Central Excise – Basic Concepts Tax Induction School – IDT Gurgaon 18 th September 2008

18 th September 2008 Central Excise – Basic Concepts What is there is excise? ► Levy, Imposition and Collection ► Valuation ► Tariff Rates ► Cenvat credit ► Exemptions and Concessions ► Payment of Duty and Returns ► Removal Procedures ► Records ► Adjudication Procedures and penalties ► Appellate Procedures/ Settlement Commission ► Refunds ► Job work

18 th September 2008 Central Excise – Basic Concepts Topics covered ► Levy of Duty ► Valuation ► Tariff Rates ► Cenvat credit ► Exemptions and Concessions ► Payment of Duty and Returns ► Removal Procedures ► Records ► Adjudication Procedures and penalties ► Appellate Procedures/ Settlement Commission ► Refunds ► Job work

18 th September 2008 Central Excise – Basic Concepts Levy of Duty ► Charging Section (Section 3) ► Excisable goods [Section 2(d)] ► Marketable ► Moveable ► Produced and manufactured in India [Section 2(f)] ► New substance ► Distinct Name, character and use

18 th September 2008 Central Excise – Basic Concepts Excisable Goods ► Marketable ► The goods must be known in the market ► Goods can ordinarily come to market can be brought and sold ► Actual sale is not necessary for determining marketability ► Marketability test requires the goods should ‘as such’ be in a position to be taken to market and sold. Therefore, the fact that the goods can be further processed to make it marketable is irrelevant. ► Refuse, ashes and rubbish are different from waste and scrap in as much as the same are not marketable ► Not goods merely because the same is specified in the Schedule ► The fact that there is only one purchaser does not change the fact that the goods are not marketable ► Highly unstable goods not capable of being marketed, hence not goods

18 th September 2008 Central Excise – Basic Concepts Excisable Goods ► Moveable ► Immovable property attached to earth cannot be termed as ‘goods’ ► goods assembled at the site into a immovable property are also not excisable. ► The test is when the goods are grouted to earth and disassembling would only lead to scrap, the goods would be termed as immovable ► However, if the goods are grouted to earth merely for operational convenience then the same cannot be treated as immovable goods

18 th September 2008 Central Excise – Basic Concepts Manufacture “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 Act, 1985 as amounting to manufacture; or (iii) Which, in relation to the goods specified in the Third Schedule, involves packing, repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration ot alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

18 th September 2008 Central Excise – Basic Concepts Produced or manufactured in India ► Incidental or ancillary to the completion of manufactured product ► Deemed Manufacture ► Which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, or ► Goods specified in Third Schedule to the CEA, involves specified activities

18 th September 2008 Central Excise – Basic Concepts Produced or manufactured in India ► A change is necessary ► Trade Parlance ► Identity of the Original article must be lost ► Assembly can amount to manufacture

18 th September 2008 Central Excise – Basic Concepts Methods of Payment of Duty ► Specific Duty ► Duty as % of Tariff Value fixed ► Compounded Levy Scheme ► Duty based on Maximum Retail Price ► Duty as % based on Assessable Value

18 th September 2008 Central Excise – Basic Concepts Assessable Value ► TRANSACTION VALUE (Section 4) IF: ► Goods are sold ► Goods sold at the time of removal ► Goods sold at the place of removal ► Price is sole consideration of sale ► Buyer and seller are not related parties

18 th September 2008 Central Excise – Basic Concepts Assessable Value ConditionsRule if condition not satisfied AV if condition not satisfied The goods should be sold at the time of removal Rule 4Value of such goods sold by the assessee for delivery at any time nearest to the time of the removal of goods under assessment subject to adjustment on account of the difference in the date of delivery. The goods should be sold at the place of removal Rule 5Value of goods shall be the transaction value excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods Price should be the sole consideration for the sale Rule 6The AV shall be the aggregate of TV and the amount of money value of any additional consideration flowing directly or indirectly from the buyer

18 th September 2008 Central Excise – Basic Concepts Assessable Value ConditionsRule if condition not satisfied AV if condition not satisfied Buyer and assessee should not be related Discussed below Goods not sold: (i) Goods sold from depot and not from the factory Rule 7The value shall be price at which the goods are sold from such depot (ii) Goods are captively used Rule 8The value shall be 110% of the cost of production

18 th September 2008 Central Excise – Basic Concepts Assessable Value – Related party ► Persons shall be deemed to be ‘related’ if- ► They are inter-connected undertakings. ► They are relatives ► They have interest in the business of each other ► Who is not ‘Related Person’ ► Brand name owner is not related person ► Sole Distributor or Sole Agent not necessarily a Related person ► Buyer undertaking after-sales service ► Buyer exercising quality control and price fixed as per formula

18 th September 2008 Central Excise – Basic Concepts Assessable Value – Related party ► 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 ► If goods are supplied to related person for captive consumption, valuation will be on basis of cost of production plus 10 % ► 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 ► 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.

18 th September 2008 Central Excise – Basic Conceptsslide 16 Excise Valuation Rules – Case Studies 1) ABC Ltd. has its factory in Chennai and a depot at Mumbai 2) Based on a order placed by a Mumbai customer, certain goods are dispatched from the Chennai factory (4,000 units are per unit) to the Mumbai depot, from where these are sold 3) At the time of removal from Chennai, the following prices are made available at the depot: >1,000 units per unit; and >2,000 units per unit Help ABC Ltd. In ascertaining the AV for the goods cleared (per unit)

18 th September 2008 Central Excise – Basic Conceptsslide 17 Excise Valuation Rules – Case Studies 1) Since the goods are sold through a depot, Rule 7 would apply - In such cases, price prevailing at depot (but at the time of removal from factory) shall be the basis of AV 2) The value would be based on ‘normal transaction value’ 3) Thus, in the present case, the AV would be Rs.40 per unit, ie, the price at which the goods are sold in greatest aggregate quantity from the depot In short, the price ruling at the depot, but at the time of removal from the factory will be relevant. It would not matter if subsequently the goods are actually sold from depot at higher or lower price – Castrol India 2000 (118) ELT 35

18 th September 2008 Central Excise – Basic Conceptsslide 18 Excise Valuation Rules – Case Studies 1) XYZ Surgicals Ltd. is engaged in the manufacture of syringes 2) ABC Hospital has requested for a few samples of syringes before it places a bulk order 3) XYZ removes 5 units of syringes to ABC on a free sample basis 4) At the same time it also sells 10 units to PQR Ltd. for Rs.50/ unit XYZ believes that there is no duty liability on removal of free samples Is XYZ correct in its view??

18 th September 2008 Central Excise – Basic Conceptsslide 19 Excise Valuation Rules – Case Studies 1) XYZ is not correct in its view 2) Even though there is no sale on issue of free samples, it is still a removal 3) Rule 4 would apply to the present case - If goods are not sold at the time of removal, then value will be based on the value of such goods sold by assessee at any other time nearest to the time of removal, subject to reasonable adjustments 4) In the present case, XYZ can adopt Rs.50 as the assessable value CBEC vide Circular No.813/10/2005 has clarified that in case of samples distributed free, the valuation should be done on the basis of rule 4

18 th September 2008 Central Excise – Basic Conceptsslide 20 Excise Valuation Rules – Case Studies 1) XYZ Ltd. manufactures furniture and furniture products 2) It has decided to use its own furniture for the new administrative office that is being set up within its factory 3) It has estimated the cost of production (as certified by a CWA in terms of ICWAI guidelines) as Rs.10,000 for the furniture to be used in-house XYZ is of the view that since it has not sold the furniture to a third party, there is no duty liability Is XYZ correct in its view??

18 th September 2008 Central Excise – Basic Conceptsslide 21 Excise Valuation Rules – Case Studies 1) Since the furniture is captively consumed, Rule 8 would apply 2) In the case of Captive consumption, Valuation shall be done on basis of Cost of production (Cop) plus 10% (notified) profit margin on Cop, i.e. the AV shall be 110% of the Cop 3) Captive consumption amounts to ‘removal’ of goods 4) Thus, the value as per Rule 8 would be Rs.11,000, ie, 110% of the Cop, determined as per the ICWAI guidelines in Cost Accounting Standard- 4 (CAS-4) issued by ICWAI

18 th September 2008 Central Excise – Basic Conceptsslide 22 Excise Valuation Rules – Case Studies 1) RST Ltd. has manufactured 50 units of tyres for PQR Ltd, at a value of Rs.2,000 2) PQR Ltd has supplied the following to RST on a free of cost basis for the manufacture of these tyres:  Materials, components, parts and similar items, valued at Rs.100  Engineering, development, art work etc., valued at Rs.50 3) RST Ltd. contends that the AV is only Rs.2,000 for the present case Is RST Ltd. correct in its view?

18 th September 2008 Central Excise – Basic Conceptsslide 23 Excise Valuation Rules – Case Studies 1) No, RST is not correct in its view 2) The AV has to be determined as per Rule 6 - The AV shall be the price charged by the assessee + the money value of the additional consideration received 3) In the present case, materials and engineering work issued on a FOC basis will be added to the AV for the payment of duty as an additional consideration Thus, the AV in the present case would be Rs.2,150 (2, )

18 th September 2008 Central Excise – Basic Concepts Cenvat Credits ► Relevant definitions ► Capital goods [Rule 2(a) of CCR] ► Input [Rule 2(k) of CCR] ► Input Service [Rule 2(l) of CCR] ► Input Service Distributor [Rule 2(m) of CCR]

18 th September 2008 Central Excise – Basic Concepts Cenvat Credit - Conditions CAPITAL GOODS ► Cenvat credit of capital goods can be taken upto 50% in the financial year in which capital goods are received and balance in subsequent year/ s ► In capital goods upto 50% credit is available in current year and balance in subsequent financial year or years. ► Cenvat credit of capital goods is allowable even if the capital goods are acquired on lease, hire purchase or loan. However, assessee should not claim depreciation on the excise portion of value of capital goods

18 th September 2008 Central Excise – Basic Concepts Cenvat Credit - Conditions INPUTS ► Cenvat credit on inputs is available as soon as inputs are received in the factory of manufacturer or premises of the provider of output service [Rule 4(1)] INPUT SERVICES ► Cenvat credit of input service is allowed only after payment towards value or service and service tax is made

18 th September 2008 Central Excise – Basic Concepts Cenvat Credit - Conditions Common Inputs and Input Services ► Cenvat credit is not available on inputs and input services that are exclusively used in manufacture of exempted goods ► Maintain separate account for receipt, and consumption of common inputs/ input services which are used to manufacture both exempt and taxable output service ► Where separate accounts are not maintained, a manufacturer has to reverse an amount which is equal to 10% of the value of exempted goods ► For 17 specified input service whole of service tax paid will be allowed as credit, even though part of these services may be used in exempt services / activity

18 th September 2008 Central Excise – Basic Concepts Job Work ► Introduction ► Job worker person who carried the manufacturing activity on behalf of the principal manufacturer (materials usually supplied by principal manufacturer) ► Job worker is the manufacturer liable to duty ► Exemption under Notification No. 214/ 86 ► Entitled to credit on inputs and input services

18 th September 2008 Central Excise – Basic Concepts Job Work ► Option 1: ► Goods cleared by supplier on payment of duty ► Job worker takes Cenvat credit of duty paid ► Job worker pays duty and clears goods to supplier of raw materials ► Supplier takers credit of the duty paid

18 th September 2008 Central Excise – Basic Concepts Job Work ► Option 2 ► Inputs cleared without payment of duty u/r 4(5)(a) of CCR ► Goods cleared by job worker without payment of duty (notification 214/86) ► Goods brought back and used to manufacture excisable product, which are cleared on payment of duty

18 th September 2008 Central Excise – Basic Concepts Job Work ► Option 3 ► Goods cleared without payment of duty after taking permission from the Commissioner in terms of Rule 16B of CER ► Goods cleared by job worker without payment of duty (notification 214/86) ► Goods brought back and used to manufacture excisable product, which are cleared on payment of duty

18 th September 2008 Central Excise – Basic Concepts Job Work - Valuation ► Goods sold directly from job workers premises ► Price at which sold by principal manufacturer ► Goods transferred to some place from where the goods would be sold ► Normal Transaction Value ► Any other case ► As per Valuation Rules

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