 Section 3 of Central Excise Act, 1944.
 Basis of Levy.
 What is Manufacture?.
 CE Law gives only a truncated definition
  for manufacture – Includes Deemed
 Widest definition is available in Foreign
  Trade Policy – but that is not applicable
  to CE Law.
The statutory definition of
manufacture in central excise act
      “Manufacture‖ includes any process—
(i)    Incidental or ancillary to he 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
    (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
   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
 Leading   cases – Decisions of Supreme
 - ‗Formation of a new Article‘
    Vide Hawkins Cookers Ltd Vs Collector [-
 1997 (96) ELT 507 SC.
 - ‗A new distinct and commercial
    Vide TISCO V.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
 Actual substantive manufacture – does it
  include mere processing?
 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
   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
   In relation to some products of heading 7013 –
    the process of printing , decorating or
 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
   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
       3) Select Decided cases in
 AffixingInformation stickers on goods
  imported does not amount to Manufacture.
  -CCE Vs Proctor & Gamble Home Products
  2004 [167] ELT 173 – [TRI – D].
 Erection of imported Power Plant does not
  amount to manufacture.
  -Spectrum Power Generating Co. Ltd VCCE
  – 2004(177)ELT 968 [Tri-D].
 Conversion of old, diesel operated Buses
  into CNG Buses does not amount to


 -Nugas  Technologies India (P) Ltd. VCCE [-
  171 ELT 376 Tri-D].
 Gold Plating of watch cases does not
  amount to Manufacture.
   -Commissioner Vs Divya cases –
 Mixing of chocolate Powder with Sugar and
  Skimmed Milk to form drinking chocolate
  does not amount to Manufacture – CCE Vs
  Fountain Consumer Appliances Ltd – 2004
  [171] ELT 329 (Tri – Chennai)
 Branding, polishing and affixing MRP on locks
  acquired from artisans does not amount to
Key locks (I) P Ltd Vs CCE – 2004(165) ELT,74 –(Tri-
 Printing of date of Manufacture is a Legal
  requirement and hence it is a Process of
     - Surat Beverages (P) Ltd Vs Commissioner
  2004 (165) ELT313 [Tri- Mumbai].
 Rubber lining/ Painting/ Cutting/ Welding/of Iron
  and Steel pipes and Tanks does not amount to
  manufacture.- Tega (I) Ltd Vs CCE –
  2004(164)ELT390 [SC]
 Transformation  of Catalyst into spent Catalyst
  does not amount to Manufacture.
   -CCE Vs Deepak Fertilizers & Petro Corp.Ltd.-
  2004 (178)ELT 686 [Tri-M].
 The Test of Marketability is a Burden of
  -FGP(I) Ltd Vs U.O.I – 2004(168) ELT 289 [SC]
 Testing/ Gardening/ Certification of Helium gas
  cylinders before Sale is an activity amounting to
  - Commissioner Vs Air liquide North (I) P. Ltd -
  2004[174]ELT 201 [Tri - Del].
    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-
 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
Valuation rules….
 Rule 10 – sales to inter-connected
  undertakings /holding company /subsidiary
  company – solution:: do as per rule 9
 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
 Freight and Freight insurance, including
  equalised Freight.
 Bought – out items [not integral/ critical to
 Carry bags for Laptops.
 Syringe bought out and supplied with P & P
 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
 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
         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

Amortised  Cost of tools/ dies/ moulds
 received from buyers.
Interest on inventory.
Value of waste retained by
Cost of material supplied by
       7) Valuation When goods are
             assembled at site
 Isit a Composite/ turnkey/ works
 Excise duty is not leviable on
  immovable property but on Parts /
  Components/ goods already
 Case Studies – Lifts/ Boiler Plants/
  Industrial Furnaces.
         8) Valuation in Jobwork
 When   does Jobwork amount to Manufacture?.
 Labor/ Jobwork charges + Raw material costs
  are includible in assessable value.
 Ujjagar Prints etc Vs U.O.I.
 Empire Industries Vs U.O.I.
 Pawan Biscuits Co. Vs CCE.
 Is buyer’s profit margin includible in Assessable
  Value in the hands of Jobworker?.
 Food Specialities Ltd Vs U.O.I.
 The impact of new valuation rule 10A
 The Central Board of Excise & Customs
  circular no 902/22/2009 dated 20-10-09 in
  the case of vehicle body builders
 Job work exemption under notification no
       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
 One year time limit / Provision for Interest.
 Theory of unjust enrichment.
 Refund claim thro‘ credit notes – what
 Mafatlal Industries Vs U.O.I.
 L&T Sargent Lundy Ltd Vs CCE
          11)SSI Exemption
 Notification no: 8/ 2003 as amended.
 Basic ceiling Rs.1.5 Cr.
 Outer ceiling Rs. 4 Cr.
 Only listed goods benefit.
 Use of Trademark/ symbol/ brand of
  another person disentitles.

 Perennial issues – Clubbing of
  Clearances and use of Brand name.
 Use of Foreign – owned Trade mark/
  Brand name by Indian SSI Units.
 Clearances Excluded / included for
  Computing Rs.1.5 Cr and Rs 4 Cr.
  Value Caps.
Returns Raj 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
 ER 4 – Annual financial statement for units
  paying INR I crore in excise – due by the
  30th of April 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
 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
Important procedures in central
   Issue of invoice under Rule 11 of central excise
    rules 2002
   Provisional assessment under Rule 7 &
   Time and manner of payment of duty under Rule
   Remission of duty under Rule 21 for
    damaged/defective/unfit/unmarketable goods
Important procedures in central
 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
Important procedures in central
 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 –
simply draconian & colonial
 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
 Time limit for adjudication of SCN
Penal provisions in central excise

 Interest for delayed payment under section
 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
 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
Penal provisions in central excise

 Section 11DDA – power to order
  provisional attachment of property to
  protect “Revenue” during he pendency of
 Section 14 – power to issue summons
 Section 13 – power to arrest
 The foundation of the value-added tax
 Avoids cascading effect of tax on tax on
 Integrates goods and services
 Cenvat credit Rules 2004 – apply to
  Manufacturers & Service providers
Cenvat credit rules – what is the
 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
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
   Wide definition in the CCR
   “Inputs” means all goods except light diesel oil,
    high speed diesel and petrol
   Used in or in relation to the manufacture of final
   Whether directly or indirectly
   Whether contained in the final product or not
 Inputs include ---
 Lubricating oils
 Greases
 Cutting oils
 Coolants
 Accessories of the final products
 Goods used as…
 Paint or packaging material or as fuel or
  for generation of electricity or steam
 Used in or in relation to the manufacture of
  final products or for any other purpose
 Within the factory of production
   For service providers:
   All goods except light diesel oil, high speed
    diesel , petrol and motor vehicles
   And used for providing output service
   Inputs will not include cement, angles and
    channels, CTD / TMT bars & other items used
    for construction in the factory / building or in
    laying of foundation or structural support of
    capital goods
Input services
 For manufacturers:
 Any service used by a manufacturer
 Whether directly or indirectly
 In or in relation to the manufacture of final
 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
Input services allowed to both
manufacturers to service providers
 Services used in relation to –
 Setting up
 Modernization
 Renovation
 Repairs
 Of a factory or the premises of the service
Common services….
 Or an office relating to such factory or the
 Advertisement
 Sales promotion
 Market research
 Storage upto the place of removal
 Procurement of inputs
Common services….
 Activities relating to Business “such as” –
 Accounting
 Auditing
 Financing
 Recruitment and quality control
 Coaching and training
Common services….
   Computer networking
   Credit rating
   Share Registry
   Security
   Inward transportation of inputs & capital goods
   Outward transportation upto the place of
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
 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 six % on the value of exempted
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
Central sales tax
 Current rate at 2%
 Expected to go when GST is introduced
 Retention of “C” Form
 Vat credit usage against CST
 Sale in the course of export and import
 CST & Works contract

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