MANUFACTURE AND EXCISABILITY

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 the 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 U.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? Yes, if it leads to manufacture of a product

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

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.

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 –

permissible- Mafatlal Industries Vs U.O.I. L&T Sargent Lundy Ltd Vs CCE

Returns 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 November 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

ER 8 – Quarterly Return for assesses clearing goods at 1% duty

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

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

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

New definition in the CCR “Inputs” means all goods used by the

manufacture of final products Includes accessories cleared with the final

products, if their value is included in the assessable value

All goods used for generation of electricity or steam for captive use

Inputs….

All goods used for providing any output service:

But excludes- Light diesel oil, high speed diesel oil and

petrol Any goods used for – construction of a

building or a civil structure or part thereof

Inputs…

Or, for laying foundation or for making of structures for support of capital goods

Capital good themselves unless these are parts and or components in the manufacture of the final product

Motor vehicles Any goods for the personal consumption of the

employees, primarily Any goods unrelated to manufacture

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 & service providers Services used in relation to – 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….

Accounting Auditing Financing Recruitment and quality control Coaching and training

Common services….

Computer networking Credit rating Share Registry Security, business convention, legal services 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 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