FINAL COURSE STUDY MATERIAL

PAPER

8

Indirect Tax LawsAs amended by the Finance Act, 2006

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text book(s). In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material.

The Institute of Chartered Accountants of India

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Published by Dr. T.P. Ghosh, Director of Studies, ICAI, C-1, Sector-1, NOIDA-201301Typeset and designed by Gursharan K Madhwal at Board of Studies, The Institute of Chartered Accountants of India.

PREFACEIn the scheme of our national economy, the role of Indirect Taxes is fast gaining prime importance. In the fiscal legislations increased importance has been given on the levy of indirect taxes as it constitutes a major source of revenue. Tax management and planning, especially in the corporate sector, necessarily entails a great degree of indirect taxes management and chartered accountants are expected to advise clients and organisations in this area of tax management. Accordingly, adequate emphasis has been given in the chartered accountancy curriculum on the subject. This study material covers the syllabus for that paper and includes laws relating to central excise, customs, service tax and VAT. VAT is introduced for the first time in the new Final Course. The study material has been divided into three sections. Section A covers central excise law, Section B deals with service tax and VAT and Section C deals with customs law. The subject matter of all the sections is based on the law as amended by the Finance Act, 2006. Though the law is vast, we have tried to make the study material simple yet comprehensive. The chapters have been organised in a logical sequence so as to facilitate easy understanding of the law. The latest amendments have been given in italics. Another helpful feature in this study material is the addition of self-examination questions at the end of every chapter which will be useful to test the understanding of the students with regard to various provisions in the chapter. Answers have been given in respect of those questions which are based on judicial decisions or involving legal interpretations. Students may keep in mind that though the study material covers the entire syllabus, it is of utmost importance to refer to the bare Acts and a standard text book in addition to this study material. This would be helpful for solving problems, answering a variety of questions and remembering sections and rules. Past suggested answers published by the Institute also provide a rich bank of questions. Students must also update themselves regularly with amendments in the law and other relevant judicial and legislative developments. The annual publications brought out by the Board of Studies in the form of the Supplementary Study Paper and Select Cases in Direct and Indirect Taxes An Essential Reading for the Final Course would be helpful in this regard. No efforts have been spared in making this study material lucid and student friendly. The Board has also received useful inputs from Mr. Arun Kumar Agrawal for which the Board is thankful. Finally, we would request the students to kindly send their suggestions on how to make this study material more useful for them. Students are welcome to write to the Director of Studies, The Institute of Chartered Accountants of India, C-1, Sector 1, Noida - 201301.

SYLLABUSPAPER 8 : INDIRECT TAX LAWS(One paper Three hours 100 marks) Level of Knowledge: Advanced knowledge Objectives: (a) To gain expert knowledge of the principles of the laws relating to central excise customs and service tax, (b) To acquire the ability to apply the knowledge of the provisions of the abovementioned laws to various situations in actual practice. Contents: Section A: Central Excise (40 marks) Central Excise Act, 1944 and the related Rules, Circulars and Notifications; Central Excise Tariff Act, 1985 and the related Rules. Section B: Service tax & VAT (40 marks) Law relating to service tax as contained in the Finance Act, 1994 as amended from time to time and the related Rules, Circulars and Notifications. Issues related to Value Added Tax: 1. 2. 3. 4. 5. 6. 7. Backdrop for State-Level VAT in India Taxonomy of VAT Input tax credit, tax invoices Small dealers and composition scheme VAT procedures VAT in relation to incentive schemes, works contract, lease transactions and hire purchase transactions. VAT and Central Sales Tax

Section C: Customs (20 marks) Customs Act, 1962 and the related Rules, Circulars and Notifications; Customs Tariff Act, 1975 and the related Rules.

While covering the above laws, students should familiarize themselves with the interrelationship of accounting with excise, customs and service tax and also the ethical considerations involved in the compliance of these laws. Note If new legislations are enacted in place of the existing legislations relating to central excise, customs and service tax, the syllabus will accordingly include such new legislations in place of the existing legislations with effect from the date to be notified by the Institute. Students shall not be examined with reference to any particular State VAT Law.

SECTION A CENTRAL EXCISECONTENTSCHAPTER 1 BASIC CONCEPTS 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Constitution of India....................................................................................... 1.1 Direct and indirect taxes ................................................................................ 1.2 What is excise duty........................................................................................ 1.2 History of central excise law........................................................................... 1.3 Body of central excise law.............................................................................. 1.4 Exemption notifications in central excise......................................................... 1.5 Departmental circulars and trade notices in central excise............................... 1.6 Definitions under excise law........................................................................... 1.6 Levy and collection of duty............................................................................. 1.7 Goods and excisable goods ........................................................................... 1.8 Manufacture ................................................................................................ 1.12 Dutiability of intermediate products and captive consumption......................... 1.20 Dutiability of site related activities and immovable property ........................... 1.21 Whether assembly amounts to manufacture .................................................. 1.26 Dutiability of waste and scrap....................................................................... 1.26 Packing, labelling and branding activities...................................................... 1.27 Can the test of change in tariff heading/sub-headings be adopted for identifying whether a process amounts to manufacture.................................. 1.29 Determination of taxable event for charge of duty.......................................... 1.30

CHAPTER 2 CLASSIFICATION OF EXCISABLE GOODS 2.1 2.2 2.3 2.4 2.5 Introduction ................................................................................................... 2.1 Central Excise Tariff ...................................................................................... 2.1 Explanatory Notes to the HSN ........................................................................ 2.3 Power of Central Government to amend first and second schedules of the tariff .................................................................................................... 2.3 Interpretative Rules to Central Excise Tariff .................................................... 2.3

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CHAPTER 3 VALUATION OF EXCISABLE GOODS 3.1 3.2 3.3. 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 Basis of valuation .......................................................................................... 3.1 Valuation under section 4 (ad valorem)........................................................... 3.2 Related persons ............................................................................................ 3.6 Place of removal.......................................................................................... 3.13 Price is the sole consideration...................................................................... 3.13 Ingredients of transaction value.................................................................... 3.13 Situations where transaction value does not apply ........................................ 3.16 Valuation Rules, 2000.................................................................................. 3.17 Analysis of the Valuation Rules .................................................................... 3.24 Valuation under different circumstances ....................................................... 3.29 Maximum Retail Price (MRP) based valuation [Section 4A]............................ 3.32

CHAPTER 4 CENVAT CREDIT RULES, 2004 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 Introduction & brief legislative history ............................................................. 4.1 CENVAT Credit Rules, 2004 .......................................................................... 4.1 Rule 2 - Definitions ........................................................................................ 4.2 Rule 3 - Cenvat credit .................................................................................. 4.11 Rule 4 - Conditions for availing the Cenvat credit .......................................... 4.16 Job work provisions [Rule 4(5) and 4(6)]....................................................... 4.17 Rule 5 - Refund of Cenvat credit .................................................................. 4.17 Rule 6 - Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services ................................................... 4.20 Option to pay duty ....................................................................................... 4.23 Rule 7 Manner of distribution of credit by input service distributor ............... 4.24 Rule 8 Storage of inputs outside the factory of the manufacturer................. 4.24 Rule 9 - Documents and accounts ................................................................ 4.25 Rule 9A Information relating to principal inputs .......................................... 4.27 Rule 10 - Transfer of credit .......................................................................... 4.28 Rule 11 - Transitional provisions .................................................................. 4.29 Rule 12 - Special dispensation in respect of inputs manufactured in factories located in specified areas of North East region, Kutch District of Gujarat, State of Jammu & Kashmir and State of Sikkim ............................................. 4.29

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4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25

Rule 13 Power of Central Government to notify goods for deemed Cenvat credit .................................................................................. 4.29 Rule 14 Recovery of Cenvat credit wrongly taken or erroneously refunded .. 4.29 Rule 15 - Confiscation and penalty ............................................................... 4.30 Rule 16 - Supplementary provision ............................................................... 4.30 CBEC guidelines on Cenvat credit ................................................................ 4.31 Cenvat and assessable value ....................................................................... 4.32 Cenvat on defective goods returned ............................................................. 4.32 Balance of Cenvat credit lying unutilized at year end..................................... 4.33 Procedure for removal of inputs.................................................................... 4.33

CHAPTER 5 GENERAL PROCEDURES UNDER CENTRAL EXCISE 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 Introduction ................................................................................................... 5.1 Removal of excisable goods [Rule 4] .............................................................. 5.2 Date for determination of duty and tariff valuation [Rule 5]............................... 5.3 Assessment [Rule 6] ...................................................................................... 5.4 Manner of payment [Rule 8] ........................................................................... 5.8 Registration [Rule 9] .................................................................................... 5.11 Records [Rule 10]........................................................................................ 5.17 Electronic maintenance of records and preparation of returns and documents ............................................................................ 5.19 Invoicing [Rule 11]....................................................................................... 5.20 Returns [Rule 12] ........................................................................................ 5.23 Job work in article of jewellery [Rule 12AA]................................................... 5.25 Maintenance of records & payment of duty by the independent weaver of unprocessed fabrics [Rule 12C] ................................. 5.27 Special procedure for payment of duty [Rule 15] ........................................... 5.27 Return of duty paid goods to the factory [Rule 16] ......................................... 5.27 Removal of goods for job work etc. [Rule 16A] .............................................. 5.28 Special procedure for removal of semi-finished goods for certain purposes [Rule 16B] .................................................................................... 5.28 Special procedure for removal of excisable goods for carrying out tests [Rule 16C]........................................................................................... 5.29

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5.18 5.19 5.20 5.21

Removal of goods by a 100% export oriented undertaking for domestic tariff area [Rule 17]...................................................................................... 5.29 Powers of central excise officers .................................................................. 5.29 Account current and procedures relating thereto ........................................... 5.31 Samples...................................................................................................... 5.35

CHAPTER 6 EXPORT PROCEDURES 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 Introduction ................................................................................................... 6.1 Export without payment of duty under bond/letter of undertaking...................... 6.1 Categories of exports and the conditions and safeguards thereto................... 6.10 Export procedure ......................................................................................... 6.13 Procedure for discharge of bond or the duty liability ...................................... 6.15 Cancellation of export documents................................................................. 6.16 Re-entry of the goods cleared for export under bond but not actually exported, in the factory of manufacture......................................................... 6.17 Re-import of exported goods for repairs etc. and subsequent re-export .......... 6.17 Entry of goods in another factory of the same manufacturer for consolidation and loading of consignment for export ..................................... 6.18 Samples of export goods ............................................................................. 6.18 Export under claim for rebate ....................................................................... 6.18 Miscellaneous matters ................................................................................. 6.29

CHAPTER 7 BONDS 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 Bond ............................................................................................................. 7.1 Types of bonds.............................................................................................. 7.1 Guidelines for executing bonds ...................................................................... 7.2 Bonds for provisional assessment .................................................................. 7.3 Stamps on bond ............................................................................................ 7.3 Execution of bond by government undertakings or autonomous corporations .................................................................................................. 7.3 Security ........................................................................................................ 7.4 Surety ........................................................................................................... 7.5 Guarantee bond executed by bank ................................................................. 7.5 Preservation of bond and retention of securities.............................................. 7.5

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7.11 7.12

Verification of sureties ................................................................................... 7.6 Bond accepting authority ............................................................................... 7.6

CHAPTER 8 DEMAND, ADJUDICATION AND OFFENCES 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Demand ........................................................................................................ 8.1 Issue of duty demand notice .......................................................................... 8.1 Waiver of notice ............................................................................................ 8.3 Certain common questions about the provisions relating to demand................. 8.3 Adjudication .................................................................................................. 8.5 Interest ......................................................................................................... 8.8 Offences ....................................................................................................... 8.8 Civil and criminal proceedings...................................................................... 8.10 Penalty and confiscation .............................................................................. 8.14 Recovery of dues ........................................................................................ 8.18

CHAPTER 9 REFUND 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 9.13 Refund of duty............................................................................................... 9.1 Interest on delayed refund ............................................................................. 9.1 Theory of unjust enrichment ........................................................................... 9.1 Assessment documents to show duty payment particulars ............................... 9.3 Time-limit for making the application for refund of duty.................................... 9.4 Presentation of refund claim........................................................................... 9.5 Payment of refund ......................................................................................... 9.6 Post Audit ..................................................................................................... 9.6 Monitoring and control for timely disposal of refunds ....................................... 9.7 Provisions relating to interest on delayed refunds [Section 11BB] .................... 9.7 Duty of excise not levied or short-levied as a result of general practice not to be recovered [Section 11C] ..................................................... 9.8 Obligation of persons who have collected excise duty from buyers [Section 11D] ..................................................................................... 9.8 Interest on the amounts collected in excess of the duty [Section 11DD] ......... 9.19

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CHAPTER 10 APPEALS 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 Introduction ................................................................................................. 10.1 Appellate stages.......................................................................................... 10.1 Appeals to Commissioner (Appeals) ............................................................. 10.2 Production of additional evidence before Commissioner (Appeals) ................. 10.4 Appeals to Appellate Tribunal....................................................................... 10.5 Stay of demand/order [Section 35F] ............................................................. 10.8 Legal decisions relating to stay applications ................................................. 10.9 Revision application....................................................................................10.10 Appeal to High Court [Section 35G] .............................................................10.11 Appeal to Supreme Court ............................................................................10.12 Summary ...................................................................................................10.12

CHAPTER 11 REMISSION OF DUTY AND DESTRUCTION OF GOODS 11.1 11.2 11.3 11.4 Statutory provisions ..................................................................................... 11.1 Procedure for destruction of goods and remission of duty .............................. 11.2 Manner of destruction .................................................................................. 11.3 Case laws pertaining to remission of duty ..................................................... 11.4

CHAPTER 12 WAREHOUSING 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 Statutory provisions ..................................................................................... 12.1 Place of registration of warehouse................................................................ 12.1 Procedure for warehousing of excisable goods removed from a factory or a warehouse ........................................................................................... 12.2 Failure to receive a warehousing certificate .................................................. 12.2 Accountal of goods in a warehouse .............................................................. 12.3 Responsibility of the registered person ......................................................... 12.3 Revoked or suspended registration of a warehouse....................................... 12.3 Warehouse to store goods belonging to the registered person ....................... 12.4 Registered persons right to deal with the warehoused goods ........................ 12.4 Export warehousing ..................................................................................... 12.4

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CHAPTER 13 EXEMPTION BASED ON VALUE OF CLEARANCES (SSI) 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10 13.11 Introduction ................................................................................................. 13.1 Meaning of small scale units ........................................................................ 13.1 Products covered under the SSI exemption notification ................................. 13.2 Eligibility ..................................................................................................... 13.2 Relaxation in the duty .................................................................................. 13.2 Availability of Cenvat credit.......................................................................... 13.3 Value of clearances to be excluded for calculation of limit of Rs.100 lakhs and Rs.400 lakhs .................................................................... 13.3 Important case laws on value of clearances .................................................. 13.4 Brand name ................................................................................................ 13.5 Clubbing of clearances ................................................................................ 13.7 Case laws relating to clubbing of clearances................................................. 13.8

CHAPTER 14 NOTIFICATIONS, DEPARTMENTAL CLARIFICATIONS AND TRADE NOTICES 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9 14.10 14.11 Power of the Central Government to make rules ........................................... 14.1 Power of the Central Government to empower central excise authorities ........ 14.5 Emergency power of the Central Government under Central Excise Tariff Act, 1985 to increase duty................................................................... 14.5 Exemption notifications in central excise....................................................... 14.7 Effect of amendments, etc., of rules, notifications or orders [Section 38A] ...... 14.8 Departmental circulars and trade notices in central excise............................. 14.9 Binding nature of Board circulars.................................................................. 14.9 Can departmental authorities of one region refuse to accept a circular issued by another region? ............................................................14.10 Can departmental circulars be inconsistent with the law? .............................14.10 Can a Board circular be contrary to a Tribunal decision? ..............................14.10 Date from which Board circulars are effective ..............................................14.10

CHAPTER 15 ADVANCE RULING 15.1 15.2 Definitions................................................................................................... 15.1 Procedure for application for advance ruling ................................................. 15.2

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15.3 15.4

Constitution of Authority for Advance Ruling (Central Excise, Customs and Service tax) ......................................... 15.3 Procedure to be followed by Authority for Advance Ruling (Central Excise, Customs and Service tax) on receipt of application [Section 23D] .................. 15.3

CHAPTER 16 ORGANISATION STRUCTURE OF THE EXCISE DEPARTMENT 16.1 Organisation structure ................................................................................. 16.1

CHAPTER 17 EXCISE AUDIT 17.1 17.2 17.3 17.4 Audit under Central Excise Act, 1944 ........................................................... 17.1 Audit prescribed by central excise department .............................................. 17.2 What is Excise Audit 2000?.......................................................................... 17.3 Procedure of Excise Audit 2000 ................................................................... 17.4

CHAPTER 18 SETTLEMENT COMMISSION 18.1 18.2 18.3 18.4 18.5 Introduction ................................................................................................. 18.1 Salient features of Settlement Commission ................................................... 18.1 Categories of cases that cannot be settled.................................................... 18.4 Procedure to make an application before the Settlement Commission ............ 18.5 Procedure to be followed by the Settlement Commission [Section 32F] .......... 18.6

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SECTION B SERVICE TAX & VATCONTENTSCHAPTER 1 INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Need for a tax on services ............................................................................. 1.1 Genesis of service tax in India ....................................................................... 1.1 Constitutional authority .................................................................................. 1.2 Service tax law .............................................................................................. 1.3 Selective vs. comprehensive coverage ........................................................... 1.5 Administration of service tax .......................................................................... 1.6 Service tax procedures .................................................................................. 1.7 Role of a chartered accountant ...................................................................... 1.7

CHAPTER 2 PRELIMINARY LEGAL PROVISIONS 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Extent, commencement and application [Section 64] ....................................... 2.1 Definitions [Section 65] .................................................................................. 2.1 Classification of taxable services [Section 65A] .............................................. 2.2 Charge of service tax [Section 66] .................................................................. 2.3 Education Cess ............................................................................................. 2.3 Nature of service tax ..................................................................................... 2.4 Valuation of taxable services for charging service tax [Section 67]................... 2.4 Service Tax (Determination of Value) Rules, 2006 .......................................... 2.4

CHAPTER 3 BASIC CONCEPTS APPLICABLE TO ALL SERVICES 3.1 3.2 3.3 3.4 3.5 Basic exemption to small service providers ..................................................... 3.1 Payment only on receipt ................................................................................ 3.3 Service tax payable on advance received ....................................................... 3.4 Import of services .......................................................................................... 3.4 Taxation of Services (Provided from Outside India

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and Received in India) Rules, 2006 ................................................................ 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 Export of services........................................................................................ 3.11 Export of Services Rules, 2005 .................................................................... 3.11 Concept of deemed service non-existent ...................................................... 3.20 Services provided by mutual concerns to its members subject to service tax .................................................................................................. 3.20 Services provided to United Nations or International Organisation exempt from payment of service tax ............................................................. 3.20 Services provided to a developer or units of special economic zone exempt from payment of service tax ...................................... 3.21 Exemption to goods and materials sold by service provider to recipient of service ...................................................................................... 3.21

CHAPTER 4 GAMUT AND COVERAGE OF SERVICE TAX LAWS 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 Stock broking services ................................................................................... 4.1 Telephone services ....................................................................................... 4.2 Pager services .............................................................................................. 4.3 General Insurance services............................................................................ 4.3 Advertising agency services. .......................................................................... 4.4 Courier services ............................................................................................ 4.6 Consulting engineers services ....................................................................... 4.6 Custom house agents services ...................................................................... 4.8 Steamer agents services............................................................................... 4.8 Clearing & forwarding agents services ........................................................... 4.9 Manpower recruitment agents services ........................................................ 4.11 Air travel agents services ............................................................................ 4.12 Mandap keepers services............................................................................ 4.12 Tour operators services .............................................................................. 4.15 Rent-a-cab scheme operators services ........................................................ 4.17 Architects services ..................................................................................... 4.18

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4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33 4.34 4.35 4.36 4.37 4.38 4.39 4.40 4.41 4.42 4.43 4.44

Interior decorators services ......................................................................... 4.19 Management consultants services ............................................................... 4.20 Practising chartered accountants services ................................................... 4.22 Practising cost accountants services ........................................................... 4.22 Practising company secretarys services....................................................... 4.22 Real estate agents services ........................................................................ 4.23 Security agencys services ........................................................................... 4.23 Credit rating agencys services .................................................................... 4.24 Market research agencys services............................................................... 4.24 Underwriters services ................................................................................. 4.25 Scientific or technical consultancy services .................................................. 4.26 Photography services .................................................................................. 4.27 Convention services .................................................................................... 4.28 Leased circuit services ................................................................................ 4.29 Telegraph services ...................................................................................... 4.29 Telex services ............................................................................................. 4.30 Facsimile (Fax) services .............................................................................. 4.31 On-line information and database access and/or retrieval services ................ 4.32 Video tape production services .................................................................... 4.34 Sound recording services............................................................................. 4.35 Broadcasting (radio and television) services ................................................. 4.36 Insurance auxiliary services ......................................................................... 4.39 Banking and other financial services ............................................................ 4.42 Port services by major ports and other ports ................................................. 4.48 Authorised service stations services ........................................................... 4.49 Beauty parlours services ............................................................................. 4.51 Cargo handling services .............................................................................. 4.51 Cable operators services ............................................................................ 4.53

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4.45 4.46 4.47 4.48 4.49 4.50 4.51 4.52 4.53 4.54 4.55 4.56 4.57 4.58 4.59 4.60 4.61 4.62 4.63 4.64 4.65 4.66 4.67 4.68 4.69 4.70 4.71 4.72

Dry cleaning services .................................................................................. 4.54 Event management services ........................................................................ 4.55 Fashion designers services ......................................................................... 4.56 Health club and fitness centre services......................................................... 4.57 Life insurance services ............................................................................... 4.58 Rail travel agents services .......................................................................... 4.60 Storage and warehousing services ............................................................... 4.60 Business auxiliary services .......................................................................... 4.61 Commercial training or coaching services ..................................................... 4.65 Erection, commissioning and installation services ......................................... 4.67 Franchise services ...................................................................................... 4.69 Internet cafs services ................................................................................ 4.69 Management, maintenance or repair services ............................................... 4.69 Technical testing and analysis services ........................................................ 4.71 Technical inspection and certification services .............................................. 4.72 Airport services ........................................................................................... 4.72 Transport of goods by air services................................................................ 4.73 Business exhibition services ........................................................................ 4.74 Transport of goods by road (by a goods transport agency) ............................ 4.75 Construction services in respect of commercial or industrial buildings or civil structures ......................................................................................... 4.77 Intellectual property service other than copyrights......................................... 4.79 Opinion poll services ................................................................................... 4.80 Outdoor catering ......................................................................................... 4.81 TV or radio programme production services .................................................. 4.81 Survey and exploration of mineral services ................................................... 4.82 Pandal or shamiana services ....................................................................... 4.83 Travel agents services (other than air/rail travel agents)............................... 4.84 Forward contract services ............................................................................ 4.84

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4.73 4.74 4.75 4.76 4.77 4.78 4.79 4.80 4.81 4.82 4.83 4.84 4.85 4.86 4.87 4.88 4.89 4.90 4.91 4.92 4.93 4.94 4.95

Transport of goods through pipeline or other conduit ..................................... 4.85 Site preparation and clearance, excavation, earth moving and demolition services ............................................................................... 4.85 Dredging services of rivers, ports, harbours, backwaters and estuaries .......... 4.86 Survey and map-making services other than by government departments ............................................................................. 4.87 Cleaning services other than in relation to agriculture, horticulture, animal husbandry or dairying .................................................... 4.88 Services in respect of membership of clubs or associations ........................... 4.89 Packaging services...................................................................................... 4.90 Mailing list compilation and mailing services ................................................. 4.91 Construction services in respect of residential complexes ............................. 4.91 Registrar to an issues services ...................................................................... 4.93 Share transfer agents services ............................................................................. 4.94 Automated teller machine operations, maintenance or management services ....... 4.94 Recovery agents services..................................................................................... 4.94 Sale of space or time for advertisement, other than in print media ........................ 4.95 Sponsorship services provided to any body corporate or firm, other than sponsorship of sports events ................................................................ 4.95 Transport of passengers embarking on international journey by air, other than economy class passengers ........................................................ 4.96 Transport of goods in containers by rail by any person, other than government railway .............................................................................. 4.96 Business support services..................................................................................... 4.97 Auctioneers' services, other than auction of property under directions or orders of a court of law or auction by the Central Government .............................. 4.97 Public relations services........................................................................................ 4.98 Ship management services ................................................................................... 4.98 Internet telephony services ................................................................................... 4.99 Transport of persons by cruise ship....................................................................... 4.99

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4.96

Credit card, debit card, charge card or other payment card related services.......... 4.99

CHAPTER 5 - SERVICE TAX PROCEDURES 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 5.19 5.20 5.21 Registration [Section 69 & Rule 4 of Service Tax Rules, 1994] ........................ 5.1 Taxable service to be provided or credit to be distributed on invoice, bill or challan [Rule 4A of Service Tax Rules, 1994] ........................................ 5.3 Payment of service tax [Section 68 & Rule 6 of Service Tax Rules, 1994] ........ 5.5 Returns [Section 70 & Rule 7 of Service Tax Rules, 1994] ............................... 5.9 Records [Rule 5 of Service Tax Rules, 1994] .................................................. 5.9 Assessment ................................................................................................ 5.10 Recovery of service tax not levied or paid or short-levied or short paid or erroneously refunded [Section 73] ................................................................ 5.11 Service tax collected from any person to be deposited with the Central Government [Section 73A] ......................................................... 5.13 Interest on amount collected in excess [Section 73B] .................................... 5.14 Provisional attachment to protect revenue in certain cases [Section 73C]....... 5.15 Publication of information in respect of persons in certain cases [Section 73D] ........................................................................ 5.15 Refunds ...................................................................................................... 5.16 Penal consequences.................................................................................... 5.17 Reasonable cause [Section 80] .................................................................... 5.19 Power to search premises [Section 82] ......................................................... 5.20 Powers of revision [Section 84] .................................................................... 5.20 Appeals to Commissioner of Central Excise (Appeals)- First appeal [Section 85]................................................................................................. 5.20 Appeals to the Appellate Tribunal Second appeal [Section 86] .................... 5.20 Appeal to High Court and Supreme Court ..................................................... 5.22 Recovery of any amount due to Central Government [Section 87] .................. 5.22 Power of the Central Government to grant exemption from service tax [Section 93] ............................................................................... 5.23

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5.22 5.23 5.24 5.25 5.26 5.27 5.28

Power to grant rebate [Section 93A] ............................................................. 5.23 Power to make rules [Section 94] ................................................................. 5.24 Power to remove difficulties [Section 95] ...................................................... 5.25 Chapter VA Advance ruling ....................................................................... 5.25 Applicability of provisions of the Central Excise Act, 1944 to service tax [Section 83]................................................................................................. 5.29 Due dates for service tax ............................................................................ 5.30 Credit of service tax..................................................................................... 5.31

CHAPTER 6 BACKDROP FOR STATE-LEVEL VAT IN INDIA 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 Introduction ................................................................................................... 6.1 Historical background .................................................................................... 6.2 VAT in Indian context .................................................................................... 6.3 Committee of State Finance Ministers ............................................................. 6.3 Empowered Committee of State Finance Ministers .......................................... 6.4 Dr. Vijay Kelkars views ................................................................................. 6.4 White paper on State-Level VAT in India ........................................................ 6.5 Present position ............................................................................................ 6.5 Discontinuance of the central sales tax........................................................... 6.6 Goods and service tax ................................................................................... 6.6

CHAPTER 7 TAXONOMY OF VAT 7.1 7.2 7.3 7.4 7.5 Different stages of VAT.................................................................................. 7.1 How VAT operates......................................................................................... 7.2 Variants of VAT ............................................................................................. 7.5 Methods for computation of tax ....................................................................... 7.6 Merits and demerits of VAT .......................................................................... 7.12

CHAPTER 8 INPUT TAX CREDIT 8.1 Concepts of input tax and output tax .............................................................. 8.1

xv

8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10

Input tax credit (ITC)...................................................................................... 8.1 VAT liability................................................................................................... 8.2 Eligible purchases for availing input tax credit ................................................. 8.3 Purchases not eligible for input tax credit ........................................................ 8.4 Carrying over of tax credit.............................................................................. 8.4 Refund to exporters within three months ......................................................... 8.5 Exemption or refund to SEZ and EOU units .................................................... 8.5 Concept of input tax credit on capital goods.................................................... 8.5 VAT invoice................................................................................................... 8.7

CHAPTER 9 SMALL DEALERS AND COMPOSITION SCHEME 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Principles laid down in the White Paper .......................................................... 9.1 Threshold exemption limit .............................................................................. 9.1 State laws to provide for composition scheme ................................................. 9.1 Features of composition scheme..................................................................... 9.2 Eligibility for the composition scheme.............................................................. 9.2 Exercising of option ....................................................................................... 9.3 VAT chain under composition scheme ............................................................ 9.3

CHAPTER 10 VAT PROCEDURES 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Registration ................................................................................................ 10.1 Tax payers identification number (TIN) ........................................................ 10.2 Records ...................................................................................................... 10.2 Returns...................................................................................................... 10.3 Assessment ............................................................................................... 10.4 Audit ........................................................................................................... 10.4 Penal provisions .......................................................................................... 10.5 Tax rates under VAT.................................................................................... 10.5 Miscellaneous ............................................................................................. 10.6

xvi

CHAPTER 11 VAT IN SPECIAL TRANSACTIONS 11.1 11.2 11.3 11.4 VAT and sales-tax incentives ....................................................................... 11.1 VAT and works contract ............................................................................... 11.3 VAT and lease transactions ......................................................................... 11.6 VAT and hire-purchase transactions............................................................ 11.9

CHAPTER 12 VAT AND CENTRAL SALES-TAX 12.1 12.2 12.3 12.4 12.5 Central sales tax ......................................................................................... 12.1 CST leads to cascading of taxes .................................................................. 12.1 CST is not vatable ....................................................................................... 12.2 CST after introduction of VAT ..................................................................... 12.2 Amendments in CST act to facilitate introduction of VAT .............................. 12.3

xvii

SECTION C CUSTOMSCONTENTSCHAPTER 1 - BASIC CONCEPTS 1.1 1.2 1.3 1.4 Introduction ................................................................................................... 1.1 Constitutional provisions ................................................................................ 1.2 An overview of the Customs Act, 1962............................................................ 1.3 Some important definitions............................................................................. 1.5

CHAPTER 2 - LEVY OF AND EXEMPTIONS FROM CUSTOMS DUTY 2.1 2.2 2.3 2.4 Determining factors ....................................................................................... 2.1 Point and circumstances of levy ..................................................................... 2.2 Procedure, mechanism and organisation for assessment of duty...................... 2.5 Remission, abatement and exemptions........................................................... 2.7

CHAPTER 3 - TYPES OF DUTY 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 Basic customs duty [Section 2 of the Customs Tariff Act] ................................ 3.1 Additional duty of customs [Section 3 of the Customs Tariff Act] ...................... 3.2 Protective duties [Section 7 of the Customs Tariff Act] .................................... 3.5 Emergency power to impose or enhance export duties [Section 8 of the Customs Tariff Act] ........................................................................................ 3.6 Emergency power to impose or enhance import duties [Section 8A of the Customs Tariff Act] ........................................................................................ 3.6 Safeguard duty [Section 8B of the Customs Tariff Act] .................................... 3.7 Power of Central Government to impose transitional product specific safeguard duty on imports from China [Section 8C of the Customs Tariff Act]................... 3.8 Countervailing duty on subsidized articles [Section 9 of the Customs Tariff Act] ...................................................................................................... 3.9 Anti-dumping duty [Section 9A of the Customs Tariff Act] .............................. 3.10 No levy under section 9 or section 9A in certain cases [Section 9B of the Customs Tariff Act] ...................................................................................... 3.12 Education cess @ 2% .................................................................................. 3.13

xviii

CHAPTER 4 - CLASSIFICATION OF GOODS 4.1 4.2 4.3 4.4 4.5 Customs Tariff............................................................................................... 4.1 General explanatory notes ............................................................................. 4.1 Rules of Interpretation of Customs Tariff Act................................................... 4.2 Special provisions for classification of sets of articles and accessories ............ 4.6 Some cases on classification ......................................................................... 4.7

CHAPTER 5 - VALUATION UNDER THE CUSTOMS ACT, 1962 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 Introduction ................................................................................................... 5.1 Concept of value ........................................................................................... 5.1 Terms used in commercial parlance ............................................................... 5.2 Technical terms relating to value in the course of import or export ................... 5.6 Concept of indirect tax and valuation for the same .......................................... 5.6 Computation of assessable value ................................................................... 5.7 Customs valuation (Determination of Price of Imported Goods) Rules, 1988 ... 5.10 Notes to Rules............................................................................................. 5.18 Date for determination of rate of duty and tariff value .................................... 5.30 Judicial decisions on valuation of imported goods ......................................... 5.31

CHAPTER 6 - ADMINISTRATIVE ASPECTS OF CUSTOMS ACT, 1962 6.1 6.2 6.3 Appointment of customs ports, airports, warehousing stations, etc., ................. 6.1 Administrative set up ..................................................................................... 6.4 Warehousing stations .................................................................................... 6.6

CHAPTER 7 - IMPORTATION, EXPORTATION AND TRANSPORTATION OF GOODS 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 Introduction ................................................................................................... 7.1 Importation.................................................................................................... 7.1 Definitions of important terms......................................................................... 7.2 Statutory provisions ....................................................................................... 7.3 Procedure for clearance of imported goods ................................................... 7.10 Exportation.................................................................................................. 7.16 Procedure for the clearance of export goods ................................................. 7.21 Procedure for postal articles ........................................................................ 7.22xix

7.9 7.10 7.11

Special provisions relating to stores ............................................................. 7.26 Special procedures relating to clearance of baggage..................................... 7.30 Transit and transhipment ............................................................................. 7.38

CHAPTER 8 - WAREHOUSING 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Introduction ................................................................................................... 8.1 Parallel provisions for home consumption ....................................................... 8.2 Special provisions for warehousing ................................................................ 8.2 Important definitions ...................................................................................... 8.3 Procedure for deposit in the warehouse and subsequent removal .................... 8.3 Statutory provisions ....................................................................................... 8.5 Removal of goods from the warehouse ......................................................... 8.13 Manufacture in bonded warehouse ............................................................... 8.22 Free trade zones and export processing zones ............................................. 8.26 Project imports ............................................................................................ 8.29

CHAPTER 9 - DEMAND AND APPEALS 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 Demands under Customs Act, 1962................................................................ 9.1 Issue of show cause notice [Section 28] ......................................................... 9.1 Power of the Central Government not to recover duties [Section 28A] .............. 9.3 Duties collected from the buyer to be deposited with the Central Government [Section 28B]................................................................................................. 9.4 Certain common questions on demand ........................................................... 9.5 Adjudication .................................................................................................. 9.6 Interest, penalty, confiscation, duty payment under protest.............................. 9.8 Appeals and revisions.................................................................................... 9.8

CHAPTER 10 - REFUND 10.1 10.2 10.3 10.4 10.5 Introduction ................................................................................................. 10.1 Application for refund................................................................................... 10.1 Processing of refund claim ........................................................................... 10.2 Interest on delayed refund ........................................................................... 10.3 Refund of export duty in certain cases [Section 26] ....................................... 10.3xx

10.6 10.7

Duty paid under protest................................................................................ 10.5 Doctrine of unjust enrichment with respect to refund of duty .......................... 10.5

CHAPTER 11 - DUTY DRAWBACK 11.1 11.2 11.3 11.4 11.5 11.6 11.7 Introduction ................................................................................................. 11.1 Drawback of customs duty ........................................................................... 11.1 Rate of drawback ........................................................................................ 11.4 Duty Drawback Rules .................................................................................. 11.6 Drawback on imported materials used in the manufacture of export goods [Section 75]................................................................................................. 11.7 Interest on drawback [Section 75A] .............................................................11.13 Prohibition and regulation of drawback [Section 76] .....................................11.13

CHAPTER 12 - PROVISIONS RELATING TO ILLEGAL IMPORT, CONFISCATION, PENALTY & ALLIED PROVISIONS 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 12.11 Introduction ................................................................................................. 12.1 Prohibition................................................................................................... 12.1 Detection of illegally imported goods and prevention of the disposal thereof [Chapter IV A] ............................................................................................. 12.3 Prevention or detection of illegal export of goods [Chapter IV B] .................... 12.5 Exemptions from the operation of Chapter IV A & IV B .................................. 12.7 Confiscation of goods and conveyances and imposition of penalties [Chapter XIV] .............................................................................................. 12.7 Penalties on persons ..................................................................................12.12 Penal provisions under the Customs Act ......................................................12.12 Adjudication [Section 122]...........................................................................12.16 Seizure and arrest ......................................................................................12.17 Offences and prosecution - specific provisions.............................................12.21

CHAPTER 13 - SETTLEMENT COMMISSION 13.1 13.2 13.3 13.4 Introduction ................................................................................................. 13.1 Definitions [Section 127A] ............................................................................ 13.1 Application for settlement of cases [Section 127B] ........................................ 13.2 Procedure on receipt of application [Section 127C] ....................................... 13.3xxi

13.5 13.6 13.7 13.8 13.9 13.10 13.11

Powers of Settlement Commission ............................................................... 13.5 Inspection, etc., of reports [Section 127G] .................................................... 13.7 Order of settlement to be conclusive [Section 127J] ...................................... 13.7 Recovery of sums due under order of settlement [Section 127K] .................... 13.7 Bar on subsequent application for settlement in certain cases [Section 127L] ............................................................................................. 13.7 Proceedings before Settlement Commission to be judicial proceedings [Section 127M] ............................................................................................ 13.8 Certain persons who have filed appeals to the Appellate Tribunal entitled to make applications to the Settlement Commission [Section 127MA] .......................................................................................... 13.8 Applications on certain provisions of Central Excise Act [Section 127N] ......... 13.9 Customs (Settlement of Cases) Rules, 1999 ................................................. 13.9

13.12 13.13

CHAPTER 14 - ADVANCE RULING 14.1 14.2 14.3 14.4 14.5 14.6 14.7 Definitions [Section 28E].............................................................................. 14.1 Authority for Advance Ruling (Central Excise, Customs and Service tax) [Section 28F] ............................................................................ 14.2 Application for advance ruling [Section 28H] ................................................. 14.2 Procedure on receipt of application [Section 28-I] ......................................... 14.3 Applicability of advance ruling [Section 28J] ................................................. 14.5 Advance ruling to be void in certain circumstances [Section 28K] .................. 14.5 Powers of authority [Section 28L] ................................................................. 14.5

CHAPTER 15 - MISCELLANEOUS PROVISIONS 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 Conveyance and goods in a customs area subject to control of officers of customs [Section 141] .............................................................. 15.1 Recovery of sums due to Government [Section 142]...................................... 15.1 Power to allow import or export on execution of bonds in certain cases [Section 143] ............................................................................................... 15.3 Duty deferment [Section 143A] ..................................................................... 15.4 Power to take samples [Section 144] ............................................................ 15.5 Custom house agents to be licensed [Section 146]........................................ 15.6 Appearance by authorised representative [Section 146A] .............................. 15.6 Procedure for sale of goods and application of sale proceeds [Section 150] ... 15.8xxii

15.9 15.10 15.11 15.12 15.13 15.14 15.15 15.16

Certain officers required to assist officers of customs [Section 151] ............... 15.9 Instructions to officers of customs [Section 151A] ........................................15.11 Delegation of powers [Section 152] .............................................................15.12 Service of order, decision, etc. [Section 153] ...............................................15.13 Rounding off of duty, etc. [Section 154A]. ....................................................15.14 General power to make rules [Section 156] ..................................................15.14 General power to make regulations [Section 157].........................................15.15 Provisions with respect to rules and regulations [Section 158] ......................15.15

CHAPTER 16 - SPECIAL ECONOMIC ZONE 16.1 16.2 16.3 16.4 16.5 Introduction ................................................................................................. 16.1 Features of special economic zones ............................................................. 16.1 Advantages of special economic zones......................................................... 16.2 Disadvantages ............................................................................................ 16.3 Approved SEZ ............................................................................................ 16.4

CHAPTER 17 INTER-RELATIONSHIP OF ACCOUNTING WITH EXCISE, CUSTOMS AND SERVICE TAX 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 Introduction ................................................................................................. 17.1 Accounting standards issued by Accounting Standards Board (ASB) of ICAI .................................................................... 17.1 Cost Accounting Standards issued by ICWAI ................................................ 17.7 Guidance notes ..........................................................................................17.11 Accounting for CENVAT credit of service tax ...............................................17.20 Accounting treatment for PLA......................................................................17.21 Accounting for import and export duties .......................................................17.21 Maintenance of books of account ................................................................17.21 Divergence between accounting and taxation principles ...............................17.23

xxiii

SECTION A CENTRAL EXCISE

1BASIC CONCEPTS1.1 CONSTITUTION OF INDIA

Power to levy and collect taxes whether direct or indirect emerges from the Constitution of India. Without a study of the basic provisions in the Constitution, no study would be complete. Article 246 of Constitution of India gives the respective authority to Union and State governments for levying tax. Seventh Schedule to the Constitution of India contains three lists setting out matters under which the State and Union have got the authority to make laws. List I known as Union List contains 97 entries. The Union Legislature has an exclusive power to make laws in respect of matters listed in List I. List II known as State list contains various matters like taxes on agricultural income, excise duty on alcoholic liquors, opium and narcotics, etc., in respect of which State legislatures have the exclusive powers to make laws. List III also known as Concurrent list lists out the matters like criminal law and procedure, trust and trustees, civil procedures, economic and social planning etc., in respect of which Central Government has authority to make laws. Part XII of the Constitution of India contains matters related to Finance, Property, Contracts and Suits in the Articles 264 to Article 300A. Article 265 states that no tax shall be levied or collected except by authority of law. It has been held by the Supreme Court in Kunnathat v. State of Kerala AIR 1961 SC 552 that the term authority of law means that tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The law must not be a colourable use of or a fraud upon the legislative power to tax. It must not also violate the fundamental rights such as Article 14, 19 etc. See Express Newspapers v. U.O.I. 1999 (110) E.L.T. 3 (S.C.). Article 272 mentions Union duties of excise other than such duties of excise on medicinal or toilet preparations as are mentioned in the Union List shall be levied and collected by the Government of India. Entry 84 of list I of the Seventh Schedule to the Constitution of India enumerates duties of excise on tobacco and other goods manufactured or produced in India except (a) (b) alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-

1.2

Central Excise paragraph (b) of this entry.

1.2

DIRECT AND INDIRECT TAXES

Taxes are broadly classified into Direct taxes and Indirect taxes. Direct Taxes are taxes which are levied on persons for the income earned or activities conducted, the incidence of which is to be borne by the person himself on whom it is levied. On the other hand, Indirect taxes are the taxes which are levied on a product or a service the incidence of which is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or seller of goods. 1.3 WHAT IS EXCISE DUTY

Excise is derived from the Latin word Excisum. Excise, according to the Federal Court and Privy Council is a tax attracted by the event of manufacture but collected at some convenient stage which may be after the said event, which is only for administrative convenience [Province of Madras v. Boddu Paidanna & Sons 1978 (2) E.L.T. J272]. It is a duty levied upon goods manufactured and not upon sales or the proceeds of sale of goods [Council v. Province of Madras, 1978 (2) E.L.T. J28]. Therefore the duty of excise is levied on a manufacturer or producer in respect of the commodities produced or manufactured by him. It is a tax upon manufacture of goods and not upon sales or proceeds of sale of goods. Duty of excise has been renamed as Central Value Added Tax (CENVAT). CENVAT includes duty, duties duty of excise or duties of excise. Excise duties are of following types Duties under Central Excise Act, 1944 Basic excise duty: This duty is levied under section 3(1)(a) of Central Excise Act. As per section 2A of Central Excise Act, basic excise duty is termed as Cenvat with effect from 125-2000. It is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption notification, if any. Special excise duty: This duty is levied under section 3(1)(b) of Central Excise Act. Special duty of excise is leviable on some commodities like pan masala, cars etc. These items are covered in Second Schedule to Central Excise Tariff. Duty in case of 100% EOU and FTZ: Hundred percent Export Oriented Undertakings (EOU) and units in Free Trade Zone (FTZ) export all their production. However, when they clear their final products in Domestic tariff area (DTA), excise duty has to be paid. The duty amount is equal to the aggregate of the duties of customs leviable on like article if imported in India. Even if rate of customs duty is considered for payment of duty, actually the duty paid by them is Central Excise Duty. The rate of customs duty is taken only as a measure. Duties under Other Acts Some duties and cesses are levied on manufactured products under other Acts like

Basic Concepts

1.3

Additional Duty on Goods of Special Importance [AED(GSI)] and Additional Duty on Textile Articles. The administrative machinery of Central Excise is used to collect these taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and collection of these duties/cesses. A National Calamity Contingent Duty (NCCD) has been imposed vide section 136 of Finance Act, 2001. This duty is imposed on pan masala, chewing tobacco and cigarettes. An Education Cess has been levied on excisable goods manufactured in India with effect from 10.09.2004. It is levied @ 2% of the aggregate duties of excise levied on such goods. The cess paid on inputs and capital goods is available as credit for payment of cess on the final products or output services, as per the provisions of Cenvat Credit Rules, 2004. The Education Cess so collected is utilized for providing and financing universalised quality basic education. The Education Cess on excisable goods is in addition to any other duties of excise chargeable on such goods, under the Central Excise Act, 1944 or any other law for the time being in force. The provisions of the Central Excise Act, 1944 and the rules made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty, apply in relation to the levy and collection of the Education Cess on excisable goods as they apply in relation to the levy and collection of the duties of excise on such goods under the Central Excise Act, 1944 or the rules, as the case may be. An additional excise duty, by way of surcharge on pan masala and certain specified tobacco products is levied to finance the National Rural Health Mission. This additional duty is charged at prescribed specific rates on cigarettes, and at a rate equal to 10% of the aggregate of normal rates of excise duties payable on pan masala and other tobacco products. This surcharge is not levied on biris. The additional duty of excise is in addition to any other duty of excise chargeable on such goods under the Central Excise Act or any other law for the time being in force. The provisions of the Central Excise Act and the rules made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty apply in relation to the levy and collection of such additional duty of excise on the specified tobacco products as they apply in relation to the levy and collection of the duty of excise on such goods under the Central Excise Act or, as the case may be, the rules made thereunder. 1.4 HISTORY OF CENTRAL EXCISE LAW

Prior to 1944 there were 16 individual Acts which levied excise duty. Each such act dealt with one or same type of commodities. All these acts were consolidated and a consolidating Act was passed in 1944 called as Central Excises and Salt Act, 1944 which came into effect from 28th February 1944. In I996 the Act was renamed as Central Excise Act, 1944. The Central Excise Act, 1944 (originally Central Excises and Salt Act, 1944) and Rules framed there under came into force on 28 th February, 1944. The Act applies to the whole of India. India includes Indian territorial waters. Indian territorial waters extend upto 12

1.4

Central Excise

nautical miles from the Indian land mass. It also extends to areas designated in the Continental Shelf and Exclusive Economic Zone of India. The exclusive economic zone extends upto 200 nautical miles inside the sea from base line. Though originally the Act did not apply to the State of Jammu and Kashmir, its application was extended to that State since the enactment of Taxation Laws (Extension to Jammu & Kashmir) Act, 1954. 1.5 BODY OF CENTRAL EXCISE LAW

Central Excise Law includes (a) Central Excise Act, 1944 (b) Central Excise Rules, 2002 (c) Cenvat Credit Rules, 2004 (d) Central Excise (Appeal) Rules, 2001 (e) Central Excise (Advance Rulings) Rules, 2002. (f) Central Excise (Settlement of Cases) Rules, 2001. (g) Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 (h) Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (i) Central Excise Tariff Act, 1985 1.5.1 Central Excise Act, 1944 : This Act contains the basic provisions relating to the levy of excise duty. There are 10 chapters in the Central Excise Act. These are briefly as follows:

Chapter I Chapter II Chapter IIA Chapter III Chapter IIIA Chapter V Chapter VI Chapter VIA Chapter VIB Chapter VII

Short title, extent and commencement of the Act including definitions Levy and collection of duty Indicating amount of duty in the price of goods, etc., for purpose of refund and crediting certain amounts to the Consumer Welfare Fund Powers and Duties of Officers and Land Holders Advance Rulings Settlement of Cases Adjudication of Confiscations and Penalties Appeals Presumptions as to Documents Supplemental Provisions

Basic Concepts

1.5

1.5.2 Central Excise Rules, 2002: These Rules contain the procedure for the assessment and collection of duty including other procedures like manner of payment of duty, registration, maintenance of records, invoicing, rebate of duty, export without payment of duty etc. 1.5.3 Cenvat Credit Rules, 2004 : The provisions relating to Cenvat credit which were a part of Central Excise Rules, 1944 were given a separate identity from 1st July 2001 and were called Cenvat Credit Rules, 2001. These Rules were superseded by the Cenvat Credit Rules, 2002. However, with effect from 10.09.2004 Cenvat Credit Rules, 2002 have been replaced by a new set of rules, viz., Cenvat Credit Rules, 2004 which provide for extending credit across goods and services. 1.5.4 Central Excise (Appeals) Rules, 2001 : The procedure relating to appeals are covered in this rules which was earlier included in Central Excise Rules, 2001. 1.5.5 Central Excise (Settlement of Cases) Rules, 2001 : The procedural aspects relating to settlement commission are contained in these rules. 1.5.6 Central Excise (Advance Rulings) Rules, 2002: These rules contain the provisions relating to Advance Rulings. 1.5.7 Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 : These rules contains the provisions and procedure relating to the goods removed at concessional rate of duty for manufacture of excisable goods. 1.5.8 Central Excise Tariff Act, 1985 : The Central Excise Tariff which was originally a schedule to the Central Excise Act, 1944 was de-linked from it and the Central Excise Tariff, Act 1985 containing the Tariff schedule was enacted, based on the international product coding system called Harmonised System of Nomenclature(H.S.N.). However, w.e.f. 28.02.2005 the Central Excise Tariff (Amendment) Act, 2005 has been brought into 1.5.9 Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 have been framed to prescribe valuation methods where transaction value cannot be determined under Section 4. 1.6. EXEMPTION NOTIFICATIONS IN CENTRAL EXCISE

Central excise legislation is driven by exemption notifications. Under section 5A(1), the Central Government is empowered to grant exemption in public interest either absolutely or subject to conditions (either before or after removal) from the whole or any part of the duty of excise payable. Notifications issued under section 5A(1) are not applicable to 100% EOU/EPZ/STP/EHTP unless otherwise specified. This is because such units are exempted under other notifications issued specially for them. It is clarified that where an exemption under sub-section (1) in respect of any excisable goods from the whole of the duty of excise leviable thereon has been granted absolutely, the manufacturer of such excisable goods shall not pay the duty of excise on such goods.

1.6

Central Excise

Sub section (2) of section 5A states that the Central Government can exempt excisable goods from the payment of duty by a special order if it is satisfied that it is necessary in the public interest to do so, under circumstances of an exceptional nature which are to be stated in such order. Under the Customs Act, 1962, a similar provision exists in section 25(2). 1.7 DEPARTMENTAL CIRCULARS AND TRADE NOTICES IN CENTRAL EXCISE

Departmental circulars and trade notices are a form of delegated legislation. Under section 37B, which is titled Instructions to Central Excise Officers, the Central Board of Excise and Customs (CBEC or Board), which is constituted under the Central Boards of Revenue Act, 1963, shall issue instructions to officers who are bound to follow them. These instructions or orders can be for the purpose of ensuring uniformity in the classification of excisable goods or with respect to levy of duty of excise on goods. However, such orders cannot be passed to direct any officer to dispose of a case in a particular manner or interfere with the discretion of the Commissioner (Appeals). A separate chapter is devoted to notifications and trade notices and their legal effect thereof. 1.8 DEFINITIONS UNDER EXCISE LAW

Section 2 of the Act contains definitions of certain terms which are given below. 1.8.1 "Adjudicating authority" means any authority competent to pass any order or decision under this Act, but does not include the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act,1963 (54 of 1963), Commissioner of Central Excise (Appeals) or Appellate Tribunal; (Sec 2(a)) 1.8.2 "Appellate Tribunal" means the Customs, Excise and service tax Appellate Tribunal constituted under section 129 of the Customs Act, 1962 (52 of 1962); (Sec 2(aa)) 1.8.3 "broker" or "commission agent" means a person who in the ordinary course of business makes contracts for the sale or purchase of excisable goods for others; (Sec 2(aaa)) 1.8.4 "Central Excise Officer" means the Chief Commissioner of Central Excise, Commissioner of Central Excise, Commissioner of Central Excise (Appeals), Additional Commissioner of Central Excise, Joint Commissioner of Central Excise, Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise or any other officer of the Central Excise Department, or any person (including an officer of the State Government) invested by the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 with any of the powers of a Central Excise Officer under this Act; (Sec 2(b)) 1.8.5 "Curing" includes wilting, drying, fermenting and any process for rendering an unmanufactured product fit for marketing or manufacture; (Sec 2(c)) 1.8.6 "Excisable goods" means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt; (Sec 2(d))

Basic Concepts

1.7

1.8.7 "Factory" means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on; (Sec 2(e)) 1.8.8 "Fund" means the Consumer Welfare Fund established under section 12C; (Sec 2(ee)) 1.8.9 "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 as amounting to manufacture, or (iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-Iabelling 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 labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account; (Sec 2(f)) 1.8.10 "Prescribed" means prescribed by rules made under this Act; (Sec 2(g)) 1.8.11 "Sale" and "purchase", with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration; (Sec 2(h)) 1.8.12 "Wholesale dealer" means a person who buys or sells excisable goods wholesale for the purpose of trade or manufacture, and includes a broker or commission agent who, in addition to making contracts for the sale or purchase of excisable goods for others, stocks such goods belonging to others as an agent for the purpose of sale; (Sec 2(k)). 1.9 LEVY AND COLLECTION OF DUTY

Chapter II of the Central Excise Act, 1944 deals with levy and collection of the duty. This chapter contains sections 3, 4 & 4A. Section 3 is the charging section, section 4 provides for the method of valuation of excisable goods and section 4A deals with valuation based on maximum retail price (MRP). Section 3(1) which is the charging section states : There shall be levied and collected in such manner as may be prescribed: (a) a duty of excise on all excisable goods (excluding goods produced or manufactured in

1.8

Central Excise special economic zones) which are produced or manufactured in India as, and at the rates set forth in the First Schedule to the Central Excise Tariff Act, 1985;

(b) a special duty of excise, in addition to duty of excise specified in clause (a) above, on excisable goods (excluding goods produced or manufactured in special economic zones) specified in the Second Schedule to the Central Excise Tariff Act, 1985 which are produced or manufactured in India, as, and at the rates set forth i