GROUP 1(Central Excise).Doc

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CHAPTER I

AN OVERVIEW OF CENTRAL EXCISE

Brief history and developments -

Central Excise duty is an indirect tax levied on goods manufactured in India. The tax is

administered by the Central Government under the authority of Entry 84 of the Union List

(No. 1) under Seventh schedule read with Article 246 of the Constitution of India.

The Central Excise duty is levied in terms of Central Excise Act, 1944 and the rates of duty,

ad valorem or specific, are prescribed under the Schedule I and II of the Central Excise Tariff

Act, 1985. The taxable even under the Central Excise law is 'manufacture' and the liability

of Central Excise duty arises as soon as the goods are manufactured. The Central Excise

Officers are also entrusted to collect other types of duties levied under Additional Duties of

Excise (Goods of Special Important) Act, Additional Duties of Excise (Textiles and Textile

Articles) Act, Cess etc.

Till 1969, there was physical control system wherein each clearance of manufactured goods

from the factory was done under the supervision of the Central Excise Officers. Introduction

of Self-Removal procedure was a watershed in the excise procedures. In 1969, the assessees

were allowed to quantify the duty on the basis of approved classification list and the price list

and clear the goods on payment of appropriate duty.

In 1994, the gate pass system gave way to the invoice-based system, and all clearances are

effected on manufacturer's own invoice. Another major change was brought about in 1996,

when the Self-Assessment system was introduced. This system is continuing today also. The

assessee himself assesses his Tax Return and the Department scrutinizes it or conducts audit

to ascertain correctness of the duty payment. Even the classification and value of the goods


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were to be merely declared by the assessee instead of obtaining approval of the same from the

Department.

In 2000, the fortnightly payment of duty system was introduced for all commodities, an

extension of the monthly payment of duty system introduced the previous year for Small

Scale Industries.

In 2001, new Central Excise (No.23) Rules, 2001 have replaced the Central Excise Rules,

1944 with effect from 1st July, 2001. Other rules have also been notified namely, CENVAT

Credit Rules, 2001, Central Excise Appeals rules, 2001 etc. With the introduction of the

new rules several changes have been effected in the procedures. The new procedures are

simplified. There are less numbers of rules, only 33 as compared to 234 earlier. Classification

declaration and Price declarations have also been dispensed with, the CENVAT declaration

having been earlier dispensed with in 2000 itself.

Administration of Central Excise -

The Central Excise law is administered by the Central Board of Excise and Customs (CBEC

or Board) through its field offices, the Central Excise Commissionerates. For this purpose,

the country is divided into 23 Zones and a Chief Commissioner of Central Excise heads

each Zone. There are total 92 Commissionerates in these Zones headed by Commissioners

of Central Excise. Divisions and Ranges are the subsequent formations, headed by Deputy/

Assistant Commissioners of Central Excise and Superintendents of Central Excise,

respectively.

For enforcing the Central Excise law and collection of Central Excise duty the following

types of procedures are being followed by the Central Excise Department -

a) Physical Control- Applicable to cigarettes only. Here assessment precedes clearance

which takes place under the supervision of Central Excise officers;


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b) Self-Removal Procedure- Applicable to all other goods produced or manufactured

within the country. Under this system, the assessee himself determines the duty

liability on the goods and clears the goods.

CHAPTER II

1. CONSTITUTIONAL BACKGROUND

Central Excise is a duty on excisable goods manufactured or produced in India, other than

alcoholic liquor. But liability is principally on manufacturer, except in a few cases. In

majority of cases, duty rate w.e.f. 24.2.09 is 10% plus education cess of 2% and Secondary

and Higher Education Cess of 1%. Thus, generally, duty is 10.30%. There are some

exclusions, partial or full exemptions and higher duties in some cases. As per Appendix IV

of CETA, the rate of additional duty on Goods of special Importance is 8% in majority of the

cases. (Section 3(1) of The Additional Duties of Excise (Goods of Special Importance) Act,

1957.

Power of Taxation under Constitution of India is as follows :


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(a) The Central Government gets tax revenue from Income-tax (except on Agricultural

Income), Excise (except on alcoholic drinks) and Customs.

(b) The State Governments get tax revenue from sales tax, excise from liquor and alcoholic

drinks, tax on agricultural income.

(c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and

house property tax.

Article 265 provides that no tax shall be levied or collected except by authority of Law. The

authority for levy of various taxes, as discussed above, has been provided for under Article

246 and the subject matters enumerated under the three lists set out in the Schedule-VII to the

Constitution.

Central Government and State Government can make laws.

Laws Relating to Central Excise

Central Excise Act, 1944(CEA) : The basic Act which provides the constitutional power for

charging of duty,valuation, powers of officers, provisions of arrests, penalty, etc.

Central Excise Tariff Act, 1985 (CETA) : This classifies the goods under 96 chapters with

specific codes assigned.

Central Excise Rules, 2002 : The procedural aspects are laid herein. The rules are

implemented after issue of notification.

Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 : The

provisions regarding the valuation of excisable goods are laid down in this rule.

Cenvat Credit Rules, 2004 : The provisions relating to Cenvat Credit available and its

utilisation is mentioned.

2. Nature of Excise Duty


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Power to levy excise duty is derived from Constitution. Excise is a duty on excisable goods

manufactured or produced in India. Each word of this definition is vitally important to fix

liability of Central Excise Duty.

Indian Constitution has given powers to Central Govt. and State Govt. to levy various

taxes and duties. Powers of Central and State Govt. are enlisted in Seventh Schedule to our

Constitution. Entry No. 84 of list I of Seventh Schedule to the Constitution reads as follows :

Duties of excise on tobacco and other goods manufactured or produced in India, except

alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet

preparations containing alcohol, opium or narcotics.

In addition, in some cases, duty is imposed on 'deemed manufacture' also. Hence, central

excise duty is presently levied under entry 84 and 97.

Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under

entry No. 51 of list II of Seventh Schedule to the Constitution and it is called State Excise.

The Act, Rules and rates for excise on liquor are different for each State (this is the reason

why price of liquor varies widely from Goa to MP to Punjab. In some States, it is officially

not available.).

BASIC CONDITIONS OF EXCISE LIABILITY - 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 duties on all excisable goods (excluding goods produced or

manufactured in special economic zones) which are produced or manufactured in India -

Basic excise duty is levied under sec 3 of central excise act at rates specified in first schedule

to central excise tariff act, 1985.

This definition of charging section of Central Excise is vital, because it clearly signifies that

there are four basic conditions for levy of Central Excise duty.


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(1) The duty is on goods.

(2) The goods must be excisable.

(3) The goods must be manufactured or produced

(4)Such manufacture or production must be in India.

Unless all of these conditions are satisfied, Central Excise Duty cannot be levied.

Manufacture of excisable goods in india is a taxable event

Goods manufactured in SEZ are excluded excisable goods A per section 3(1) of CE Act,

duty is leviable on all excisable goods (excluding goods manufactured or produced in Special

Economic Zones). Thus, goods manufactured or produced in SEZ are excisable goods

but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods

manufactured in SEZ are not exempted goods. They can be termed as excluded excisable

goods

Ownership of raw material is not relevant for duty liability sales tax is leviable on sales,

whether actual or deemed, while excise duty is a levy on taxable event of manufacture.

Liability under excise law is event based and irrespective if whther the goods are sold or

captively consumed.excise duty is not concerned with ownership or sale.

No exemptionto goods manufactured in J&K- services provided in J&K are exempt from

service tax. However, excise duty is payable on goods manufactured in J&K as provisions of

excise law have been extended to J&K.

Person liable to pay excise duty- Once duty liability is fixed, the duty can be collected from

a person at the time and place found administratively most convenient for collection.

The Duty liability in case of manufactured goods - Rule 4(1) of Central Excise Rules makes

it clear that excise duty is payable by the manufacturer or producer of excisable goods. In


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case where goods are allowed to be stored in a warehouse without payment of duty, the duty

liability is of the person who stores the goods. Rule 4(1) makes it clear that goods can be

removed from the place where they are manufactured or produced or warehoused, only on

payment of duty.

Ownership of raw material is not relevant for duty liability. Duty demand is payable by

manufacturer, even if it cannot be recovered from customer.

Duty liability in case of goods stored in warehouse - Rule 20 of CE Rules permit warehousing

of certain goods in warehouses without payment of duty. These goods are coffee, petroleum

products, benzene, tolune etc. In such cases, the duty liability is on the person who stores the

goods.

Duty liability in case of molasses produced in khandsari sugar factory - The other exception is

in case of molasses produced in a khandsari sugar factory, the duty liability is of the procurer

(i.e. purchaser) of such molasses. The duty is payable on the date of receipt of such molasses

in the factory of procurer. The duty on molasses produced in khandsari sugar factory is

payable only when the procurer procures the molasses for use in the manufacture of any

commodity. Such commodity may or may not be excisable.

Duty liability in case of job work - Even in case of job work, the duty liability is of actual

manufacturer and not of the raw material supplier. However, a job worker manufacturing

goods under notification No 214/86 is exempt from excise duty, as the raw material supplier

undertakes that he will use these goods further to manufacture final product or clear for

export or pay duty on such goods. [The only exception is in case of textile articles].

RATE OF DUTY AS APPLICABLE ON DATE OF REMOVAL RELEVANT- Though

taxable event is 'manufacture', duty payable is as applicable on date of removal i.e. clearance

from factory.


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STATE OF GOODS AT THE TIME OF REMOVAL IS RELEVANT - Goods have

to be classified and valued in the state in which goods are removed from the factory. Any

further processing done after removal is not relevant.

DUTY PAYABLE EVEN WHEN NOT COLLECTED - An assessee is liable to pay sales

tax and the question whether he has collected it from consumer or not is of no consequence.

His liability is by virtue of being an assessee under the Act

DUTY IS A MANUFACTURING EXPENSE FROM ACCOUNTING POINT OF

VIEW - Excise duty should be considered as a manufacturing expense and should be

considered as an element of cost for inventory valuation, like other manufacturing expenses.

Excise duty cannot be treated as a period cost.

3. Types of excise duties- Excise duties are of following types

Duties under Central Excise Act- Basic duty is levied under Central Excise Act.

Basic excise duty to be termed as Cenvat - Basic excise duty (also termed as Cenvat as per

section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule

to Central Excise Tariff Act, read with exemption notification, if any.

Education cess is payable @ 2% of the basic duty and Secondary and High Education Cess is

1% of basic excise duty.

Education Cess and SAH EDUCATION CESS on excise duty - If excise duty rate is 8%,

education cess will be 0.16% and SAH Education cess will be 0.08%. A provisions of Central

Excise Act, including those relating to refunds, exemptions and penalties will apply to

education cess and SAH cess.

Excise duty in case of clearances by EOU The EOU units are expected to export all their

production. However, if they clear their final product in DTA (domestic tariff area), the rate

of excise duty will be equal to customs duty on like article if imported in India. [provison


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to section 3(1)]. Note that 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. The EOU unit can sale part of their final products in India at 50% of customs

duty or normal excise duty in certain cases.

National Calamity contingent Duty A National Calamity Contingent Duty (NCCD) has

been imposed vide section 136 of Finance Act, 2001 [clause 129 of Finance Bill, 2001, w.e.f.

1.3.2001]. This duty is imposed on pan masala, chewing tobacco and cigarettes. It varies

from 10% to 45%. NCCD of 1% was imposed on PFY, motor cars, multi utility vehicles and

two wheelers and NCCD of Rs 50 per ton was imposed on domestic crude oil, vide section

169 of Finance Act, 2003.

Duties under other Acts - Some duties and cesses are levied on manufactured products

under other Acts. The administrative machinery of central excise is used to collect those

taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and

collection of these duties / cesses.

Duty on Medical and Toilet preparations - A duty of excise is imposed on medical

preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.

Additional duty on mineral products - Additional duty on mineral products (like motor spirit,

kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of

Excise and Customs) Act, 1958.

Duties Leviable

Basic Excise Duty is levied u/s 3(1) of Central Excise Act. The section is termed

as charging section. General rate of duty of central excise on non-petroleum products is

10% w.e.f. 27-02-2010. (The duty rate was 14% during 1-3-2008 to 6-12-2008, which was

reduced to 10% w.e.f. 7-12-2008 and to 8% w.e.f. 24-02-2009). This duty is applicable to


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majority of excisable goods. There is partial exemption to a few products.

Education Cess @ 2% of excise duty under section 93 of Finance (No. 2) Act (w.e.f. 9-7-

2004).

Secondary and Higher Education Cess (S&H Education Cess) @ 1% of the total duties of

excise vide section 136 read with section 138 of Finance Act, 2007 w.e.f. 1-3-2007.

Thus, total excise duty is 10.30% in majority of the cases.

National Calamity Contingent Duty A National Calamity Contingent Duty (NCCD) has

been imposed vide section 136 of Finance Act, 2001 on some products. NCCD of 1% has

been imposed on mobile phones w.e.f. 1-3-2008.

In addition, cesses and duties have been imposed on some specified products. 1.1.4 Goods

It is obvious from section 3(1) that, to attract excise duty, the following conditions must be

fulfilled :

There should be goods;

The goods must be excisable;

The goods must be manufactured or produced; and

The manufacture or production must be in India.

Goods manufactured or produced in SEZ are excluded excisable goods. This means, that

the goods manufactured or produced in SEZ are excisable goods but no duty is leviable, as

charging section 3(1) excludes these goods.

Thus, the goods manufactured in SEZ are not Exempted goods. They can be termed as

excluded excisable goods.

As per explanation to section 2(d), goods includes any article, material or substance which

is capable of being bought and sold for a consideration and such goods shall be deemed to be

marketable.

Basic Ingredients


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From the above definitions of goods, the two essential elements of goods are emanated:

(i) They should be movable, and

(ii) They should be marketable.

MEANING OF "MANUFACTURE"

2.1 The taxable event for Central Excise duty to be attracted is manufacture or production

in India of excisable goods. 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; and

(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; and

(iii) Which in relation to goods specified in the Third Schedule to the Central Excise Tariff

Act, 1985, involves packing or repacking of such goods in a unit, container or labelling or re-

labelling of containers or declaration or alteration of retail sale price or any other treatment to

render the product marketable to consumer.

(The clauses (ii) and (iii) above are termed as deemed manufacture.) 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 "manufacture" for the

purpose of attracting Central Excise duty has taken place was 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


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not ordinarily amount to manufacture and no excise duty would be payable unless it is

deemed to be manufacture as follows:

In a particular case by a section or Chapter note of the Tariff; or

In relation to goods, which are specified under MRP based assessment under section

4A, packing or repacking of such goods, labelling or re-labelling of containers

including declaration or alteration of retail sales price shall amount to manufacture.

mEANING OF "GOODS"

Central Excise duty is levied on goods which are manufactured or produced. The

understanding of term goods is of vide importance in determining the leviability of Excise

Duty. The Act does not define the term "goods". The judgment of the Supreme Court in the

case of Delhi Cloth and General Mills (supra) is considered to be the landmark judgment

in this regard, where it is held that an 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.

The marketability element of goods was enumerated in Union of India and Others, Appellants

vs. Sonic Electro Chem (P) Ltd. 2002 (52) RLT 878 (SC) where the Supreme Court held

that the essence of marketability is neither in the form nor in the shape or condition in which

the manufactured articles are to be found, it is the commercial identity of the articles known

to the market for being bought and sold. Whether immovable things are goods or not, was

clarified in the case of Triveni Engg. vs. CCE 2000 (120) ELT 273 by the Supreme Court

where it was observed that 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.


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The Explanation is added by Finance Act, 2008 under section 2(d) provides that goods

includes any article, material or substance which is capable of being sold for consideration

and such goods shall be deemed to be marketable.

MANUFACTURER DUTY LIABILITY

The definition of manufacturer under the Act is an inclusive one and broadly specifies two

categories of manufacturer; i.e., one who manufactures on his own account or one gets the

goods manufactured through hired labour. Thus we can construe the meaning of the word

manufacturer as understood in common terminology. Manufacturer may be understood as

any person who is the creator, initiator and architect of the activities and the processes, which

bring in existence a new and identifiable product/goods in the market. Thus a manufacturer

is the one who undertakes manufacturing activity in reality. A purchaser of goods does not

become manufacturer, he can only be termed as a supplier of raw material, if applicable or a

person who gets goods manufactured according to his specifications or with his brand name.

Here, it is worthwhile to mention that such contracts are on a principal to principal basis. A

person supplying the raw material cannot be considered as hiring the job worker if he does

not supervise and control the activities of the job worker. However if the manufacturer is a

dummy or fake unit, then the raw material supplier or the brand name owner is deemed to be

the actual manufacturer.

Section 3A incorporated in the Statute by Finance Act, 2008 provides power to the Central

Government to charge excise duty on the basis of capacity to manufacture by manufacturer

himself in respect of notified goods. Till today, the product under this sub-section has not

been notified. Once the product has been notified, excise duty will be payable on the basis of

capacity.

Importance of notification


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The rate of duty prescribed against each of sub-heading specified in schedule to the Central

Excise Tariff Act is known as tariff rate. The effective rate of duty must be ascertained by

considering the various notification issued from time to time. The tariff rate read with the rate

prescribed in the notification determined the effective rate of duty payable on clearance of

goods.

Excisable Goods

Section 2(d) of Central Excise Act defines Excisable Goods as Goods specified in the

Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes

salt. As per explanation to section

2(d), goods includes any article, material or substance which is capable of being bought and

sold for a consideration and such goods shall be deemed to be marketable. Thus, unless the

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

In terms of the above definition of Excisable Goods, it may be held that all those goods,

which are specified in the Tariff Schedule are excisable goods. However, question arises as

to whether those goods, which are exempted from duty by a notification, but find a place in

the tariff schedule are excisable goods.

By analyzing the definition, the following two important ingredients of excisable goods are

found :

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

(b) The goods so specified must be subject to duty.

Excisability of Plant & Machinery

In view of Entry N. 84 of List-I Seventh Schedule to the Constitution of India, duty of excise

could be levied only on goods and not on immovable property. The goods are classified and

charged to duty according to the state and condition in which they are removed from the

factory.


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Assembly of Plant & Machinery at Site

Mere bringing together of parts of a plant and machinery at site cannot be termed to be

manufacture and hence, assembled plant cannot be treated to be goods.

Where assembly of parts and components brings out a different recognizable marketable

product, before its installation or erection or attachment to the earth, it would be goods and

hence chargeable to duty.

Excisability of Waste & Scrap

Section 3 imposes duty on manufacture of goods. Waste and scrap are not manufactured, but

arise as a result of manufacture of the final product. Therefore, generally, there should not be

levied any tax on the waste and scrap.

Thus, waste and scrap can be goods but duitable only if manufactured and are mentioned

in Tariff.

CHAPTER III

1. VALUATION

The levy of duty requires the valuation of the goods under consideration after establishing

the duty liability and the classification of the goods. Except in cases where specific duty has

been provided for on the basis of certain unit like weight, length, etc. as in case of goods

like cigarettes (length basis), cement clinkers (per ton basis), for most of the goods the rates

are specified on an ad valorembasis; i.e., expressed as a percentage of value of goods. Thus


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for calculating the amount of duty payable, first the assessable value of the goods has to be

determined under the provisions.

The modes of valuation of goods under the Excise Act are:

(A) Tariff value

The Central Government is authorized under the provisions of section 3(2) of the Act, to fix the tariff value for

any goods which may be different for different classes of goods. This is also termed as the notional value. The

duty in such cases is the % of such tariff value and not the Assessable Value.

(B) M.R.P. value

The Central Government under section 4A of the Act can notify goods on which excise

duty will be payable on the MRP less % of abatement. Such value shall be deemed to be the

assessable value in such cases. The provisions of this section are applicable to products which

are statutorily required to put MRP under the Standards of Weight and Measures Act, 1976,

or any other law and in respect of which specific notification has been issued.

(C) Transaction value

(i) In respect of all other goods which are not covered by the above-mentioned provisions, their

assessable value would be in terms of "transaction value" as provided in section 4 of

the Act. The assessable value would be the transaction value when the goods are sold

by an assessee for delivery at the time and place of removal, where the assessee and

the buyer are not related and price is the sole consideration. In all other cases, which

do not fulfil the aforesaid conditions, value shall be determined as per the Central

Excise Valuation Rules, 2000. The definition of transaction value as per section 4(3)

(d) means the price actually paid or payable for the goods when sold, and includes in

addition to the amount charged as price, any amount that the buyer is liable to pay to

or on behalf of, the assessee by reason of or in connection with the sale, whether at


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the time of sale or any other time. The definition gives an inclusive but not exhaustive

list of additions and deductions from the invoice price in respect of certain amounts.

(ii) The valuation rules have to be followed when transaction value cannot be

determined under section 4(1); which are enumerated below:

(a) If goods are not sold at the time of removal, the value of excisable goods

shall be value of goods sold by the manufacturer for delivery at any other

time nearest to the time of removal of goods except in cases of stock /branch

transfer, sale to related person, job work where specific provisions have been

made. (Rule 4)

(b) In case goods are sold for delivery at any other place other than the place

of removal, the value will be the price less the actual cost of transportation

from place of removal to the place of delivery. (Rule 5)

(c) In case the price is not the sole consideration in respect of any transaction,

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. (Rule 6)

(d) In case where goods are cleared to depot, consignment agent etc.,

transaction 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

is the price at which the greatest aggregate quantity of goods are sold. (Rule 7)

(e) In case of consumption of goods captively; i.e., consumed by the assessee

or on his behalf, the value shall be 110% of the cost of production. (Rule 8)

(f) In case of sale of goods to a related person, the value shall be the price at

which the related person has sold the goods to an unrelated person. In case


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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 115% of the cost of

production. (Rule 9)

(iii) The following deduction can be made from the transaction value for

determination of value under section 4

(a) Trade discount

The Board has clarified as follows:

"Discount of any type or description given on any normal price payable for

any transaction will not form part of the transaction value for the goods;

e.g., quantity discount for goods purchased or cash discount for the prompt

payment etc. will therefore not form part of the transaction value. However,

it is important to establish that the discount has actually been passed on

to the buyer of the goods. The different type of discounts extended as per

commercial considerations on different transactions to unrelated buyers if

extended is also permissible and different actual prices paid or payable for

various transactions are to be accepted."

(b) Tax and duties

The definition of transaction value stipulate that excise duty, sales tax and

other taxes paid or payable shall be excluded from the transaction value.

(c) Freight

The cost of transportation can be excluded even when freight is averaged

and also there is no condition that the cost of transportation should be shown

separately in the invoice. The cost of transportation will include the cost of

insurance during transportation of goods.


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(d) Interest for delayed payment

Interest for delayed payments is a normal practice in industry. Interest under a

financing arrangement entered between the assessee and the buyer relating to

the purchase of excisable goods shall not be regarded as part of the assessable

value provided that:

The interest charges are clearly distinguished from the price actually paid or

payable for the goods.

The financing arrangement is made in writing; and Where required, assessee

demonstrates that such goods are actually sold at the price declared as the

price actually paid or payable.

(e) Erection, installation and commissioning charges

If the product after erection, installation and commissioning is not excisable

the question of including these charges in the assessable value of the product

does not arise.

(iv) Inclusion in the price

Some of the expenditures like packing charges, designing and engineering charges,

handling charges incurred within the factory are required to be included in the price if

they are not already included.

Basis of calculation of duty payable i.e. Valuation

Modes of

calculation of excise

duty

Duty can be payable on basis of specific duty (based on weight,

length, volume etc.), MRP based duty [section 4A], compounded

levy, tariff value [section 3(2)], production capacity [section 3A]

or on ad valorembasis [section 4].


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MRP based

valuation [section

4A]

Products covered

under MRP

provisions

In case of about 110 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.

The provision applies only when product is package intended for

retail sale andis specified in a notification issued u/s 4A.

MRP provisions are

overriding

MRP provisions u/s 4A are overriding provisions.

Assessable value

when MRP not

applicable

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.

MRP provisions do not apply to free samples, package less than

10gm/10 ml, wholesale package or package above 25 Kg (50 Kg

in some cases)

Deemed

manufacture of

products u/s 4A

In case of goods covered under section 4A, packing or repacking

and re-labelling is deemed manufacture.

Incorrect MRP Department can ascertain MRP if MRP not declared or incorrectly

declared or obliterated. Penalty can be imposed [section 4A(4)(a)

of Central Excise Act].


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Basic requirement

of Assessable Value

[section 4]

Transaction value as

assessable value

When duty is payable on ad valorem basis, it is payable on

assessable value as defined in section 4 of Central Excise Act.

Transaction Value is taken as Assessable Value only if goods are

sold at the time and place of removal, buyer is unrelated and price

is sole consideration [Section 4(1)(a) of Central Excise Act].

What is transaction

value

Transaction value is the price paid or payable for the goods at the

time and place of removal, by reason of, or in connection with

sale, inclusive of all expenses but excluding taxes [section 4(3)(d)

of Central Excise Act].

Transaction value does not include duty of excise, sales tax and

any other taxes on goods. Only taxes actually paid or payable are

allowed as deduction.

Price to be taken as

inclusive of excise

duty

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 CCE v.Maruti Udyog 122 Taxman 105 =

(2002) 3 SCC 547 = 141 ELT 3 (SC 3 member bench). If there

is additional consideration, it will be added to invoice price and

then duty payable is calculated by making back calculations

[Explanation to section 4(1) of Central Excise Act]


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Inclusions and

exclusions

in transaction

value

By reason of or in

connection with sale

of such goods.

Any amount charged is includible in assessable value if it is by

reason of or in connection with sale of such goods.

Packing and design

charges

Duty is payable on packing charges and design charges related to

manufacture.

Price escalation Duty is payable in case of price escalation after clearance, but not

when price was final at the time of clearance. If there is price rise

after clearance of goods from factory, differential excise duty and

interest @ 13% is payable.

Trade discounts Trade discount is allowable as deduction from assessable value.

Cash discount is allowable. Discount need not be uniform.

Notional interest on

advances

Notional interest on advances is includible only if there is

evidence that it has depressed the selling price.

Warranty charges Compulsory charges for after sale service during warranty period

are includible. After sale service charges which are optional are

not includible.

PDI and after sales

service

Pre-delivery charges (PDI) and after sale service charges are not

includible if these are incurred by dealer out of his commission.


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Outward freight

after place of

removal not

includible in

assessable value

Place of removal Transport charges upto place of removal are includible in

assessable value.

Ownership

transferring at

factory gate

If delivery is ex-works and property is transferred to buyer at

factory gate, outward freight is not includible in assessable value

as factory gate is the place of removal. This will be so even if

transport is arranged by manufacturer and charged to buyer.

Contract FOR Even if contract is F.O.R. destination basis, there can be sale at

factory gate, since as per section 39 of Sale of Goods Act, delivery

of goods to carrier is prima facie delivery to buyer. If contract is

F.O.R. basis andsale takes place only when goods are delivered to

buyer (i.e. property in goods passes to buyer at destination only),

transport charges are includible in assessable value.

Profit on transport

activity permissible

If assessee himself provides transport services, reasonable

profit on the transport activity should be permissible i.e. it is not

includible in assessable value.

Equalised freight Equalised freight is also allowable as deduction, if there is sale at

factory gate.


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Bought out goods

and accessories

when includible in

assessable value

Price of essential

bought out goods

Price of Bought out goods supplied along with manufactured

goods is includible, if these are essential parts of manufactured

goods.

Price of parts not

fitted at time of

removal

Since goods are to be assessed in the condition in which cleared

from factory, value of components not fitted is not required to be

added in assessable value, even if they are essential

Price of accessories

not includible

Price of accessories and optional bought out items is not includible

in Assessable Value

Accessory means an object not essential in itself but adding to

beauty, convenience or effectiveness of something else.

Valuation rules

Transaction value

not acceptable

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]

Value of similar

goods

Valuation can be done on value of such goods (i.e. goods of

same class of same manufacturer) [Rule 4]

Transport upto place Cost of transport upto place of removal is includible in


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of removal assessable value but not beyond that [Rule 5]

Money value of

other consideration

includible

If price is not sole consideration, money value of other

consideration should be added e.g. cost of material, patterns,

dies, designs etc. supplied by buyer is required to be added to

Assessable Value [rule 6]. Value of patterns, dies etc. should be

added on pro-rata basis.

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 In case of job work, duty is payable by job worker. Valuation

is done on the basis of price at which raw material supplier

(Principal Manufacturer) sales the manufactured final product in

market [Rule 10A]. If goods are covered under MRP valuation

provisions, duty is payable on MRP basis.

Valuation in case

of sale from depot/

branch

Depot price at the

time of removal

In case of depot sale, duty is payable on basis of depot price

prevailing at the time of removal of final product from the factory

[Rule 7].

Subsequent sale

price not relevant

Price at which the goods are actually sold subsequently is not

relevant. Differential duty is not payable even if goods are sold


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later at higher price from depot. Similarly, refund is not available

if prices are goods are subsequently actually sold at lower price.

Transport charges

after depot

Transport charges upto depot and depot expenses are not

allowable as deduction (These are already included in depot

price). Transport charges from depot onwards are not includible in

assessable value.

Value addition done

at depot

Any value addition done at depot is not includible in assessable

value, if activity is not manufacture (the reason is that goods are

to be assessed in the condition in which they are removed from

factory).

Deemed

manufacture in case

of MRP

In case of products covered under MRP provisions, if packing

in retail pack and labelling of MRP is done at depot/place of

consignment agent, it will be deemed manufacture and excise

duty will be payable.

Valuation when sale

through related

person

Price to unrelated

buyer relevant

If goods are sold through related person, value for purpose of

excise will be the price at which the related buyer sales goods to

unrelated buyer.

Inter connected

undertaking

An inter-connected undertaking will be treated as related person

for excise valuation only if there is holding subsidiary relationship


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[Inter-connected undertaking means 25% common control]

Holding and

subsidiary

A holding and subsidiary are related persons,

Rate legal entities A mere distributor is not a related person.

A company or firm is a separate legal entity and cannot be

a related person of other company or firm.

Piercing corporate

veil

Even if the buyer does not fall within the definition of related

person, sale price to him can be rejected by piercing the corporate

veil. His selling price can be considered if it is found, by piercing

corporate veil, that the transaction is not at arms length i.e. price is

not the sole consideration.

Valuation in case of

entire sale through

related person

If goods are sold solely through related person (except in case of

inter connected undertaking, unless there is holding subsidiary

relationship), valuation will be normal transaction value at

which the related buyer sales to unrelated buyer [rules 9 and 10 of

Valuation Rules]

Supply of goods to

related person for

captive consumption

If goods are supplied to related person for captive consumption,

valuation will be on basis of cost of production plus 10%.

Partial sale through

related person

If sale is partly to related person and partly to unrelated person,

valuation shall be done on reasonable basis by residual method

under rule 11.


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If related person is only one of the buyers and substantial sales

are made to unrelated persons at same price, that price can be

considered for valuation in respect of sale to related person also.

Other provisions

relating to valuation

Residuary rule of

valuation

If valuation is not possible under any of aforesaid rules, valuation

will be on basis of best judgment assessment, i.e. value shall be

determined using reasonable means consistent with the principles

and general provisions of Valuation rules and section 4(1) of

section 4 of the Act [Rule 11]

Duty based 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. Pan masala

and gutkha are covered under these provisions.

Compounded levy

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. The scheme is presently applicable to

stainless steel pattas/patties and Aluminium circles. These articles

are not eligible for SSI exemption.

Tariff value [section

3(2) of Central

Excise Act]

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


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payable as percentage of this 'tariff value' and not the Assessable

Value fixed u/s 4.

2. CENTRAL EXCISE (DETERMINATION OF RETAIL SALE PRICE OF

EXCISABLE GOODS) RULES, 2008

[Notification No. 13/2008-C.E. (N.T.), dated 01-03-2008]

In exercise of the powers conferred by section 37 read with sub-section (4) of section 4A

of the Central Excise Act, 1944 (1 of 1944), the Central Government hereby makes the

following rules, namely :-

RULE 1. (1) These rules may be called the Central Excise (Determination of Retail Sale

Price of Excisable Goods) Rules, 2008.

(2) They shall come into force on the date of their publication in the Official Gazette.

RULE 2.In these rules, unless the context otherwise requires, -

(a) Act means the Central Excise Act, 1944 (1 of 1944);

(b) retail sale price means the retail sale price as defined in section 4A of the Act; and

(c) words and expressions used in these rules and not defined but defined in the Act or any

other rules made under the Act shall have the meaning as assigned therein.

RULE 3. The retail sale price of any excisable goods under sub-section (4) of section 4A of

the Act, shall be determined in accordance with these rules.

RULE 4. Where a manufacturer removes the excisable goods specified under sub-section

(1) of section 4A of the Act, -

(a) without declaring the retail sale price on the packages of such goods; or


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(b) by declaring the retail sale price, which is not the retail sale price as required to be

declared under the provisions of the Standards of Weights and Measures Act, 1976 (60 of

1976) or rules made there under or any other law for the time being in force; or

(c) by declaring the retail sale price but obliterates the same after their removal from the

place of manufacture,

then, the retail sale price of such goods shall be ascertained in the following manner, namely :

(i) if the manufacturer has manufactured and removed identical goods, within a

period of one month, before or after removal of such goods, by declaring the

retail sale price, then, the said declared retail sale price shall be taken as the

retail sale price of such goods :

(ii) if the retail sale price cannot be ascertained in terms of clause (i), the retail

sale price of such goods shall be ascertained by conducting the enquiries in the

retail market where such goods have normally been sold at or about the same

time of the removal of such goods from the place of manufacture :

Provided that if more than one retail sale price is ascertained under clause

(i) or clause (ii), then, the highest of the retail sale price, so ascertained, shall

be taken as the retail sale price of all such goods.

Explanation. - For the purposes of this rule, when retail sale price is required

to be ascertained based on market inquiries, the said inquiries shall be carried

out on sample basis.


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RULE 5. Where a manufacturer alters or tampers the retail sale price declared on the

package of goods after their removal from the place of manufacture, resulting into increase in

the retail sale price, then such increased retail sale price shall be taken as the retail sale price

of all goods removed during a period of one month before and after the date of removal of

such goods:

Provided that where the manufacturer alters or tampers the declared retail sale price

resulting into more than one retail sale price available on such goods, then, the highest of

such retail sale price shall be taken as the retail sale price of all such goods.

RULE 6. If the retail sale price of any excisable goods cannot be ascertained under these

rules, the retail sale price shall be ascertained in accordance with the principles and the

provisions of section 4A of the Act and the rules aforesaid.

3. CLASSIFICATION OF GOODS

Central Excise Duty is chargeable at the rates, which are manufactured in India and are

subject to excise duty.

However, all goods cannot be charged with the same rate of duty. Therefore, the goods need

to be grouped into separate categories and sub-categories, for which the rate of excise duty

may be determined. This identification of goods through groups and sub-groups is called

classification of goods.

The rate of duty is found out by classifying the product in its appropriate heading under

Central Excise Tariff. The Central Excise Tariff Act, 1985 (CETA) classifies all the goods

under 96 chapters and specific code is assigned to each item. CETA is based on International

convention of Harmonised System of Nomenclature (HSN), which is developed by World

Customs Organisation (WCO) (That time called as Customs Cooperation Council). This is an

International Nomenclature standard adopted by most of the Countries to ensure uniformity


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(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a product

cannot be established, find technical or dictionary meaning of the term used in the tariff. You

may also refer to BIS or other standards, but trade parlance is most important.

(3) If goods are incomplete or un-finished, but classification of finished product is known,

find if the unfinished item has essential characteristics of finished goods. If so, classify in

same heading - Rule 2(a).

(4) If ambiguity persists, find out which heading is specific and which heading is more

general. Prefer specific heading.- Rule 3(a).

(5) If problem is not resolved by Rule 3(a), find which material or component is giving

essential character to the goods in question - Rule 3(b).

(6) If both are equally specific, find which comes last in the Tariff and take it - Rule 3(c).

(7) If you are unable to find any entry which matches the goods in question, find goods which

are most akin - Rule 4.

(8) Packing material is to be classified in the heading in which the goods packed are

classified Rule 5.

(9) In case of mixtures or sets too, the procedure is more or less same, except that each

ingredient of the mixture or set has to be seen in above sequence. As per rule 2(b), any

reference to a material or substance includes a reference to mixtures or combinations of that

material or substance with other material or substance.

As regards the Interpretative Rules, the classification is to be first tested in the light of Rule

1. Only when it is not possible to resolve the issue by applying this Rule, recourse is taken to

rules 2,3 and 4 in seriatim.

EXEMPTIONS FOR SMALL SCALE INDUSTRIES


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This notification provides exemption from whole of duty leviable on goods specified in

annexure to the notification up to the aggregate value of clearance of Rs. 1,50,00,000/- . In

computing 1,50,00,000/- the following clearance shall not be taken in account:

a) Clearances, which are exempt from the whole of the excise duty leviable thereon ( other

than an exemption based on quantity or value of clearances) under any other notification or

on which no excise duty is payable for any other reason;

b) Clearances bearing the brand name or trade name of another person, which are ineligible

for the grant of this exemption

c) Clearances of the specified goods which are used as inputs for further manufacture of any

specified goods within the factory of production of the specified goods;

The benefit is available to small scale manufacturer where:

a) The value of clearance in the previous financial year shall not be exceeds Rs. 4

crore

b) The goods have not been affixed with the brands name of other person.

In computing the value of clearance of Rs. 4 crores. The following clearance shall not be

considered :

a) Clearance of excisable goods without payment of duty

i) To a unit in a free trade zone or

ii) To a unit in a special economic zone; or

iii) To a hundred percent export oriented undertaking; or

iv) To a unit in an Electronic Hardware Technology Park or Software Technology Park; or


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v) Supplied to the United Nations or an international organization for their official use

or supplied to projects funded by them, on which exemption of duty is available under

notification No. 108/95.

b) Clearance bearing the brand name or trade name of another person, which are

ineligible for the grant of this exemption in terms of paragraph 4 of the notification.

c) Clearance of the specified goods which are used as inputs for further manufacture

of any specified goods within the factory of production of the specified

goods.

d) Clearance, which are exempt from the whole of the excise duty leviable thereon

under notification No. 214/86-Central Excise or No. 83/94-Central Excise or 84/94-

Central Excise.

If a manufacturer clears the specified goods from one or more factory the exemption shall

applicable to the aggregate value of clearance of all the products cleared by the manufacturer

from all the factories.

Where the specified goods are cleared by one or more manufacturer from the facto the

exemption shall apply to aggregate value of clearance of specified goods by all the

manufacturers. The exemption will not available separately to each manufacturer.

Documents

GROUP 1(Central Excise).Doc