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Central Excise Laws contd..

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PRODUCTION, MANUFACTURE AND

PROCESS DISTINGUISHED Taxable event -manufacture or production

Production is a naturalprocess by which a product isbrought into existence.

Manufacture, on the other hand involves some artificial

process which adds some more utility to the product, e.g.

Tobacco is produced and cigarettes are manufactured,

Sugar cane is produced and sugar is manufactured.

Process is a continuous and regular action or succession of

actions taking place or carried on in a definite manner andleading to accomplishment of some results

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Mere process is not enough..

For excise purpose, mere process is notenough to call it manufacture/production.

It should bring into existence an excisable

entity preferably with a distinct name,character or use.

For instance, a log of wood is cut into pieces.

Cutting is a process, but not manufacture. Furniture is made out of wood. This process is

manufacture as it is a distinct excisable item.

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Process can be manufacture even if in

the same tariff Case: Decorative Laminates v. CCE(1996) 6 S.C.627. Duty

paid commercial plywood to slip proof plywood

Printing logos and names on the bottles is not manufactureas the basic character of bottles doesnt change and bottles

are marketable even without printing. [U.O.I, v.J.G. GlassIndustries 1998 (97) ELT-5 S.C.].

The Bombay High Court held in case ofPremji Hari Das v.MCB 1997 (89) ELT 658 (Bom. H.C.) that the product cannot be differentiated on the ground of its end use. It is to

be judged by its distinctiveness. In this process of filtration,only impurity is reduced and the castor oil is retaining itscharacter even after the process. Hence, no manufacture.

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PROCESSES AMOUNTING TO

MANUFACTURE/DEEMED MANUFACTURE

labelling or re-labelling of containers and re-packingfrom bulk packs to retail packs or application of anyother treatment to render the product marketable tothe consumer shall amount to manufacture in case of

dairy products like milk, cream, butter and cheese pan masala

natural or artificial mineral waters

packs ofcolouring matter

perfumes, beauty preparations and preparations for useon the hair

packs of soaps, waxes etc

insecticides, gums, artificial graphite

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Test of Manufacture- Two pronged

approaches

One, where the process is bringing into

existence any product with a distinctive name,

character or use,

Second, if the process is not manufacture as

per the above test, then look up the chapter

notes and section notes for processes deemed

to be manufacture.

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Manufacture Defined

As per section 2(f) Manufacture includes any process incidental or ancillary to the completion of

a manufactured productand

which is specified in relation to any goods in the

Section or Chapter Notes of the First Schedule to theCentral Excise Tariff Act, 1985 as amounting tomanufacture, or

which in relation to goods specified in the thirdschedule to Central Excise Act, 1944, packing,repacking, labelling or relabelling, declaration oralteration of retail sale price or adoption of any othertreatment on the goods to render the productmarketable also amounts to manufacture.

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DCM Case on Manufacture- Landmark

Judgement Facts of the case:

the parties were manufacturers of Vanaspati

They purchased groundnut and Til oil from the open market.

The oils thus purchased were subjected to different processes toconvert them into Vanaspati.

Excise duty was paid on Vanaspati.

But, the department contended that when the basic oils were beingsubjected to a series of processes, they emerged at a particularstage as a product which can be constructed as Vegetable Non-Essential Oil (VNE), which would attract duty under a separate

Tariff Item. Therefore, in the departments view, there was manufacture of

V.N.E. Oil attracting excisability, before its further conversion intoVanaspati, attracting excisability once again.

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Citation

manufacture implies a change, but every

change is not manufacture; and yet every

change of an article is the result of treatment,

labour and manipulation. But something more

is necessary and there must be a

transformation; a new and different article

must emerge, having a distinctive name,character or use.

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Decision

mere processing of the basic oils did not tantamount tomanufacture of VNE Oils, since on the basis of detailedexamination of evidence, it was held that for VNE Oilpopularly marketed as refined oil, the essential

ingredient was that they were deodorised. On the contrary, in DCM cases, though substantial

processes of purification of the basic oils had takenplace, still they were not deodorised, before beingconverted into Vanaspati.

Hence, the learned judges held that there had been notransformation bringing in new name, character or use,and hence there was no manufacture as such.

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Can waste products be manufactured?

Yes, if has different characteristics or use or

name.

they are excisable if they can be accommodated

in an appropriate tariff heading.

For instance, Bagasse which is a waste product

emerging in the manufacture of sugar was held as

excisable. Saw-dust emerging in the sawing of timber has

also been held as excisable.

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Manufacturer

Inclusive definition which identifies following

types of parties who can be considered as

manufacturers. Which are:

(a) Those who personally manufacture the

goods in question on their own account.

(b) Those who get the goods manufactured by

employing hired labour.

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What in case of sub-contracting?

No duty charged on goods manufactured by the small scaleunits upto prescribed limits.

Large scale manufacturers, may utilise this facility to avoidexcise duties.

It can be done by supplying almost all the inputs,specifications, etc. to the small scale units, and at timeseven going to the extent of supervising the production bythe small scale units.

Cases

Shree Agencyv. S.K. Bhattacharjee & Others (1972 SC 780 AIR) Ujagar Prints v. U.O.I 1989 (39) ELT 493 (S.C.)

Pawan Biscuits Co. Ltd. v. CCE, Patna 2000, (120) ELT 24, SC.

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TESTS OF A MANUFACTURER

Relationship Test

Profit Test

Ordinarily, the following are not manufacturers Raw Material supplier: the supplier is not manufacturer though he has a right

to reject the goods.

Brand Owner: If the brand owner has no control over the manufacturingprocess

Raw material supplier is manufacturer if the manufacturer is either a dummymanufacturer or is the agent of the raw material supplier (Shree Agency).

Supplier of concentrates etc. under franchise agreementis not a manufacturerand the bottling company is the manufacturer (Puna Bottling Co.).

Person Supplying raw material to produce drugs though having licence to

produce is not the manufacturer. Person who actually manufactures drugs isthe manufacturer.

Labour contractorsupplying labour is not the manufacturerfor the goodsmanufactured by the labour supplied by him under Contract Labour(Regulation & Abolition) Act, 1970.

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Classification

Classification is the process by whichidentification of excisable goods can be made.

Under the central excise, the goods are identified

by their code numbers called as classificationnumbers.

Trade parlance test must be preferred totechnical or dictionary meaning of the words.

When trade parlance test fails, other optionsincluding BIS (Bureau of Indian Standards)classification may be tried.

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Timing of classification

leviability of goods is determined on the basis

of classification applicable at the time of

manufacture.

dutiability of goods is decided as per the rate

of duty on the date of such removal.

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Types of Excise Duty

Basic Excise Duty (CENVAT)

Excise Duty, imposed under section 3 of the Central Excise Act of1944 on allexcisable goods other than salt produced or manufactured in India, at the rates setforth in the first schedule to the Central Excise tariff Act, 1985, falls under thecategory of Basic Excise Duty . Rate 10 per cent.

Additional Duty of ExciseSection 3 of the Additional Duties of Excise Act of 1957 permits the charge andcollection of excise duty in respect of the goods as listed in the Schedule of thisAct. This tax is shared between the Central and State Governments and chargedinstead of Sales Tax.

Special Excise DutyAccording to Section 37 of the Finance Act, 1978, Special Excise Duty is levied onall excisable goods that come under taxation, in line with the Basic Excise Dutyunder the Central Excises and Salt Act of 1944. Therefore, each year the FinanceAct spells out that whether the Special Excise Duty shall or shall not be charged,and eventually collected during the relevant financial year.

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VALUATION OF GOODS UNDER

CENTRAL EXCISE LAW

two rates of duty - specific rates andadvalorem rates.

Specific rates are unit rates based on quantity.

The base unit may be a kilogram, a centimeter,a quintal, a tonne and so on.

For ad valorem basis goods require valuation

and on that value (Known as assessablevalue), duty amount is calculated at specifiedpercentage rates.

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Specific rates and Advalorem rates.

The specific rates are easy and simple to understand andapply but, there are practical difficulties attached to them.

It is not possible to fix rates for all the varieties of goods.

They require frequent revision due to price fluctuations.

The ad valorem rates have the following advantages: They are flexible and elastic

They are scientific

They are convenient

They have in-built adjustability to price and quality variations.

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Valuation

Valuation based on Government notified

values [Section 3(2)];

Valuation based on MRP (Maximum Retail

Price) for the goods notified by the

Government (Section 4A);

Valuation based on Transaction Value (T.V.)

(Section 4)

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Tariff Values under Section 3(2)

The main purposes for which the tariff values arefixed are to prevent undervaluation of certaingoods and to mitigate litigation.

The tariff values are fixed by Central Govt. bynotification.

A few goods are covered under this scheme.

Different tariff values may be fixed for differentproducts or different values for differentmanufacturers of same product.

The values may be even different for differentclasses of buyers.

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Basis of Fixation under Section 3(2)

whole sale prices or

average of such whole sale prices.

Pan Masala packs below 10 grams are coveredunder tariff values and Pan Masala packs of 10

grams and above are covered under Section

4A [MRP based assessable values].

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Valuation Based On MRP [Retail Sale

Price] (Section 4A)

Retail price instead of wholesale price should

form the basis of valuation for assessment of

excise duty particularly, for such commodities

which show a difference of more than 100%between the retail price and the wholesale price.

After budget 1997 Section 4A was inserted in the

Central Excise Act and the valuation based onretail price came into effect on 14th May, 1997

Reduced litigation

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Valuation Based On MRP [Retail Sale

Price] (Section 4A)

The notified goods should necessarily bear the

MRP.

Rates of abatement are notified by the

Government. Rates of abatement may bedifferent for different commodities.

The assessable value = MRP Abatement value.

The amount of duty is percentage of dutymentioned in the Schedules to Central Excise

Tariff Act.

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If a package contains different MRPs printed

on it, highest of them must be taken for the

purpose of valuation.

If separate MRPs are printed on packages

meant for sale in different places, each of such

MRP is taken for the purpose of valuation and

each such consignment is valued separately.

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Latest cases

Kraftec Products Inc. 2008 (S.C.) Multi Piece packets whose total weightis less than 10 grams are liable to be valued under Section 4 and not underSection 4A, even though they have been notified by the governmentunder Section 4A.

Kraftec manufactures hair dye. It is packed in pouches each containing 3gms. 3 pouches (sachets) are sold in one packet. The net weight of each

pouch, as also the net weight of the commodity in 3 pouches and themaximum rate is printed on the pouches.

Note: As per Rule 34 of Packaged Commodity Rules, 1977, the retail packsbelow ten grams/10 ml. are exempt from printing MRP on them. WhereMRP is not a statutory requirement, Section 4A can not be applied.

Jayanti Food Processing (P) Ltd. 2007 (S.C.) Held that ice cream supplied

in the four litre pack to hotels is a wholesale pack and not retail pack. Assuch, the goods have to be assessed under Section 4 and not Section 4A.

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Transaction value

Determined under Section 4 of the Central Excise Act, 1944,supplemented by the Central Excise Valuation (Determination ofPrice of Excisable Goods) Rules, 2000.

Transaction value means the price actually paid or payable for thegoods, when sold, and

includes in addition to the amount charged as price, any amount thatthe buyer is liable to pay to, or on behalf of, the assessee, by reason of,or in connection with the sale, whether payable at the time of the saleor at any other time,

including, but not limited to, any amount charged for, or to makeprovision for, advertising or publicity, marketing and selling

organization expenses, storage, outward handling, servicing, warranty,commission or any other matter;

but does not include the amount of duty of excise, sales tax and othertaxes, if any, actually paid or actually payable on such goods.

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A diversion from Normal Price

Concept

The assessable value under the Normal Valueschemes was based on notional values. Now, it isunder actual transaction value.

Under Normal Price single uniform price wasmade applicable to each class of buyers inwholesale trade. Under the new method, eachremoval is considered a separate transaction and

its transaction value is taken as assessable value. In brief, Transaction Value is based on actual

invoice price, not on notional price.

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Valuation of goods under Section 4

Specific rates of duty are not applicable, i.e.

where advalorem basis is to be adopted;

Tariff values are not notified for the goods

under Section 3(2)

The excisable goods are not notified for

valuation under Section 4A.

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Three conditions

For Transaction Value to be accepted as the assessablevalue following three conditions must be satisfied The goods are sold by the assessee for delivery at the time and

place of removal; there is sale at the time of removal;

the delivery is from factory / warehouse; such delivery is for the purpose of sale from the factory or warehouse.

The assessee and the buyer are not related; and they are not inter-connected undertakings;

they are not relatives;

amongst them the buyer is not a relative and distributor of theassessee, or a sub-distributor of such distributor; or

they are not so associated that they have interest, directly orindirectly in the business of each other.

The price is the sole consideration for the sale.

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Rule 4. When there is no sale at the

time of removal

Take the price of such goods sold at the time nearest tothe time of removal.

Make reasonable adjustments. These adjustments maybe with reference to any price fluctuations during the

time lag between these two removals, difference in thequality, and packing material used and so on.

This rule is not applied in case of stock consumptionand captive transfer, even though, there is no sale in

those two situations. For them there are separate rulesi.e. Rules 7 and 8 respectively.

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Rule 5: Delivery for sale not at the

place of removal Place of removal and place of delivery are not same.

Price quoted is F.O.R. price, including the cost oftransportation and insurance from the factory to the placeof buyer. [F.O.R. - free on road]

The price for the purpose of valuation will be the pricecharged from the buyer i.e. F.O.R. price the cost oftransport up to the point of delivery. (F.O.R. price - cost oftransport etc.)

If the manufacturer uses his own vehicles freight charges as

certified by a C.A./ CWA are allowed to be deduced fromF.O.R. price.

Equalised freight charges are allowed to be deducted fromF.O.R value.

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Rule 6 Price not sole consideration

Aggregate consideration is arrived at by adding all other considerations to the

transaction value, that flowed directly or indirectly from the buyer to the assessee.

The value of the items given are added to the consideration to make it the

transaction value i.e.

Value of materials, components, parts and similar items relatable to such

goods. Value of tools, dies, moulds, drawings, blue prints, technical maps and charts

and similar items used in the production of such goods.

Value of material consumed, including packaging materials in the production

of such goods.

Value of engineering, development, art work, design work and plans andsketches.

Interest on advance amount received from the buyer is added to the

transaction value.

Cenvat credit availed on the inputs should be deducted from the cost of such

inputs. [Dai Ichi Karkaria Ltd. 1999, S.C.]

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Rule 7 When goods are sold from

sales depot, or any other place As per the rules, assessment is to be made at the time of removal

of goods from the factory or warehouse as the case may be.Dutiability and rate of duty are ascertained on the date of removal. If the goods are cleared from the factory today for sale to be made

from the depot, the duty is assessed on the basis of the priceprevailing at the depot today. It means it is the price at which actualtransaction took place today at the depot.

If there is no sale and the price is not available at the depot on thedate of removal from the factory/ warehouse, then the price at thedepot on the date (preceding) nearest to the date of removal shall betaken.

If different quantities are sold at different rates, then the price of the

aggregate quantity [greatest quantity] sold on that day or on the datenearest to the removal shall be taken. If the above scheme can not beapplied then rule 11 shall be applied.

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Rule 8 When goods are not sold but

captively consumed:

When the goods manufactured are not sold

but are reused in the factory for the

manufacture of other articles, the value for

the purpose of excise shall be 110% of thecost of production. Here, the valuation is

based on the cost sheet certified by a Cost

Accountant/Chartered Accountant.

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Rule 9 - Sale to related person other

than inter connected undertaking:

In such a case, the value shall be the normal

transaction value at which these are sold by the

related person at the time of removal to

unrelated persons. Normal transaction valuemeans price of the greatest aggregate quantity.

If the goods are not sold by the related person,

but consumed captively, the value shall bedetermined as per Rule 8. i.e. 110% of cost of

production.

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Rule 10 Sale to / through inter-

connected undertakings (and related)

If the inter-connected undertakings alsohappen to be the related persons under theremaining clauses or they happened to be

holding and subsidiary companies, thenTransaction Value shall be determined asper Rule 9.

In any other case the value shall be

determined under Section 4(1)(a), as if theyare not related persons at all.

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Rule 10A- Valuation of goods under

jobwork

The price charged by the principal manufacturerat the time of removal of goods from thepremises of the job worker shall be taken forvaluation.

Such price shall be sole consideration and theprincipal manufacturer and the buyer shall not berelated persons.

If the price is not sole consideration, follow the

mechanism given under Rule 6 and if thetransaction is related persons transaction, followRule 9.

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Rule 11 Residual method/method of

reasonable means

When the value cannot be determined by any

of the valuation rules, it shall be determined

using reasonable means consistent with the

principles and general provisions of theserules and Section 4(1).