TAX LAW

jamia millia islamia, faculty of law TAX LAWCONDITIONS FOR LEVYING OF EXERCISE DUTY

FAHIMUDDIN AHMED KHAN7th SemesterSection A

ACKNOWLEDGEMENT

It is my privilege to record my deep sense to perform gratitude to those who helped me in completion of this project.In making of this project many people helped me immensely directly or indirectly. First of all I would like to thank Dr. K. Y. Danyal who had given me this project. I would like also to thank my friends and the Librarian for helping me out in the research.

Fahimuddin Ahmed Khan

CONTENTS

CONTENTS2INTRODUCTION3ORIGIN4BASIS OF LEVY5LAWS RELATING TO EXCISE DUTY6CONDITIONS FOR LEVIABILITY OF EXCISE DUTY8ILLUSTRATIONS OF MANUFACTURE16ILLUSTRATIONS: WHAT IS NOT MANUFACTURE17DEEMED MANUFACTURE19CONCLUSION20BIBLIOGRAPHY21

INTRODUCTIONTheCentral Exciseduty is levied in terms of the Central Excise Act, 1944 and the rates of duty are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The taxable event under the Central Excise law is manufacture / production and the liability of Central Excise duty arises as soon as the goods are manufactured or produced. As per the Central Excise Act, duty is leviable only on excisable goods. i.e., Goods specified in Central Excise Tariff Act, 1985.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.

ORIGINTill 1969, there was physical control system wherein each clearance of manufactured 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. Now, 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 now effected on manufacturers 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 scrutinises it or conducts selective audit to ascertain correctness of the duty payment. Even the classification and value of the goods have to be merely declared by the assessee instead of obtaining approval of the same from the Department.In 2001, new Central Excise (No.2) Rules, 2001 have replaced the Central Excise Rules, 1944 with effect from 1 July 2001. Other rules have also been notified namely, CENVAT Credit Rules, 2001, Central Excise Appeal 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 32 as compared to 234 earlier.

BASIS OF LEVY

Excise duty is levied under the authority of Entry 84 and 97 of List 1 of Schedule 7 of the Indian Constitution.Entry 84 of List 1 of the Seventh Schedule in the Constitution of India 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.Power to impose excise on alcohol, liquor or opium and narcotics is granted under Entry 51 of List II of the Seventh Schedule of the Constitution to the states and that is called State Excise.In some cases, duty is payable on deemed manufacture. Even if such duty is not leviable under Entry 84, it can be taxed under Entry 97 which is the residual entry.

LAWS RELATING TO EXCISE DUTY

CENTRAL EXCISE ACT, 1944This is the basic Act providing for charging of duty, valuation, powers of officers, provisions of arrests, penalty etc. it has been amended from time to time. CENTRAL EXCISE RULESSection 37(1) of the CEA, 1944 grants the power to the government to make rules to carry into effect the purpose of CEA, 1944. Rules can make the provisions for penalty and prosecution. Such rules include the Central Excise Rules, 2002; Cenvat Credit Rules, 2004; Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000; Central Excise (Appeal) Rules, 2001; Central Excise (Settlement of Cases) Rules, 2001; Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 etc. NOTIFICATIONSUnder Sections 5A and 11C of the Central Excise Act, 1944, the central government has been given the power to issue notifications in order to grant full or partial exemptions to goods from excise duty. Similarly, the rules also provide provisions for issuing of notifications for various matters. Each rule and notification has to be placed before each of the Parliament houses for a total period of 30 days. The rules and notifications are treated as part of the Act itself. CENTRAL EXCISE TARIFF ACT, 1985Goods are classified under this Act under various heads in 96 chapters and a specific code is assigned to each of them. It is based on the different duties leviable on different types of goods.

CONDITIONS FOR LEVIABILITY OF EXCISE DUTY

Section 3 of the Central Excise Act is called the charging section. It 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 IndiaBasic excise duty is levied under Section 3 of the Central Excise Act at rates given under Schedule I to the Central Excise Tariff Act, 1985.There are mainly 4 major essentials for the levy of central excise duty:1. The duty is on the good2. The goods must be excisableAccording to section 2(d) of the Central Excise Act, excisable goods have been defined as goods specified in the schedule to CETA as being subject to a duty of excise and includes salt.As per judicial pronouncements, there are two main conditions for a good to be excisable, the following two conditions need to be satisfied:a. It must be movable immovable property or property attached to the earth is not excisable.b. It must be marketable the item must be such as is capable of being bought or sold. The goods must be known in the market. Otherwise, duty is not leviable. However, actual sale is not required. Also, only one purchaser may also be sufficient to establish marketability.In Triveni Engineering v. CCE[footnoteRef:2], it was observed that goods to be marketable must be in a position to be taken to the market and sold as such. If they have to be separated or dis-assembled before moving them, the test is not satisfied. Huge tanks separate from the earth but which cannot be physically moved without dismantling are also not goods. [2: AIR 2000 SC 2896]

In the case of Union of India v. Delhi Cloth Mills[footnoteRef:3], DCM was manufacturing Vanaspati. The raw materials used were groundnut and sesame oil. During the manufacturing process, refined oil got produced at an intermediate stage which was consumed within factory for manufacture of Vanaspati. The excise department demanded excise on this refined oil. During those days, Vanaspati was not excisable but refined oil was. However, the refined oil was not deodorised, and that was an essential part of the manufacture of refined oil. It was held that in the market, the product was not known as refined oil unless it was deodorised. Thus, such refined oil was not a good and hence, excise duty could not be levied on that. [3: AIR 1963 SC 791]

CBEC, vide Circular No. 904/24.2009-CX dated 28-10-2009, has clarified that waste such as dross, skimmings, bagasse, residues, refuse etc. will be subject to excise duty (as it is capable of being sold). Waste for the purpose of this act is treated as a final product. Empty drums and packing materials in which the inputs were packed cannot be dutiable as they were not manufactured. Waste arising during cutting and dismantling of old machinery is also not dutiable as it was not manufactured.Waste arising during maintenance and repair work is not excisable. In Grasim Industries v. Union of India[footnoteRef:4], the issue was whether scrap arising from repairs or maintenance of machinery were dutiable or not. The assessee was manufacturer of cement. He was repairing his machinery for which wielding electrodes, steel angles, beams, channels etc. were being used. During manufacture, mild steel scrap and iron scrap did arise. Department demanded duty on such scrap. It was held that to be dutiable, the scrap must arise continuously and regularly in the course of the business of the product manufactured by the assessee. Goods are not excisable merely because they are mentioned in the tariff entry. Repairing is not manufacture. [4: (2011) 273 ELT 10 (SC)]

In Union of India v. Ahmedabad Electricity Co. Ltd.[footnoteRef:5], it was held that waste arising in ancillary process is not manufacture. In this case, coal was used as a fuel to produce steam. The steam was used in manufacturing process. The coal left cinder after being burnt. The cinder was held to not be dutiable as it was a waste generated from an ancillary process. [5: AIR 2004 SC 11]

Waste and scrap can beexcisable only if mentioned in CETA and not otherwise.In Bata India v. CCE[footnoteRef:6], the issue was whether theoretical possibility of sale and purchase was sufficient to prove marketability. In this case, the assesse was manufacturing unvulcanised sandwiched fabric which was captively consumed for the manufacture of footwear. Such fabric was also sent to job worker. Vulcanisation of footwear takes place only after completing the entire process and then it becomes finished footwear. The assessee contended that the intermediate product is not marketable. He produced certificate from technical authorities that the product has no commercial identity as such. The department did not produce any evidence of marketability. It was held that the test of marketability that the product which is made liable to duty must be marketable in the condition in which it emerges, without further processing. Hypothetical possibility of purchase and sale is insufficient. Mere theoretical possibility of the product being sold is not sufficient but there should be commercial capability of being sold. The burden of proof is on the department to show marketability. The intermediate product is not marketable and hence not dutiable. [6: (2010) 252 ELT 492 (SC)]

Goods unstable and having very short life are not goods, if not marketable in that short period. However, if goods are marketable in the short shelf life, they will be excisable goods.In Nicholas Piramal India v. CCE[footnoteRef:7], the issue was whether the goods having a short shelf life can be marketable. In this case, the assessee was manufacturing animal feed supplements which were exempt from duty. At intermediate stage, Vitamin A was manufactured and captively consumed. Duty was demanded on the intermediate product. The assessee contended that the foods are not marketable. Its shelf life is 2 or 3 days and it is unstable in the stage produced. The department contended that the product is marketable as a finding of fact. It was held that if the shelf life is 2 or 3 days and it is capable of being sold during that period, it will be marketable. If the assessee had not manufactured the intermediate product, they would have to buy it from the market. Thus, the product is marketable and hence dutiable. [7: 2010) 260 ELT 338 (SC)]

Gas and steam, electricity, electrical energy, drawings or designs, software etc. are all illustrations of goods.

3. The goods must be manufactured or producedThe term manufacturing is defined inSection 2(f)of theCentral Excise Act, 1944which includes any process enumerated therein. However all the process would not amount to manufacturing under this Act. The term process is not defined under the Act. Therefore it should be understood in a common parlance. The process may be a flow, progress, movement, transformation, change continuation, a link, an action, happening etc. Any process which produces distinct and identifiable commodity and renders marketable value then it can be said to be a manufacturing process. A commodity whether manufactured or not necessarily depends on the context and the factors of production/process of the commodity.Production means among other things, that which is produced; a thing which results as from any action, process or effort, a product. It is something which is yielded naturally or through some effort. The word produce has a wider meaning than manufacture. Every manufacture is production, but every production may not be a manufacture. Production covers all the intermediate, subsidiary or residual products that arise in course of manufacture.Manufacture is defined in the Act through an inclusive definition. Section 2(f) defines it as including any process:a. Incidental or ancillary to the completion of manufactured productb. Which is specified in relation to any goods in the section or chapter notes of the First Schedule to the CETA, as amounting to manufacturec. Which, in relation to goods specified in Third Schedule of the CEA, involved packing or repackaging of such goods in a unit container or labelling or re-labelling of containersor any other treatment to render the product marketable to the consumer.Clauses b and c are called deemed manufacture.The word manufacture stems from the Latin word manu, by hand and facere which means to do, make or form, but the meaning is wide enough to include that which is done by hand as well as by machinery. Manufacture means bringing into existence a new substance. Manufacture is the end result of one or more processes, through which original commodity passes.[footnoteRef:8] [8: Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791]

New substance having distinct name, characterand use must emergeThere are a number of tests to determine when manufacture has taken place:1. The common parlance test. The test is whether a commodity subject to processing retains its original character and identity or whether the processed commodity is regarded in the trade by those who deal in it, as distinct identity from original commodity. With each step, the original commodity gets changed. But manufacture only is said to take place from the step when the original commodity changes to such an extent that it leaves its original character and begins to be recognised as a new and distinct entity altogether.2. Another test is the test of irreversibilityIn the case of Indian Cine Agencies v. CIT[footnoteRef:9], the court held that by manufacture, something s produced or brought into existence which is different from that, out of which it is made, in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The test to determine whether a thing is manufactured or not is whether a new and different thing emerges having a distinct name, use and character. The word production has a wider connotation than manufacture. [9: (2009) 233 ELT 8 (SC)]

In ITO v. Arihant Tiles and Marbles[footnoteRef:10], the issue was whether the conversion of marble blocks into tiles and slabs amounted to manufacture or not. It was held that mere cutting of marble stones into slabs will not amount to manufacture, but since after the process completes, a new and distinctive polished slab and tile results, it becomes a new and different commodity, it is manufacture. [10: (2010) 186 Taxmann 439]

In the case of Kesarwani Zarda Bhandar v. State of UP[footnoteRef:11], the issue was whether zafrani zarda which was processed from raw tobacco was processed or manufactured. The UP government had imposed a market fees on agricultural produce in raw form and processed form. The appellant contended that the zafrani zarda was made from raw tobacco by carrying out various processes like sprinkling of jiggery juice, cutting it, drying it, adding flavours and mixing it with other spices and lime etc. thus, raw tobacco loses its original character and becomes an altogether new product. It is a different commercial commodity and is thus a manufactured product. It is not a processed agricultural produce. The court held that when a new form comes into being and in the market parlance, it is considered to be a new product, the same would be deemed to be manufactured goods as contra-distinguished from processed goods. Test of manufacture is whether it is a completely new item. In trade, it is known as a different product. Applying common parlance test, the product is a manufactured good. [11: (2009) 227 ELT 337 (SC)]

A manufacture can also happen if both the final product as well as the input fall under the same tariff heading. Tariff heading is merely for the classification of goods and it is not an authority on whether a good has been manufactured or not. In CCE v. Tarpaulin International[footnoteRef:12], the issue was whether the tarpaulin made out of tarpaulin sheets was manufactured only because the item was mentioned in the Tariff. The court held that an article does not merely become a manufactured good because it is mentioned in the CETA Schedule. The process of stitching tarpaulin sheets and fixing eyelets does not change the basic nature of the tarpaulin and does not bring into existence any new product which is completely transformed from its original entity. The activity is NOT manufacture. [12: (2010) ELT 481 (SC)]

However, an assembly of various parts and components may amount to manufacture if the new product so formed is movable and marketable. Combining a steam engine turbine and an alternator by fixing them on a platform and aligning them is a manufacture as new product a turbo alternator comes into existence which has a distinctive use and name.[footnoteRef:13]But if an immovable entity results after such assembly, then it is not dutiable. [13: Triveni Engineering v. CCE AIR 2000 SC 2896]

InCollector of Central Excise v. Technoweld Industries[footnoteRef:14],the Supreme Court has dealt with the issue that drawing wires from wire rods is manufacture or not and it is held that both the products being wires are not considered excisable merely because they are covered by two separate entries in the tariff. [14: 2003 -TMI - 46589 - SUPREME COURT OF INDIA]

Incidental or ancillaryPacking, purification, filtering of chemical to make it marketable, testing, heat treatment and chrome plating are all illustrations of ancillary and incidental processes and do amount to manufacturing.

4. Such manufacture or production must be in IndiaExcise cannot be levied on imported goods or goods that are manufactured outside India. It can be levied only and only if the good has been manufactured or produced in India.

ILLUSTRATIONS OF MANUFACTURE

Coffee beans from raw coffee berries Crushing of limestone into lime Cutting fabrics to make bedsheets Making pan masala Paddy to rice Processing of commercial plywood Recording of cassette Turmeric to turmeric powder Wheat to wheat flour Yarn to thread Transforming blank CDs into software loaded discs is manufacture[footnoteRef:15] [15: CIT v. Oracle Software India (2010) 187 Taxman 275 (SC)]

Chewing tobacco from raw tobacco[footnoteRef:16] [16: R. K. Patel v. CST (2010) 3 GST 320]

Conversion of marble blocks into tiles and slabs[footnoteRef:17] [17: ITO v. Arihant Tiles and Marbles (2010) 186 Taxman 439 (SC)]

Fabrication of furniture at site[footnoteRef:18] [18: CCE v. Mehta & Co. (2011) 264 ELT 481 (SC)]

Oil cake from mustard seed[footnoteRef:19] [19: Jain Bhargwan Oil and Flour Mills v. Union of India (2009) 239 ELT 401 (SC)]

ILLUSTRATIONS: WHAT IS NOT MANUFACTURE

Affixing brand name Blending and packing tea as loose tea does not lose its original character after being packed and sealed Calendaring of fabrics it is only a finishing process Changing colour of an article Cleaning and repairing old ornaments Coating Compressing and bottling gas Crushing of stone boulders into small stones Electroplating Preparation of frozen foods Galvanizing Improving quality, utility or performance of a product Labelling Repairing Testing or inspection Upgradation or modification Tarpaulin made from tarpaulin sheets[footnoteRef:20] [20: CCE v. Tarpaulin International (2010) 256 ELT 481 (SC)]

Printing on glass bottle and logo[footnoteRef:21] [21: Union of India v. Alembic Glass Industries (2010) 259 ELT 8 (SC)]

InMafatlal Industries Limited V. Nadiad Nagar Palika[footnoteRef:22], the Supreme Court observed that cutting 100 meters cloth into small pieces does not bring any different commercial commodity and does not amount to manufacture. [22: 2000 -TMI - 71287 - SUPREME COURT OF INDIA]

In Parle Products Private Limited V. Union of India[footnoteRef:23], the Division Bench of the Bombay High Court has dealt with an issue of use of aluminium foil with printed paper for packing whether amounts to manufacturing. The Court held that the Department was clearly in error in recovering the duty from the company. Backing of aluminium foil with printer paper only to make it more attractive for packing and not resulting in any distinct and different articles does not amount to manufacture. [23: 1991 -TMI - 43023 - HIGH COURT OF JUDICATURE AT BOMBAY]

In Commissioner of Central Excise, New Delhi I V. S.R. Tissues Private Limited[footnoteRef:24],the Supreme Court has observed that slitting/cutting of jumbo rolls of plain tissue paper/aluminium foil is not treated as a manufacture. Mere mention of the product in tariff heading does not necessarily imply that the said product was obtained by process of manufacture. [24: 2005 -TMI - 47380 - SUPREME COURT OF INDIA]

DEEMED MANUFACTURE

Deemed manufacture is of two types:a. CETA prescribes some processes as deemed manufacture.b. Goods specified in 3rd schedule of Central Excise ActSo, the process may not be amounting to a manufacture as per court judgements but they are said to be amounting to manufacture or deemed manufacture under CETA. The test of marketability however, still needs to be satisfied.The processes amounting to manufacture under CETA are: Repacking from bulk packs to retail packs in case of pan masala, yeast, sauces, tea extracts, mineral water, starches, glues, enzymes etc. Printing, decorating or ornamenting of glass mirrors, bottles, watch glass, beads etc.Mere putting of bar code is not manufacture.

CONCLUSIONTheCentral Exciseduty is levied in terms of the Central Excise Act, 1944 and the rates of duty are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The taxable event under the Central Excise law is manufacture / production and the liability of Central Excise duty arises as soon as the goods are manufactured or produced. As per the Central Excise Act, duty is leviable only on excisable goods. i.e., Goods specified in Central Excise Tariff Act, 1985.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.In order for it to be levied, certain conditions are indispensable to be proved. Only then can such a duty be levied.

BIBLIOGRAPHY

WEB SOURCES http://www.advocatekhoj.com/library/bareacts/centralexcise/2.php?Title=Central%20Excise%20Act,%201944&STitle=Definitions https://www.google.co.in/search?sourceid=chrome-psyapi2&rlz=1C1CHWA_enIN603IN603&ion=1&espv=2&ie=UTF-8&q=definition%20manufacture%20central%20excise http://en.wikipedia.org/wiki/Central_Excise_(India) http://www.caclubindia.com/forum/manufacture-u-s-2-f-of-central-excise-act-1944-21442.asp#.VFX0EfmUeZQ http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1264BOOKS Datey, V. S., INDIRECT TAXES LAW AND PRACTICE, Taxmanns 32nd Edition, 2014