Central Excise

Basic Concepts
V S Datey

Direct and Indirect Taxes

Tax is the price we pay for civilised society

Justice Holmes of US Supreme Court

Taxes broadly classified as direct and indirect
Direct taxes are paid directly by assessee to
Government while indirect taxes are paid
indirectly

Foundation of all Laws in

India
Constitution of India is foundation of all

laws in India
It is mother of all laws in India, law how to
make laws
All other laws and Parliamentary or
Government actions are subordinate to
Constitution.
Act contrary to provisions of Constitution is
Ultra vires the Constitution and void

Constitutional
Background
India, that is Bharat, shall be a Union of States
[Article 1(1)]
Article 246 read with Seventh Schedule gives
bifurcation of powers between Union and
State List I Union List
List II State List
List III Concurrent List

Taxation
in
Union
List

Entry No. 82 - Tax on income other than

agricultural income.
Entry No. 83 - Duties of customs
including export duties.
Entry No. 84 - Duties of excise on
tobacco and other goods manufactured
or produced in India except alcoholic
liquors for human consumption, opium,
narcotic drugs, but including medicinal
and toilet preparations containing
alcoholic liquor, opium or narcotics.
- - Continued

Union List (Continued)

Entry No. 85 - Corporation Tax.
Entry 92 - Tax on advertisements in

newspapers
Entry 91 - Stamp duty on specified
transactions
Entry No. 92A - Taxes on the Sale or
purchase of goods other than newspapers,
where such sale or purchase takes place in
the course of Interstate trade or
commerce.

List I (Continued)
Entry No. 92C Tax on services (Entry passed

but not yet notified and hence not effective)

Entry No. 97 - Any other matter not included
in List II, List III and any tax not mentioned in
list II or list III [This is residual entry]
Central Excise duty is levied under Entry 84
and 97

Four Pillars of Central

Excise
Duty Liability
Valuation
Classification of goods
Cenvat
General excise duty rate is 12.5% - no

education cess

Charging Section of Central Excise

Section 3 of Central Excise Act (often called

the Charging Section ) states that There

shall be levied and collected in such
manner as may be prescribed duty of excise
on all excisable goods (excluding goods
produced or manufactured in special
economic zones) which are produced or
manufactured in India - . - . -'

Basic Requirements for excise duty

Duty is on goods
Goods must be excisable goods
Goods must be manufactured or produced
Such manufacture or production should be in

India

What are goods

Must be movable and marketable.
Actual marketing not necessary.
Marketable Not marketed
Mere mention in Central Excise Tariff not

sufficient SC in Bhor Industries and Moti

Laminates

Illustration of Goods
Electricity
Water
Software packaged and tailor made
Air
Photograph

Dutiability of waste and

scrap
Waste and scrap is final product for excise.
Waste and scrap are goods if these are

normally salable.
Waste and scrap is dutiable only if
manufactured.
Waste and scrap is dutiable only if it is
specified in Central Excise Tariff

Plant and machinery erected at site

In Triveni Engineering v. CCE AIR 2000 SC

2896 = 120 ELT 273 (SC), it was observed,

'The marketability test requires that the goods
as such should be in a position to be taken to
market and sold. If they have to be separated,
the test is not satisfied'. [Thus, if machine has
to be dis-assembled for removal, it is not
goods and duty cannot be levied].

Excisable Goods
Section 2(d) - Excisable Goods means Goods

specified in the Schedule to Central Excise

Tariff Act, 1985 as being subject to a duty of
excise and includes salt.
Goods include article capable of being sold.
Nil Duty and Exempt from Duty Both are
excisable goods

Manufactured or
Produced
Production is broader than manufacture.

Production included manufacture

In both production and manufacture, new and
identifiable product should emerge
Usually, production term is used for new
product by natural process. Manufacture
derived from manu i.e. by hands.

Production
Items like ore, asbestos, coffee, tea, tobacco,

dairy products etc.

live products like horse, fish, flowers etc.
By-products, scrap etc. which are not really
'manufactured' but they do get 'produced'
It also covers manufactured goods as term
produced is broader than manufacture.

Meaning of Manufacture
Manufacture as specified in various Court

decisions i.e. new and identifiable product

having a distinctive name, character or use
must emerge or
Deemed Manufacture (a) Process
amounting to manufacture (b) Products
covered under MRP provisions

Manufacture as defined by Courts

Union of India v. Delhi Cloth Mills Co. Ltd. AIR

1963 SC 791 = 1 ELT (J199) (SC five member

constitution bench) - manufacture means
bringing into existence a new substance.
Manufacture is end result of one or more
processes, through which original commodity
passes. Manufacture implies a change but
every change is not manufacture. A new
and different article must emerge having
a distinctive name, character or use.

Issues relating to
Manufacture
Repairs, testing
Packing, Labelling not manufacture except

in case of deemed marketability

Assembly of computer components
Assembly of CKD packs

Deemed Manufacture
Processes specified as amounting to

manufacture in Central Excise Tariff About

35 processes in different Chapters
Repacking, relabelling, putting or altering MRP
is deemed manufacture in case of about 110
articles covered under MRP valuation
provisions

Taxable Event in Central

Excise
Manufacture or production of excisable goods

in India is taxable event.

Distinction between sales tax and central
excise.
Captive consumption, free samples,
intermediate product
Ownership irrelevant in Excise. Excise Duty
payable on intrinsic value of goods

Manufacturer
Section 2(f) - the word manufacturer shall be

understood 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.

Duty Liability
Duty liability is on manufacturer rule 4(1)

of Central Excise Rules

Exceptions (a) Molasses produced in
Khandsari sugar factory (b) goods in
warehouse (c) Job work under Notification No.
214/86-CE

Who is Manufacturer
Person who actually brings new and

identifiable product into existence

Raw material supplier is not manufacturer.
Job worker is the manufacturer.
Brand name owner is not manufacturer.
Loan licensee is not manufacturer

Principal to Principal
Relation
Contractor undertaking contract work within

the factory is not manufacturer

Example Wheat given to chakkiwala for
grinding into wheat powder
Specialised agency doing fabrication within
factory

Manufacture must be in
India
Imported goods
Imports of CKD packs assembly in India will

not be manufacture

Why Classification?
Classification tells you rate of duty, while

valuation tells you on what value that rate should

apply
Thousands of products Not possible to list all
and state duty of each product
Goods have to be classified and sub-classified
and then rate of each sub-classification is to be
specified
Tariff to specify rate of duty payable on each
Article - Central Excise Tariff Act and Customs
Tariff Act.

Background of Tariff
Harmonised Commodity Description and

Coding System developed by World Customs

Organisation (WCO)
Based on International convention of
Harmonised System of Nomenclature (HSN).
Indian Customs adopted this nomenclature
w.e.f. 28-2-1986. Central Excise Tariff also
adopted HSN based classification w.e.f. 1-31986.
Eight digit classification

Arrangement of Tariff
Classification of goods from groups to sub-

groups to sub-sub groups

Arrangement similar to menu in a Hotel
All goods classified in 20 Sections in Excise
Tariff and 21 Sections in Customs Tariff.
Sections are divided into 96 chapters in
Excise Tariff and 98 Chapters in Customs
Tariff. Chapter 77 is blank in both Tariffs.

Headings and sub-headings within

the Chapter
Each chapter and sub-chapter is further

divided into various headings depending on

different types of goods belonging to same
class of products.
The tariff is designed to group all goods
relating to same industry and all the goods
obtained from the same raw material under
one Chapter in a progressive manner as far as
possible.

Eight Digit
classification
First two digits indicate chapter number. Two

more digits are added to make headings.

Thus, headings have four digits. Further 2
digits are added for sub-classification, which
are termed as sub-headings. Last 2 digits are
added for sub-sub-classification, which is
termed as tariff item. Rate of duty is
indicated against each tariff item and not
against heading or sub-heading.
Rules for interpretation of Tariff

Exemption from Excise

Duty
Government can grant exemption from excise

duty partial or complete conditional or

unconditional by issuing a notification
section 5A(1) of CEA and section 25(1) of
Customs Act
Tariff has to be read along-with exemption
notification to find exact rate of duty

Exemption Notification
Notifications are issued by Government by

notifying in Official Gazette

They become effective on the date issued
[section 5A(5) of CEA and section 102(4) of
Customs Act]
Notification subordinate to Act. Notification
cannot be with retrospective effect
CE, CE(NT), Cus, Cus(NT) and Ser suffix to
indicate type of Notification

Tariff Rate and Effective

Rate
Tariff Rate is as prescribed in Tariff
Effective Rate is as specified in exemption

Notification
Nil duty means the Tariff itself specifies duty
as Nil
Exempt from duty means exempted by a
notification

Some Exemption
Notifications
SSI Exemption 8/2003-CE
Exemption to goods manufactured in

backward areas like North-East Region, J&K,

Sikkim and Kutch
Goods supplied to EOU

Overview of SSI
Exemption
Notification No. 8/2003-CE dated 1-3-2003
Unit whose turnover was less that Rs 4

crores in previous financial year are

entitled to full exemption upto Rs 150
lakhs in current financial year.
Goods manufactured by an SSI unit with
brand name of others are not eligible for
SSI concession, unless goods are
manufactured in a rural area.

Valuation
After determining that excise duty is payable,

rate of excise duty is found out on the basis of

Central Excise Tariff Act read with relevant
exemption notification.
Next issue is valuation i.e. value on which
excise duty is payable.

Excise duty payable on one of

following basis
Specific duty, based on some measure like

weight, volume, length etc.

Duty as % of Tariff Value fixed under section 3(2)
Duty on basis of production capacity section
3A of Central Excise Act
Duty based on basis of Maximum Retail Price
printed on carton after allowing deductions section 4A of CEA
Duty as % based on Assessable Value fixed
under section 4 (ad valorem duty) (If not
covered in any of above)

MRP Based Valuation

In case of about 144 products, duty is payable

u/s 4A of Central on basis of MRP printed on

the package, after allowing abatement at
specified rates. MRP should be inclusive of all
taxes and duties.
For example, if MRP is Rs 100 and abatement
is 35%, value will be Rs 65 for excise
purposes, irrespective of actual sale price

Applicability of MRP Valuation

provisions
The provision applies only when product is

package intended for retail sale and is

specified in a notification issued u/s 4A of CEA.
MRP provisions u/s 4A of CEA are overriding
provisions (even for job work)
Even in case of products covered u/s 4A,
where MRP provisions are not applicable,
valuation will be on basis of value u/s 4 i.e.
Assessable Value e.g. wholesale package,
industrial or institutional consumers, exports

Composition Scheme
Compounded levy scheme under rule 15 of

Central Excise rules, provides for payment of

duty on basis of production capacity. It is an
optional scheme and not compulsory like
production capacity basis scheme.
The scheme is presently applicable to
stainless steel pattas/patties and Aluminium
circles. These articles are not eligible for SSI
exemption.

Duty on Production
Capacity
Section 3A of CEA provides for payment of

duty on basis of production capacity, without

any reference to actual production. Production
capacity will be determined as per Rules.
Scheme compulsory and not optinal
Pan masala , gutkha and chewing tobacco are
covered under these provisions.
Reduction if factory closed for 15 days or
more

Tariff Value
In some cases, tariff value is fixed by Government

from time to time. This is a Notional Value for

purpose of calculating the duty payable. Once
tariff value for a commodity is fixed, duty is
payable as percentage of this 'tariff value' and not
the Assessable Value fixed u/s 4. This is fixed u/s
3(2) of Central Excise Act.
In customs, tariff values fixed for edible oils

Ad valorem duty
This is residual method of valuation
Duty is payable on value as per section 4 of

Central Excise Act

Section and Rules well drafted to avoid
manipulation in value
Basic principle is that excise duty is payable
on intrinsic value of goods ownership is
irrelevant

When transaction value is

assessable value
The goods should be sold at the time and

place of removal.
Buyer and assessee should not be related.
Price should be the sole consideration for the
sale.
Each removal will be treated as a separate
transaction and 'value' for each removal will
be separately fixed.

Transaction Value excludes taxes

Amount of duty of excise, sales tax and other

taxes, if any, actually paid or actually payable

on such goods is deductible
Only taxes actually paid or payable are
allowed as deduction.
If goods are cleared without payment of duty,
the price is taken as cum duty price and
excise duty payable should be calculated by
back calculations

Inclusions in Assessable
Value
Packing

charges and design

charges related to manufacture.
Price escalation after clearance,
but not when price was final at
the time of clearance interest
Transport charges upto place of
removal
are
includible
in
assessable value.
Notional interest on advances is

Exclusions from Value

Any Trade discount is

allowable as deduction from

assessable value.
Cash discounts
Taxes are not includible in
value
Outward freight after place of

Valuation Rules
If transaction value is not acceptable,

valuation is required to be done as per

Valuation Rules [Section 4(1)(b) of Central
Excise Act and Valuation Rule 3]
Valuation can be done on value of such
goods (i.e. goods of same class of same
manufacturer) [Rule 4]
Valuation of free samples, when price not
sole consideration, related party
transactions, depot sales

Valuation in case of captive

consumption
In case of captive consumption, duty is

payable on basis of cost of production plus

10%. Cost of Production should be calculated
on basis of CAS-4 [Rule 8]

Job Work
Since excise duty is on manufacture, duty

will be payable even if goods are

manufactured on job work basis, on
intrinsic value
As per rule 10A of Valuation Rules, duty is
payable on the basis of price at which raw
material supplier sales the final product in
the market.
If product is covered under MRP, duty is
payable as per section 4A.

Exemption to Job work

Job work is exempt if material is sent to job

worker under Cenvat Credit Rule 4(5)(a).

Job work is exempt if material was sent under
Cenvat provisions or under notification No.
214/86-CE.
Service tax is payable on Job work if (a)
Activity is not manufacture or (b) Material is
not sent under Cenvat provisions

Basics of Vat
Vat is tax on value added
Broadly, value added is difference between

value at the output stage and value at the

input stage

Conventional Mode of tax on

Goods
Detail
Purchases
Value
Added
Sub-Total
Add Tax
10%
Total

100

110
40

165
35

100
10

150
15

200
20

110

165

220

Transaction with Vat

Details
Purchase
s
Value
Added
Subtota
l
Add Tax
Total

Transaction without
VAT

A
-

B
110

100

Transaction With VAT

A
-

B
100

40

100

40

100

150

100

140

10
110

15
165

10
110

14
154

Highlights of Cenvat
Instant Credit You need not wait till actual

use
One to one co-relation not required in
Vat/Cenvat
Credit on inputs, input services as well as
capital goods
Destination principle

Document for availing Cenvat

Credit
Original or Duplicate Invoice (in case of

manufactured goods), Dealers Invoice, Bill of

Entry (in case of imports), Supplementary
Invoice
Xerox not permitted. Endorsed Invoice/Bill of
Entry permissible
Defect in document Permission of AC/DC
required to avail Cenvat Credit

Core procedures in Central Excise

Registration PAN based Registration Number
Daily Stock Account
Invoice for clearance
Monthly/quarterly payment of duty
Records and returns

Other procedures
Exports
Receipt of goods for repairs/reconditioning
Provisional assessment
Warehousing of goods
Adjudication, appeals and settlement

Thanks
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