MANUFACTURE AND EXCISIBILITY

 Section 3 of Central Excise Act, 1944.

 Basis of Levy.
 What is Manufacture?.
 CE Law gives only a truncated definition
for manufacture – Includes Deemed
Manufacture.
 Widest definition is available in Foreign
Trade Policy – but that is not applicable to
CE Law.
…contd
The statutory definition of
manufacture in central excise act
 “Manufacture” includes any process—
(i) Incidental or ancillary to he completion of a
manufactured product;
(ii) Which is specified in relation to any goods
in the section or chapter notes of the First
Schedule to the central excise tariff as
amounting to manufacture
Continued……..
 (iii) Which in relation to the goods specified
in the Third Schedule involves packing or
repacking of such goods in a unit container
or labeling or re-labeling 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
Continued……
 And the word “manufacturer” shall be
construed accordingly and shall
include not only a person who employs
hired labor in the production or
manufacture of excisable goods, but
also any person who engages in their
production or manufacture on his own
account.
 …contd
 Leading cases – Decisions of Supreme
Court.
- ‘Formation of a new Article’
Vide Hawkins Cookers Ltd Vs Collector [-
1997 (96) ELT 507 SC.
- ‘A new distinct and commercial
commodity.’
Vide TISCO V.O.I[2004(164) ELT 372 SC.
The accepted wisdom about
manufacture in central excise
 Manufacture implies a change; but not
every change is a manufacture. A new
product should emerge from the raw
material stage with a new name, new use
and marketability.
2) Ingredients of excisablity

 Fact of Manufacture.
 Entry availability in CE Tariff.
 Marketability.
Manufacture in central excise
 Two concepts
 Actual substantive manufacture & Deemed
manufacture
 Actual substantive manufacture – does it
include mere processing?
 Deemed manufacture
What is deemed manufacture?
 Process or activity specified in section or
chapter notes – for example:
 Labeling or re labeling of containers
 Repacking from bulk packs to retail packs
 Adoption of any other treatment to render
the product marketable to the consumer
Continued….
 Addition of chemicals and other ingredients to
certain products of tariff heading 3808
 In relation to products of heading no 3920 &
3921 – process of metallization or lamination or
lacquering
 In relation to some products of heading 7013 –
the process of printing , decorating or
ornamenting
Continued….
 In relation to flat-rolled iron & steel
products under chapter 72 – the process
of hardening or tempering
 In relation to articles of iron and steel
under chapter 73 – the process of
galvanization
Continued….
 In relation to motor vehicles under chapter
no 87 – building a body or fabrication or
mounting or fitting of structures or
equipment on the chassis falling under
8706
 3) Select Decided cases in
Manufacture
 AffixingInformation stickers on goods
imported does not amount to Manufacture.
-CCE Vs Proctor & Gamble Home Products
2004 [167] ELT 173 – [TRI – D].
 Erection of imported Power Plant does not
amount to manufacture.
-Spectrum Power Generating Co. Ltd VCCE
– 2004(177)ELT 968 [Tri-D].
 Conversion of old, diesel operated Buses
into CNG Buses does not amount to
Manufacture.

…contd
 …
contd

 -Nugas Technologies India (P) Ltd. VCCE [-

171 ELT 376 Tri-D].
 Gold Plating of watch cases does not
amount to Manufacture.
-Commissioner Vs Divya cases –
2004[169]ELT225[Tri-D]
 Mixing of chocolate Powder with Sugar and
Skimmed Milk to form drinking chocolate
does not amount to Manufacture – CCE Vs
Fountain Consumer Appliances Ltd – 2004
[171] ELT 329 (Tri – Chennai)
 …
 contd
Branding, polishing and affixing MRP on locks
acquired from artisans does not amount to
Manufacture.
Key locks (I) P Ltd Vs CCE – 2004(165) ELT,74 –(Tri-
D).
 Printing of date of Manufacture is a Legal
requirement and hence it is a Process of
manufacture.
- Surat Beverages (P) Ltd Vs Commissioner
2004 (165) ELT313 [Tri- Mumbai].
 Rubber lining/ Painting/ Cutting/ Welding/of Iron
and Steel pipes and Tanks does not amount to
manufacture.- Tega (I) Ltd Vs CCE –
2004(164)ELT390 [SC]
 …contd
 Transformation of Catalyst into spent Catalyst
does not amount to Manufacture.
-CCE Vs Deepak Fertilizers & Petro Corp.Ltd.-
2004 (178)ELT 686 [Tri-M].
 The Test of Marketability is a Burden of
Revenue.
-FGP(I) Ltd Vs U.O.I – 2004(168) ELT 289 [SC]
 Testing/ Gardening/ Certification of Helium gas
cylinders before Sale is an activity amounting to
manufacture.
- Commissioner Vs Air liquide North (I) P. Ltd -
2004[174]ELT 201 [Tri - Del].
 4]Valuation – The Crux of the matter
 Tending to become more like an opinion poll.
 Section 4 and 4A/ Valuation Rules 2000.
 What is Transaction value?.

Requirements for acceptance of Transaction Price

 Sale of goods.
 For Delivery, at the time and place of removal
 Seller and Buyer not related.
 Price is the sole consideration for sale.
 The legal fiction created by the definition of time of
removal – let us note this
A tour of the valuation rules 2000
 The official name for the rules is this – Central
Excise Valuation ( Determination of price of
excisable goods) Rules, 2000
 These rules apply when any of the ingredients of
transaction value is missing
 The rules are used for ascertaining the “normal
transaction value” at which the greatest
aggregate quantity of goods are sold
The valuation rules….
 They are 11 rules in all
 Rule 1 – name & entry into force from 1-7-
2000
 Rule 2 – definitions
 Rule 3 – exhortation to decide the value
(when the transaction value is unavailable
or unacceptable)
The valuation rules….
 Rule 4 – ascertainable equivalent price of
such goods – nearest in time to the time of
removal of goods from the factory –
margin adjustment on account of
differences in dates of delivery allowed
 Rule 5 – cases when the delivery of goods
is at a place other than the factory
The valuation rules…..
 Rule 6 – when there is additional
consideration to the sale not reflected in
the transaction price charged – solution:
monetize the additional consideration and
add it up to the tax value
 Rule 7 – Depot / branch sales – solution:
adopt the nearest prevailing depot price
Valuation rules….
 Rule 8 – captive /self consumption/use –
solution: tax value is 110% of the cost of
production of the goods (as per CAS 4)
 Rule 9 – sales to related persons –
solution: resale price of related person /
110% of the cost where the related person
does not resell but consumes or uses for
self
Valuation rules….
 Rule 10 – sales to inter-connected
undertakings /holding company /subsidiary
company – solution:: do as per rule 9
above.
 Rule 10A – job work on behalf of a
principal manufacturer – solution: resale
price of the principal manufacturer
 Rule 11 – residual method
 5) Exclusions From Value
 -By Statute
 Excise Duty.
 Sales Tax.
 Other taxes such as Octroi, entry tax.
 -By Court / Tribunal Decisions
 Trade Discount.
 Cash Discount/ Prompt Payment discount.
 Turn over discount.
 Quantity discount.
 Year – end/ Bonus discount. … contd
 …contd
 Freight and Freight insurance, including equalised
Freight.
 Bought – out items [not integral/ critical to
Product].
 Carry bags for Laptops.
 Syringe bought out and supplied with P & P
medicines.
 Computer Software ( discuss with NCR case)
 Third party Inspection charges at the instance of
and borne by the buyer.
 Excess of Freight collected over actual
expenditure on freight.
 Interest on receivables …contd
 …contd
 Erection, Commissioning charges if products
emerge as immovable property.
 Free items supplied with products.
 Advertising charges borne by the client – buyer
on his own account.
 Additional warranty charges.
 Notional interest on Advances/ deposits from
buyers not influencing the price.
 Straw supplied with Juice.
 Rental paid on durable and returnable container
 Liquidated damages received for non- lifting of
molasses
 6) Inclusions into Value
 -By Statute
 Advertising.
 Publicity.
 Marketing/ Sales Promotion.
 Storage/ Outward handling.
 Servicing.
 Warranty.
 Commission.
 -By Tribunal/ Court Decisions
 Dharmada.
 Design/ Development/ Engineering. …contd
 …contd

Royalty.
Amortised Cost of tools/ dies/ moulds
received from buyers.
Interest on inventory.
Value of waste retained by Jobworker.
Packing.
Cost of material supplied by Customer.
 7) Valuation When goods are
assembled at site
 Isit a Composite/ turnkey/ works
contract?
 Excise duty is not leviable on
immovable property but on Parts /
Components/ goods already
manufactured.
 Case Studies – Lifts/ Boiler Plants/
Industrial Furnaces.
 8) Valuation in Jobwork
 When does Jobwork amount to Manufacture?.
 Labor/ Jobwork charges + Raw material costs
are includible in assessable value.
 Ujjagar Prints etc Vs U.O.I.
 Empire Industries Vs U.O.I.
 Pawan Biscuits Co. Vs CCE.
 Is buyer’s profit margin includible in Assessable
Value in the hands of Jobworker?.
 Food Specialities Ltd Vs U.O.I.
Continued…….
 The impact of new valuation rule 10A
 The Central Board of Excise & Customs
circular no 902/22/2009 dated 20-10-09 in
the case of vehicle body builders
 Job work exemption under notification no
214/86
 9) MRP based Valuation
 Section 4A/ weights & Measurements Act.
 MRP minus prescribed abatement is the
assessable value.
 Region – wise MRP accepted
 If different MRPs are printed, the maximum
MRP will be taken as the basis.
 Sale of phones with MRP fixed, to customer,
by phone companies U/S 4A only.
 Multi – Piece Packages.
 10) Refunds & Rebates
 Section 11B/ Rule 18/ cenvat Rule 5/ Section
11BB.
 One year time limit / Provision for Interest.
 Theory of unjust enrichment.
 Refund claim thro’ credit notes – what
happens?
 Mafatlal Industries Vs U.O.I.
 L&T Sargent Lundy Ltd Vs CCE
 11)SSI Exemption
 Notification no: 8/ 2003 as amended.
 Basic ceiling Rs.1.5 Cr.
 Outer ceiling Rs. 4 Cr.
 Only listed goods benefit.
 Use of Trademark/ symbol/ brand of
another person disentitles.
 …contd

 Perennial issues – Clubbing of

Clearances and use of Brand name.
 Use of Foreign – owned Trade mark/
Brand name by Indian SSI Units.
 Clearances Excluded / included for
Computing Rs.1.5 Cr and Rs 4 Cr.
Value Caps.
Returns Raj in central excise
 ER 1 – monthly – due by the 10th of the
following month
 ER 2 – monthly, for EOU – due by the 10th
of the following month
 ER 3 – quarterly for SSI units – due by
the10th of the following quarter
Continued….
 ER 4 – Annual financial statement for units
paying INR I crore in excise – due by the
30th of April of the following year
 ER 5 – CENVAT – Annual Return of
information relating to principal inputs –
due by 30th April of the following year –
some class of manufacturers given
exemption
Continued……
 ER 6 – monthly return of principal cenvat
inputs due by the 10th of the following
month – some class of manufacturers
given exemption
 ER 7 – Annual Installed capacity
statement – due by the 30th April of the
following year
Important procedures in central
excise
 Issue of invoice under Rule 11 of central excise
rules 2002
 Provisional assessment under Rule 7 &
finalization
 Time and manner of payment of duty under Rule
8
 Remission of duty under Rule 21 for
damaged/defective/unfit/unmarketable goods
Important procedures in central
excise
 Credit of duty paid on sales returns under
Rule 16
 Rule 16-A – removal of any inputs as such
or partially worked outside the factory for
testing, repair etc
 Rule 16-B – removal of semi-finished
products for further work / finishing and
return
Important procedures in central
excise
 Rule -16C – removal of finished goods
outside for test etc & return
 Export without payment of duty as well
under claim for rebate of duty – LUT
(UT1), Bond, ARE
 Removal of excisable goods without duty
for export warehousing under Rule 20
Penal provisions in central excise –
simply draconian & colonial
 Prosecution for select offenses under
section 9 of the Act
 Demand of duty under section 11A with
normal time limit of one year and 5 years
for cases where suppression of facts by
the assesses is alleged
 Time limit for adjudication of SCN
Penal provisions in central excise

 Interest for delayed payment under section

11AB
 Penalty equal to duty under section 11AC
in cases involving suppression of facts.
 Penalty under Rule 25 – maximum upto
duty or Rs 2000/-whichever is greater, with
confiscation of the goods
Penal provisions in central excise
 Rule 26 – penalty for abettors ,
transporters, issuers of false invoices –
max upto duty or Rs 2000/- whichever is
greater
 Rule 27 – general penalty where no
penalty is specified for any offense in the
rules, max of Rs 5,000/- with possible
confiscation of the goods
Penal provisions in central excise
 Tax default – penalty under rule 8 – daily
clearance on payment of duty in cash, plus
prohibition of using cenvat credit, till dues
are paid up.
 Rule 12CC – blanket powers given to the
department to impose restrictions on
Manufacturers and Dealers involved in tax
evasion
Penal provisions in central excise

 Section 11DDA – power to order

provisional attachment of property to
protect “Revenue” during he pendency of
proceedings
 Section 14 – power to issue summons
 Section 13 – power to arrest
CENVAT CREDIT
 The foundation of the value-added tax
system
 Avoids cascading effect of tax on tax on
tax
 Integrates goods and services
 Cenvat credit Rules 2004 – apply to
Manufacturers & Service providers
Cenvat credit rules – what is the
gain?
 Input stage duty relief in the form of tax
credit to –
 Capital goods
 Inputs
 Input services
Cenvat credit – Capital goods
 All goods falling under the following
chapters –
 Chapter 82 – tools etc
 Chapter 83 – miscellaneous articles of
base metals
 Chapter 84 – machinery, equipment etc
Capital goods…..
 Chapter 85 – electrical / Electronic machinery &
equipment etc
 Chapter 90 – optical, photographic, medical ,
checking, measuring equipment etc
 Abrasives under heading no 6805
 Grinding wheels & the like under heading 6904
Capital goods……
 Pollution control equipment
 Components, spares & accessories of the
goods for the above two categories
 Moulds, dies , jigs and fixtures
 Refractories, and Refractory materials
 Tubes, pipes and fittings thereof
 Storage tank
Capital goods…
 Used in the factory of the manufacturer of
final products, but does not include any
equipment or appliance used in the office
 Or, used for providing output service
 Motor vehicles registered in the name of
the following service providers are allowed
– courier agency, GTA, Rent a cab
operator , tour operator, outdoor caterer
Capital goods….
 Ownership of capital goods is not required
for a manufacturer or service provider
except for the motor vehicle credit
 Credit to be taken for 50% of the duty in
the first year and the rest in any
subsequent year
 Depreciation under Income tax prohibited
Capital goods…..
 The 50% restriction does not apply to special
CVD of 4% paid on imported capital goods
 Removal of capital goods requires reversal of
credit – 2.5% depreciation on credit for every
quarter of use
 Removal on scrapping of capital goods requires
payment of duty on transaction value
Capital goods….
 Provision for removal of capital goods for
test, repair etc
 Moulds, dies , jigs and fixtures can be
deployed at the premises of the job worker
 Capital goods can be produced and used
in the factory of production for
manufacture of excisable goods – duty
exempt
Capital goods….
 Capital goods on which credit is taken
should not be solely used in the
manufacture of exempted goods
 Capital goods which are not defined in the
CCR but used in the factory of production
will qualify for credit as “Inputs”. – Benco
Products Vs CCE – CESTAT larger bench
decision
INPUTS
 Wide definition in the CCR
 “Inputs” means all goods except light diesel oil,
high speed diesel and petrol
 Used in or in relation to the manufacture of final
products
 Whether directly or indirectly
 Whether contained in the final product or not
Inputs….
 Inputs include ---
 Lubricating oils
 Greases
 Cutting oils
 Coolants
 Accessories of the final products
Inputs…
 Goods used as…
 Paint or packaging material or as fuel or
for generation of electricity or steam
 Used in or in relation to the manufacture of
final products or for any other purpose
 Within the factory of production
Inputs……
 For service providers:
 All goods except light diesel oil, high speed
diesel , petrol and motor vehicles
 And used for providing output service
 Inputs will not include cement, angles and
channels, CTD / TMT bars & other items used
for construction in the factory / building or in
laying of foundation or structural support of
capital goods
Input services
 For manufacturers:
 Any service used by a manufacturer
 Whether directly or indirectly
 In or in relation to the manufacture of final
products
 And clearance of final products upto the
place of removal
Input services…..
 For service providers:
 Any input service used by a provider of
output service for providing an output
service
Input services allowed to both
manufacturers to service providers
 Services used in relation to –
 Setting up
 Modernization
 Renovation
 Repairs
 Of a factory or the premises of the service
provider
Common services….
 Or an office relating to such factory or the
premises
 Advertisement
 Sales promotion
 Market research
 Storage upto the place of removal
 Procurement of inputs
Common services….
 Activities relating to Business “such as” –
 Accounting
 Auditing
 Financing
 Recruitment and quality control
 Coaching and training
Common services….
 Computer networking
 Credit rating
 Share Registry
 Security
 Inward transportation of inputs & capital goods
 Outward transportation upto the place of
removal
Important features of cenvat credit

 Input credit can be availed immediately on

receipt of the goods accompanied by the
relevant invoice
 No one-to-one correlation between input
and output
 Cenvat credit is a legal and vested right
Important features of cenvat credit

 Input service tax credit should be taken

only after settling the service supplier
invoice with value and tax
 Transfer of credit on transfer of business
allowed
 Transitional credit
Important features of cenvat credit

 Importance of new rule 6 in CCR 2004

 Options there under
 Maintain separate accounts
 Or pay 5% on the value of exempted
goods and six % on the value of exempted
services
Important features of cenvat credit
 Or take credit proportionate to the taxable
turnover as per formula prescribed
 Inputs & capital goods & input services
should not be exclusively utilized in the
manufacture / provision of exempted
goods or exempted services
 Clearances to EOU/SEZ/BTP/STP/EHTP
& exports will not require reversal of credit
Important features of cenvat credit

 Storage of inputs outside the factory

allowed subject to applying for the same
 Significance of tax invoice in CENVAT
credit system
 First stage dealer/second stage
dealer/input service distributor
Central sales tax
 Current rate at 2%
 Expected to go when GST is introduced
 Retention of “C” Form
 Vat credit usage against CST
 Sale in the course of export and import
 CST & Works contract