A. Levy
Central Excise is a tax on act of manufacture or production. Section 3 of the Central Excise Act, 1944 (hereinafter referred to as 'the Act') is the charging section and derives its authority from Entry 84 of the Union List (List I), Seventh Schedule read with Article 246 of the Constitution of India. As per Section 3, Central Excise can be levied or collected on excisable goods which are produced or manufactured in India. This essentially means that the levy does not include taxability on every chain of transactions but rather it is restricted till the time manufacturing of goods happen. Once the goods enter into the distribution channel, the levy of Excise does not trigger.
B. Manufacture
Central Excise being a tax on manufacture, the term 'manufacture' is of significant importance. Section 2(f) of the Act defines the term 'manufacture' in an inclusive manner so as to include any process:
i. Incidental or ancillary to the completion of a manufactured product, or
ii. Which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; or
iii. Which in relation to goods specified in Third Schedule (MRP goods) packing, repacking, labelling, relabelling or adoption of any other treatment to make it marketable.
The aforesaid definition gives a wider content to the expression 'manufacture' as several processes, which would not ordinarily be understood as amounting to manufacture, are specifically included therein.
However, the most commonly used test for ascertaining whether "manufacture" for the purpose of attracting Central Excise duty has taken place or not has been evolved by the Supreme Court in the case of Delhi Cloth and General Mills [(1977 (1) ELT (J-199)]. In terms of this decision, the activity or process in order to amount to 'manufacture' must lead to emergence of a new commercial product, different from the one with which the process started. In other words, it must be an article with different name, character or use. Thus, a process which simply changes the form or size of the same article or substance would not ordinarily amount to manufacture and no excise duty would be payable unless it is deemed to be manufacture, vide clause (ii) or (iii) as specified hereinabove.
The concept of deemed manufacture as provided under Excise is to expand the scope of the term manufacturing as may be generally understood. For e.g., In case of beverages, the deemed manufacturing provision also considered repacking of goods from bulk packing to small packing as a process amounting to manufacturing. Therefore, in essence, the concept of deemed manufacture expanded the scope of term manufacturing to include certain activities which in general understanding and the provisions of law are not considered as manufacturing.
C. Goods
Before Central Excise duty can be levied, two conditions have to be satisfied.
♦ The article should be goods; and
♦ It should have come into existence as a result of manufacture.
The term 'manufacture' has been defined above. The Act does not define the term 'goods'. A definition of the term 'goods' enunciated by the Supreme Court in the case of Delhi Cloth and General Mills (supra) is considered to be the foundation stone. It is on the ratio as laid down in this decision, that the term 'goods' has been interpreted over a period of time, depending on the facts of each case. In terms of the said decision, an article can be called 'goods' if it is known to the market as such and can ordinarily come to the market for being bought and sold. Actual sale of the article is not important, but it must be capable of being bought and sold. Immovable property or articles embedded to earth, erections, turnkey projects are not generally termed as 'goods' because they cannot ordinarily come to the market to be bought and sold. [Triveni Engg. — 2000 (120) ELT 273 (S.C.)]
D. Liability to pay duty is on manufacturer
Manufacturer is the one who actually undertakes the manufacturing activity. A customer does not become manufacturer. He merely supplies raw materials or gets goods manufactured according to his specifications or with his brand name, provided the manufacturer or job worker is not a dummy unit or hired labour of the customer. In other words, the relationship between the manufacturer and the raw material supplier/brand name owner has to be at an arm's length or on a principal-to-principal basis.
E. Job work and Excise Duty
Excise duty is an act of manufacture, hence, duty liability arises only when the goods are manufactured by the job worker i.e., a person who actually carried out manufacturing is liable to duty.
Exception to above rule : Readymade Garments and made-ups sector covered by C.E. Tariff Chapters 61/62/63 and jewellery sector covered by chapter 7113, the option to pay duty only if CENVAT credit is availed [NT 11/2013 CE dated 1-3-2013] is given either to job worker or merchant manufacturer (person who gets goods manufactured from job worker). Subject to Notification No. 30/2004 dated 9-7-2004 as amended.
F. Rates of duty and classification
Rates of Central Excise duty are specified in the Schedules to the Central Excise Tariff Act, 1985 (hereinafter referred to as 'the Tariff'). There are two Schedules; the First Schedule specifies the basic rate of excise duty and the Second Schedule the special rate of excise duty. The First Schedule contains 96 Chapters grouped into 20 sections and has been selectively aligned with the Harmonised System of Nomenclature which is an International Nomenclature adopted by more than 130 countries for international trade.
In order to determine the rate of duty, it is essential to determine the correct heading or sub-heading of the Tariff. This is known as classification of goods. Classification is based on statutory definition, if any, and in absence thereof, on trade or commercial parlance. There are Rules of Interpretation for the purpose of aiding the classification.
The schedule to the Central Excise Act provides rules for interpretation of the tariff. These rules are as follows:
i. The reference to goods shall include incomplete or unfinished goods provided incomplete or unfinished goods have the essential character of complete or finished goods.
ii. Any reference in heading to a material shall include the reference to mixture or combination. The classification of goods consisting of more than one material shall be decided on the basis of the material, which gives the essential character to the product.
iii. The heading, which is more specific, should be preferred to the more general heading. In case the classification cannot be decided on the basis of above principle, the product shall be classified under a heading which occurs last in the Para.
G. Valuation
Where rates of duty are ad valorem (expressed as a percentage of value of goods), assessable value of the goods has to be found out before the duty amount can be quantified. The modes of valuation under the excise law are as follows.
i. Tariff Value
Under section 3(2) of the Act, the Central Government is empowered to fix the tariff value for the goods. In such case, the assessee's task is easy, i.e., to find out the tariff value and pay duty on the same irrespective of the sale price.
ii. M.R.P. Value
In terms of section 4A of the Act, the Central Government is empowered to notify goods on which excise duty is payable on the M.R.P. value less certain percentage of abatement. This applies only in respect of packaged commodities specified in 3rd schedule to CETA, 1985, on which the M.R.P. is required to be affixed under the Legal Metrology Act, 2009 or any other law.
iii. Transaction Value
If a product is not notified under section 4A or no tariff value has been fixed under section 3(2), then the Valuation would be in terms of 'transaction value' w.e.f. July 1, 2000. For the transaction value to apply to each removal, the following conditions have to be satisfied :
♦ Goods sold by an assessee for delivery at time and place of removal
♦ Assessee and the buyer should not be related; and
♦ Price should be the sole consideration for sale
If any of the above requirements are not complied with, valuation has to be in terms of the Central Excise Valuation Rules, 2000.
The following can be deducted from a transaction value.
i. Freight and insurance incurred from the place of removal up to the place of removal. In case of direct dispatch from factory to the customer's premises, the transport expenditure incurred on transportation of goods from the factory to the customer's premises will be deducted as per terms of contract. In case of sale from depot, the transportation expenditure incurred from depot to customer's premises should be deducted as per the terms of contract.
ii. Trade discount — Trade discounts by whatever name they are called, like turnover discount, quantity discount, seasonal discount, regional discount.
iii. Cash discount
iv. All taxes payable on goods like excise duty, sales tax, Octroi etc.
If the goods are not sold from factory, the value is required to be determined in terms of Valuation Rules, 2000. These are briefly as follows:
i. The value of excisable goods shall be goods sold by the manufacturer for delivery at any other time nearest to the time of removal of goods.
ii. Sale of excisable goods for delivery at any place other than the place of removal. The cost of transportation from place of removal to the place of delivery shall be excluded.
iii. In case the price is not the sole consideration, the value of goods shall be the aggregate of such transaction value and the amount of money value of additional consideration flowing directly or indirectly from buyer to the assessee.
iv. Where goods are cleared to depot, consignment agent etc., the value shall be the normal transaction value of such goods sold from such other place at or about the same time. The normal transaction value shall be the transaction value at which the greatest aggregate quantities of goods are sold.
v. Where goods are captively consumed, the value shall be 110% of the cost of production [Rule 8 of Valuation Rules, 2000].
vi. Where goods are sold to related person or interconnected undertakings, the value shall be the price at which the related person has sold the goods. In case a related person does not sell the goods but uses or consumes the goods in production or manufacture of the article, the value shall be 110% of the cost of production [Rule 9 of Valuation Rules, 2000].
vii. Valuation when:
(a) Goods are partly sold to related person or interconnected undertakings and partly to others.
(b) When goods are distributed as free samples.
In both the above cases price relevant for valuation will be normal transaction value at the relevant time.
viii. Valuation of Job work
As per Rule 10A w.e.f. 1-4-2007 Excise duty will be payable on the basis of price at which raw material supplier sells the goods.
H. Self-assessment credit
The assessee himself has to assess the duty liability on the goods and pay it to the credit of the Government.
I. CENVAT credit
The Excise duty paid on the inputs & capital goods & service tax paid on input services is allowed to be set-off against the excise duty liability of the final products. This is the gist of the CENVAT Scheme (earlier known as the MODVAT Scheme). CENVAT Credit Rules, 2004 have been notified to regulate the availment and utilisation of the CENVAT Credit. The salient features are as follows:
♦ Full credit in respect of Excise duty paid on inputs can be taken on receipt of inputs. Credit in case of input services can be availed only if the payment for the services value and the service tax has been made.
♦ Pay an 'amount' equal to proportionate CENVAT credit attributable to exempted final product/exempted output services, as provided in Rule 6(3A) - Rule 6(3)(ii) of CENVAT Credit Rules.
♦ Maintain separate accounts for inputs and pay 'amount' as determined under Rule 6(3A) in respect of input services — Rule 6(3)(iii) of CENVAT Credit Rules as inserted w.e.f. 1-4-2011.
♦ Documents on the basis of which credit can be availed are specified under Rule 9 of CENVAT Credit Rules, 2004.
♦ Registered first and second stage dealers permitted to pass on CENVAT Credit subject to the following prescribed procedure.
♦ Concept of input service distributor to be used for using the service tax credit for services consumed at head office for payment of excise duty at the factory.
J. CENVAT credit on capital goods
In respect of capital goods only 50% credit can be taken in the first year of receipt (by an unit other than SSI unit) and the balance 50% can be taken in the subsequent year provided that the said capital goods is in use.
However, in the case of Nidhi Pipes Limited vs. CCE, Chandigarh - II 2016 (343) E.L.T. 1014 (Tri. - Chennai), it has been held that in case the assessee has taken CENVAT Credit of 100% instead of 50%, then they should compensate with Interest for such intervening period.
If capital goods are partly used for exempted goods and party for dutiable final products, entire CENVAT credit of duty paid on capital goods is available. CENVAT credit of duty on capital goods is not allowable only when it is exclusively used for manufacture of final products [Rule 6(4)].
K. Job work and CENVAT
The input on which credit has been availed can be removed without payment of duty to any job worker for carrying out further process and brought back to the factory after carrying out process.
L. SSI exemption
SSI Exemption up to ₹ 1.5 crore is available to notified products. It means no duty is payable to goods eligible for SSI exemption up to ₹ 1.5 crore on notified products.
However, once turnover exceeds ₹ 4 crore in current year, then, no SSI benefit is available in next financial year.
For computing value of clearances of ₹ 1.5 crore and ₹ 4 crore criteria are different. However, in both cases value of deemed manufactured goods should be included.
(a) For computing value of clearances of ₹ 1.5 crore, clause 3 of NT 8/2003 is applicable, i.e., goods exempted on value/quantity not to be included.
(b) For computing value of clearances of ₹ 4 crore, clause 3A of NT 8/2003 is applicable, i.e., goods exempted on account of clearances to FTZ/SEZ/100% EOU/EHTP/STP/UN or International organisations for official use and clearances on payment of duty under others brand name and captively consumed goods are not to be included. Further, Clause 3A does not envisage exclusion of value of clearances which are exempt by NT 50/2003, i.e., units located in Himachal Pradesh etc.
M. SSI Exemption and Brand name
SSI unit located in area other than rural area is not entitled to SSI exemption if they are using the Brand name or Trade name of other person. "Brand name" or "Trade name" means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person.
Following specified goods in the nature of packing material bearing brand name of others are eligible for SSI benefit namely; printed cartons of paper or paper boards, metal container, HDPE woven sacks, adhesive tapes, stickers, PP caps, crowns, corks, metal labels, plastic bags, printed laminated rolls, plastic containers, plastic bottles.
N. Rural Area exemption
SSI unit located in rural area is entitled to SSI exemption even if they are using the Brand name or Trade name of other person.
O. SSI unit and CENVAT credit
SSI availing exemption up to ₹ 1.5 crore is not entitled to avail CENVAT credit of input on goods and services, however they can avail full credit on capital goods in the same year. However, they can utilise the same once they start paying normal duty.
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