1. 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

2. The statutory definition of manufacture in central excise act
“Manufacture” includes any process—
Incidental or ancillary to the completion of a manufactured product;
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

3. 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

4. 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.

5. Leading cases – Decisions of Supreme Court.
…contd
Leading cases – Decisions of Supreme Court.
- ‘Formation of a new Article’
Vide Hawkins Cookers Ltd Vs Collector [ (96) ELT 507 SC.
- ‘A new distinct and commercial commodity.’
Vide TISCO V U.O.I [2004(164) ELT 372 SC.

6. 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.

7. 2) Ingredients of excisablity
Fact of Manufacture.
Entry availability in CE Tariff.
Marketability.

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. The valuation rules…. They are 11 rules in all
Rule 1 – name & entry into force from
Rule 2 – definitions
Rule 3 – exhortation to decide the value (when the transaction value is unavailable or unacceptable)

16. 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

17. 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

18. 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

19. 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

20. 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

21. Freight and Freight insurance, including equalised Freight.
…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

22. Free items supplied with products.
…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

23. 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

24. Amortised Cost of tools/ dies/ moulds received from buyers.
…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.

25. 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.

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. Cenvat credit rules – what is the gain?
Input stage duty relief in the form of tax credit to –
Capital goods
Inputs
Input services

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. Input services….. For service providers:
Any input service used by a provider of output service for providing an output service

53. 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

54. 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

55. Common services…. Accounting Auditing Financing
Recruitment and quality control
Coaching and training

56. 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

57. 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

58. 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

59. 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

60. 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

61. 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