.
Sirpur Paper Mills Ltd Vs CCE 1998(97) ELT 3(SC)
Installation or erection of turbo alternator on the platform specifically constructed on the land cannot be considered as a common base, therefore such alternator would be immovable property
Triveni Engineering & Industries Ltd. Vs CCE 2000(120) ELT 273
Judicial Decision on Marketability
Aluminum cans used in making of torches were intermediate goods, not goods as they were not marketable for the purposes of Central Excise.
Geep Industrial Syndicate Ltd Vs Centre 1987(31)ELT 865(SC)
Highly unstable goods like starch hydrolysate being transient in nature not capable of being marketed and therefore not goods.
CCE Vs Ambalal Sarabhai Enterproses 1989(43) ELT 214 (SC) :
Coils used in manufacture of Transformers come into being when the transformer is wound. Therefore not marketable as such, not goods.
Punjab State Electricity Board Vs CCE 1995(76)ELT 313 affirmed by SC in 83 ELT A 106
Electric Poles manufactured in the production of electricity held to be marketable- Goods
APSEB Vs CCE 1994(70)ELT 3 (SC)
Explanation 2 : Manufacture
Definition :
Section 2(f) of Central Excise Act, 1944 defines manufacture in an inclusive manner as follows including the term manufacturer:
"manufacture" includes any process,—
(i) incidental or ancillary to the completion of a manufactured product; and
(ii) which is specified in relation to any goods in, the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture, and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;
Explanation 3 : Cenvat Credit
Definitions :
“Capital goods” means, -
a. all goods falling under Chapter 82, Chapter 84, Chapter 85 or Chapter 90, heading No. 68.02 and sub-heading 6801.10 of the First Schedule to the CET
b. components, spares and accessories of the goods specified in (i) above;
c. moulds and dies;
d. refractories and refractory materials;
e. tubes and pipes and fittings thereof;
f. pollution control equipment; and
g. storage tank.
used in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office;
“Input” means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final products, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production.
Explanation 4 : Contents of Invoice
A. Manufacturer
Mandatory particulars
Additional Suggested Particulars
Serial Number
a. Name of the company
Registration Number
b. Address of the Company
Description of goods
c. Address of the factory of manufacture
Classification of goods
d. Address of the jurisdictional range and division
Time and date of removal
e. Name and address of the Consignee
Rate of duty
f. Mode of transport and motor vehicle registration number or other reference no.
Quantity of goods
g. Certification as given below
Value of the goods
Duty payable thereon
Certification to be included in the Manufacturer’s Invoice :- Certified that the particulars given above are true and correct and the amount indicated represents the price actually charged and that there is no flow of additional consideration directly or indirectly from the buyer. We further declare that the duty payable shall be paid on due date.
B. Registered Dealer
The mandatory and additional particulars would be the same.
The certification/ declaration :- Certified that the goods have been issued out of duty paid goods duly recorded consignment wise and entered in the stock record. Further the duty passed on is proportionate to the quantity. ( i.e. the duty per unit is the same)
Madhukar N. Hiregange FCA,ISA(ICAI)
This article is addressed to the uninitiated to understand the concepts of central excise. The article has adopted a modular approach and has been broadly broken into two parts a) The excisability of the product and the other legal aspects. This has been examined step wise b) The procedures required to be complied with for a normal assessee stage wise.
The suggested steps/ stages have been deliberately kept free of the sections and case laws to serve the purpose of being reader friendly. Once Excisability has been confirmed then the procedural compliance to avoid demands and dispute is essential. The important definitions, case laws and explanations are available at the end of this article.
Central Excise Law
The duty of excise is leviable on removal of excisable goods manufactured in India for home consumption at rates specified in the Central Excise Tariff at values as applicable for the class of goods and payment for the same can be made after adjusting the cenvat credit suffered on the inputs and capital goods used in relation to the manufacture of the said goods.
Step 1 : Examine whether “goods” exist. Under the Sale of Goods Act 1930 items that are movable are said to be goods. Movable property is anything that is not immovable. Immovable property has been defined as anything that is permanently embedded/ fastened to the earth, or anything permanently attached to such embedded item. ( Refer definition in Exp-1) Marketability is an equally important criterion. Most items, which are known are marketable with the exception of damaged machinery, transient chemicals, intermediate goods which are not known to be sold, garbage and few exceptional products.
Once an item is goods and it finds a place in the Central Excise Tariff then it is excisable goods. The goods need not be subject to a duty rate. Even if it were exempted or subject to Nil rate of duty they would be excisable goods.
Step 2: Examine Whether in State List or Central : The Products under List II ( State List) or List III( Concurrent List) of the VII schedule of the Constitution of India are not covered by Central Excise. The products like opium, narcotic drugs, alcoholic liquors for human consumption are outside the scope of Central Excise. The excise duty on medicinal and toilet items, which contain alcohol would be collected by the State Government.
Step 3: Classify the product with reference to the broad category and then specific coverage within the broad entry of the Central Excise Tariff 1985. Where the entry is not clear or more than one classification appears to be correct then reference is to be made to the rules of interpretation of the First Schedule contained in the Central Excise Tariff Act 1985 . Even when this is not helpful the recourse to the Harmonised System of Nomenclature maybe made. The confirmation of such classification could also be done by reference to the case laws with regard to the products if any, which could be a valuable indicator. Where an alternative with a lower rate is chosen, the justification of the choice should be clear and legally defendable.
The classification is important to ensure that the appropriate rate is chosen as higher rate will make the product uncompetitive and lower rate may end up with a demand which will have to be met out of pocket. Secondly the valuation under MRP is dependent on the classification. The exemptions are also in a majority of cases based on the classification.
Step 4 : The chapter notes to the chapter under which the product falls should be perused to ensure that deemed manufacture concept does not apply. In the case of such products even if process/ activity (like packing, labeling, repacking etc) understood in normal course as NOT amounting to manufacture are undertaken, the activity is DEEMED to be manufacture and the central excise provisions would apply. (For definition see Exp - 2) Where for the product the processes carried out are not specifically set out, they will not be covered by the deeming fiction. This would require to know the list of activities chapter wise to which deemed manufacture concept applies. This leads to a situation where the trader of certain goods may be liable for payment of central excise duty. Consequently they would also be eligible for the credit on the incoming products and the exemptions provided under law for a manufacturer. The products which are notified as being valued based on the Maximum Retail Price (MRP) are deemed to be manufactured by any person who either declares the MRP or alters the MRP. The upward revisions is only liable for the deeming fiction. Such a person also would be liable to register under central excise and pay the differential duty.
Step 5: In case the product is not covered by the deemed manufacture concept, the process should be examined whether amounting to manufacture.( For definition of manufacture see Exp – 2) Since the definition is not very clear, the meaning is to be understood by referring to the judicial pronouncements. The tests which can be applied are that the incoming material and the final outgoing material are to be compared with respect to their name, character or use. If the final product is distinct and different with regard to the three criterion then manufacture has taken place as understood under central excise. The name refers to what is the product called in common parlance (generic) and does not refer to the brand name. The condition of use is to be applied in a broad manner as every change will bring about some restriction to the use. If the use has not altered, then it would be advisable to seek an opinion from experts in the field or err on the side of revenue. There have been a large number of decisions of the Tribunal and the courts with regard to manufacture of innumerable products, which may shed light (See Exp - 2). The elaborate nature of the processing has nothing to do with the process of manufacture and consequently the simple process also may amount to manufacture. Ex. Assembly has been held to be manufacture.
However it should be ensured that processes not amounting to manufacture are not described as manufacture as the department may at a later date take the view that there is no manufacture. This could result in denial of credit along with consequent demand for interest and penalty. The recent move of expanding the scope of service tax to job works not amounting to manufacture indicates that if a process is NOT amounting to manufacture then, it would be liable for service tax. If amounting to manufacture liable for excise duty subject to the exemption based on value of clearances or other exemption.
The excise law lays down that the person who does the manufacturing process
Step 6: We now have an excisable product manufactured in India. The next examination is whether the manufacturer wishes to avail the exemption if any, which is available. This should depend on the type of product/ customers orders. If the final product is being sent to the consumer then exemption should be claimed. If the item is an intermediate product then availing credit on the inputs and paying duty on the finished goods would be preferable as long as the customer is eligible for credit. The orders if generally received as basic + taxes as applicable would mean that the manufacturer would benefit by opting for duty payment. A comparative analysis of the two situations( opting for registration and opting for exemption ) could highlight the benefits. The manufacturer doing very low value addition may also find opting for registration preferable. In the course of doing this the impact of service tax credits and payments may also be considered.
Step 7: The exemption notification if any is to be examined carefully as non following of the substantive conditions could lead to a denial of the benefit. The exemption based on the value of clearances for units who have had clearances not exceeding Rs 400 Lakhs also called the SSI Exemption is available for specified products which maybe confirmed by reference to the Notification 8/2003 dt. 1.3.2003. Here it has to be noted that this exemption is not available for Branded Goods of another. Therefore a manufacturer of branded goods of another would be required to register and pay duty from day one. However if such a manufacturer is situated in a rural area, manufactures for Khadi Board or is an Original Equipment Supplier then the exemption would still be available. The notification also sets out that the exemption is applicable to :-
A manufacturer from one or more factories
A factory of one or more manufacturers
Manufacturers who set up new concerns by splitting the company, setting up one more company with financial, managerial, production, marketing dependence may attract the clubbing provisions where the whole group would be considered as one entity. Generally the start of the litigation is due to proximity and the decision on clubbing due to establishment of financial flowback.
If the manufacturer is eligible for the exemption he can claim the exemption upto a clearance value of Rs.100 Lakhs. Clearance has to be differentiated from turnover.
Step 8: The product maybe so competitive that it cannot bear any duty of excise. In such cases location at specified areas of Kutch in Gujrat or North East of India is an option, which can be examined. The recent addition of Himachal Pradesh, Uttaranchal and Chattisgarh have been popular destinations for the MNCs and the FMCG products. The exemption is available only to specified products, which are set up in the specified location/ places. There are also some investment criterion, which have to be met.
Step 9. The decision for registering as a manufacturer maybe made at this point where no other option exists or registration is mandatory or when the same is preferable economically.
Step 10 : The trader who wishes to pass on the duty paid on goods traded by him to customers who can avail the credit for the same could also be registered. The trader who deals in intermediate products for the industry or capital goods used by excisable units or to service providers who are liable for service tax would find that he has an advantage if he is registered. Consequently the trader who deals in final consumer products and exempted goods would not have any advantage.
Central Excise Procedures at a Glance
The manufacturer would know that points of law and interpretations are considerably less frequent than the day to day queries. Under Central Excise there have been hundreds of Circulars and Trade Notices, which could be used for specific purposes as long as they are not repugnant to the rules. It is the experience of the paper writer that almost all possible commercial transactions / requirements have a specified procedure available in Central Excise. The older the procedure the more cumbersome it would be. The manufacturer opting for registration and duty payment goes through some common procedures which are set out in sequence below:-
Stage (1) : The decision to register should be made a little prior to crossing Rs. 100 Lakhs which is the exemption or immediately if due to budget changes as the product has become excisable or manufacturer opting for the same. The application is to be submitted complete in all respects. The registration is generally issued within a period of 7 days. The registration number is based on the PAN no. The large scale manufacturers may find that obtaining a registration in the early stages would enable the availing of cenvat credit on the capital goods which would go to reduce the cost of the project. Even exporters may sometimes find opting into registration preferable if they are under the DEPB scheme or wish to obtain duty free imports.
Stage (2) : The manufacturer who has registered is to provide a declaration of the books of account, stocks, returns and documents maintained for the recording and control of the stocks and of monetary transactions. The law enjoins on a manufacturer to keep record of quantity of goods manufactured , removed, value of removal and the inventory. The inputs similarly require the account of receipt, disposal, consumption and inventory. In case the accounts and registers are computerised the details of the software along with the sample reports maybe submitted to the department.
Stage (3): The inputs or semi finished goods could be sent for job work on payment of duty where the job worker could avail the credit and discharge the duty at the time of removal. Generally inputs are removed for job work without payment of duty as the facility is available under the Cenvat credit Rules 2002. This requires a quantitative account / record to be maintained. The control on the delivery documents used for this purpose would be wise( separate series)
Stage (4): The invoice has now become a vital document of control and therefore whenever invoices are brought into use a declaration of the numbers is to be made after authentication of the first and last pages of the invoice book. The contents of the invoice as per law and recommended is provided in Exp – 4.
Stage (5): The valuation of goods under central excise is mainly under three main methods. First the transaction value or the value at which the goods are sold to independent customer on principal to principal basis where no additional consideration accrues over a period in future. Here the clarity of the order and its independence with other orders to the same client could play a vital role. The place and time of delivery is also important. In these cases the invoice value would be the proper value. Most of the goods fall into this category. Secondly the MRP method of valuation requires that the value at the time of removal be the MRP printed on the commodity less the abatement allowed under the law. This figure could be more or less than the value on which the duty is discharged. MRP based valuation is applicable to specified goods. The FMCG as well as a few other products find a place in the list. It is to be noted that excise duty is payable on removal. Therefore third method applies when the goods sold are tainted by the vice/ bias ( consumed, sold to relatives, additional consideration exists, sold by the depots) and removals other than sale such as samples, warranty repairs, donations, captive consumption etc. In this case reference to the Valuation Rules 2000 would be required. The manufacturer who is unable to determine the value of the final products at the time of removal can also opt for provisional assessment and discharge the balance of duty / claim a refund on final assessment. It is expected that most of the litigation in the future would be concentrated in this area as the definition of transaction value appears to be impractical as well as unreasonable.
Stage (6): The duty paid on almost all inputs (Exp – 3 for definition), which are used in the manufacture of final products leviable to duty is available. This is called the cenvat credit (earlier Modvat). This amount can be used in lieu of cash to discharge the central excise duty ( now also called the cenvat ). The credit can be availed on receipt of the inputs, which do not require to be owned by the manufacturer. The conditions in this regard are that the inputs must be used for final products on which duty is chargeable, received under a valid invoice or bill of entry and a known source.( For conditions see Exp – 3). The inputs can be removed on payment of duty at any value when removed as such and the duty credit availed is required to be reversed. They can also be removed without payment of duty for job work under a delivery document and are to be returned in a period of 180 days. In case of delay the duty debit is required for which a re-credit is permissible on receipt.
Similarly the cenvat credit on specified capital goods( see definition in exp - 3) is available. The credit could be taken @ 50 % in the year of receipt and the balance in any subsequent year in which the same are in possession of the manufacturer. The total amount of all the input credits (as per valid invoices) and the capital credit is to be included in the ER –1 filed monthly or quarterly in a prescribed format.
The service tax credit has also been allowed for the manufacturer where the services, which are used for the manufacture would be eligible for cenvat credit. There is no need to have any taxable service for availing the credit of service tax.
Stage (7): The payment of duty may become necessary where the cenvat credits are not sufficient. The payment of duty should be into the assessee account with Central Excise called the PLA( Personal Ledger Account). The requirement of payment is that for the removals for the month, the payment should be made by the 5th of the subsequent month. The manufacturers who are claiming the concession as SSIs can pay the whole months duty by the 15th of the subsequent month. This payment is net of the cenvat credit for inputs and capital goods received upto the relevant dates. The delay in expensive and attracts Rs.1000/- per day or 2% of the amount outstanding whichever is more. The date of payment would be the date of submitting to the bank provided that the cheque is honoured. The account of the payments and utilisation of the PLA could be maintained in the normal financial accounts of the concern.
Stage (8): The removal of goods for export can be done without payment of duty as duty is leviable only for home consumption. This can be done on the basis of a yearly undertaking to the jurisdictional Assistant/ Deputy Commissioner. The alternative routes to this are as under:-
To cash out the inputs credit by applying for a rebate on inputs in manufacture of export product. ( Consumption questions would have to be fended)
To pay the duty at the time of export after availing credit on the inputs by utilising the credit balances and claiming a refund of the duty paid also called the exports under rebate claim.
To claim the drawback under excise and customs as applicable to the product. (Generally opted for where the All Industry Rate is available)
The exporters could also opt for registration and receipt of inputs without payment of duty wherever advantageous. Exporters also require to have a close look at alternative import methods / benefits like advance licence , DEPB, EPCG, 100% EOU, STP, EHTP etc.
Stage (9): Rejections/ Repairs/ Return of goods supplied could be received under an invoice, delivery challan, original invoice set of supplier, letter of customer. The new rules prescribe that credit can be taken on the invoice of the customer or on own invoices similar to inputs. If the goods are sold without any further process amounting to manufacture the duty originally paid is to be debited. In case goods are re-manufactured the duty would be payable on the transaction value/ MRP and at the rate as applicable at the time of removal. The important point to be noted is that third party evidence for rejection and cross link to the invoice under which it was received by the supplier himself would ensure the credit is not interfered with.
Stage (10) : ER- 1: Excise returns for manufacturers which provides the information on the manufactured products. The opening balance, quantity manufactured, quantity removed either on payment of duty or otherwise, the value at which removed, duty payable and the closing balance. It also provides an abstract of the duty credits available and used as well as the PLA available and used. In the absence of number if intimations and declarations this return is now scrutinised in great detail.
Stage (11): The scrutiny powers of the Range Officers has been curtailed by the removal of the provisions relating to the same. However details required maybe asked for while verifying the ER-1 as per the Supplementary instructions. However the real check would be only by way of an audit conducted by the Internal audit party of the Division/ Commissionerate, preventive wing or the Accountant Generals Office. The EA-2000 has ushered in an era of more professional and in depth methods of verification. The records perused in an excise audit now cover the entire gamut of financial records as well as the stock records. Therefore the reconciliation between the returns and the finance becomes crucial. The Act also provides for Special audit by Cost Accountants where credit of duties or valuation adopted are suspect.
Stage (12): The assessee may at the time of an internal audit (internally or by professionals) or while preparing the reconciliation observe that short payment/ no payment has taken place. In such cases it is advisable that the duty so short discharged be debited by way of a supplementary invoice indicating the errors as well as the cross reference to the transaction where the same took place. The customer if under excise would be admissible to duty credit on such supplementary invoice. However if the same is issued consequent to a show cause notice, invoking the extended period, then the duty credit would not be admissible to the customer.
Stage (13): The demands for non payment or short payment of duty could be within a period of 1 year or 5 years . The latter is where the allegation of fraud, collusion, suppression of fact, willful misstatement , or contravention of the provisions of the Act with intention to evade duty exists. In this case the extended period of 5 years from the relevant date can be invoked. The demands by the department are to be preceded by a show cause notice and should quantify the amount payable and the basis for reaching the allegations. The show cause notices have to be authorised by the Commissioner of Central excise. In case of extended period the show cause notice is to be issued by the Joint Commissioner/ Additional Commissioner or the Commissioner. The assessee is advised to provide all the facts and grounds at this stage so as to avoid the appeal stage. In the event the demand is confirmed by the adjudicating officer the assessee can opt to pay up. At this point he could opt to pay 25 % of the penalty if the same is paid within a period of 30 days of communication of the order. The interest liability starts three months from the date of the order for normal cases. Where the extended period of limitation has been invoked the interest would be reckoned from the first date of the month following the month in which duty was to be paid.
Stage (14): The adjudication order can be appealed against by the assessee or the department within a period of 60 days to the Commissioner(Appeals) where the orders are passed by an officer junior to Commissioner. In case of the manufacturer filing the appeal, it should also be accompanied by an application of waiver of pre deposit pending disposal of the appeal. The order of the Commissioner (Appeals) could be further appealed against to the Tribunal. The adjudication order of Commissioner also can be appealed against to the Tribunal. The requirement of pre deposit exists here also. Most cases culminate at this stage. However where there is a question of law the high court and further appeal to the Supreme Court could be examined. There is also a settlement procedure envisaged under the Act.
Stage (15): The penalty under Section 11AC of the CEA 1944 envisaged a maximum limit equal to amount of demand. This however is not mandatory and could be lower depending on the circumstances in each case. The requirement of mens rea ( mala fide/ premeditation/ deliberation ) prove that the intent was faulty and penalty should be charged. In case of bona fide belief then there should be no penalty or nominal penalty.
Explanations:
Explanation - 1 : Immovable Property
Definitions :
Section 2(26) of the General Clauses Act 1897 defines Immovable property as under :
“Immovable Property” shall include land, benefits to arise out of land, and things attached to the earth,, or permanently fastened to anything attached to the earth..
Sec2(7) of Sale of Goods Act 1930 defines goods:- “Goods” means every kind of movable property( other than actionable claims and money) and includes stock shares, growing crops and things attached to or forming part of land which was agreed to be severed before sale or under a contract for sale
Judicial Decisions on Immovable Property
Plant and machinery embedded in the earth, structures, erections and installations are not goods since they do not pass the twin test of being capable of being bought to the market. – Tube Mill
Quality Steel Tubes P Ltd Vs CCE 1995(75) ELT 17(SC)
Totaliser System installed in the race club being embedded in earth is not goods hence not liable to duty.
Hyderabad Race Club 1996(88) ELT 633 (SC)
Projects by itself being an immovable property not goods and not liable.
Tata Robins Fraser Ltd Vs CCE 1990(46)ELT 562 (T) maintained in 84 ELT A 108 (SC)
Embedding Paper making machine in a concrete base to ensure wobble free operation does not make it immovable property. Just because a plant and machinery are fixed in the earth for better functioning, it does not automatically become an immovable property.
This decision is under review.
Sirpur Paper Mills Ltd Vs CCE 1998(97) ELT 3(SC)
Installation or erection of turbo alternator on the platform specifically constructed on the land cannot be considered as a common base, therefore such alternator would be immovable property
Triveni Engineering & Industries Ltd. Vs CCE 2000(120) ELT 273
Judicial Decision on Marketability
Aluminum cans used in making of torches were intermediate goods, not goods as they were not marketable for the purposes of Central Excise.
Geep Industrial Syndicate Ltd Vs Centre 1987(31)ELT 865(SC)
Highly unstable goods like starch hydrolysate being transient in nature not capable of being marketed and therefore not goods.
CCE Vs Ambalal Sarabhai Enterproses 1989(43) ELT 214 (SC) :
Coils used in manufacture of Transformers come into being when the transformer is wound. Therefore not marketable as such, not goods.
Punjab State Electricity Board Vs CCE 1995(76)ELT 313 affirmed by SC in 83 ELT A 106
Electric Poles manufactured in the production of electricity held to be marketable- Goods
APSEB Vs CCE 1994(70)ELT 3 (SC)
Explanation 2 : Manufacture
Definition :
Section 2(f) of Central Excise Act, 1944 defines manufacture in an inclusive manner as follows including the term manufacturer:
"manufacture" includes any process,—
(i) incidental or ancillary to the completion of a manufactured product; and
(ii) which is specified in relation to any goods in, the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture, and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;
Explanation 3 : Cenvat Credit
Definitions :
“Capital goods” means, -
a. all goods falling under Chapter 82, Chapter 84, Chapter 85 or Chapter 90, heading No. 68.02 and sub-heading 6801.10 of the First Schedule to the CET
b. components, spares and accessories of the goods specified in (i) above;
c. moulds and dies;
d. refractories and refractory materials;
e. tubes and pipes and fittings thereof;
f. pollution control equipment; and
g. storage tank.
used in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office;
“Input” means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final products, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production.
Explanation 4 : Contents of Invoice
A. Manufacturer
Mandatory particulars
Additional Suggested Particulars
Serial Number
a. Name of the company
Registration Number
b. Address of the Company
Description of goods
c. Address of the factory of manufacture
Classification of goods
d. Address of the jurisdictional range and division
Time and date of removal
e. Name and address of the Consignee
Rate of duty
f. Mode of transport and motor vehicle registration number or other reference no.
Quantity of goods
g. Certification as given below
Value of the goods
Duty payable thereon
Certification to be included in the Manufacturer’s Invoice :- Certified that the particulars given above are true and correct and the amount indicated represents the price actually charged and that there is no flow of additional consideration directly or indirectly from the buyer. We further declare that the duty payable shall be paid on due date.
B. Registered Dealer
The mandatory and additional particulars would be the same.
The certification/ declaration :- Certified that the goods have been issued out of duty paid goods duly recorded consignment wise and entered in the stock record. Further the duty passed on is proportionate to the quantity. ( i.e. the duty per unit is the same)
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