CENTRAL EXCISE

Madhusudan Sharma

GOVERNING LEGISLATIONS Central Excise Act,1944(CEA) : The basic act Central Excise Tariff Act, 1985 (CETA):

Classifies the goods under 96 chapters with specific codes assigned.

Central Excise Rules, 2002: Procedural aspects. The rules are implemented after issue of notification.

Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: Provisions regarding valuation of excisable goods

Cenvat Credit Rules, 2004: Provisions relating to Cenvat Credit available and its utilization

CONSTITUTIONAL BASE Article 268. (1) Such stamp duties and such

duties of excise on medicinal and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected—

(a) in the case where such duties are leviablewithin any Union territory, by the Government of

India, and (b) in other cases, by the States within which

such duties are respectively leviable. (2) The proceeds in any financial year of any such

duty leviable within any State shall not form part of the Consolidated Fund of India, but shall be assigned to that State.

UNION LIST – ENTRY 84Before GST Amendment Duties of excise on tobacco and other goods

manufactured or produced in India except— (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and

narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

After GST Amendment Duties of excise on the following goods manufactured

or produced in India, namely:- petroleum crude; high speed diesel; motor spirit (commonly known as petrol); natural gas; aviation turbine fuel; and tobacco and tobacco products

STATE LIST – ENTRY 51 Duties of excise on the following goods

manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:—(a) alcoholic liquors for human consumption;(b) opium, Indian hemp and other narcotic drugs and narcotics; but not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

TERRITORIAL JURISDICTION Extends to whole of India including the state of

Jammu and Kashmir Also extended to the designated areas in the

Continental Shelf and Exclusive Economic Zone (EEZ) of India (vide Notification No. 166/87-CE, dated 11.6.1987).

Exclusive Economic Zone extends to 200 nautical miles from the base line of the coast.

BASIC EXCISE DUTY (BED) In majority of cases, the standard rate of basic

excise duty is 12.50% w.e.f 01.03.2015 It will vary product wise according to the rate

mentioned in CETA. National Calamity Contingent Duty –

(NCCD) was imposed vide Finance Act, 2001 on some products.

NCCD of 1% has been imposed on mobile phones w.e.f. 1-3-2008.

In addition, cesses and duties have been imposed on some specified products.

TAXABLE EVENT Excise duty is leviable on all excisable goods,

which are produced or manufactured in India. ‘Manufacture or production in India’ of an

excisable goods is a ‘taxable event’ Though duty is collected at a later stage i.e. at

the time of removal of goods, removal from factory is not the ‘taxable event’.

In UOI v Bombay Tyre International Ltd. the SC held that while the levy of duty of excise is on manufacture or production of the goods, taxable event is with reference to manufacture.

Production on 1st February 2016, removed from factory on 4th April 2016, taxable event 1 Feb 16

CONDITIONS FOR LEVY OF EXCISE DUTYCentral Excise duty is levied if the following

conditions are satisfied: The duty is on goods. The goods should be movable and marketable The goods must be excisable The goods must be manufactured or produced Such manufacture or production must be in

India. All of these conditions are required to be satisfied Goods manufactured or produced in SEZ are

“excluded excisable goods”, “excisable goods” but no duty is leviable

GOODS ‘’Goods’’ has not been defined in the central

Excise Act, 1944. As per Article 366(12) of the Constitution of

India, ‘’Goods’’ means all articles, materials and commodities.

Section 2(7) of Sale of Goods Act, 1930 defines ‘Goods’ to mean every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to and forming part of the land, which are agreed to be served before sale or under the contract of sale.

For Excise levy ‘goods’, should be movable, and marketable.

GOODS MUST BE MOVABLE In order to be movable, an article must fulfill two

conditions: It should come into existence (as a result of manufacture); and be capable of being moved to market to be bought and sold.

Where goods have not come into existence, they cannot be moved , and no question of levy of excise duty.

In Municipal Corporation of Greater Mumbai v. Union of India, a petrol pump of huge storage capacity which was not embedded to earth but which could not be removed without dismantling was held to be immovable in nature.

In Sirpur Papers Mills Ltd. V. CCE the machinery embedded to a concrete base to ensure its wobble free operation was held to be a movable property.

CBEC has clarified that whatever is attached to earth, unless it is like a tree/building/similar thing, shall not necessarily be regarded as immovable property if the whole purpose behind such attaching to the concrete base is to secure maximum operational efficiency and safety.

Excise duty cannot be levied on immovable property.

CASE LAWS – MOVABLE GOODS A Ltd. purchased duty paid parts of water treatment

plant in unassembled form and assembled to the ground with civil work. The plant could not function until it was wholly built including civil construction. Excise duty is not required to pay because, the product emerges as immovable in nature. Larsen & Toubro Limited v UOI

X Ltd., engaged in the manufacture of drums mix/hot mix plant by assembling and installing its parts and components. The machine is fixed by nuts and bolts to a foundation not because the intention was to permanently attach it to the earth, but because a foundation was necessary to provide a wobble free operation to the machine. Supreme Court held that the plants in question were not immovable property, duty would be levied CCE v Solid & Correct Engg

GOODS MUST BE MARKETABLE Theoretical possibility of product being sold is not

sufficient to establish the marketability of a product: A product known in the market with a nomenclature

is not sufficient for marketability unless there is a buyer to buy it.

W Ltd. manufactured Double Textured Rubberized Fabric (i.e. upper lace of the shoe) and removed from the factory for job work, it has no marketability, because the said product is known in the market but with no buyer [Bata India Ltd. v CCE ].

Karnataka High Court in Cipla Ltd. Vs UOI, held that for dutiability, a product must pass the test of marketability, even if it is a transient item captivelyconsumed in the manufacture of other finished goods. onus is on the Dept. to produce evidence of marketability.

CASE LAWS In UOI v Indian Aluminium Co. Ltd. v CCE, the SC

held that marketability of a product is must for its dutiability. Mere manufacture or specification of an article in Tarrif is not enough.

In Bhor Ind. Ltd. v CCE, SC held that the mere inclusion of a particular article in the Tariff Schedule will not render it liable to excise duty. Marketability of that article is of primary importance. The decision given in this case was a turning point because prior to this decision, it was normal to treat all goods in the Tariff Schedule, as chargeable to duty regardless of the test of marketability.

(d) In Union Carbide India Ltd. v UOI , SC held that intermediate products, which were in a crude form, would not constitute goods. Aluminium cans produced by the extrusion process were not goods, as they were not marketable.

SHELF-LIFE SC ruled that short shelf-life could not be

equated with no shelf-life. A shelf-life of 2 to 3 days was sufficiently long enough for a product to be commercially marketed.

No shelf-life or the shelf-life of the product was such that it was not capable of being brought or sold during that shelf-life. Nicholas PiramalIndia Ltd v CCE.

EXCISABLE GOODS Section 2(d) defines Excisable Goods as ‘Goods

specified in the First Schedule and the Second Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt.

Explanation - ‘goods’ includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable’.

Unless the item is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable.

All goods specified in the Tariff Schedule are ‘Excisable Goods’.

However, question arises as to whether those goods, which are exempted from duty by a notification, but find a place in the tariff schedule, are excisable goods.

Dutiable goods mean excisable goods which has rate of duty greater than 2% per cent.

Non-dutiable goods or exempted goods mean excisable goods which has rate of duty nil or 0% or 1% or 2%.

Both dutiable and non-dutiable goods are called as excisable goods.

Manufacturers paying excise duty @1% or 2% as are not eligible for claiming CENVAT Credit, since, these goods are called as exempted goods.

Goods must be specified in the Schedule to the Central Excise Tariff Act, 1985;

The goods so specified must be subject to duty. “Non-Excisable goods” are that goods which has

not been very clearly mentioned in the Central Excise Tariff Act

MANUFACTURE Taxable event for central excise duty is

manufacture or production in India. Word ‘produced’ is broader than ‘manufacture’

and covers articles produced naturally, waste, scrap etc.

Section 2(f) ‘Manufacture’ means any process : incidental or ancillary to the completion of a

manufactured product (a new and identifiable product having a distinctive name, character or use emerge, as specified in various Court decisions )

which is specified as amounting to manufacture (Deemed manufacture)

DEEMED MANUFACTURE Processes specified as ‘amounting to manufacture

in Central Excise Tariff Act Repacking, re-labelling, putting or altering retail

sale price etc. in respect of goods specified in Third Schedule to Central Excise Act i.e Goods on which excise duty is payable on the basis of MRP printed on the package

CASE LAWUoI v Delhi Cloth & General Mills Ltd” Excise Department contended that during the

process of manufacture of vanaspati, vegetable non-essential oil was produced, which is a separate dutiable product.

The court decided that Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulations. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name and character or use. Court held that mere processing of basic oils did not amount to manufacture, because it is not marketable product.

ASSEMBLY Assembly involves use of certain duty paid

components to bring into existence an operational or functional product.

Where assembly brings into existence a new commercially known different product, however minor the consequent change, it would amount to manufacture. TV from TV parts

Mere bringing together of parts of a plant and machinery at site cannot be termed to be manufacture and hence, assembled plant cannot be treated to be goods.

Repairing activity in any possible manner cannot be called manufacturing . Generation of metal scrap or waste during the repair of plant does not amount to manufacture.

WASTE AND SCRAP Waste and scrap are not manufactured, but arise

as a result of manufacture of the final product. Therefore, generally, there should not be levied any tax on the waste and scrap.

In 1987 in the case of Modi Rubber Ltd., it was held that even though the waste was capable of fetching some amount of sale, it would not be chargeable to excise duty.

In 1989, in Asiatic Oxygen Limited v CCE, Tribunal held that whether waste would be charged to duty or not would depend on whether: a process of manufacture has taken place, the waste generated is marketable, and the product named in the Tariff.

After amendment in 2008 in the definition -bagasse, aluminium/zinc dross and other such products termed as waste, residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would be excisable goods and chargeable to payment of excise duty

INTERMEDIATE PRODUCTS & CAPTIVECONSUMPTION Intermediate products are such products, which are

produced in a process naturally in the course of manufacture of a finished product, which involves more than one process. output of one process is input for the subsequent process.

Captive consumption means consumption of such output of one process in the subsequent process.

Definition of manufacture implies that manufacture would take place even at an intermediate stage, so long as the intermediate product is commercially and distinctly identifiable.

In JK Spinning &Weaving Mills v UoI SC held that the captive consumption would amount to removal, hence chargeable to duty.

In Union Carbide v UOI, SC held that an intermediate product would be chargeable to excise duty, only if it is a complete product and can be sold in the market to a consumer.

WHAT IS NOT MANUFACTURE Any activity shall not be deemed to be manufacture,

only because it has been so written in the licence granted.

The following are not manufacture : (a) Natural activity, even if carried otherwise, e.g.

drying yarn in natural sun; (b) Processing of duty paid goods; (c) Purchasing various item and putting into a

container and selling them; (d) Obtaining of natural products; (e) Testing/quality control of items manufactured by

others; (f) Cutting and polishing of diamond; (g) Upgradation of computer system; (h) Printing on glass bottles; (i) Affixing brand name; (j) Crushing of boulders into smaller stones.

MANUFACTURERManufacturer is a person: (a) who manufactures or produces any excisable

goods, or (b) carries on any process incidental or ancillary

to the completion of the manufactured products. Raw material provided to the household ladies

who were manufacturing ‘dhoop, agarbatti; etc. in their houses. Payment to the ladies was on the basis of number of pieces manufactured. It was held that the household ladies, were the manufacturers.

Who is a Manufacturer ? (a) Person manufacturing for own consumption, (b) Person hiring labour or employees for

manufacturing, (c) A job-order worker, (d) A contractor. Who is not a Manufacturer ? (a) Where an activity is not a manufacture; (b) Brand Owners, if their relation with the

manufaturer is ‘Principal to Principal’ basis. (c) Labour Contractors, who supply labor; (d) Loan licensee. (e) Raw material supplier is not manufacturer

CLASSIFICATION OF GOODS For Levy of Duty goods are classified into

separate groups, categories and sub-categories The rate of duty is found out by classifying the

product in its appropriate heading under Central Excise Tariff.

CETA is based on International Convention of Harmonised System of Nomenclature (HSN), developed by World Customs Organisation (WCO)

This is an International Nomenclature standard adopted by most of the Countries to ensure uniformity in classification in International Trade.

The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 96 chapters and specific code is assigned to each item.

Each chapter and sub-chapter is further divided into various headings and sub-headings depending on different types of goods belonging to same class of products.

All goods are classified using 4 digit system called ‘headings’.

2 digits are added for sub-headings’. Further 2 digits are added for sub-sub-

classification, termed as ‘tariff item’. Rate of duty is indicated against each ‘tariff

item’ and not against heading or sub-heading.

CASE LAWS Glass mirror cannot be classified as Glass and

Glassware because glass loses its basic character after it is converted into mirror, which has the reflective function [Atul Glass Industries Ltd v CCE ]

Baidyanath manufacturing a product called “DantManjan Lal” (DML) contended that the product was a medicament but the Dept. said product was a cosmetic / toiletry preparation / tooth powder, by considering common parlance test.

As long as product has popular meaning and understanding which is attached to such products by those using the product and not to the scientific and technical meaning of the terms and expressions used.

EXAMPLES Motor Car not fitted with wheels or tyres will be classified

under the heading of Motor Vehicle. Motor Car contains the stereo (music system), here two

different products namely Motor Vehicle and Electronic System,

Cell phone which consist a calculator will be called as Cell phone and not a Calculator.

Packing material used as cases for camera classifiable as camera product

Classification of parachute coconut oil : In Amardeo Plastics Industries v. CCE , on the basis of chapter notes, it was held that parachute coconut oil is ‘vegetable oil’ under chapter 15 and not ‘preparation for use on the hair’, since the marking on package did not say that it is for ‘such specialized use’, though advertisements did indicate so.

However, in Shalimar Chemical Works v. CST, it has been held that except in a few Southern States, coconut oil is not treated as edible oil for use of daily cooking. In West Bengal, considering consumption pattern, coconut oil cannot be treated as ‘edible oil’. It has to be treated as ‘hair oil’.

Plastic name plate : Plastic name plate for motor vehicle is to be classified as ‘accessory of motor vehicle’ in chapter 87 and not ‘other articles of plastic’ in chapter 39, since ‘name plate’ is not specified in any heading in chapter 39 – PragatiSilicons P Ltd. v. CCE

VALUATION OF GOODS Duty based on production capacity

For products (e.g. pan masala, rolled steel products) perceived to be prone to duty evasion, Govt. can specify that duty will be levied and collected on the basis of production capacity of the factory

Specific Duty Duty payable on the basis of certain unit like weight, length, volume, thickness etc. For example, duty on Cigarette is payable on the basis of length of the Cigarette, duty on sugar is based on per Kg basis etc.

TARIFF VALUE In some cases, Notional Value” is fixed by Govt.

from time to time as tariff value Products covered under the tariff basis of valuation: Pan masala packed in retail packs of upto 10 gm per pack, Readymade garments

If price of readymade garment is ` 500 per unit and govt. fixes a rate of 60% for computing tariff value. Tariff value is 60% of ` 500 i.e. ` 300. If the duty rate is 12.5%, the excise duty payable will be ` 300 × 12.5% = ` 37.50 per unit

DUTY BASED ON MRP MRP provisions will be covered only when the

following two conditions are satisfied: (a) Goods must be specified under Legal Metrology

Act, 2009, w.e.f. 1-8-2011 (earlier Standards of Weights and Measures Act, 1976).

(b) Those Goods must be mentioned in the notification issued by the Government of India along with rate of abatement.

MRP of an Air-conditioner is Rs. 40,000 , abatement per cent is 40%. Excise duty rate is 12.5% :

Maximum Retail Price = ` 40,000 Less: abatement (40%) = ` 16,000 Assessable Value = ` 24,000 Excise Duty = 24,000 × 12.5/100 = 3,000

COMPOUNDED LEVY SCHEME - Normal excise procedures and controls are not practicable

when there are numerous small manufacturers. Rule 15 of Central Excise Rules provides that Govt. may

specify goods in respect of which an assessee shall have option to pay duty of excise on the basis of specified factors relevant to production of such goods and at specified rates.

The scheme is presently applicable only to stainless steel pattas/pattis and aluminium circles. These articles are not eligible for SSI exemption. The rate of compounded levy in case of cold rolled Stainless Steel patties/pattas, the manufacturer has to pay Rs. 30,000 per cold rolling machine per month plus cess as applicable.

The rate of compounded levy on aluminum circles is ` 12,000 per machine per month plus cess as applicable.

PERSONS LIABLE TO PAY DUTY Every person who produces or manufactures any

excisable goods, or who stores such goods in a warehouse, shall pay the duty leviable on such goods

Following persons shall be liable to pay excise duty : who produces or manufactures any excisable goods, who stores excisable goods in a warehouse, In case of molasses, the person who procures such

molasses, In case goods are produced or manufactured on job

work, the person on whose account goods are produced or

manufactured by the job work, or the job worker, where such person authorizes the job

worker to pay the duty leviable on such.

COLLECTION OF EXCISE DUTY Physical Control Procedure

Applicable to cigarettes only. Assessment is done by Central Excise Offices and thereafter goods are removed under his supervision under cover of an invoice counter signed by him.

Self-Removal ProcedureApplicable to all other goods produced or

manufactured within the country. Under this system, the assesee himself determines the duty liability on the goods and clears the goods.

CRITICAL ISSUES Software is ‘Goods’, But Unbranded Software is

Service In TCS v. State of Andhra Pradesh it was held that

canned software (i.e. computer software packages sold off the shelf) like Oracle, Lotus, Master-Key etc. are ‘goods’. The copyright in the programme may remain with originator of programme, but the moment copies are made and marketed, they become ‘goods’.

It was held that test to determine whether a property is ‘goods’ for purpose of sales tax, is not whether the property is tangible or intangible or in-corporal. The test is whether the concerned item is capable of abstraction, consumption and use, and whether it can be transmitted, transferred, delivered, stored, possessed etc.

Even intellectual property, once it is put on a media, whether it be in form of books or canvas (in case of painting) or computer discs or cassettes and marketed would become goods.

Classification of encyclopedia, books on CD: there is hardly any ‘interactivity’, except that search engine helps in locating particular information, which can be termed as ‘software’ forms insignificant part of the whole goods.

Applying the criteria of ‘essential character’ in case of mixture of goods, in my view, these cannot be termed as ‘software’. These have to be classified as books.

CENVAT-CENTRAL VALUE ADDED TAX CENVAT Credit is an integration of excise duty

and service tax. While paying excise duty service tax can be claimed as Cenvat credit and while paying service tax excise duty can be claimed as Cenvat credit

CENVAT Credit Rules, 2004 extended to the whole of India except State of Jammu and Kashmir with regard to availment and utilization of credit of service tax.

CENVAT Credit is available to the manufacturer of excisable goods which either may be dutiable or non dutiable and the provider of taxable service.

CENVAT credit is not available to the dealer Following duties paid on inputs are eligible as

CENVAT Credit for the manufacturer of Excisable goods:

(i) Basic duty of excise specified under First Schedule to Central Excise Tariff Act.

(ii) Special duty of excise specified under Second Schedule to Central Excise Tariff Act.

(iii) The additional duty of excise can be utilized only towards payment of excise duty leviableunder additional duties of excise

(iv) The additional duty of excise leviable under can be utilized towards payment of either basic or special excise duty.

(v) The National Calamity Contingent duty can be utilized for payment of NCCD.

(vi) Education Cess on excisable goods or on taxable services is to be utilized only towards the payment of education cess either on goods or taxable output services.

(vii) Secondary and Higher education cess on inputs and input services can be utilized only towards payment of secondary and higher education cess either on excisable goods or on taxable output service.

Thanks

ध यवादMadhusudan Sharma,

FCS, FCMA, LLB, Dip. TaxationUrban Finance and PPP Specialist

madhu.mss@gmail.com20th February 2017