I

Introduction to Indirect tax

History:
Tax had its genesis from 300 B.C in Kautilyas Arthasastra, where King used to levy taxes on various
classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-
coins, cattle, grains, raw-materials and also by rendering personal service. There was a belief that King
collects taxes, just as sun draws moisture from earth to give it back a thousand fold.

The State not only collected a part of the agricultural produce but also levied water rates, octroi duties,
tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals etc.
Salt tax was an important source of revenue and it was collected at the place of its extraction

The revenues collected in this manner were spent on social services such as laying of roads, setting up of
educational institutions, setting up of new villages and such other activities beneficial to the community
and also for protection, Law and order [Also, for distributing free color TVs, Washing machines, laptops,
free rice!!!].
Present:
Tax is a fee charged by a government on an income, a product or activity. There are two types of tax
viz., Direct Taxes and Indirect Taxes. If tax is levied directly on the income or wealth of a person, then it is a
direct tax. If tax is levied on the price of a good or a service, then it is called an indirect tax. In the case of
indirect taxes, the person paying the tax passes on the burden to another person.

Future:
Goods and Services Tax (GST) which eliminates the present excise, service and sales tax. Customs will be
retained. India is a federal republic, and the GST will thus be implemented concurrently by the central and
state governments as the Central GST and the State GST respectively.
Indian Constitution w.r.to taxes:
In its current state, the Constitution of India does not provide concurrent powers of taxation to the Union
and the States. The 115
th
Constitution Amendment Bill, 2011 (BILL) proposes to amend the Constitution to
empower the Union and States to frame laws for levying GST on transactions involving the supply of goods
and services.
Article 265 of constitution of India prohibits arbitrary collection of tax. It read as No tax shall be levied or
collected except by authority of law. The power to Levy and collect tax is derived from Constitution.

Taxes
Direct taxes
Income tax
Wealth
Tax
Indirect taxes
Excise
Duty
Customs
Duty
Service tax
Sales
tax/VAT


II
President of India is the head of the state and the state has 3 organs
Legislative organ Parliament Enact the Laws
Executive organ Council of Ministers headed by PM Implement the Laws
Judicial organ Supreme Court Interpret the Laws
(Of course the Fourth Organ or Fourth Estate is NEWS PAPER)
How an Act comes into Existence?
Recognition of Issue Appointment of Committee Recommendations by committee Preparation of
Bill Presentation to parliament Discussion in both the houses Bill passed with majority Sent to
president for assent Bill becomes Act on the date of assent by president.

For every Act, there will be Rules, notifications, circulars, judicial pronouncement. Why? -- In order to
support the Act.


Act Contains the detailed provisions which are to be complied with as a Citizen of India

Rules Are meant only for the purpose of carrying out the purposes of the provisions of the Act and it
should be read in such a way as to make it in accordance with the main object contained in the Act.

Notifications It is not practicable to approach parliament and seek its approval for every minor change.
Therefore, parliament delegates some powers to other authorities to issue notifications for those changes
and also every change should be notified. A notification has to be published in official Gazette, which is
then made available to public. The notification comes into effect on the day it is published in official
Gazette.

Trade circulars/Trade notices Are issued to clarify the views of the government in respect of any Act,
rules or notifications. They do not have any legal force.
Authorities cannot take different stand in different states and that trade notice issued by
customs house will bind all customs authorities.
Board circulars are not binding on the Supreme Court or high court or tribunal. In the
same way, departmental clarifications are not binding on the assessee.
If departmental circulars are favorable to assessee, they bind revenue even if they are
contrary to the interpretation of law by Supreme Court. This is not true if circulars are
against assessees, who are bound by provisions of law.
The board is not empowered to issue circulars contrary to tribunal decisions and instead
has to take up the matter in appeal.

Orders Orders with respect to tax may be issued either by CBEC or by Central government. Orders have
been issued by the CBEC from time to time to define jurisdiction of officers.

Any Act, Rule, Notification or order which is not according to constitution is Void and illegal.



Sources of any law
Act Rules Notifications
Circulars or
Office letters
Trade
Notices
Orders


III
Administration of Tax By Executive Organ:

Central Board of Excise & Customs (CBE&C) is the central authority to regulate Central Excise, Service tax
and Customs matters.
The following diagram illustrates the levy of Indirect taxes in
India:

Ministry of Finance
Department of Revenue
Central Board of Direct taxes (CBDT)
To control in respect of all matters
related to Direct tax including levy and
collection of tax
Central Board of Excise & Customs (CBE&C)
To control in respect of all matters
related to Indirect tax including levy
and collection of tax


IV
Seventh schedule to the Constitution, contains 3 Lists
List I - Union List List II State List List III Concurrent List
Entry No. 82: Tax on income
other than agricultural income
Entry No. 46: Taxes on agricultural
income
Where both Central and
state government can make
laws. It includes
Entry No. 83: Duties of customs
incl. export duties
Entry No. 51: Excise duty on
alcoholic liquors, Opium, narcotics
Entries like
Criminal law
Trust and trustees
Entry No. 84: Duties of excise
on tobacco and other goods
manufactured or produced
except alcoholic liquors, Opium,
narcotic drugs
Entry No. 52: Tax on entry of goods
into a local area for consumption,
use or sale there in.
(usually called Octroi)
Civil procedures
Price control
Factories etc.
Entry No. 85: Corporation tax Entry No. 54: Tax on sale or
purchase of goods other than
newspapers, within the state

Entry No. 92A: Tax on sale or
purchase of goods other than
newspapers, which take place in
the course of interstate trade or
commerce.

Entry No. 92B: Taxes on
consignment of goods where
consignment takes place in the
course of interstate trade or
commerce

Entry No. 92C: Tax on services
(passed but not made effective)

Entry No. 97: Residual powers











INDIRECT
TAX LAWS
CENTRAL
EXCISE ACT,
1944
C Taxable Event
C Rate of duty
C Valuation
C CENVAT credit
C Exemptions
C Procedures
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Table of Contents
Nil rated goods Vs. Non excisable goods: ..................................................................................... 8
Excisable goods Vs. Exempted Goods: .......................................................................................... 8
Issues in Taxable Event: ........................................................................................................................ 9
1. Goods under Central Excise: ...................................................................................................... 10
Issues in Goods: ................................................................................................................................ 11
Recent Cases on Plant and machinery assembled at site: .......................................................... 14
2. Excisable Goods under Excise: ................................................................................................... 17
3. Manufacture under Excise: ......................................................................................................... 17
FAQs on Manufacture: ................................................................................................................... 18
Case laws on Manufacture: ............................................................................................................. 21
Manufacturer: .................................................................................................................................. 22
FAQs on Manufacturer: ................................................................................................................. 23
General Rule: ........................................................................................................................................ 23
Exceptions: ........................................................................................................................................... 23
4. Scope and Coverage of Excise Act, 1944: ....................................................................................... 25
Dutiability in case of EOU: ......................................................................................................... 25
Various Schedules under CETA: ......................................................................................................... 26
Features of CETA: ............................................................................................................................... 26
Harmonised System of Nomenclature:................................................................................................. 27
Classification under CETA: ................................................................................................................. 28
An Extract from CETA: .................................................................................................................... 28
Steps in classification: ..................................................................................................................... 28
Trade parlance Theory: ................................................................................................................... 28
General Interpretative rules (GIR) or Rules for Interpretation of Tariff: ........................................... 29
Classification of accessories: .......................................................................................................... 31
Classification of parts and components:.......................................................................................... 31
Case laws on Classification: ................................................................................................................ 32
Circulars on Classification: ................................................................................................................. 34
Various Types of duties under Excise: ................................................................................................. 35
Provisions relating clean energy Cess: (Notifications 1-6/2010 and 28-29/2010): .................... 35
1. Specific duty ..................................................................................................................................... 37
2. Tariff Value ...................................................................................................................................... 37
3. Duty based on production capacity [Sec. 3A] ................................................................................. 37
4. MRP based valuation ....................................................................................................................... 38
FAQs on MRP based valuation: ..................................................................................................... 38
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Retail Selling Price (Determination) Rules, 2008: .......................................................................... 40
5. Compounded Levy scheme: .............................................................................................................. 41
6. Transaction Value ............................................................................................................................ 41
FAQs on the definition of TRANSACTION VALUE: .................................................................. 42
Computation of Transaction Value:..................................................................................................... 45
Valuation Rules:................................................................................................................................... 47
Case laws on Valuation and Valuation Rules: ................................................................................ 49
Circulars on Valuation and Valuation Rules: ................................................................................. 51
Definition of Inputs: ............................................................................................................................. 53
FAQs on inputs ............................................................................................................................... 53
Recent cases on Inputs: .................................................................................................................... 56
Definition of Input Service: .................................................................................................................. 57
FAQs on Input service: ............................................................................................................... 58
Definition of Capital goods: ................................................................................................................ 61
FAQs on capital goods. .............................................................................................................. 62
Input Service Distributor: .................................................................................................................... 63
Manner of distribution of credit (Rule 7) ..................................................................................... 64
Duties/taxes that can be taken as credit: ............................................................................................. 65
Restriction on Utilization:.................................................................................................................... 66
What are Exempted goods and Exempted services? ................................................................... 66
FAQs on Exempted goods and Exempted Services: ....................................................................... 66
Definition of output service: ................................................................................................................ 67
Removal of Inputs or Capital goods: ................................................................................................... 67
FAQ s on Removal of Inputs, Capital goods: ............................................................................. 68
Recent Circulars .................................................................................................................................. 69
Other miscellaneous provisions in Rule 3 ................................................................................... 70
Availement of CENVAT credit: ............................................................................................................ 72
FAQs on Rule 4: ........................................................................................................................... 73
Goods Sent on Job work: ..................................................................................................................... 73
FAQs on Rule 4(5) and Rule 4(6):.................................................................................................. 74
CENVAT credit w.r.to Exports: ........................................................................................................... 75
FAQs on Rule 5: ......................................................................................................................... 76
Refund of CENVAT credit to units in Specified areas Rule 5A: ................................................... 76
Inputs/Input services used in Exempted goods/services:[Rule 6] ........................................................ 77
Common inputs used for BOTH EXEMPTED AND DUTIABLE GOODS (AND) services: ............... 77
FAQs on Rule 6: ......................................................................................................................... 80
Explanation to above chart:............................................................................................................. 81
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Capital goods used for exempted as well as dutiable goods/services: ................................................ 83
Documents on the basis of which credit can be taken: ........................................................................ 84
FAQs on documents ........................................................................................................................ 84
If dutiable goods turn out to be exempted goods: ................................................................................ 85
Miscellaneous procedural CENVAT credit rules ................................................................................ 86
Procedures & Records for CENVAT .................................................................................................. 86
Transfer of CENVAT credit [Rule 10 & Rule 10A] ............................................................................. 87
Confiscation and Penalty [Rule 15] .................................................................................................... 88
Notifications issued by the central government to be laid before parliament [Sec. 38] ..................... 89
Power to grant exemption from duty [Sec. 5A of CE Act] ................................................................... 89
Various Exemptions under Excise: ...................................................................................................... 90
1. Exemptions to SSI: ........................................................................................................................... 90
Case laws on SSI Exemption: .......................................................................................................... 94
Circulars & Notifications on SSI Exemption: ...................................................................................... 96
Clubbing of clearances: ................................................................................................................... 97
Case laws in this regard: ............................................................................................................. 97
2. Exports under Excise Rule 18 and Rule 19 of Central Excise Rules, 2002 .................................. 98
FAQs on Rule 18 (Rebate of duty): .............................................................................................. 103
3. Clearance of goods to an Export Oriented Unit (EOU) Notification No. 22/2003 .................... 113
4. Clearance of Excisable goods from a DTA unit to Special Economic Zone (SEZ) ........................... 114
5. Notification No. 1/2011 CE......................................................................................................... 114
6. Removal of goods at concessional rate of duty for manufacture of excisable goods: ................... 115
7. Exemptions to new units located in backward area: ..................................................................... 116
Organization hierarchy of Excise Department .................................................................................. 118
Registration [Sec. 6 of Central Excise Act along with Rule 9 of Central Excise rules] .................... 118
Application for registration by LTU Notification No. 17/2011 ...................................................... 121
Exemption to other units of manufacturers of recorded smart cards when premises from where
centralised billing done is registered Notification No. 14/2011.................................................... 121
Storage and accounting the Final Products: ..................................................................................... 121
Invoice [Rule 11 of Central Excise Rules]: ....................................................................................... 122
Payment of Duty [Rule 8 of Central Excise Rules]: .......................................................................... 123
Form and maintenance of Personal Ledger Account (PLA): ............................................................ 124
Returns under Excise (Rule 12 of Central Excise Rules): ................................................................. 124
Assessment under Excise: .................................................................................................................. 125
Procedure for Self assessment: ...................................................................................................... 126
FAQs on scrutiny of returns and assessment: .............................................................................. 126
Procedure for provisional assessment: .......................................................................................... 127
CA Final
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FAQs on provisional assessment:................................................................................................. 128
Goods brought for Repairs, remaking and reconditioning [Rule 16]: .............................................. 129
The provisions as contained in Rule 16 are as follows: .................................................................. 129
FAQs on Rule 16: ......................................................................................................................... 130
Clearance of goods for carrying out tests or other process (Rule 16C): .......................................... 130
Jobwork in jewellery (Rule 12AA): .................................................................................................... 131
Procedure and facilities for Large tax payer Unit (Rule 12BB): ...................................................... 131
Procedure for maintenance of records and payment of duty by the independent weaver of
unprocessed fabrics (Rule 12C): ....................................................................................................... 132
Warehousing of goods (Rule 20): ...................................................................................................... 132
FAQs on warehousing of goods: .................................................................................................. 133
Remission of duty (Rule 21): .............................................................................................................. 133
Bonds under Excise: .......................................................................................................................... 134
Withdrawal of facilities and imposition of restrictions on certain assessees by central government
[Rule 12AAA of CENVAT credit Rules, 2004 & Rule 12CCC of Excise Rules, 2002] Notification 3
to 5/2012 ............................................................................................................................................ 134
Audit under Central Excise:............................................................................................................... 136









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Central Excise Act, 1944/ CENVAT
An Introduction
O For every Act, there will be Rules, notifications, circulars, judicial pronouncement. Why? In order to support
the Act.

O It includes the following:
1. Central Excise Valuation Rules, 2000 To Determine the Value
2. Central Excise Tariff Act (CETA), 1985 Contains rate of duty and only goods mentioned here are taxable
goods
3. Central Excise Rules, 2002. Procedure to pay duty
4. CENVAT credit Rules, 2004

O Main purpose of Central excise Act,1944

O Govt. will impose the duty, the power to levy duty is derived from the constitution and reference is List-I of the
seventh schedule of the constitution Entry 84 Duties of excise on tobacco and other products manufactured
or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs but including
medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

O Tax payable = Rate of duty x Value
So, in order to arrive at excise duty payable 4 things are to be determined
1. When to pay the duty i.e., Taxable event
2. Rate of Duty.
3. Value on which the rate has to be applied.
4. Exemptions
5. Procedure for payment of duty

The Central Excise Act should be read to cover all the above 5 sequentially and systematically.

Taxable Event Sec. 3 of Central Excise Act, 1944
Excisable goods manufactured or Produced in India

Rate of Duty As mentioned in Central Excise tariff Act (CETA), 1985

Valuation Sec. 3(2) Tariff Value
Sec. 3A Duty based on Production capacity
Sec. 4A MRP based Valuation
Sec. 4(1) Transaction Value
Central Excise (Determination of value) Rules, 2000
Exemptions Sec. 5A and various exemption notifications by the Board in the official Gazette.

Procedures Contained in Central Excise Rules, 2002

Levy of excise duty
Why? - To raise
revenue
When? - Taxable
event
How? - Rate of duty,
How to pay etc.,
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Taxable Event under Excise















1. Levy i.e.
Taxable
Event
Governed by sec. 3 of
the Central Excise Act,
1944
The EVENT on happening of which the duty liability is attracted is known
as Taxable event. In excise the taxable event is Manufacture (or)
production of excisable goods in India
4 conditions must be satisfied to attract excise duty liability
(i) There must be goods
(ii) The goods must be excisable
(iii) Goods must be manufactured (or) produced
(iv) Such manufacture (or) production takes place in India
2. Point of
payment of
Duty
Rule 4 and 5 of Central
Excise Rules, 2002
C Even though, the duty liability arises as and when the goods are
manufactured but it is to be paid at the time of removal of
goods from the factory or warehouse. (The provision is so
constructed because of administrative convenience)
C The relevant date for determining the rate of duty and tariff
valuation shall be the date of actual removal of goods from the
factory or warehouse.
3. Collection
of Duty
Rule 8 of Central
Excise Rules, 2002

Note: For the Month of March and Quarter ending March the due date
shall be MARCH 31
st


An assessee who has paid total duty of `10 lakh or more either in cash or
by utilizing CENVAT credit or both in the preceding financial year shall
deposit the duty electronically through internet banking
(www.aces.gov.in/epayment)

The duty liability shall be deemed to have been discharged only if the
amount payable is credited to the account of Central Government.
When tax should be paid ?
Normal Assessee
Normal Payment
5
th
of the month
following, every
month
E - Payment
6
th
of the month
following, every
month
SSI Units
Normal Payment
5
th
of the month
following the
quarter
E - Payment
6
th
of the month
following the
quarter
C What is taxable event under excise?
C Issues in taxable Event
C Goods
C Issues in Goods
C Excisable Goods
C Manufacture
C Issues in Manufacture
C Manufacturer
C Scope and coverage of Excise Act, 1944
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Non-Excisable goods Non-dutiable goods Goods exempt from duty Goods carrying nil rate of
duty
If goods are not listed
in CETA (or)
If goods are listed in
CETA but no rate is
specified (i.e. not nil
rate or the rate column
is left blank)
They are excisable goods but not
liable to duty because of:
a) NIL rate has been specified
b) on account of 100%
exemption
c) On account of any other
reason like, not
manufactured or not
marketable.
These are excisable
goods
But are exempted by a
notification in official
gazette.
These are excisable
goods
But are not liable to duty
as the rate mentioned in
CETA will be NIL
Goods where rate is blank
is excisable goods
Geetanjali Woolens V.
CCE (2007) (CESTAT)
Examples: Flowers,
Ready to eat meals,
broken glazed tiles
Examples: live animals,
newspaper and maps, rice,
wheat, soya bean, cotton seed.
Examples: Iron and steel
ingots etc.,

Non duty paid goods are those, which are removed clandestinely (i.e. illegally without paying duty), without an
invoice where the intention is to evade duty.
Nil rated goods Vs. Non excisable goods:

Nil rated Goods Non Excisable Goods
Meaning Goods which are mentioned in CETA, but
the rate of duty being nil. These are
excisable goods.
When goods are not mentioned in CETA
Whether taxable event
triggered?
Yes No
Reason? As all the 4 conditions are satisfied i.e.
Goods, excisable goods, manufacture in
India.
As one of the 4 conditions not satisfied i.e.
these are not excisable goods.
Whether duty liability
attached?
Yes No
Reason? As and when taxable event is triggered,
the duty liability is attached.
As and when taxable event is not triggered,
the duty liability is not attached.
Whether duty payable? No No
Reason? The rate of duty being 0% There is no tax liability
Excisable goods Vs. Exempted Goods:
Excisable Goods Exempted Goods
Meaning Goods which are mentioned in CETA. Goods which are mentioned in CETA but
exempted by an exemption notification.
These are also excisable goods.
Whether taxable event
triggered?
Yes Yes
Reason? As all the 4 conditions are satisfied i.e.
Goods, excisable goods, manufacture in
India.
As all the 4 conditions are satisfied i.e. Goods,
excisable goods, manufacture in India.
Whether duty liability
attached?
Yes Yes
Reason? As and when taxable event is triggered,
the duty liability is attached.
As and when taxable event is triggered, the
duty liability is attached.
Whether duty payable? Yes No
Reason? Tax liability is attached, so tax payable at
the time of removal.
Though the tax liability is attached, but it is
exempted by a notification.
CA Final
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Issues in Taxable Event:

Issue 1: In the following cases goods are not sold and money not received. Whether excise duty is
payable?
(i) If consumed within the factory.
(ii) If given as free samples
(iii) If Goods captively consumed means goods are consumed for further manufacture, ex:
Consumption of cloth for readymade garments
(iv) If Goods are distributed as replacement

In all the above issues, excise duty is levied, since the taxable event (i.e) manufacturing of goods taken
place.


Issue 2: Take a look at the following situations and decide whether excise duty is payable?
Situation On the date of manufacture On the date of removal Whether duty payable
(i) NIL 16%
(ii) Not excisable 16%
(iii) Exempted Exemption with drawn
(iv) No special levy Special levy introduced

Situation (i): Rate of duty as relevant on the date of removal Wallance Floor Mills Co. Ltd. v. CCE.
Facts of the case:
O Goods were fully manufactured and packed when goods were exempt from duty.
O These were cleared after the exemption was withdrawn and goods became liable to duty.
O Held that the duty is payable.

Situation (ii): If a particular good is not excisable on the date of manufacture and subsequently made
excisable, then there is no duty liability.

Situation (iii): Exempted goods do not mean the goods are non-excisable.

Situation (iv): No special levy applicable as there is no special levy on the date of manufacture CCE. v.
Vazir Sulthan Tobacco Ltd.
Facts of the case:
The company was engaged in manufacture of cigarettes.
Levy of special Excise duty on cigarettes were removed between 1.3.1978 and 12.3.1978.
Cigarettes were manufactured during that period i.e., Prior to 12.3.1978
Held that the duty is on manufacture and not upon removal. When the goods were manufactured,
there was no levy of special duty so it cannot be attached at the stage of removal.


Issue 3: If goods were seized by excise authorities and released later and in meanwhile if excise
exemption is withdrawn, what is the position of the assessee?

Assessee will not be entitled to exemption, as the exemption notification was not in force on the date of
removal from the factory Kuil Fire Works v. CCE.


Issue 4: Indian railways, which is a department of central government has manufactured certain goods
falling under CETA, 1985. Whether duty can be levied on government undertaking?

The supreme court vide Karya palak engineer V. State of Rajasthan has observed the articles 285 and 289
of constitution and held that, excise duty can be levied on goods manufactured by state or central
government undertakings.

CA Final
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1. Goods under Central Excise:
Goods are not defined under Central Excise Act. But
Goods under sale of goods Act is Every kind of
movable property other than actionable claims and
money; and includes shares, grass and things attached
to and forming part of land which are agreed to be
served before sale or under contract of sale.
O Based on the Sale of Goods Act,
If a particular article (or) commodity is movable,
then it is a good.
O Based on the case UOI v. DCM,
If a particular article (or) commodity is marketable,
then it is a good.

O Combing the above.
1. It must be movable
2. It must be marketable (includes
Deemed Marketability)
Concept of Marketability:
Marketable Capable of being bought or sold (Actual sale not necessary) Marketability or vendibility test.
O The goods manufactured must be known to the market.
O Existence of an open market is not a pre condition. There may or may not be an actual market.
O The fact that the product in question is generally not being bought and sold or has no demand in the
market would be irrelevant. (As capable of being bought or sold is sufficient)
O Usage in captive consumption is not determinative of whether the article is capable of being sold in the
market.
O Even if goods are available from only one source or from a specified market, it makes no difference so long
as they are available for purchasers.
O The test of marketability is that the product which is made liable to duty must be marketable in the
condition in which it emerges.
Deemed Marketability:
As per the explanation to sec. 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.


UOI vs. Delhi Cloth Mills Case:
- The company was engaged in the manufacture
of vanaspathi. Ground nut oil and til oil was
the raw material.
- An intermediate product called Refined oil was
obtained during the process and which was
further processed to obtain the final product.
- Excise authorities have demanded duty on final
product.
- Court held that, refined oil produced by the
company was deodorized before being used for
hydrogenation to produce final product.
- The duty of excise can be levied on intermediate
product though it is not going to be sold in the
market unlike final product, as the duty is on
manufacture but not on sale.
- However, the relevant test is whether the
substance produced is known to the market.
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Case laws on Marketability:
Case Judgment
1. Union Carbide India
Ltd. V. UOI
Goods must be marketable and known in the market as such, in order to be exigible to
duty.
2. Flex Engineering Ltd.
V. CCE (2012) (SC)
Manufacture is intrinsically integrated with marketability.
3. Gujrat Narmada valley
Fertilizer Co. Ltd. V. CCE
(2005) (SC)
Simply because certain articles fall within the schedule (i.e. mentioning in tariff) does
not make them marketable.
4. Cipla Ltd. V. CCE (2010)
(SC)
Marketability is essential. Mere mention in Chemical weekly drug directory as
intermediate product does not mean that product is marketable.
5. Bata India Ltd. V. CCE
(2010) (SC)
The mere theoretical possibility of the product being sold is not sufficient but there
should be commercial capability of being sold. Theory and practice will not go together
when one examine the marketability of a product.
6. CCE V. Ambalal
Sarabhai Enterprises
(1989) (SC)
Goods with unstable character can be theoretically marketable if there was a market
for such transient types of articles.
Highly unstable goods like starch hydrolysate being transient in nature not capable of
being marketed and therefore not goods.
7. Nicholas Piramal India
Ltd. V. CCE (2010) (SC)
1. Short shelf-life could not be equated with no shelf-life and would not mean that it
could not be marketed.
2. A shelf-life of 2 to 3 days was sufficiently long enough for a product to be
commercially marketed.
3. Shelf-life of a product would not be a relevant factor to test the marketability of a
product unless it was shown that the product had absolutely no shelf-life or the
shelf-life of the product was such that it was not capable of being brought or sold
during that shelf-life.
4. Hence, product with the shelf life of 2 to 3 days was marketable and hence,
excisable
8. CCE V. Umesh Pencil
Processors P. Ltd. (2011)
(SC)
The fact that the assessee was availing the exemption doesnt prove that the goods
were marketable. In deciding the marketability of a product, mere specification in the
dictionary, excise tariff and drawback schedule is of no consequence.
9. Medley
Pharmaceuticals Ltd. V.
CCE (2011) (SC)
Even though Drugs and Cosmetics Act, 1940 bars the sale of physicians samples,
however, excisability of a product is not dependent on its saleability. Excise duty is a
levy on production or manufacture and is payable whether or not the goods are sold.
Further, such prohibitions on sale of physicians samples under Drugs Act doesnot
affect the marketability of such samples. Restrictions under Drugs Act cannot affect
imposition of excise duty under the Central Excise Act thereby causing loss of revenue.
Therefore, physicians samples are liable to excise duty.
10. Hindalco Industries
Ltd. V. UOI (2009) (HC) &
Circular No. 904/24/09
In view of explanation to sec. 2(d), the bagasse, aluminium/zinc dross and other such
products termed as waste, residue or refuse which arise during the course of
manufacture and are capable of being sold for consideration would be excisable goods
and chargeable to payment of excise duty. [This has reversed the SC judgement in CCE
V. Indian Aluminum Co Ltd. (2006) (SC)]
In case of goods which are manufactured and sold for a consideration, the DEEMED marketability test
is satisfied and the goods are said to be marketable and hence excise duty shall be levied
[Remember!!! The deemed marketability test is applied only when marketability test is not satisfied].
But for the goods, which are manufactured and captively consumed the DEEMED MARKETABILITY
TEST CANNOT BE APPLIED (as goods are not sold) and only MARKETABILITY TEST should be applied.
Issues in Goods:
Issue 1 Dutiability of Waste & Scrap
Issue 2 Plant and Machinery assembled at site
Issue 3 Dutiability of Steel and concrete structures
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Issue 4 Sub standard goods & By-products
Issue 5 Intermediate goods captively consumed
Issue 6 Software


Issue 1: Dutiability of Waste & Scrap

Circular No: 904/24/2009 has clarified that waste like dross, skimmings, bagasse, residues, refuse etc., will
be subject to excise duty w.e.f 10-5-2008.
Waste and scrap to be dutiable must be
- Marketable (including deemed marketability)
- Movable
- Manufactured and
- Mentioned in Tariff.

Question of law involved:
Marketability

Recent Cases on Dutiability of waste & Scrap:


Grasim Industires Ltd. V
UOI (2011) (SC)
Generation of metal scrap or waste during the repair of the worn out machineries/parts
of cement manufacturing plant does not amount to manufacture.

FAQs on Dutiability of Waste & Scrap:

1. What is the meaning of Waste and scrap?
C A small piece or amount of something especially one that is left over after the greater part has been
used or material, especially metal discarded after processing Baby Varghese V. State of Kerala
C If finished product is rejected at testing stage, it is to be classified as scrap Durgapur steel plant V.
CCE
C Defective products unusable have to be taken as scrap and waste Panchmahal steels Ltd. V. CCE

2. Is Waste and scrap a good under Excise?
Yes, CETA has specific headings Brass Dross, Aluminium Dross, and Slag/dross from manufacture of iron and
steel.

3. Whether all waste & scrap is a good (i.e.) whether it has market (or) not?
No, It was held that Scrap would be liable to duty, if it is known in commercial parlance by that name and has
an established market- Khandewal Metal & Engg. Works V. UOI
But now, in view of explanation to section 2(d), if waste or scrap which arise during course of manufacture
and capable of being sold for consideration would be excisable goods and chargeable to payment of excise
duty.

4. Whether scrap aroused out of manufacture is goods (or) scrap as such is good?
It has been held that waste will be dutiable only if there is Manufacture- Markfed Vanaspati V. CCE
Facts of the case:
- The company used activated clay for deodoring, bleaching and decolouring of oil. These are not
manufacturing processes.
- Spent earth which is the residue arises after activity clay loses its absorbent charater.
- It was held that it is not a manufactured product and it remains earth even after processing.
- No duty is payable even if it is marketable and even it is specified in tariff.

5. Some waste has arised during dismantling of machine, whether that waste is good?
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C Waste and scrap arising during cutting and dismantling of old and damaged machinery is not
manufacture - ACC Ltd. V. CCE.
C Waste and Scrap generated out of replacement of worn out and deteriorated parts of machinery are
not generated due to mechanical working in the factory. It is not dutiable CCE V. Sanjivani SSK

6. If waste (or) scrap is not mentioned in CETA, whether the duty is payable (or) not?
It was observed that if the waste in question is not specified in the tariff, it is not excisable goods and therefore
not liable to excise duty Arihant cotsyn Ltd. V. CCE & CCE V. J K Industries Ltd.

7. If waste and scrap arises out of manufacture of a product, which is exempted. Will it be dutiable?
No, the waste, Scrap and pairings produced while manufacturing an exclusively exempted product are fully
exempted from duty. Notification 89/95.

8. Assessee manufactures both excisable and exempted goods, whether waste & Scrap arising out of such
products is dutiable?
If assessee is manufacturing both exempt and dutiable products, the waste and scrap arising while
manufacturing exempted final product will not exempt i.e. Duty will be payable TTK pharma V. CCE

9. Waste and scrap didnt arise during manufacture but aroused during maintenance and repairs. Whether it is
dutiable?
Waste like Scrap, borings generated during maintenance and repairs work is not excisable when assessee is
not involved in manufacture of iron and steel Prism Cement V. CCE

10. Containers in which inputs were received are cleared and assessee. Department claimed duty as these
amounts to waste. Is department correct?
Containers in which inputs are received cannot be treated to be waste arising out of manufacturing process
and therefore no duty is leviable on such containers at the time of clearance from factory CCE V. West coast
Industrial gases Ltd.

11. An electricity company was engaged in the production of steam, which is then used in manufacturing
process. Coal was used as fuel to produce steam. After coal was burnt, cinder was left. Whether cinder is
dutiable?
As production of steam is an ancillary process, waste arising in ancillary process is not manufacture UOI V.
Ahmedabad Electricity Co.



Issue 2: Plant and machinery assembled at site:

The Board vide its sec. 37B order No. 58/1/2002-CX has clarified the issue relating to plant and machinery
assembled at site as under:
For goods manufactured at site to be dutiable
Must have a new identity, character and use, distinct from the inputs/components.
Should be specified in CETA as excisable goods.
Should be marketable.
Should not be an immovable property

Question of law involved:
Movable Vs. Immovable

Thumb Rule to determine the dutiability:
- Where the plant and machinery comes into existence and is capable of being removed from one
place to another, without causing damage to it and can be re-assembled (i.e. removed in
completely knocked down condition or semi knocked down condition) Plant and machinery is
movable.
- Where the plant and machinery can be removed only by dismantling and causing substantial
damage to it and thus cannot be re-assembled Plant and machinery is immovable.
- Where the plant and machinery is capable of working but attached to prevent vibration free or
wobble free operation Plant and machinery is movable.
- Where the plant and machinery comes into working condition only after carrying out civil
construction or civil works Plant and machinery is immovable.
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Recent Cases on Plant and machinery assembled at site:

Case Judgment
1. CCE V. Globus Stores
(2011) (SC)
Refrigeration/ Air conditioning plant assembled at site is not excisable goods.
2. Craft Interiors P. Ltd.
(2006) (SC) [Same view
held in CCE V. Mehta &
Co. (2011) (SC)]
Storage cabins, Kitchen counters etc., erected at site on the customer, is immovable and
hence not dutiable
3. Larsen & Turbo Ltd.
V. UOI (2009) (HC)
When a property comes into existence and starts functions, only after embedding
different parts in the civil works, such property is not movable property.
4. CCE V. Solid and
correct Engineering
works (2010) (SC)
- The expression attached to the earth has three distinct dimensions, viz.
(a) rooted in the earth as in the case of trees and shrubs
(b) Imbedded in the earth as in the case of walls or buildings or
(c) Attached to what is imbedded for the permanent beneficial enjoyment of that to
which it is attached.
- If machine is attached 1 feet deep, intended to provide stability to the working of
the plant and prevent vibration or wobble free operation does not qualify for being
described as attached to earth under any of the three clauses above and hence not
an immovable property

FAQs on Plant and machinery assembled at site:

1. By processing inputs, it results in a new product with distinct name, identity and use. It will be immediately
assimilated in the structure or other immovable property, thereby it is not dutiable on the grounds of
immovability. What is the tax treatment?
Excise duty will be chargeable on the goods immediately upon their change of identity and before their
assimilation. Hence, when change of identity of inputs takes place in the course of construction or erection of
a structure which is an immovable property, then there would be no manufacture of goods and no excise
duty is leviable.

2. A group of machines assembled at site and fixed to earth for the purpose of ensuring vibration free
movement (eg. Paper machinery). Is it dutiable?
Yes it is dutiable, provided a new machine comes into existence which has own identity/marketability.

3. If items assembled or erected at site and attached to foundation to earth cannot be dismantled without
substantial damage to its components and thus cannot be reassembled, then will it be dutiable?
The items are considered not movable and hence not excisable goods. If goods installed at site are capable of
being sold or shifted as such after removal from base and without dismantling, the goods will be considered as
movable and hence excisable. The guiding factor is Capable of being marketed in the original form

4. Whether the intention of the party is considered or not?
The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment
of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine
whether the goods are moveable or immovable.

5. Whether Turnkey projects like steel plants, cement plants, power plants etc. will be considered as excisable
goods?
No, but their components would be dutiable.

6. Lifts and escalators are specifically mentioned in subheading 8428.10, those which are installed in buildings
and permanently fitted into the civil structure. Whether they are dutiable?
These are not considered to be excisable goods Otis Elevators India Co. Ltd.; CCE V. Kone elevators India Ltd.
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However if lift and escalator is fabricated as whole and is movable in nature, it will be dutiable even if
temporarily installed at construction site or exhibition.

7. Refrigeration/Air conditioning Plants: Though each component is dutiable, the refrigeration/air conditioning
system as a whole cannot be considered to be excisable goods. Air conditioning units, however, would
continue to remain dutiable as per the Central Excise Tariff.

8. Huge tanks made of metal for storage of petroleum products:
In oil refineries or installations tanks, though not embedded in the earth, are erected at site, stage by stage,
and after completion they cannot be physically moved. On sale/disposal they have necessarily to be
dismantled and sold as metal sheets/scrap. It is not possible to assemble the tank all over again. Such tanks are
therefore not moveable and cannot be considered as excisable goods CCE Chandigarh V. Bhagwanpura Sugar
Mills


Issue 3: Dutiability of Steel and concrete structures:

In Mahindra & Mahindra Ltd. V. CCE (2005), CESTAT held that
- Immovable iron and steel structures are not goods
- Structures and parts like bridges, lock gates, towers, trusses, columns, frames etc., in their
movable state will be subject to excise duty, even if latter they get permanently fixed in the
structures
- Plates, rods, angles, sections, tubes and the like, prepared for use in the structures will also be
excisable goods subject to duty in their pre-assembled or dis-assembled state.
[Followed in CCE V. Telemats India (2001) (CESTAT)]

Manufacture Vs. Service:
In Neo Structo Construction V. CCE (2010), CESTAT held that, fabrication of structure at site is
manufacture and hence not a service.


Issue 4: Sub Standard goods and By - Product:

Sub standard goods sold are still goods. They cannot be classified as Scrap as commercially understood
Tisco V. CCE

By-Product will be goods. By product means something of value produced in making main product or a
substance obtained in the course of a specific process but not its primary object Markfed Vanaspati V. CCE


Issue 5: Intermediate goods captively consumed:


Captive consumption means consumption of goods manufactured by one division or unit by another
division or unit of same organization or related undertaking for manufacturing other products.
Rule 4 Read with Rule 5 of Central Excise Rules, 2002:
Duty is payable on removal of goods, the rate of duty being the rate in force on the date of such removal
(Rule 4)
Concept of DEEMED REMOVAL, provided that in case of excisable goods used within factory, the date of
issue of such goods for such use shall be the date of removal thereof (Explanation to Rule 5)
Are all intermediate products captively consumed dutiable?
No, Only those articles captively consumed and satisfies the following conditions are dutiable
(i) Articles must be movable
(ii) Articles must be marketable
(iii) Articles must be mentioned in Tariff
Articles in crude and elementary form are not dutiable, as they are merely intermediate products, not
marketable in that condition. Union carbide India Ltd. V. UOI; Moti laminates P. Ltd. V. CCE
Exemption notification in Force:
As per notification No. 67/95, if finished good is exempted, duty liability is attracted on intermediate
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product that intermediate product is movable and marketable and it should be mentioned in CETA &
such good should be consumed within the factory.
If finished good is not exempted, there is no duty liability on intermediate product.

Analytical table on captive consumption:
Situation Intermediate Product Finished Product Whether duty payable on
intermediate product
(i) The 4 conditions i.e.
Goods, Excisable goods,
Manufacture or
production, in India has
been satisfied and hence
Taxable
The 4 conditions i.e.
Goods, Excisable goods,
Manufacture or
production, in India has
been satisfied and hence
Taxable
Duty is not required to be paid on
intermediate product as the
exemption Notification No. 67/95
specifies that, if finished product is
taxable then intermediate product is
exempted. Hence, No duty payable.
(ii) All or any of the 4
conditions out of Goods,
Excisable goods,
Manufacture or
production, in India are
not satisfied and hence
Not Taxable
The 4 conditions i.e.
Goods, Excisable goods,
Manufacture or
production, in India has
been satisfied and hence
Taxable
As Intermediate product is not
taxable there wont be a question of
duty payable.
Hence, No duty payable.
(iii) The 4 conditions i.e.
Goods, Excisable goods,
Manufacture or
production, in India has
been satisfied and hence
Taxable
All or any of the 4
conditions out of Goods,
Excisable goods,
Manufacture or
production, in India are
not satisfied and hence
Not Taxable
Duty is required to be paid on
intermediate product as the
exemption Notification No. 67/95
specifies that, if finished product is
exempted then duty shall be payable
on intermediate product.
Hence, Duty payable.
(iv) All or any of the 4
conditions out of Goods,
Excisable goods,
Manufacture or
production, in India are
not satisfied and hence
Not Taxable
All or any of the 4
conditions out of Goods,
Excisable goods,
Manufacture or
production, in India are
not satisfied and hence
Not Taxable
As both the products are not taxable,
there wont be question of duty
payable
Hence, No duty payable.



Issue 6: Software:

Software falls under heading 8523 80 20 of CETA, 1985. However, all software except canned software is
exempt. Packaged or Canned software means software developed to meet the needs of variety of users,
and which is intended for sale or capable of being sold, off the shelf. Duty on packaged software is 10% and
there is no excise duty on tailor made i.e. customized software.

Summary of taxability of Information Technology Software:
Category of
Software
Excise duty (In
case of
manufacture in
India)
Customs duty (in case
of Imports)
Service tax VAT/CST
1. Packaged
software with
MRP
Yes
[MRP based
valuation under
sec. 4A]
No basic customs duty
but CVD payable
[CVD computed in line
with MRP based
valuation]
No Yes
2. Packaged
software where
MRP not
required
Excise duty on cost
of media
[Transaction value
under sec. 4]
No basic customs duty
but CVD payable
[CVD computed in line
with Transaction value
i.e. cost of media]
Service tax on
transfer of right
to use software.
[To this extent it
is not taxable
Yes
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under excise]
3. Tailor made
software
No No Yes Yes
4. Paper licence
of software and
PUK cards.
No No Yes Yes
5. Software
downloaded on
internet from
out of India
No No Yes, as import of
service
Not applicable to
person
downloading the
software.
(Source: Commentary on Central Excise by V.S. Datey)

2. Excisable Goods under Excise:
C The second condition to be satisfied to attract excise duty liability is that the goods must be excisable.
C Section 2(d) defines excisable goods to be goods which are specified in the tariff as being subject to duty
of excise and includes salt
C Burden of proof that goods are excisable is on the department.
C Mere mention in tariff will not attract duty, unless test of movability and marketability is satisfied.
3. Manufacture under Excise:
Production Manufacture
A natural process by
which a product is
brought into existence
Eg: Production of tobacco
Production of Sugarcane
Artificial Process which
adds some more utility to
that product
Eg: Manufacture of
cigarettes
Manufacture of sugar
Every production is not
manufacture
Every manufacture is
production
Production is a broader
term which includes
manufacture
Manufacture is a
restricted term
Process Manufacture
A single operation/ a part
in manufacture
A series of process is
called manufacture
The output of a process
may (or) may not be
finished product
The output of
manufacture is finished
product
Every process is not a
manufacture
Every manufacture is a
process

Sec 2(f) - 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 or repacking of such goods in a
unit container or labelling or re-labelling 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,

CIT V. N C Budharaja and co. & CIT V. Tara
Agencies
Production has a wider connotation than the
word manufacture. Every manufacture can be
characterized as production, but every
production need not amount to manufacture.
When the word produced or production is
used in juxtaposition with the word
manufacture, it takes in bringing into existence
new goods by a process which may or may not
amount to manufacture. It also takes all by-
products, intermediate products and residual
products, which emerge in the course of
manufacture of goods.

UOI V. DCM co. Ltd. (1963) (SC)
Manufacture means bringing into existence a
new substance. Manufacture is the end result of
one or more processes, through which original
commodity passes. Thus, manufacture implies a
change but every change is not manufacture. A
new and different article must emerge having a
distinctive name, character or use.
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FAQs on Manufacture:

1. In the opinion of some persons, a process has been carried out and a new product came into existence but
for others there is no new commodity. Whose opinion has to be considered?
Case Law: UOI V. J.G. Glass Industries.
Facts: Decoration & printing was done on glass bottles & the Dept. contended that the activity
amounts to manufacture
Decision:

A process will amount to manufacture if the commodity which was already in
existence will serve no purpose or will be of no commercial use but for the process.
Even before printing glass bottle was commercial commodity and could be sold
even without printing.
It was held that printing of bottles with ceramic color and decoration is not
manufacture.

Case Law: Sterling foods V. State of Karnataka. (The case was related to Central Sales Tax but the
judgment is relevant here too)
Facts: The appellants in the course of their business, purchase shrimps, prawns and lobsters
locally for the purpose of complying with orders for export and they cut the heads and
tails of the shrimps, prawns and lobsters purchased by them, peel, devein and clean them
and after freezing and packing them in cartons, they export them to foreign buyers
outside India under prior contracts of sale. The CTO contended that the goods were
changed from its original purchase and demanded duty.
Decision:

The decision to be applied is whether the 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.
The change or series of change take commodity to a point where commercially it is
recognized as a new and distinct commodity, then it can be said that new
commodity has come into being

Case Law: ALEMBIC GLASS INDUSTRIES (2010) (SC)
Decision:

By the process of printing names or logos on the bottles, the basic character of the
commodity does not change. They continue to be bottles and, therefore, it cannot
be said that but for the process of printing, the bottles will serve no purpose or
are of no commercial use.
The distinction between J.G. Glass Industries case and Alembic glass Industries
case, is in case of former the activity of manufacturing and printing/decoration is
carried out in the same factory. But in the present case the two process are carried
in separate units of same assessee.
Therefore in the present case, the value of the printing will not be includible while
determining the assessable value of the excisable goods for computing the excise
duty.

Manufacture - Sec. 2(f)
Process - Incidental/
ancilliary for the
completion of main
product
Land Mark Case
- UOI V. DCM
Deemed Manufacture
Any process
amounting to
manufacture as
specified in section
notes/ chapter notes
Labelling (or) Re-labelling,
Packing/ repacking from bulk
packs to retail packs and
adoption of any other process
to make Schedule III products
marketable and saleable
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Case Law: CCE V. TARPAULIN INTERNATIONAL (2010) (SC)
Decision:

The process of stitching and fixing eyelets would not amount to manufacturing
process, since tarpaulin after stitching and eyeleting continues to be only cotton
fabrics. The purpose of fixing eyelets is not to change the fabrics, even though
there is value addition.
To sum up, the conversion of Tarpaulin into Tarpaulin made-ups would not amount
to manufacture. Therefore, there can be no levy of Central Excise duty on the
tarpaulin made-ups.

2. What are the process which amounts to manufacture as per CETA?
a. Body building of vehicles
b. Cutting, sizing, perforation, of photographic plates, films shall amount to manufacture.
c. Galvonizing of articles of iron and steel.,
d. Audio video recording in tapes
e. Conversion of powder into tablets
f. Adding or mixing cardamom, copra, menthol, spices, sweetning agents or such ingredients, other
than lime or tobacco to betelnut in any form shall amount to manufacture.
g. Refining of edible oils
h. The process of cutting or sawing or sizing or polishing or any other process, for converting of
stone blocks into slabs or tiles, shall amount to manufacture.
i. The process of drawing or redrawing shall amount to manufacture.
j. Labelling (or) rebelling of containers (or) repacking from bulk packs to retail packs (or) adoption
of any other treatment to render the product marketable of
(a) Dairy products like milk, butter, cheese
(b) Preparations of meat, fish
(c) Panmasala, yeast, soup, sauce, extracts of tea (or) coffee
(d) In organic chemicals
(e) Readymade garments.
(f) Coffee, tea and spices
(g) Starches
(h) Vegetable oils and margarine
(i) Natural or artificial mineral waters
Note: Emergence of new product is not relevant, in case of Deemed manufacture

3. Who has to prove that manufacture has taken place?
The burden of proving the fact is entirely on the Revenue. Department has to prove that a new and distinct
product has come into existence Metlex P. Ltd. V. CCE

4. When it is said that manufacture has taken place (not deemed manufacture)?


5. When a particular product is manufactured and some of the components are purchased, uniting these two
to form a finished good, does it amount to manufacture (i.e.) does assembly amounts to manufacture?
Case Law: Triveni Engg. Co. Ltd. V. CCE
Facts: The co. purchased load cells & plat forms from the open market & manufactured an
indicating system these 3 items were assembled together and end product was a weight
bridge. The assessee contended that assembly does not amount to manufacture.
2 tests should be satisfied
Identity Test
A new commercially
identifiable product should
come into existance.
Utility Test
The Finished product should
serve a different purpose than
that of the Input
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Decision: Assembly of the items results in new identifiable product and it amounts to manufacture.

Case Law: BPL India Ltd. V. CCE (2002) (SC)
Facts: If the assembly of duty paid parts or components does not result in the emergence of an
entirely new and distinct article having a different characteristic, it will not result into
manufacture


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Case laws on Manufacture:

Case Judgment
1. CCE V. Sony Music
Entertainment (I) P.
Ltd. (2010) (HC)
the activity of packing imported Compact discs in a jewel box along with inlay card would
not amount to manufacture under Section 2(f) of the Central Excise Act, 1944
2. CCE V. Kapri
International (p) Ltd.
(2002) (SC)
If manufacture takes place, the commodity is dutiable even if the raw material and
resultant product fall under the same tariff heading. The mere fact that the material,
from which the new goods are manufactured, has suffered a duty under a particular
tariff item does not exclude the finished product from being exigible to fresh duty if tariff
Act provides so. Multiple levy under the same tariff entry is permissible if the
manufacture is involved.
3. Bemcee Ltd. (2010)
(SC)
Slitting/shearing of steel coils does not amount to manufacture as the description as flat
rolled products was continuing even when tariff sub-heading changed following width of
product. Since the identity of the product remained unchanged even with change of
classification, activity causing such a change does not amount to manufacture.
4. Tikitar Industries
(2010) (SC)
The process of converting straight grade bitumen into blown grade bitumen through
Oxidation, known as blowing process, does not amount to manufacture and therefore,
exempted from payment of Excise duty.
5. Orissa Bridge &
Construction
Corporation Ltd. V. CCE
(2011) (SC)
Fabrication of cutting edge, shuttering plates, vertical props from steel angles, MS
plates, MS sheets and pipes is manufacture as the materials get transformed into various
products which are having a distinct name, character and use.
6. CIT V. Oracle
Software India (2010)
(SC)
Transforming blank CD into software based disc is manufacture as duplicating process
changes basic character of blank compact disc.
7. Air Liquide North
India P. Ltd. V. CCE
(2011) (SC)
When gas cylinders are not sold as such but were sold only after certain tests or process
as specified by the customers of the assessee, the analysis and tests resulted into
categorization of the gas and fixation of prices accordingly. This process amount to any
other process in order to make the product marketable in terms of sec. 2(f) for the
purpose of deemed manufacture.
8. Usha Rectifier Corp.
(I) Ltd. V. CCE (2011)
(SC)
Testing equipments manufactured instead of importing the same and used captively,
amount to manufacture and liable to excise duty.
9. CCE V. Onsar
Chemical P. Ltd. (2012)
(SC)
The process of mixing and additives to heated bitumen, which results in emergence of
Polymer Bitumen (PMB) and crumbled Rubber Modified Bitumen (CRMB) does not
amount to manufacture, as the said process did not result in transformation of bitumen
into new product having different identity, characteristic and end use. The end use also
remained the same viz. mixing of aggregates for constructing roads.
10. CCE V. GTC
Industries Ltd. (2011)
(HC)
Cutting and embossing aluminium foil with the words PULL did not transform
aluminium foil into distinct and identifiable commodity
The said process did not render any marketable value, and only made it usable for
packing.
There were no records to prove that these are distinct marketable commodities.
Only the process which produces distinct and identifiable commodity and renders
marketable value can be called manufacture.
11. CCE V. Pushpadeep
Enterprises (2011) (HC)
Cutting aluminium sheets/angles/plates into required size and grooving and drilling them
in order to fix it to the main frame and sealing amounts to manufacture, even though the
resulting panel was also classifiable under the same tariff heading as the original
sheets/plates. Change in tariff heading is not a pre-condition for manufacture.
12. CCE V. Elecon
Engineering Co. Ltd.
(2012) (SC)
Cutting, drilling, punching and welding do not result in transformation. The products
resulting out of these processes are merely structural shapes; and assembling them for
constructing building or shed is fabrication and not manufacture, as no new article
different in name, character or use emerges. [Mere fabrication is not manufacture]
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13. CCE V. Johnson and
Johnson Ltd. (2005)
(SC)
Merely packing for being marketed is not sufficient. The repacking would have to be
from bulk packs to retail packs so as to render the product marketable directly to
consumer.
14. Metalite Industries
V. CST (2012) (HC)
Bending, punching and carrying out various process with respect to iron plates and
making them perforated type cable trays and channel shaped trays amounts to
manufacture as these are sold in the market to meet different mechanical and
engineering needs as distinct from plain or chequered plates. The plates undergo
transformation into cable trays and the process involved is manufacture.
15. Circular No.
927/17/2010
Mere undertaking the process of oiling and pickling as preparatory steps do not amount
to manufacture as no new product emerges as a result of these process.
The process of pickling is only a chemical cleaning process to remove scales and dirt from
the metal by immersion on chemical solution.
16. CCE V. Hindustan
Coca cola beverages P.
Ltd. (2011) (SC)
Facts:
6. The assessee is a manufacturer of aerated beverages, had water treatment plants
for purifying and treating water which was captively consumed in the manufacture
of aerated waters.
7. Some quantity of treated water was supplied to few retail outlets selling beverages
such as cocacola, thumps up through vending machines.
8. Note 5 to chapter 22: In relation to waters, including natural or artificial mineral
waters of heading 2201 and waters, including mineral waters of heading 2201
processes, such as filteration, purification of any other process ot any one or more
of these processes, labelling or relabelling of containers or repacking from bulk
packs to retail packs or adoption of any other treatment to render the product
marketable to consumer shall amount to manufacture.
9. Consumer refers to the one who purchases the product for consumption by him,
as distinct from a purchaser who trades in it.
Decision:
- Treatment of borewell water/municipal water, does not amount to bringing into
existence a new and commercially different commodity. Hence, it does not amount
to manufacture in normal sense.
- The water in its original form itself i.e. prior to carrying out the above process was
marketable and therefore it cannot be said that assessee gave the attribute of
marketability to water which was not earlier present.
- The treated water was being used only for business purposes by retail outlets that
do not fall within the definition of Consumer
- Therefore, since the treatment of water did not render the same marketable to
consumer, hence, it did not amount to deemed manufacture.

Manufacturer:
C As per Sec. 2(f), the term manufacturer includes not only a person who employs hired labour in the
production and manufacture of excisable goods but also a person who engages in their production or
manufacture on his own account.
C As per the natural meaning Manufacturer is a person who actually manufactures or produces excisable
goods i.e. one who actually brings into existence new and identifiable product.
C Manufacturer is a person who employs hired labour for the purpose of manufacture (or) production (or)
who carries, on his own account.
- Ownership is not relevant, but manufacture (or) production is relevant.
- A brand owner is not a manufacturer. Ex: Bata, Bajaj Fans, Kingfisher, Cocacola & Pepsi
C Generally Raw material supplier is not manufacturer. But, relationship between manufacturer & supplier, if
it is agency (or) master (or) servant relationship, then the raw material supplier is the manufacturer.

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FAQs on Manufacturer:
1. What is the meaning of word ON HIS OWN ACCOUNT?
On his own account has to be interpreted to mean as Under his direction and control Philips India
V. UOI
As per this phrase, a person though not owning a factory or not himself doing the manufacturing
process, can be considered to be manufacturer if,
(a) Those who own the factory are dummy (or)
(b) If he gets the goods manufactured by then under HIS DIRECTION AND CONTROL.

2. Can a Brand owner who get his goods manufactured through others, be termed as manufacturer?
C A Brand name owner (i.e. Bata, Bajaj Fans, Kingfisher) is not manufacturer, they may even supply
the design or control the quality.
C If goods are produced with customers brand name under his quality control, it does not mean
that the customer is the manufacturer
C Brand name owner will not be manufacturer even if he supplies raw material Philips India Ltd. V.
UOI
C Goods manufactured under franchisee agreement, the franchisee provider is not manufacturer.
(Eg. Coco-cola and Pepsi)

3. Raw materials are sent to job work for manufacture and then returned. Who is the manufacturer?
C Raw material supplier is not manufacturer.
C Excise duty is on manufacture and production of goods and liability to pay duty is not dependent
upon whether the manufacturer is owner or not Ujagar Prints V. UOI
C The household ladies to whom the raw material is sent are the manufacturers and not the raw
material supplier. The ladies cannot be termed as hired labour CCE V. MM Khambatwala.
C If any bogus units are created to evade tax, then the raw material supplier is the manufacturer and
not the job worker.

4. What is the acid test to determine, who is manufacturer?
Two tests should be satisfied:
1) Relationship Test: If the relationship between raw material supplier and job worker is on principal to
principal basis, then JOB WORKER is the manufacturer
2) Profit Test: If the entire profit is enjoyed and retained by raw material supplier, then the RAW
MATERIAL SUPPLIER will be the manufacturer

General Rule: Excise duty is payable by the manufacturer or producer of excisable goods.

Exceptions: But, in the following cases the duty liability will be on the person other than manufacturer or producer.
1. Goods stored in a warehouse: When goods are stored in a warehouse without payment of duty, then the
duty liability is on the person who stores the goods.
2. Molasses produced in khandsari sugar factory: The duty liability is of the procurer (i.e. purchaser of such
molasses)
3. Job work: Job worker is the actual manufacturer and he is liable to pay excise duty. But if raw material
supplier undertakes to make payment of excise duty under notification No. 214/86, then duty liability is on
the raw material supplier.
4. Textile Articles: In respect of textile products falling under heading 61, 62 or 63, person who is getting the
goods manufactured on job work basis (i.e. Merchant manufacturer and Not job worker) will be liable to
pay excise duty under Rule 4(1A) of Central Excise Rules. (w.e.f 1-3-2011). Such person (i.e. who is getting
goods manufactured) will be manufacturer and eligible for SSI exemption under SSI exemption
Notification No. 18/2003.




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Job Work Notification No. 214/86 Vs. Duty on person getting goods manufactured under Rule 4(1A)




Situation (i) A Ltd. supplies raw materials to Mr. B (a job worker) for getting the goods
manufactured on independent job work basis. Who is the manufacturer?
Situation (ii) A Ltd. Supplies raw materials to Mr. B (a job worker) and gets the goods
manufactured according to his designs and specifications. Who is the
manufacturer?
Situation (iii) Bata Ltd. supplies raw materials to Razor & Co. (a small scale industry in
foot wear) and gets the goods manufactured with the brand name of
Bata. Who is the manufacturer?
Situation (iv) A Ltd. supplies raw material to B Ltd. and exercises full control,
supervision over the job worker for getting the goods manufactured.
Who is the manufacturer?
Situation (v) Where the job worker is a dummy unit of raw material supplier, who is
the manufacturer?
Situation (i) As Mr. B is carrying out the manufacture on independent and standalone basis, he is the
Manufacturer. As per the relationship test if raw material supplier does not have control
over job worker but has control over process, then job worker shall be the manufacturer
under excise.
Hence, Mr. B is the manufacturer.
Situation (ii) As per the relationship test if raw material supplier does not have control over job worker but
has control over process, then job worker shall be the manufacturer under excise.
In the present situation raw material supplier has control over process but not on job worker
as raw material supplier requires the job worker to manufacture the product as per his
designs and specifications.
Hence, Mr. B is the manufacturer.
Situation (iii) Brand name owner is not the Manufacturer as laid down in various cases. Even he may supply
raw material to job worker too.
Goods under Central Excise Tariff Act (CETA)
manufactured through job work
Chapter 61 - Articles of apparel and clothing
accessories, knitted or crocheted
Chapter 62 - Articles of apparel and clothing
accessories, not knitted or crocheted
Chapter 63 - Other madeup textile articles, sets,
worn clothing and worn textile articles, rags
Duty Liability cast on
Person getting
goods manufactured
on jobwork basis (i.e.
Rawmaterial
supplier/Brand
owner) as per Rule
4(1A) of Excise Rules,
1994
Exemption:
There is no
exemption to raw
material supplier in
this case.
Goods other than those falling under
chapter 61,62,63.
Duty liability cast on
Job Worker, being the
actual manufacturer as
per Sec. 3 of Central
Excise Act, 1944
Exemption:
If rawmaterial
suppier undertakes
to pay duty, then
duty liability is on
rawmaterial supplier
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Hence, Razor & Co is the manufacturer.
Situation (iv) As per the relationship test if raw material supplier has control over job worker, then raw
material supplier shall be the manufacturer under excise.
Hence, A ltd. is the manufacturer.
Situation (v) If the job worker is dummy unit of the raw material supplier, then the relationship is so
construed in order to evade tax. Therefore, Raw material supplier shall be the manufacturer.
4. Scope and Coverage of Excise Act, 1944:
The fourth condition is that the manufacture or production must take place in India. The following points clarify the
meaning of India.
- The CEA extends to the whole of India including the state of Jammu and Kashmir. Therefore goods
manufactured in the state of Jammu and Kashmir are liable to excise duty
- Goods manufactured in India by, or on behalf of, Central/ State government are dutiable.
- Any goods produced or manufactured within (a) The territorial waters of India and (b) The designated
areas of the continental shelf or Exclusive economic zone, which are treated as part of India, shall be
leviable to excise duty.

Dutiability in case of EOU:
C The goods manufactured by a 100% EOU but sold in Domestic Tariff Area (a.k.a DTA clearances by 100%
EOU) are liable to excise duty, which is equal to the customs duty leviable on goods, as if such goods are
imported into India.
C Where, in respect of any such like goods, any duty of customs is leviable at different rates, then such duty
shall be deemed to be leviable at the highest of those rates.
C The value of such goods will be determined in accordance with the provisions of Customs Act, 1962 if the
duty to be levied is advalorem.
C As per the Notification no. 23/2003, DTA clearances by 100% EOU are exempt from
a) 50% of basic customs duty leviable there on;
b) Additional customs duty under sec. 3(5) of Customs Tariff Act, 1975. Exemption from additional duty is
available only if the goods so removed are not exempt from payment of sales tax/VAT in India.

Scope of Excise Act
Land
Inside India except
SEZ
J&K, EOU, EHTP,
STP, BTP, DTA
CE Act, 1944
applicable
SEZ
CE Act, 1944 NOT
applicable (Though
Inside India but
excluded from levy)
Water
Upto 200 NM i.e.
upto Exclusive
economic zone
Designated areas in
the continental
shelf and exclusive
economic zone
(EEZ) of India
CE Act, 1944
applicable
Beyond 200 NM i.e.
High seas
CE Act, 1944 NOT
applicable
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Determination of Rate of Duty
The rate of duty is found out by classifying the product in its appropriate heading under Central Excise Tariff Act
(CETA)







Various Schedules under CETA:


Features of CETA:
The central excise tariff system in India is governed by CETA, 1985. The features are as follows.
C HSN (Harmonized system of nomenclature) commodity description.
It refers to internationally accepted product coding System for categorization and classification of
commodities for the purpose of fixation of rates for levying duties of excise.

C It has Eight digit classification
- The first 4 digits are for the purpose of headings
-- Further 2 digits for sub classification Subheadings
--- Further 2 digits for sub sub classification tariff item.

C Coding of dashes.
Type Denoted by Meaning
Single dash - Indicates a group of articles Covered by the heading
Double dash -- It is the sub classification of preceding article which
has single dash (-)
Triple dash/ quadruple
dash
---
----
Indicate sub classification of immediately preceding
description of article having single (or) double dash.

C Section, chapters and headings in Tariff.
- Section divided in chapters and chapters in sub chapter. A Section grouping of number of
chapters which codify a particular class of goods. Each of the section is divided to a broader class
of goods.
CETA
First Schedule
Basic Excise duty
(CENVAT) leviable on
various products
Second Schedule
List of items on which
Special Excise Duty is
payable
At present it is Exempt
Third Schedule
List of items covered
under MRP valuation and
'Deemed manufacture'
provisions.
C Various schedules under CETA
C Features of CETA
C Harmonized system of Nomenclature
C Classification under CETA
C General Interpretative Rules
C Classification of accessories
C Classification of parts or components
C Case laws and circulars
C Various types of duties under excise.
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- Each section is divided into various chapters and each chapter contains goods of one class. Some
chapters are divided into sub chapters.
- Section notes are given at the beginning of each section which govern entries in that section.
These notes are applicable to all chapters in that section.
- Chapter notes are given at the beginning of each chapter, which govern entries in that chapter.
Eg: Section IX textile and textile articles. Eg: Chapter 72
(Iron and steel) is divided into
Chapter 50 Silk
Chapter 51 - Wool
Chapter 52 cotton.
I Primary materials
II - Iron and Non alloy metal
III - Stainless steel.
- Each chapter and sub chapter is further divided into various headings depending upon different
types of goods belonging to same class of products.
Eg: Chapter 50 relating to silk is divided into 5 headings.
5001 - Silk worm cocoons
5002 - Raw silk
- Central Excise tariff is divided into 20 sections and 96 chapters. There are over 1,000 tariff
headings and 2,000 subheadings.
C Are both Central Excise Act, 1944 and Central Excise tariff Act, 1985 linked together?
- Yes, Sec. 3(1) of Central Excise Act, 1944 specifies that duty shall be levied and collected on all excisable
goods which are produced or manufactured in India, as and at the rates set forth in the schedule to
CETA.
- Sec. 2 of CETA, 1985 states that rate at which duties of excise shall be levied under Central Excise Act,
1944 are as specified in Schedule to CETA.
- Hence, both the Acts are linked to each other.
Harmonised System of Nomenclature:
C Background of the Tariff
- As international trade increased, need was felt to have universal standard system of classification of
goods to facilitate trade flow and analysis of trade statistics.
- Hence, International Convention of Harmonised system of Nomenclature (HSN), called Harmonised
commodity Description and coding system, was developed by World customs organisation (WCO)
(That time called customs cooperation council, Brussels)

C Explanatory Notes to HSN
- These are official notes issued by World Customs Organisation
- They explain and clarify the scope and extent of each and every heading of the HSN, on the basis of
which Present CETA has been patterned.
- They do not have legal backing but can be used as an aid to classification of goods when there is
ambiguity as to the scope of entry.

C G.M pens International Case
- The Larger bench of tribunal held that
- HSN notes can be brought into picture only when there is doubt or ambiguity about scope of any tariff
entry and if tariff entry is clear,
- No external aid is necessary or permissible for determining its scope.
- Explanatory notes in should be invoked only if there is ambiguity in tariff items in CETA.

C Will notes to HSN prevail over CETA for classification?
- Nowhere in CETA it has been stated that Notes in HSN will be applicable for interpreting the tariff.
- In case of difficulty in understanding the scope of the headings/ subheadings, reference should be
made to supplementary texts like Explanatory notes to HS Department opinion
- If entries in HSN and Tariff are not aligned, reliance CANNOT be placed on HSN for the purpose of
classification of goods Camlin Ltd. V. CCE (2008) (S.C)
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Classification under CETA:
- While classifying goods, the foremost consideration is the statutory definition
- In the absence of statutory definition, check the guideline provided by HS explanatory notes
- In the absence of guideline, the cardinal principle would be the way goods are known in the common
parlance.
An Extract from CETA:
Section II Vegetable Products (Chapters 7 to 14)
Section Note
In this section, the expression, unit container means a container, whether large or small designed to hold a
quantity.
Chapter 9
Coffee, Tea and Spices
Chapter Notes
1. In Heading No. 0901, Coffee means the seed of the coffee tree (coffee), but does not include the seed
while still attached to tree.
2. In case of tea or tea waste blending, sorting, packing or re-packing into smaller containers shall amount to
manufacture.
Tariff Item Description Unit Basic rate of
duty
0901 - Coffee, whether or not
roasted or decaffeinated

0901 11 -- Not decaffeinated
--- Arabica plantation
0901 11 11 ---- A Grade Kg 16%
0901 11 12 ---- B Grade Kg
--- Arabica cherry
0901 11 21 ---- AB Grade Kg 16%
0901 11 22 ---- BB Grade Kg 16%
0901 12 00 -- Decaffeinated kg 16%
Steps in classification:
Step 1: Refer the heading and sub heading, Read corresponding Section Notes and Chapter Notes. If there is no
ambiguity, (or) confusion, the classification is final.
Step 2: If meaning of word is not clear, refer to the trade practice
Step 3: If trade understanding of a product cannot be established, find technical (or) Dictionary meaning of the
term used in tariff.
Step 4: If classification cannot be done as above, apply general Interpretative rules sequentially.

Trade parlance Theory:
- Applicable only when classification rules does not provide conclusive answer.
- Based on popular sense. Popular sense means that which people are conversant with the subject matter with
which the statute is dealing.
- Classification based on customer use and identity of product.
- Examples:
(i) Carbon paper cannot be classified as papers.
(ii) Mineral water cannot be classified as Beverages.
(iii) Lal Dhant manjan (tooth powder) cannot be classified as medicines
(iv) Mirror cannot be clarified as glass article.

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General Interpretative rules (GIR) or Rules for Interpretation of
Tariff:
? As there are many articles mentioned in CETA, how to study these and how to interpret this.

RULE 1: The titles of sections, chapters & sub-chapters are provided for reference only.
For legal purposes, classification shall be determined according to the terms of the headings & any relative section
(or) chapter notes. Rule 1 gives precedence to section notes/ chapter notes while classifying a product.

Rule 1 - The titles of sections and chapters are provided for ease of reference only; for legal purposes, classification
shall be determined according to the terms of the headings and any relative section or chapter notes and,
provided such headings or notes do not otherwise require, according to the provisions hereinafter contained.

AN EXTRACT FROM CETA
Section II Vegetable Products (Chapters 7 to 14)
Section Note
Chapter 9
Coffee, Tea and Spices
Chapter Notes

Tariff Item Description Unit Basic rate of
duty
0901 - Coffee, whether or not
roasted or decaffeinated

0901 11 -- Not decaffeinated
--- Arabica plantation
0901 11 11 ---- A Grade Kg 16%
0901 11 12 ---- B Grade Kg

RULE 2(a): Complete goods = Incomplete or unfinished goods
Rule 2(a) - Any reference in a heading to goods shall be taken to include a reference to those goods incomplete or
unfinished, provided that, the incomplete or unfinished goods have the essential character of the complete or
finished goods. It shall also be taken to include a reference to those goods complete or finished (or falling to be
classified as complete or finished by virtue of this rule), removed unassembled or disassembled.

First Part
Any reference to complete goods also includes incomplete (or) unfinished gods, if such incomplete (or) unfinished
goods have essential character of finished goods.
Eg: car not yet fitted with wheels or tyres will be classified under motor vehicles

Second Part
The heading will also include finished goods removed un-assembled (or) disassembled in SKD (or) CKD packs.
Eg: machineries dismantled for transportation will be classifiable as machinery only and not individually based on its
parts.

ESSENTIAL CHARACTER - The functional test for essential character is that the incomplete goods are able to
functions as finished goods.

RULE 2(b): Material = combination of that material with other
Rule 2(b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures
or combinations of that material or substance with other materials or substances. Any reference to goods of a
given material or substance shall be taken to include a reference to goods consisting wholly or partly of such
material or substance. The classification of goods consisting of more than one material or substance shall be
according to the principles contained in Rule 3.
Not
Relevant for
legal
purpose
Relevant for
legal purpose
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Any reference in heading to material (or) substance will also include the reference to mixture (or) combination of
that material (or) substance.
Eg: Article of gold will include an article which is made partly of Gold and partly of silver.
If a particular good can be classifiable under two (or) more headings, then classification shall be as per Rule 3(a) (or)
Rule 3(b) (or) Rule 3(c)
RULE 3(a): When there is a specific description and a general description?
Rule 3(a): The heading which provides the most specific description shall be preferred to headings providing a
more general description. However, when two or more headings each refer to part only of the materials or
substances contained in mixed or composite goods or to part only of the items in a set, those headings are to be
regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise
description of the goods.

The heading, which provides the most specific description, shall be preferred to headings providing a more general
description.

Example 1:
Heading 8215 covers spoons, forks, ladles, skimmers, fish-knives etc., while heading 7323 covers table, kitchen or
other house hold articles of iron and steel. In order to classify steel forks, heading 8215 is preferred to heading 7323

Example 2:




Electric shaving machine can be classified under heading 85.10 as it is specific over heading 85.09 which is general

RULE 3(b): If a particular good is a mixture and composite of goods containing different materials?
Rule 3(b): Mixtures, composite goods consisting of different material or made up of different components, and
goods put up in sets, which cannot be classified by reference to (a), shall be classified as if they consisted of
material or component which gives them their essential character, in so far as this criterion is applicable.


Mixtures, composite goods consisting of different material or made up of different components and goods put up
in sets for retail sale, shall be classified as if they consisted of the material or component which gives them their
essential character.

Example 1: If a pack contains drawings instruments (90.17)
Pencils (96.09)
Pencil sharpner (82.14)
Put up in a leather case (4201.90)
The set will be classifiable under drawing instrument.

Example 2: Hair dressing sets consisting of a pair of electric hair clippers (8510)
a comb (9615)
a pair of scissors (8213)
a brush (9603)
a towel (6304)
The set will be classifiable under hair dressing set.

RULE 3(c): If both the headings are specific?
Rule 3(a): When goods cannot be classified by reference to (a) or (b), they shall be classified under the heading
which occurs last in the numerical order among those which equally merit consideration.


HEADING 85.09
Electro-mechanical domestic
appliances with self-contained
electric motor
HEADING 85.10
Shavers and hair clippers with self-
contained electronic motor
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If two or more headings seem equally possible and the dispute cannot be resolved by any of the aforesaid rules, the
heading which occurs last in numerical order is to be preferred (i.e. latter the better).
Eg: Electrical insulating self adhesive tape can be classified as self adhesive tape under 39.19 and electrical insulator
under 85.46. Hence, later serial number i.e. 85.46 will prevail.

RULE 4: Akin Goods
If the classification is not possible by any of the aforesaid rules 1, 2 and 3, then it should be classified under the
heading appropriate to goods to which they are most akin.
Example: Plastic films used to filter or remove the glare of the sunlight, pasted on car glass windows, window panes
etc., shall be classified under heading 3925 30 00 as builders ware of plastics not elsewhere specified shutters,
blinds.

RULE 5: Classification of packing containers & packing materials
These will be classified along with that of main article which are sold. Eg:boxes designed to keep jewellery.
Note: this rule is not applicable for containers of repetitive use.

RULE 6: Goods can be compared at the same level only
Sub-Headings can be compared only at the same level. However, sub-heading under one heading cannot be
compared with sub-heading under a different heading.

Summary of rules for interpretation of tariff:
Rule 1 The titles of sections, chapters & sub-chapters are provided for reference only.
Rule 2 (a) Any reference to complete goods also includes incomplete or unfinished goods i.e.
Complete goods = Incomplete or unfinished goods
Rule 2(b) Any reference to a material includes combination of that material with other material i.e.
Material = combination of that material with other
Rule 3(a) Specific description shall be preferred to heading providing general description. i.e. Prefer
SPECIFIC over GENERAL
Rule 3(b) Classification shall be as per ESSENTIAL CHARACTER if a particular good is mixture or
composite of goods containing different materials
Rule 3(c) If both the headings are specific, then LATTER THE BETTER
Rule 4 AKIN GOODS Last rule of classification where in goods under question can be classified
under that heading which is most related to the said goods.
Rule 5 Packing containers and packing materials can be classified along with the main articles,
which are sold.
Rule 6 Goods can be compared for classification at SAME LEVEL ONLY

Classification of accessories:
C Accessories cannot be characterized as component or integral part of an article, and therefore, they
cannot be classified as an article to which they are attached. [i.e. Accessories cannot be classified along
with the main product]
C Accessories are by themselves, article and will be classified as such because accessories are not
necessarily confined to particular machine, which they serve as an aid, and the same item may be an
accessory of more than one kind of instrument. [i.e. Accessories are classified as such]
C They only add to the convenience, beauty or effectiveness of the main product.
Classification of parts and components:
C Part is a component whose absence will disable a machine or appliance. It must be regarded as an
essential ingredient or part of that machine Electrosteel Castings V. CCE
C A part is an essential component of the whole without which whole cannot function. Accessory is
something supplementary or subordinate in nature and need not be essential for actual functioning of the
product. CCE V. Insulation Electricals (Judgment given to distinguish between part and accessory).

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C Based on various case laws, the conclusion is as follows:

Various judgments on classification of parts:
1. Joints, washers and articles of vulcanized rubber (other than hard rubber) are to be classified according to
constituent material and not as parts or accessories- CCE V. Gold seal Engg.
2. Part of cycle tyre is part of cycle. So part of part is part of whole CCE V. MP Ltd.
3. Component is the genus while spare part is the species. Spare part though fitted subsequent to
manufacture is a component part Hindustan sanitary ware V. CC
4. Scope of interference of SC in classification of disputes Classification of goods involves technical and
scientific evaluation and analysis. It is therefore important that unless something patently wrong is
demonstrated while classifying a particular product, SC should not interfere LML Ltd. V. CC (2010)(SC).

Case laws on Classification:
Case Judgment
Pleasantime Products
V. CCE (2009) (SC)
- The Court opined that Scrabble was not a puzzle/crossword.
- The difference between a game and a puzzle is brought out by three distinct
features, viz., outcome, clue-chance and skill. In a puzzle, the outcome is fixed or
pre-determined which is not there in Scrabble.
- In a Scrabble there are no clues whereas in crossword puzzle, as stated above,
words are written according to clues.
- Hence, the essential characteristic of crossword to lay down clues and having a
solution is absent from Scrabble.
- Thus, Scrabble would not fall in the category or class mentioned in sub-heading
9503.00, namely, puzzles of all kinds.
- As per the dictionary meaning, Scrabble is a board game in which players use
lettered tiles to create words in a crossword fashion.
- Applying the dictionary meaning, the Apex Court held that Scrabble was a board
game. It was not a puzzle. In the circumstances, it would fall under heading 95.04
and not under sub-heading 9503.00 of the CETA.

Parts of
General use
Should be classified in
their specific heads
Eg: Bolt used in a vehicle
will be classified as "Bolt"
and not as "Vehicle part"
Specific use
If seperate heading is
available for that part
Should be classified under
that particular heading.
In Bharat Fritz werner P. Ltd. V. CCE it
was held that if certain goods are
specifically mentioned in any
particular heading, these will be
classified under that heading, even if
they are parts and accessories
suitable for use of a machine in a
particular heading.
If seperate heading is not
available for that part
Should be classified
along with the main
article.
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CCE V. Funskool (I) Ltd.
(2009) (SC)
In classification of an item as a game, puzzle or toy, the age of the palyer is not a
relevant test. Hence, snake and ladder and monopoly were classifiable as games; they
were not toys even if the children play them.
Xerox India Ltd. V. CCE
(2010) (SC)
- Rule 3(a) of GIR Prefer Specific heading over general.
- Rule 3(b) of GIR In case of composite items, classify as per ESSENTIAL
CHARACTER
- While observing the multi functional machines, the major portion of manufacturing
cost as well as parts and components are allocated to printing function.
- This clearly shows that the printing function emerges as the principal function and
it gives the essential character to multi functional machines.
- Therefore, multi functional machines should be classified under heading 8471.60
- The multi functional machines serves as both input device (i.e. Scanner) and output
device (i.e. Printer) of an Automatic data processing machine.
CCE V. Vicco
Laboratories
The burden of proof that a product is classifiable under a particular tariff heading is on
the department
CCEx. vs. Insulation
Electrical (P) Ltd. 2008
(SC).
Facts:
- The assessee is a manufacturer of rail assembly; front seat adjuster/assembly slider
and rear back lock assembly for car seats.
- With the help of these items, seats can slide back and forth which enables the
driver or the passenger to adjust the position of the seat to suit his comfort and
convenience.
- The company is classifying its products under chapter heading 8708.00 as Parts
and accessories of the motor vehicle.
- However, the Department contends that the product manufactured by M/s.
Comfort Seats (P) Ltd. should be classified under chapter heading 9401.00 as
Seats whether or not convertible into beds and parts thereof.
Decision:
- The goods under question would not be classified under sub-heading 9401.00 as it
only covered parts of seats and not accessories thereof.
- The Supreme Court held that the said goods would rightly be classified under sub-
heading 8408.00 as it covered both parts and accessories.
Guljag Industries Ltd. v.
Union of India (HC)

Erroneous claim made by the assessee earlier did not preclude him from subsequently
making a claim for correct classification.
LML Ltd. V. CC (2010)
(SC)
Drawings and designs contained in a CD ROMs is neither Printed matter nor
Information technology software not either Bare CD ROM and hence, classifiable as
Recorded CD ROM under 8524.39
CC V. NI systems (I) P.
Ltd. (2010) (SC)
Controllers/Adaptors meant for use as measuring and controlling equipments are not
classifiable as Computers/data processing machines under chapter 84 and are
classifiable under Chapter 90 as Measuring and checking instruments.
CCE V. Sund-strand
Forms P. Ltd. (2011)
(SC)
Carbonless paper is a chemically treated paper used for producing impression of the
writing or manuscript of the original paper on the other paper sheet. Carbonless paper
emerging at intermediate stage during continuous process of manufacturing of carbon-
less stationary is classifiable under Tariff heading 48.16 as self copying paper, other
copying or transfer papers. The same could not be regarded as Registers and other
stationary items under heading 48.20 or Printer matter under heading 49.01
CCE V. Wockhardt Life
sciences Ltd. (2012)
(SC)
Facts:
- Assessee was a manufacturer of Povidone Iodine Cleansing Solution USP
(PICSU) and Wokadine surgical scrub (WSS).
- The assessee contended that the said products were Medicaments under Tariff
heading 3003 as it was used for surgical cleaning, while the department
contended that they were detergent under Tariff heading 3402.90
Decision:
The products were medicaments in view of the three important tests for classification -
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Composition test, Use test and common parlance test, as discussed below:
(i) Composition Test: The PICSU and WSS was made of 330 Kg. of medicines in 1000 litres
of water. The quantity of medicines used in particular product is not relevant because,
normally, extent of use of medical ingredients is very low, as larger use may be harmful
to the body. Therefore, as per composition test, the products were medicament.
(ii) Use Test: The products in question were primarily used by surgeons for cleaning or
de-germing their hands and scrubbing surface of skin of patients before operation.
Merely because they were used in detergents as cleansing agents would not affect the
classification. Therefore, as per primary use test, the products were medicaments.
(iii) Common Parlance Test: The products in question were understood as medicaments
in common parlance and trade. Therefore, merely because of alternative used in making
detergents, they could not be classified as detergents.
CCE V. Minwool Rock
Fibers Ltd. (2012) (SC)
Facts:
- Assessee was a manufacturer of slag wool/rock wool containing more than 25%
by weight blast furnace slag. Classified that said goods under tariff heading
6807.10, while the department sought classification under tariff heading 6803.
- 6803: slag wool, rock wool and similar wools (Rate of duty 18%); 6807.10: Goods
in which more than 25% by weight of ___ blast furnance slag ___ is used (Rate of
duty 8%)
Decision:
Classification beneficial to assessee to be classified: In classification dispute, in case of
two competent tariff entries, any entry which is beneficial to the assessee should be
applied. Therefore, the products in question were classifiable under heading 6807.10
Circulars on Classification:

903/23/2009 It is clarified that these products will be classified under heading 9404.
Explanatory Notes to Harmonized System of Nomenclature to Chapter Heading
5811 also states that the heading does not cover made up goods of this Section
(Section Note 7) and articles of bedding or similar furnishing of Chapter 94
which are padded or internally fitted. Thus, the articles of bedding and
furnishing fall in Chapter 94.
890/10/2009 If coconut oil is packed in packages which are generally meant for sale in retail as hair oil,
it would be classified as hair oil under heading 3305 (Chapter 33 of CETA), even though
few consumers may use it as edible oil.
If the same coconut oil is packed in say 1 liter or 2 liter packages, which are generally used
by consumers for edible purposes (even though some customers may use it as hair oil), it
would be classified as edible oil under chapter 15.
929/19/2009 It has been clarified that polyester staple fibre manufactured out of PET scrap and waste
bottles is nothing but a textile material and hence will be classified as textile material
under heading 55032000 under Section XI and not as article of plastic in Chapter 39.
52/2011 - Cus TV tuners used with Computer/Automatic data processing machines receives TV signals
and as the basis of such principal function, it is classifiable as Reception apparatus for
television under heading 8528 71 00. It cannot be regarded as part of the
computer/ADP even if it is connected with motherboard.
3/2012 - Cus Fused silica is classifiable under tariff item 3207 40 00 as glass frit and other glass, in the
form of powder, granules or flakes. Fused silica in tube form, rods or tubes, un worked,
is classifiable under tariff item 7002 31 00 as Glass in balls, rods or tubes, unworked.


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Various Types of duties under Excise:
Type of Duty Leviable under Leviable on Rate of Duty
a) Basic Excise Duty
(BED)
First schedule to CETA,
1985
All goods
b) Special Excise Duty Second schedule to
CETA, 1985
Goods specified under that
schedule
At present exempt
c) Additional duty of
excise (goods of
special Importance)
Excise (goods of
special Importance)
Act, 1957
Goods specified in the
Act
At present Exempt
d) Additional Excise
Duty
Clause 85 of Finance
Act, 2005
Pan masala and
tobacco products
10% of excise duties
e) National Calamity
and contingent Duty
(NCCD)
Sec 136 of Finance Act,
2001
- PFY, motor vehicles, cars,
multi utility vehicles and
two wheelers
- Domestic crude oil
- Mobile phones
1%



Rs. 50 per ton
1%
f) Clean Energy Cess Sec. 83 of Finance Act,
2010
Gross quantity of raw coal,
lignite and peat raised and
dispatched from a coal
mine in India
Tariff rate Rs. 100 but
effective rate is Rs. 50 per
ton. EC and SHEC not
applicable


Provisions relating clean energy Cess: (Notifications 1-6/2010 and 28-29/2010):
Exemption has been granted in respect of goods produced or extracted as per traditional and customary
rights enjoyed by local tribals in Meghalaya without any license or lease.
The procedures relating to exemption, registration, recovery, demand, interest, refund, offences, penalty
etc. in respect of such cess are being governed by the provisions as applicable under the Central Excise Act,
1944 in regard to like matters.
All coal producers would have to register with the designated officer within 30 days and pay cess on the
removal of the produce from their mines. The new levy will be paid on the basis of self assessment. The
cess should be shown separately in the invoice or bill issued by the producers.

Section 3 of CETA: The central government can increase the duties of excise by amendment of first schedule and
second schedule, by notification in the official gazette, in the following manner
- If Rate of duty specified in First and second schedule is NIL Increase can be upto 50% advalorem.
- If in any other case Increase can be upto a rate of duty not exceeding twice the rate of duty specified in
respect of such goods in First schedule and second schedule as in force immediately before issue of the said
notification.
However, the Central govt. shall not issue any notification for substituting the rate of duty in respect of any goods as
specified by an earlier notification before such earlier notification has been approved by parliament with or without
modifications.











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Valuation under Excise



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1. Specific duty
C It is the duty payable on the basis of certain
unit like weight, length, volume, thickness etc.
C However, the disadvantage is that even if
selling price of the product increases, revenue
earned by Government does not increase
correspondingly.
C Frequent revisions of rates have to be done,
which is a slow and time consuming process.
Hence, now most of the goods are covered
under Ad valorem duty.
C Presently, specific rates have been announced for
a) Cigarettes (length basis),
b) Matches (per 100 boxes/ packs),
c) Sugar (per quintal basis),
d) Marble slabs and tiles (Square meter basis),
e) Colour TV when MRP is not marked on the package or when MRP is not the sole consideration
(based on screen size in cm),
f) Cement clinke (per tonne basis),
g) Molasses resulting from extraction of sugar (Per ton basis).
C As long as variation is within maximum permissible error as per weights and measurements Act, duty is
payable on the basis of weight as shown on package. CCE V. Sagar cements Ltd.
2. Tariff Value
C It is fixed by Government from time to time.
C It is a Notional Value.
C Once tariff value for a commodity is fixed, duty is payable as percentage of this tariff value
C Government can fix different tariff values for different classes of goods or goods manufactured by different
classes or sold to different classes of buyers
C The tariff value may be fixed on basis of wholesale price or average price of various manufacturers as the
Government may consider appropriate.
C Such tariff value can be fixed only for few selected commodities like -
(a) Pan masala packed in retail packs of upto 10 gm per pack
(b) Tariff value for readymade garments has been prescribed as 30% of the retail sale price as specified on
the package.
3. Duty based on production capacity [Sec. 3A]
Some products (ex: Pan Masala, rolled steel products) are prone to duty evasion. For that reason Central Govt.
issued a notification specifying that duty shall be levied based on production capacity.
1. Annual capacity will be determined by an officer not below the rank of Assistant Commissioner of Central
Excise.
2. Factors relevant to determine production capacity will be specified by Central Govt.
3. Annual capacity fixed shall be deemed to be annual production of goods from the factory (i.e) whether the
production is below (or) more than annual capacity fixed.

Situation Adjustment
1. If factory is not working for part of year Annual production will be calculated on proportionate
basis
2. If factory does not work for a continuous
period of 15 days (or) more in a month
Duty calculated will be proportionately reduced
3. If factors determining production capacity
has been changed during the year
Annual capacity will be re-determined
C Specific Duty method
C Tariff Value
C Duty based on Production capacity
C MRP based Valuation
C RSP determination Rules, 2008
C Compounded levy scheme
C Transaction Value
C Computation of transaction value
C Valuation Rules, 2000
C Cases and circulars
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Products covered:
- Pan masala containing more than 15% betel nut,
- pan masala containing tobacco (i.e. gutkha),
- Unmanufactured tobacco bearing a brand name
- Chewing Tobacco
- Jarda scented tobacco manufactured with the aid of packing machine and packed pouches.

Special Points:
- The declaration of retail sale price is mandatory in case of such notified goods.
- The duty is fixed per month per packing machine based on retail sale price of the pouches.
- The amount of duty specified in the notification is inclusive of EC & SHEC.

Note: The above provisions are not applicable for EOU
4. MRP based valuation
Sec. 4A empowers C. Govt to specify goods on which duty will be payable on retail sale price. The provisions are as
follows:
a) The goods should be covered under provisions of Legal metrology Act, 2009 or the rules made there under
b) Central government will specify the commodities to which MRP based valuation is applicable, by a
notification in official gazette
c) It also specifies the abatement available from the Retail Sale price
Valuation Methodology:
Retail Sale Price (RSP) declared on such goods XXX
Less: Notified amount of abatement from retail price allowed by
central government.
(XXX)
Assessable Value for the purpose of levy of excise duty XXX
FAQs on MRP based valuation:

(a) Who has to declare the abatement? Central Government

(b) For what kind of goods does this provision apply? For goods covered under the provisions of Legal
Metrology Act, 2009.

(c) Whether this provision applies to all goods covered under the provisions of standards of weights and
measurements Act? The central Government by notification will specify from time to time the
commodities covered.

(d) What is the meaning of Retail Sale price? It is the maximum price at which excisable goods in packaged
forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commission payable
to dealers and all charges towards advertisement, delivery, packing, forwarding charges etc.,

(e) If there is more than one MRP on the same product? Whichever is higher should be considered

(f) Different MRPs on different packages for sale in different areas? Each such price shall be MRP which
has to be valued separately
Ex:
Brooke
Bond
(for sale to hotels)
Rs. 40


Brooke
Bond
Rs. 60


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Beautiful Hair Ltd. Manufactures shampoo at its factory in Kanpur. The following
maximum Retail Price (MRP) are printed on the packet:
MRP in Bihar - ` 150
MRP in West Bengal - ` 148
MRP in other places - ` 145
What is the AV of shampoo cleared for sale in the state of AP as per Section 4A of
the CE Act, 1944? Give Reasons for your answer?
It was held in Mount Everest Mineral water Ltd. V. CCE that where the assessee had marked different
sale prices on its mineral water bottles for sale in different region, he did not satisfy the requirement
under sec. 4A that marking of different prices must be on DIFFERENT PACKAGES. Thus, the highest
price declared in the package is to be taken into account for valuation.
Hence, MRP of ` 150 will be taken for assessment purpose. AV per packet = ` 150 Abatement.

(g) Goods are covered under MRP provisions. But MRP hasnt entered on to it (or) wrong MRP (or)
tampering of MRP? It is an offense & goods are liable for confiscation.

(h) When MRP based valuation does not apply
When goods are packed in bulk (or) whole sale

(i) If goods are sold partly in wholesale and partly in retail
Wholesale (No MRP based valuation)
Retail (MRP based valuation)

(j) A person crossing higher MRP to show lower MRP
Scored / crossed out MRP has no relevance. The price which is visible has to be considered for the
purpose of valuation.

(k) If goods are given as free gifts/ samples? In case of free samples, the value should be calculated as per
Rule 4 of Valuation Rules, 2000 which is the value at the nearest time of removal. Circular No. 915/5/2010
has clarified that in case of goods notified under Sec. 4A is given away by way of free samples/ gifts/
donations, the value under Rule 4 for payment of excise duty shall be the value determined under Sec. 4A
for the similar goods (subject to adjustment for size and pack etc.,).

(Source: Cadila Pharmaceuticals V. CCE (2008)(CESTAT), CBEC Circular No. 915/05/2010)
Note: If value of similar goods not available Valuation should be on the basis of cost of production + 10%,
in the absence of any other mode available for valuation.

(l) Coca cola supplied aerated water in packed condition to buyer who will be distributing them for free
later. How the valuation shall be made? Since product is covered under MRP, duty is payable on basis of
MRP, even if later buyer is going to distribute the same as free gift.- CCE V. Hindustan Coca Cola.

(m) Whether MRP based valuation applicable to export goods? MRP provisions so not apply to goods under
export (even export to Nepal or Bhutan). In such cases, valuation is required to be as per provisions of
section 4. Such goods are not liable for confiscation if MRP is not printed on such goods Gillete India Ltd.
V. CCE
Valuation of free samples when product is covered under MRP provisions
If MRP is marked on the samples
Valuation under sec. 4A
AV = MRP (-) abatement
If MRP is not marked on the samples
Valuation under Rule 4
AV = Price at which similar
goods sold in the market
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(n) If at the time of removal lower MRP, after removal (or) clearance higher MRP? Higher MRP shall be
taken into account

(o) When certain expenses are charged separately in the invoice and collected from the dealers, how the
valuation u/s 4A shall be made? In Gujarat Gold coin Ceramics V. CCE, it was held that any amount
collected from dealers, is not required to be added when valuation is on basis of MRP.

(p) If goods are covered under MRP based valuation, will any other valuation scheme applicable (i.e.
Transaction value u/s 4(1))? Sec. 4A uses the words notwithstanding section 4. Hence when section 4A is
applicable, provisions of section 4 for determination of AV are not applicable.

(q) When M.R.P based valuation not applicable?
- When goods are not covered under the provisions of Sec. 4A
- When goods are packed in bulk Titan Industries V. CCE
- Provisions do not apply to packages or commodities of more than 25 kg or 25 litre. In case of
cement and fertilizers the provisions apply upto 50 kg.
- Packaged commodities for Industrial or institutional customers.
The following are the exclusions irrespective of weight or volume of package
Small packages of 10gm/ 10ml or less.
Fast food items packed by restaurants/ hotels
Scheduled drugs and formulations
Agricultural farm produce
Bidis for retail sale
Domestic LPG gas

(r) Who are Institutional customers and Industrial customers?
- Institutional customer means Customers those who buy packaged commodities directly from the
manufacturers/ packers for service industry like transportation, hotel or any other similar service
industry.
- Industrial customer means those consumers who buy packaged commodities directly from the
manufacturers/ packers for using the product in their industry for production.

(s) Products covered under MRP valuation.
Chocolates in any form Abatement 35%
Biscuits manufactured with aid of power Abatement 35%
Waffles & Wafer Abatement 35%
Aerated waters Abatement 42.5%
Toothpaste Abatement 35%
Footwear Abatement 37%
Printers, ink cartridges Abatement 25%
Computers Abatement 22.5%
Input or output units for computers printers, monitors, keyboard, scanner, mouse etc.
Abatement 25%
Modems Abatement 25%
TV Receivers including Video monitors and video projectors Abatement 35%.
Photographic cameras Abatement 35%
Toothbrush Abatement 28.5%
Vacuum Flasks Abatement 40%.
Automobile parts, components and assemblies Abatement 33.5%
Retail Selling Price (Determination) Rules, 2008:
C If retail price is not declared on the package at the time of removal, or retail price is declared which is not
the retail price as required to be declared as per provisions of Excise law or any other law, the goods are
liable for confiscation Sec. 4A(4).

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C Goods are liable to confiscation in the following cases:
Removing excisable goods without M.R.P
Removing goods with wrong M.R.P
Tampering, altering, removing M.R.P

Mode of ascertainment of MRP if MRP not declared or incorrectly declared or obliterated. Central Excise
(Determination of Retail Sale Price) Rules, 2008
In the following cases, the Central Excise (Determination of Retail sale price of Excisable goods) Rules, 2008 shall
apply
Clearing goods without declaring RSP
By declaring RSP, which is not the RSP required to be declared
By declaring RSP but obliterates the same after their removal

Consequences:
1. Such goods are liable for confiscation.
2. RSP shall be determined as per the said rules.

Determination of RSP:
C Rule 4(i): When goods are removed without RSP or wrong RSP or obliteration of RSP, RSP of identical
goods sold within one month prior or later of the goods in question shall be considered. [If more than one
RSP is ascertained, highest RSP is taken into account]
C Rule 4(ii): When RSP cannot be ascertained as per above rule, enquires in retail market should be
conducted to ascertain RSP.
C Rule 5: When RSP is tampered/ altered after removal, such increased RSP shall be taken as RSP of all goods
removed during one month prior and after
5. Compounded Levy scheme:
C Normal excise procedures and controls are not practicable when there are numerous small manufacturers
C Rule 15 of Central Excise Rules provides that CG may, by notification, specify the goods in respect of which
the scheme shall be applicable
C Central Government can specify procedure for payment, abatement allowable, interest and penalty
payable etc.
C The abatement if any may be allowed on account of closure of a factory during any period, or because of
any other matter.
C This is termed as compounded levy scheme.
C It is devised for administrative convenience. It is an optional scheme.
C The advantage of this scheme is that it frees the manufacturer from observing day to day central excise
formalities and maintenance of detailed accounts after making the lump sum periodic payment.
C Thus, small manufacturers generally benefit from this scheme.
C Under compound levy scheme, the manufacturer has to pay prescribed duty for specified period on the
basis of certain factors relevant to production, like size of equipment employed etc.
C Applicability of scheme - The scheme is presently applicable to stainless steel pattas/patties, Aluminium
circles.
6. Transaction Value
Section 4(3)(d) defines transaction value as follows
Transaction value 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 payable at the time of sale or at
any other time, including, but not limited to, any amount charged for, or to make provision for,
advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty,
commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any,
actually paid or actually payable on such goods.
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The analysis of the definition is as follows:
The payment should be by reason of, or in connection with the sale.
The amount may be payable at the time of sale or at any other time. Such time may be before or after sale.
Any amount charged for, or to make provision for, advertising or publicity, marketing and selling
organization expenses, storage, outward handling, servicing, warranty, commission or any other matter is
includable.
However, the above are includable only when aforesaid conditions are satisfied i.e. (a) The amount should
be paid or payable to assessee or on behalf of assessee and (b) Payment should be by reason of sale or in
connection with sale.

When Assessable Value shall be Transaction Value?
As per Section 4(1)(a), excise duty is payable on basis of transaction value, if the following conditions are satisfied -
The goods should be sold at the time and place of removal.
Buyer and assessee should not be related
Price should be the sole consideration for the sale.
Each removal will be treated as a separate transaction and 'value' for each removal will be separately fixed.
If these requirements are not satisfied, valuation will be done as per Valuation Rules,2000. - Section 4(1)(b)
FAQs on the definition of TRANSACTION VALUE:
1. What is the
meaning of PLACE OF
REMOVAL and time
of removal?
Place of removal MEANS
(i) a factory or any other place or premises of production or manufacture of the excisable
goods from where such goods are removed,
(ii) A warehouse or any other place or premises wherein the excisable goods have been
permitted to be deposited without payment of duty from where such goods are removed,
(iii) A depot, premises of a consignment agent or any other place or premises from where
excisable goods are to be sold after their clearance from factory; from where such goods
are removed. [Section 4(3)(c)].

Thus
(i) If excisable goods are removed for sale from factory of manufacture or place of
production, that will be place of removal. If there is no sale at factory gate, it is not the
place of removal.
(ii) If goods are cleared for sale from warehouse where goods were allowed to be kept
without payment of duty, which will be the place of removal.
(iii) If goods are cleared from factory to depot or branch or place of consignment agent,
then such depot/ branch/place of consignment agent will be place of removal.
(iv) Where goods are sold at destination and not at factory gate (this may be the case in
case of CIF contract but not necessarily), such place or premises will be place of removal.

Place of removal is significant for duty liability which is as follows:
Place of
Removal
Removed to Duty Liability Duty on
(a) Factory Customer/ Buyer
under a sale
Warehouse
Depot/ Consignment
premises
Yes

No
Yes
Ex-Factory Price

N.A
Ex-Depot Value (Rule
7)
(b)
Warehouse
Customer/ Buyer
under a sale
Depot/ Consignment
premises
Yes

Yes
Ex-Warehouse Value

Ex-Depot Value (Rule
7)
(c) Depot Customer/ Buyer
under a sale
No

N.A (Since already
paid)
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2. How TIME OF
REMOVAL can be
determined if goods
are removed to depot
or premises of
consignment agent?
As per section 4(3)(cc), in case of sale from depot/place of consignment agent, time of
removal shall be deemed to be the time at which the goods are cleared from the factory.

3. When goods are
said to be not sold at
the time and place of
removal?
Transfer to depot/branch
Goods sent on jobwork.
Free samples or supply under warranty claims
Hypothecation
Free on Road (FOR) destination delivery (sale is concluded only when goods are
delivered to buyer)
In case of export, property in goods passes to buyer at the port when goods are
handed over to airlines/shipping Company.
Hence, valuation on basis of transaction value is not permissible in these cases.
4. What is the
meaning of related
person and who are
said to be related?
As per Section 4(3)(b) of Central Excise Act, persons SHALL BE DEEMED TO BE RELATED IF
(i) They are inter-connected undertakings
(ii) They are relatives
(iii) Amongst them, buyer is a relative and a distributor of assessee, or a sub-distributor of
such distributor or
(iv) They are so associated that they have interest, directly or indirectly, in the business of
each other.
5. What is the
meaning of Inter-
connected
undertakings?
(w.e.f. 1/4/2012)
One undertaking Nature of relationship Other undertaking
One undertaking Owns/controls/both are
owned or controlled by
the same person or same
group
Other undertaking
Owned by firm Common partners Owned by firm
Owned by body corporate Manages/exercises
control/subsidiary
Owned by body corporate
Owned by body corporate Under the same
management
Owned by body corporate
Owned by body corporate Partners in the firm hold
directly/indirectly 51% of
equity or preference of
body corporate
Owned by firm
Owned by body corporate Partners in the firm
exercise control
directly/indirectly in body
corporate, as
director/otherwise.
Owned by firm
Owned by body corporate Same management Owned by firm, having
body corporate as its
partners
Apart from the above, if one undertaking is connected with the other either
directly or through any number of undertakings which are inter-connected
undertakings falling above. For example, Undertaking B is interconnected with
undertaking A (i.e. B A) and undertaking C is interconnected with undertaking A
(i.e. C A). Therefore, undertaking C is interconnected with undertaking B (i.e. C
B). Further, if undertaking D is interconnected with undertaking C, then
undertaking D is interconnected with undertaking B and consequently with
undertaking A (i.e. If D C, then D B, D A)
6. What is the
meaning of same
management for the
purpose of the
Two body corporates will be deemed to be under the same management if any of the
following is satisfied.
(i) If one controls other or both are controlled by same group or any of the constituent
of the same group.
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definition of inter-
connected
undertakings?
(ii) If both have common managing director or manager
(iii) If one controls at least 25% equity shares of other or not less than 25% directorships of
other.
(iv) If atleast 25% of number of directors are common, or were common any time during
last 6 months.
(v) If same individual, group or part of group holds atleast 25% or more shares in both the
body corporates
(vi) If one or moe body corporate in a group together with subsidiaries, if any, hold 25% or
more shares of both the body corporates.
(vii) If atleast 25% voting power of both the corporate is controlled by one individual
(together with his relatives or on his own), or by same body corporate with its
subsidiaries.
(viii) If atleast 25% voting power of both the body corporate is controlled by same group
or same company belonging to a group or jointly with individuals and one ore more of
such body corporate.
(ix) If directors of one body corporate are accustomed to act as per instructions of one or
more directors of another body corporate or directors of both body corporate are
accustomed to act as per instructions of another individual, whether belonging to a
group or not.
7. What is the
meaning of relative

6. What is the
meaning of Interest
in the business of
each other?
Not defined in the Act, but can be understood based on the case laws.
C It is not enough if only buyer has interest in seller or seller has interest in buyer. Both
must have interest directly or indirectly in each other Atic Industries Ltd. V. UOI
C Mere holding shares of a public company does not mean that shareholder has an
interest in the business of the public company Alembic Glass Industries V. CCE
C Interest in the business of each other does not mean a mere business connection
between two parties. This interest has to be financial or managerial Interest
Automotive Axles V. CCE
7. What is the
meaning of Price
must be the sole
consideration?
Price is the consideration given for purchase of a thing. Consideration MEANS reasonable,
equivalent or other valuable benefit passed on by the promisor to the promise or by
transferor to transferee.
Some illustrations will clarify:
- Buyer supplies some material to be used in manufacture of product and manufacturer
i.e. seller charges lower price for the goods, price is obviously not the sole
consideration for sale of goods
- If the purchaser agrees to pay advance along with order and manufacturer agrees to
sell goods at lower price, then price is not the sole consideration.
- If buyer agrees to incur some advertisement expenditure of the goods manufactured
by the manufacturer and manufacturer agrees to give extra discount over normal
price. Here also, price charged by manufacturer cannot be treated as sole
consideration.
Brother Sister
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Computation of Transaction Value:
Any payment charged separately or made provision separately will be included in the Transaction value along with
invoice price if the following 2 conditions are satisfied:
1. Buyer is liable to pay to assessee or to a third party on behalf of assessee.
2. The payment or provision made is by reason of sale or in connection with sale.

An extract of the definition:
Section 4(3)(d) defines transaction value as follows
Transaction value means -------, 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 payable at the time of sale or at any other time, including, ---------
-.

Transaction value includes the Invoice price plus the following:
1) Amount paid by buyer to seller by reason of sale, at the time of sale.
2) Amount paid by buyer to seller by reason of sale, before the sale.
3) Amount paid by buyer to seller by reason of sale, after the sale.
4) Amount paid by buyer to seller in connection with sale, at the time of sale.
5) Amount paid by buyer to seller in connection with sale, before the sale.
6) Amount paid by buyer to seller in connection with sale, after the sale.
7) Amount paid by buyer to third party by reason of sale, at the time of sale.
8) Amount paid by buyer to third party by reason of sale, before the sale.
9) Amount paid by buyer to third party by reason of sale, after the sale.
10) Amount paid by buyer to third party in connection with sale, at the time of sale.
11) Amount paid by buyer to third party in connection with sale, before the sale.
12) Amount paid by buyer to third party in connection with sale, after the sale.


What is the difference between By reason of sale and In connection with sale?

By reason of Sale In connection with sale
Dictionary
Meaning
Reason means motive or cause. This
indicates a cause and effect relationship.
Connection means the state of being
connected or joined.
Interpretation It has a liberal interpretation It has a stricter interpretation
Explanation When a buyer pays certain amount to seller or
third party because this sale has been
concluded, then such payment is by reason of
sale. Here sale is the cause and payment is
the effect. Here the relation can be remote
and doubtful.
The term connected with means that
connection must be direct and clear as
between cause and effect and not remote and
doubtful. It implies a substantial or direct
connection and not a fanciful or highly
problematical connection
Example A manufacturer has 2 products X and Y, X is
an excisable product and Y is non excisable. A
buyer needs both X and Y. The manufacturer
charges a lesser price for excisable product
and a higher price for non excisable product.
In this case the excess amount paid is in
reason of sale.
A manufacturer charged design, engineering
charges separately in invoice. The buyer paid
both invoice price and design charges. As
design charges are necessary and are in
connection with sale. So includible.

Invoice price (or) Sales value xxxx
Add: If the following are not included in the above:
a) Packing (primary, secondary (or) special) It is in connection with sale xxxx
b) Packing supplied by buyer Circular No. 354/81/2000 xxxx
c) Durable & returnable packing (only amortised value if any, is includable) xxxx
Note: Packing charges recovered from buyer will be included only if it is in relation to sale of
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goods Grasim Industries V. CCE

d) Design & engineering charges (as they are essential for the purpose of manufacture) It is
in connection with sale
xxxx
Note: Engineering charges not connected to goods or sale should not be included

e) Consultancy charges (as these are incurred in relation to pre-installation planning, layout
design, etc.,) It is by reason of sale
xxxx
f) Warranty charges It is in connection with sale xxxx
Note: It will be includable even if they are charged separately
In case of optional warranty, if buyer does not opt for warranty, and does not pay amount
then it is not included

g) Testing charges (recovered by the assessee from the buyer in terms of contract) xxxx
h) Loading and unloading within the factory (as it is a cost of production) It is by reason of
sale
xxxx
Note: Loading & unloading charges incurred by a buyer of the assessee on his own account and
not on behalf of seller is not includable

i) After sale service
(in the same lines of warranty charges)
xxxx
j) Commission to selling agents for the services rendered by them xxxx
k) Bought out items without which the excisable goods cannot function
(as they are supplied with excisable goods & are essential parts of goods which enrich its
value)
xxxx
Note: Bought out items supplied under trading activity is not includable
l) Pre-delivery inspection (PDI)
Note: i) Cost can be incurred at any time & just before removal also xxxx
ii) If PDI is not part of contract of sale & is incurred by the buyer, then it is not includable
(See recent case law below)
m) Dharmada charges (it is amount collected by the seller & spent for charitable purpose) xxxx
Note: i) Statutory provisions not included
ii) No statutory requirement includable
n) Free supply during warranty period xxxx
o) Transportation and insurance xxxx
i) Cost incurred from factory gate to the place of removal is includable in transaction value
ii) Profit an transportation cost charged to the buyer, thereby indirectly collecting a higher
price for the goods sold is also includable

Note: Cost incurred from place of removal to place of delivery is not includable
xxxxx

EXCLUSIONS

Less: If the following are included in the Invoice Price
p) Excise duty on finished products xxxx
q) Sales tax, turnover tax, additional sales tax, surcharge on sales tax, octroi

xxxx
r) Trade discount (discount of any description given on any normal price payable for any
transaction will not form part of transaction value)

xxxx
s) Regional discount
Condition: It should be in the course of normal business practice xxxx
t) Outward handling charges (cost of transportation from place of removal to place of
delivery & the condition there is it should be shown separately in the invoice)
xxxx
u) Post removal expenses xxxx
v) Bank charges included in price of goods, such inclusion is on account of outstation checks xxxx
w) Interest on delayed payment xxxx
Conditions:
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i) Interest is chargeable only if buyer does not make payment within the credit period
allowed to him
ii) Interest charges are clearly distinguishable from the price of goods
iii) Financing agreement is made in writing


x) Interest on advances from customers xxxx
Conditions: Advances should not have any nexus relation with the price charged (i.e) the
customer paying the advance & the customer not paying the advance should not be
charged different prices


y)

Operating software (or) system software (cost of operating software & other operational
software should not be included in assessable value of computer since software &
computer are two different goods in CETA)


xxx

z)

Profits made by dealer

Conditions: There shouldnt be any flow back of profits from the dealer to the
manufacturer
xxxx

Transaction value (or) assessable value

xxxx
Valuation Rules:
As per section 4(1)(a), Assessable value shall be the transaction value as defined under section 4(3)(d), if the
following conditions are satisfied:
1. Goods must be SOLD at the TIME OF REMOVAL/ Goods must be SOLD at the PLACE of REMOVAL
2. PRICE must be the SOLE CONSIDERATION for sale
3. Buyer and seller must NOT BE RELATED
4. Each REMOVAL shall be valued SEPERATELY.
If any of the above condition or all the conditions are not satisfied then Central Excise (Determination of price
of Excisable goods) Rules, 2000 shall be applicable (i.e. Valuation Rules).

Rule 4: Value nearest to
time of removal if goods
not sold

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.
Examples: removal of free samples or supply under warranty claims.

C It was held in Bharat petroleum corporation Ltd. V. CCE (2009), that when there
were reciprocal agreements between buyer and seller, where seller charges a lesser
price to such buyer than to independent buyers, such price cannot be accepted for
valuation. In such case valuation shall be under Rule 4. Hence, different prices based
on reciprocal agreement not valid and valuation will be on the basis of Rule 4.
C Such goods means other goods of same class of same manufacturer. If a
manufacturer manufactures refrigerator of a particular brand and capacity, each of
these refrigerators will fall in category of such goods. However, refrigerator of same
capacity under different brand name by same manufacturer will not be such goods.
Departmental clarification
Rule 5: Goods sold at a
place other than the
place of removal (i.e)
delivery at buyers
premises.

Value = Transaction Value (-) Cost of transportation from the place of removal to place
of delivery.

Cost of transportation can be either on actual basis or on equalized basis.
- It should be calculated as per CAS-5 issued by ICWAI
- It is not required to show cost of transport separately in invoice for availing
deduction
- If assessee recovers an amount from the buyer towards the cost of return fare of
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empty vehicle, this amount is includible in the transaction value
- Cost of transportation includes
a) Actual cost of transportation (or)
b) Equalized freight
- Equalized freight is the average of freight charges allowed to be deducted
uniformly for all sales to different destination. This is possible when the sale is
from factory.
Rule 6: When price is not
the sole consideration
Assessable value = Sale price + money value of additional consideration received
Rule 7: Sale at depot /
consignment agent

Value shall be the Price prevailing at the depot at the time of removal from factory shall
be the assessable value
Time of removal - time at which the goods are cleared from factory.
Place of removal - depot/place of consignment agent
Rule 8: Valuation in case
of captive consumption
Value = Cost of production + 10%. (Cost of production calculated as per CAS - 4)
Rule 9: Sale to Related
person Other than Inter
connected undertakings
(including Holding -
subsidiary)
The value shall be the normal TV at which such goods (i.e. same, similar or identical) are
sold by related person to an unrelated buyer on the same date (i.e. on the date when
goods are sold to related buyer)

Special Points:
1. If the goods are sold to a related retail buyer by the related person on the same
date Price at which goods are sold to related buyer shall be considered as
Value
2. If the goods are sold to related wholesale buyer by the related person on the
same date Value determined as per Rule 11 (i.e. to the best judgment of
assessing officer)
3. If the goods are not sold by the related person on the same date other
valuation rules shall be applicable, if not Rule 11 is the last resort.


Rule 10: Sale to Related
Person Inter connected
undertakings (other than
Holding subsidiary)


Valuation shall be made as if they are not related persons

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Rule 10A: Valuation in
case of Job work
The various situations and the value in each situation are as follows:
(i) Where goods are sold by principal
manufacturer from the job workers
factory
The VALUE shall be the price
charged by principal manufacturer
to his customer.
(ii) Where goods are sold by principal
manufacturer from the job workers
factory and the principal manufacturer,
buyer are related
The VALUE shall be determined as
per Rule 9 or Rule 10.
(iv) Where goods are cleared from job
workers factory to principal
manufacturers factory
The VALUE shall be the price
prevailing at factory at the time of
removal from the job workers
factory.
(v) Where goods are cleared from job
workers factory to principal
manufacturers depot or place of
consignment agent of principal
manufacturer
The VALUE shall be the price
prevailing at depot or place of
consignment agent at the time of
removal from the job workers
factory.
(vi) Where the goods are given as free
samples by the principal manufacturer
from job workers premises
The VALUE shall be determined as
per Rule 4 i.e. Price nearest to the
time of removal
(vii) Where the goods are captively consumed
by the job worker for further processing
The VALUE shall be determined as
per Rule 8 i.e. Cost of production +
10%
(viii) Where the goods are sold for delivery at
the buyers premises from the factory of
job worker
The VALUE shall be determined as
per Rule 5 i.e. Price at buyers
premises Cost of transportation
from job workers factory to
buyers premises.
(ix) For any other situation Other Valuation rules mutatis and
mutandis shall be applicable.

Case laws on Valuation and Valuation Rules:
Case Judgment
1. CCE V. Xerogrpahic
Ltd. (2010) (SC)
Merely because two parties are related persons, the transaction value cannot be rejected.
In order to reject transaction value between related persons, it should be shown that the
price at which the goods were sold to related persons was not the normal price at which
the goods were sold to other distributors/dealers, or was less than the market price at
which it was being sold in the market, or, that there was any extra commercial
consideration in fixing the price to such related persons. IN absence, thereof, the price
discharged from the related persons shall be acceptable.
2. CCE V. Cadbury
India Ltd. (2006) (SC)
Advertising, insurance and other expenses of the final products shall not be added to
determine the value of intermediate goods.
3. CCE V. Makson
Confectionary (2010)
(SC)

Facts & Issue involved:
Whether Chocolates/Toffes packed liable for MRP based valuation? Though chocolates are
covered under MRP provisions as per Sec. 4A, but as it is packed MRP is not printed. Will
the penal provisions and confiscation as per Sec. 4A, applicable in this case?

Decision:
As per the standards of weight and measure rules,
A package containing 10 or more than 10 retail units is defined as Whole sale
package and there is no need to declare sale price on a whole sale package.
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The packs/jars of Eclairs are not intended for sale to retail customers
Therefore there is no need to declare RSP on the packs and these were assessable
as per sec. 4 and not as per sec. 4A.
4. Royal Enfield V. CCE
(2011) (SC)

Facts & issue involved:
Whether the packing charges incurred to avoid scratch and breakage to motor cycles form
part of Assessable value? Will the position be same if the said expenditure is separately
collected from the buyer?

Decision:
Any Expenditure incurred upto the place of removal and any amount paid by the
buyer by reason of sale or in connection with sale shall be included in the value of
taxable service. Packing charges shall be included if it is necessary in the ordinary
course of trade. (My Opinion)
In case of motor cycles cleared in packed condition from the factory to the depot,
the packing charges incurred to avoid scratch and breakage to motor cycles form
part of the AV because such packing is necessary for putting the excisable goods
(i.e. Motor cycles) in saleable condition.
Even though such packing charges are separately reimbursed by the buyer, the
same are includible in the value for the purpose of payment of excise duty.
5. Electronics and
Controls Power
system P. Ltd. V. CCE
(2011) (SC)

Facts & Issue involved:
Whether the value of bought out batteries supplied along with uninterrupted power
supply system (UPSS) as an option item should be included in the Value of UPS system for
the purpose of charging excise duty as these batteries are part of UPS system?

Decision:
Even if UPS cannot function without battery for conditioning power, but battery is
the essential pre-requisite.
The source of power to the UPS system is the battery which is an essential and
integral part.
Hence, the value of bought out batteries is includible in the value of UPS system.
Conclusion: Battery is not an accessory but an essential part, which needs to be
included in the value of Final product (i.e. UPS system). However, the
manufacturer can take the excise duty paid on the batteries as CENVAT credit for
the purpose of payment of excise duty on UPS system as the amended definition
of Inputs.
6. MARUTI SUZUKI INDIA
LTD. V. CCE 2010 (TRI.
LB)
Cost of after sale service and PDI charges incurred by dealer during warranty period is
includible. There need not be direct flow back of consideration to assessee. Even indirect
benefit is includible in assessable value.
7. Electronics &
Controls power
systems P. Ltd. V. CCE
(2011) (SC)
Facts:
- Assessee, a manufacturer of UPS system supplied bought out batteries as an
optional item along with UPS system.
- Department contended that the value of batteries was includible in the value of
UPS systmen for the purpose of charge of excise duty on the ground that battery
was part of the UPS system.
- Assessee denied such inclusion of the value of batteries in the value of UPS
system.

Decision:
Even f UPS system can function without battery for conditioning power, however,
battery is an essential pre-requisite, if UPS system is to provide uninterrupted
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power supply.
In such a case, the source of power is the battery.
So far as the UPS system with battery supplied to the buyers are concerned, UPS
system is an integral system of which battery is an essential and integral part.
Hence, the value of bought out batteries is includible in value of UPS system.
8. Essel propack Ltd.
V. CCE (2011) (SC)
Facts:
- Assessee, a manufacturer of plastic tubes.
- It was receiving supply of plastic caps from its customers and after fitting them
onto the plastic tubes, it was supplying the cap-fitted tubes to the customers.
- The assessee was paying duty on the value of plastic tubes, while the department
includes the value of caps in the value of tubes and demanded duty accordingly.

Decision:
If caps are manufactured separately and not in the same factory in which the
tubes are being manufactured, the caps cannot form integral part of the
assessable value of the tubes, manufactured and cleared from the factory, such
caps are merely accessory.
Since, in the present case, the caps are not manufactured in the factory of the
assessee but are being supplied by the customers of the assessee, the value of
caps will not form part of the assessable value of the tubes manufactured by the
assessee.
[Note: Caps is not packing material supplied by the customers]

Circulars on Valuation and Valuation Rules:
Circular No. 923/13/2010 Cost of return fare of vehicles is not required to be added for determining value. This
clarification has been issued in view of the Tribunals decisions in case of DCW Ltd. v. CCE
2007 and Haldia Petrochemicals Limited v. CCEx. Haldia 2009
Circular No. 938/28/2010 Quantity discounts, bonuses etc., are applicable for the valuation of goods under section
4 and not in case of goods valued under sec. 4A.















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CENVAT CREDIT RULES




Cloth Manufacturer Garment Manufacturer


Assume that 1 garment requires 2 meters of cloth
Invoice issued by cloth manufacturer for
2 meters of cloth
Invoice issued by garment manufacturer
for 1 garment
Invoice Invoice
2 meters of cloth @ `100 per
meter
`200 Readymade Garment
(Brand : Ruby : Size : S)

Add: Excise duty @ 10% `20 Raw material (Net cost)
CENVAT credit = `20
`200
Add: Education cess @ 2% on
`20
`0.4 (+) Processing charges `100
Add: SAH Education cess @ 1% `0.2 (+) Profit `50
Bill Amount (Rounded off) `221 `350
Add: Excise duty @ 10% `35
Add: Education cess @ 2% on `
`35
`0.7
Add: SAH Education cess @ 1%
on `35
`0.35
Bill Amount (Rounded off) `386
By observing the above two invoices, it is clear that the raw material (i.e. cloth) is taxable to excise duty in the
hands of cloth manufacturer i.e. `21 and again, it is taxable in the hands of garment manufacturer. This particular
raw material is taxable for two times and this is known as cascading effect of tax. In order to avoid this cascading
effect, the system of VAT has been adopted and is applied in case of excise duty, which is known as CENVAT
CREDIT.

Though the cloth manufacturer paid ` 21 as excise duty, it is passed on to garment manufacturer, i.e. `21 is actually
paid by garment manufacturer.

The modus operandi of CENVAT credit is that the excise duty paid by garment manufacturer for purchase of raw
materials (i.e. cloth) is available as credit and can be set off with excise duty payable on finished goods (i.e.
readymade garments).


Net duty payable by = (35 + 0.7 + 0.35) (21)
Garment manufacturer + +
Excise duty on FG Excise duty on RM
= ` 15


Input Process Output
Raw material Process Finished goods
Thread
(RM)
Processed
Cloth
(FG)
Cloth
(RM)
Processed
Ready
Made
garments
(FG)
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Deep into the point
For manufacturing any good (or) for providing any service, it requires inputs (Raw materials), capital goods
(machineries), input services (consultancy, etc.,)

The duties (or) taxes (or) cess paid on inputs, capital goods, input services are available as credit and can be set
off (utilized) for payment of duties (or) taxes (or) cess on finished goods and output service.
The excise duty paid on Inputs and capital goods and service tax paid on input services is available as credit,
which can be utilised (i.e. Setoff) for payment of Excise duty on finished goods and Service tax on output
services.
The concept is so simple. But .
Definition of Inputs:
Rule 2(k) input means -
(i) All goods used in the factory by the manufacturer of the final product; or
(ii) Any goods including accessories, cleared along with the final product, the value of which is
included in the value of the final product and goods used for providing free warranty for final
products; or
(iii) All goods used for generation of electricity or steam for captive use; or
(iv) All goods used for providing any output service;
But excludes -
(A) Light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) Any goods used for-
(a) Construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) Laying of foundation or making of structures for support of capital goods,
except for the provision of service portion in the execution of works contract or construction service as listed
under clause (b) of section 66E of Finance Act, 1994
(C) Capital goods except when used as parts or components in the manufacture of a final product;
(D) Motor vehicles;
(E) Any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and
clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and
(F) Any goods which have no relationship whatsoever with the manufacture of a final product.

Explanation For the purpose of this clause, free warranty means a warranty provided by the manufacturer, the
value of which is included in the price of the final product and is not charged separately from the customer.


FAQs on inputs

(i) There is a condition that, in order to qualify as input under Rule 2(k) it should be used in the factory by the
manufacturer of final product. Will that condition be applicable for output service provider also?
From the analysis of the definition, the condition of use of goods in the factory is not applicable to service
provider. He is entitled to credit on inputs if such inputs are used in providing output service.

Inputs
Process
Capital
goods
Process
Finished
goods
Output
service
Input
service
Process
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(ii) In the definition, the capital goods are specifically excluded. If certain goods which does not fall under the
definition of capital goods but used in manufacture of finished goods (or) used in provision of services, can it
be classified as inputs and can the credit be availed?
The definition reads Capital goods, so only those goods defined as capital goods under CENVAT credit
rules will be excluded from the definition of inputs. The definition of capital goods is restrictive whereas the
definition of inputs is inclusive.
Therefore, other capital goods, if used in factory, should be eligible as Inputs.
Fork lift trucks, lifting tackles, trolleys, conveyors and measuring instruments are inputs used in or in relation
to manufacture of final products. Thus, unless they are excluded by an exclusion clause, they will be eligible as
inputs CCE V. Tata Engineering & Locomotives co Ltd.

(iii) Sec. 2(k)(C) of the definition reads Capital goods except when used as parts or components in the
manufacture of a final product. So will all the parts and components of any capital goods treated as inputs
or will the parts and components of capital goods defined under Rule 2(a) treated as inputs?

The definition of Capital goods covers parts, components and accessories of capital goods. If such
parts or components are used in manufacture of final product, these will be eligible as inputs (Here
the word mentioned is USED in manufacture, which means there is no finished product if such input is
not used).
If a manufacturer of automobile uses parts and components to manufacture an automobile, these
parts and components will be eligible for CENVAT credit as input, even if these are covered in the
definition of capital goods as per Rule 2(a).
The definition of capital goods do not cover certain spares and accessories but they are the
components, spares and accessories of capital goods as defined under rule 2(a). These will be eligible
as inputs as these are used in or in relation to manufacture.


(iv) Rule 2(k)(iii) reads All goods used for
generation of electricity or steam for captive use.
Boilers are used for generation of electricity and
CENVAT credit available on them as Inputs. But
whether CENVAT credit available on the components
of boiler system?
CBEC vide circular No. 964/07/2012 clarified that
those structural components which are to be used
essentially as a part of boiler system would be
classifiable as parts of boiler. It further clarified that
since these structural components are nothing but the
parts and accessories of boiler, they would be covered
under the definition of Inputs.
Parts, components and accessories of capital goods.
Parts, comonents which are
mentioned in the definiton of
capital goods under Rule 2(a)
USED in manufacture
of final products
Credit eligible as
"Inputs"
Not USED in the
manufacture of final
products but used in
the factory
Credit eligible as
"Capital goods"
Parts, components which are not
mentioned in the definition but
related to capital goods defined
under Rule 2(a)
Credit eligible as
"Inputs" as these are
uded in or in relation
to manufacture of
final products
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(v) The exclusion list in the definition reads Any goods which have no relationship whatsoever with the
manufacture of a final product. How the no relationship whatsoever with the manufacture of final product
can be determined. Will the expression exclude the inputs used in or in relation to manufacture of final
products from taking CENVAT credit?
C The meaning can be understood from the analysis of definition which reads Rule 2(k)(i) - All goods used in
the factory by the manufacturer of the final product and Rule 2(K)(F) - Any goods which have no
relationship whatsoever with the manufacture of a final product are excluded.
C The expression must be interpreted and applied strictly and not loosely. The expression does not include
any goods used in or in relation to the manufacture of final products whether directly or indirectly and
whether contained in the final product or not. Only credit of goods used in factory but having absolutely no
relationship with the manufacture of final product is not allowed. Departments Circular No. 943/04/2011.
C Hence, Goods such as furniture and stationary used in an office within the factory are goods used in the
factory and are used in relation to manufacturing business. Therefore, the credit of same is allowed
Example mentioned in the circular.

(vi) In the previous definition there was a requirement that goods must be used in or in relation to manufacture
of final products, whether directly or indirectly and whether contained in the final product or not. Is that
requirement applicable in the new definition?
The said requirement has been removed and hence all goods used in the factory by the manufacturer of final
product, except those specified in the negative list and goods having no relationship with whatsoever with the
manufacture of final product, would qualify for treatment as Inputs Departments Clarification No.
334/3/2011.

(vii) What is the meaning of the phrase and when inputs are said to be used in or in relation to manufacture?
In the manufacture In relation to the manufacture
The Input is actually used in the manufacture of
finished product, either directly or indirectly.
The Input has been used during a process while
manufacturing the product.
Input may be present in the final product in same
or similar or identifiable form (or) may have
undergone change during the process
Input need not form part of final product
In the manufacture is a specific and exhaustive
term
In relation to manufacture is a broad expression
which covers all inputs which have direct nexus with
the manufacturing process.
Eg: Wood, Nails and paints are used In the
manufacture of table.
Eg: Sand paper for polishing is used In relation to
the manufacture of table.

(viii) If inputs are used to generate electricity (or) stream, whether credit is available ?
C Any goods used for generation of steam or electricity for captive use are eligible as inputs. However
HSD, LDO and Petrol have been specifically excluded from the definition of inputs. So, if HSD, LDO and
petrol are used for generation of steam or electricity for captive use, Credit not available.
C The words captive use is not defined, but it means For use within the factory of production or
premises of output service provider. However, Captive use shall not include electricity or steam sold
for a price to grid/others and used in residential premises/complex.
C It has been held that CENVAT credit is not available in respect of fuel used for generation of
electricity, which has been sold outside to sister units, vendors etc., Maruti Suzuki Ltd. V. CCE (2009)
C Electricity captively generated was cleared to State Electricity Board and simultaneously equal
quantity was received from Board, as electricity generated in plant was fluctuating type. It was held
that CENVAT credit of furnace oil used for captive plant is available. Jindal Stainless V. CCE

(ix) If the inputs are not directly identifiable with the finished goods, will the credit be available?
C Yes, in the definition the words in relation to connotes a wider meaning for inputs. Input need not
be physically present in the final products nor it should be completely consumed in order to avail
CENVAT credit.
C For, inputs used after manufacture of finished goods but before removal from the factory gate, the
credit can be availed. - Union Carbide India v. CCE
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C Inputs burnt up or consumed in manufacture process and not retaining identity in the end product
will be eligible for CENVAT credit Eastern Electro Chemical Industries V. CCE

(x) Bhajrang Decoratives and suppliers P. Ltd has supplied decoration items and appliances to Shadi Mubarak,
wedding planners. Bhajrang decorative and suppliers P. Ltd are taxable and are required to pay service tax
under the head Supply of tangible goods for use. They purchased equipment and appliances for providing
the service and took the excise portion on equipment and appliances as CENVAT credit. But the excise
authorities denied this. Comment?
The CBE&C letter clarified that the machinery, equipment, appliance, vehicles, aircrafts, vessels etc. supplied
during course of providing taxable service of Supply of tangible goods for use is input for providing the
taxable service. Hence excise duty/CVD paid on such machinery, equipment, appliance, vehicles, aircrafts,
vessels etc. will be eligible for CENVAT credit as Input.
(xi) Rule 2(k)(E), the exclusion clause reads Any goods, such as food items----------. As the word used is SUCH
AS, are the food articles consumed excluded or all articles excluded?
The use of the words Such as shows that the application of this sub clause shall not be limited to food items.
It covers all goods used in a guest house, residential colony, club or a recreation facility and clinical
establishment.
But such goods are used
- Primarily (Which means indirect use not covered i.e. employee purchases and employer reimburses it)
- For personal use or consumption (Articles for official use are not covered)
- Of any employee (What if, the assessee makes employee as a service provider???)

(xii) Inputs are purchased for use in finished goods, but before using some of the input are destroyed (or)
pilfered from store room.
The credit is not available, as it cannot be said that they are used in or in relation to manufacture. If the
manufacturer has already taken the credit, then he has to reverse it back (i.e. cancel the credit).
The following table will clarify the issue.

Case Whether CENVAT credit available
1. If inputs are issued for production and
there is a process loss (or) handling loss
Credit is available as inputs are used in the manufacture of final
product Multimetals Ltd. v. CCE.
Note: Exact mathematical equation between raw material purchased and raw material found in finished product
is not possible, and should not be looked for UOI V. Indian aluminium Co. Ltd. (SC)
2. Inputs used in trial production, which
turned into scrap or waste
Credit available as inputs, are used in or in relation to
manufacture.- Fertilizer corporation of India V. CCE
3. If shortage occurs during storage due to
natural causes
credit will be available CCE V. BOC India
4. If inputs are lost in fire before issue to
production
CENVAT credit not available and should be reversed Asian
paints V. CCE
5. If inputs are stolen or loss in transit Credit not available CCE V. Royal containers.
But if such loss in transit is due to natural causes then credit on
inputs available CCE V. Bhuwalka steel Industries (2010)

Recent cases on Inputs:
In case of combo-pack of bought out tooth brush sold along with tooth paste manufactured by
assessee; is tooth brush eligible as input under the CENVAT Credit Rules, 2004?
CCE. v. Prime Health Care Products 2011 (Guj)

Issue Involved:
- The assessee was engaged in the manufacture of tooth paste. It was sold as a combo pack of tooth paste
and a bought out tooth brush. The assessee availed CENVAT credit of central excise duty paid on the tooth
brush.
- Revenue contended that the tooth brush was not an input for the manufacture of the tooth paste and the
cost of tooth brush was not added in the M.R.P. of the combo pack and hence, the assessee had availed
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CENVAT credit of duty paid on tooth brush in contravention of the provisions of the CENVAT Credit Rules,
2004.

HC Decision of the Case:
- The process of packing and re-packing the input, that was, toothbrush and tooth paste in a unit container
would fall within the ambit of manufacture [as per section 2(f)(iii) of the Central Excise Act, 1944].
- Further, the word input was defined in rule 2(k) of the CENVAT Credit Rules, 2004 which also included
accessories of the final products cleared along with final product.
- There was no dispute about the fact that on tooth brush, excise duty had been paid. The toothbrush was
put in the packet along with the tooth paste and no extra amount was recovered from the consumer on
the toothbrush.
- Considering the definition given in the rules of input and the provisions contained in rule 3, the High
Court upheld the Tribunals decision that the credit was admissible in the case of the assessee.

Whether CENVAT credit can be denied on the ground that the weight of the inputs recorded on
receipt in the premises of the manufacturer of the final products shows a shortage as compared
to the weight recorded in the relevant invoice?
CCE v. Bhuwalka Steel Industries Ltd. 2010 (Tri-LB)
Tribunal held that each case had to be decided according to merit and no hard and fast rule can be laid down for
dealing with different kinds of shortages. Various factors have been laid to decide the denial. Whether the goods
under question
- Have been diverted to other place or received and used in the factor
- Are hygroscopic (i.e. absorbs but will not evaporate) or prone to evaporation
- Are countable in terms of packages or pieces and have been received and accounted
- Differs in weight on account of different scales and dispatch and receiving ends.
Tolerances in respect of hygroscopic, volatile and such other cargo has to be allowed as per industry norms
excluding, however, unreasonable and exorbitant claims. Similarly, minor variations arising due to weighment by
different machines will also have to be ignored if such variations are within tolerance limits.
Definition of Input Service:
Rule 2(l) - input service (w.e.f 1.4.2011) means any service, -
(i) Used by a provider of output service for providing an output service; or
(ii) 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,
and includes services used in relation to modernisation, renovation or repairs of a factory,
premises of provider of output service or an office relating to such factory or premises, advertisement or sales
promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing,
financing, recruitment and quality control, coaching and training, computer networking, credit rating, share
registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward
transportation upto the place of removal;
But excludes -
(A) Following services, if they are used for construction or execution of works contract of a building or a civil
structure or a part thereof; or laying of foundation or making of structures for support of capital goods:-
(i) Service portion in the execution of a works contract
(ii) Construction service as listed under section 66E(b) of the Act.
However, if works contract services are used for provision of construction services, or vice versa, they shall be eligible
as input services.
(B) Services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not
capital goods; or
(BA) Service of general insurance business, servicing, repair and maintenance, in so far as they relate to motor
vehicle which is not capital goods, except when used by
(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by him; or
(b) an insurance company in respect of motor vehicle insured or reinsured by such person.
CA Final
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(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic
surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits
extended to employees on vacation such as Leave or Home Travel Concession, when such services are used
primarily for personal use or consumption of any employee;

FAQs on Input service:

(i) The second part (i.e. Inclusive part) of the definition provided list of some services which reads services
used in relation to modernization, renovation or repairs . Are those services covered in the
definition are input services or any service related to business is Input service?
C The inclusive part of the definition covers input services used in relation to various activities.
Scope of inclusive part of the definition of input service is further widened by use of the term in
relation to.
C In a SC judgment, SC held that In relation to are words of comprehensiveness which might have
both a direct significance or indirect significance depending on the context. They are not the
words of restrictive content.
C The activities listed are random without any logic or grouping or sequence. Input services relating
to five Ms (i.e. Men, Material, Machines, Money and Minutes) which are essential for manufacture
or provision of service would be eligible as Input service unless specifically excluded.

(ii) Moto Gene TVS are dealers in TVS sales and service in Chennai. They have paid service tax with respect to
GTA service for inward transportation of new TVS bikes and spares. The said dealers availed credit of
service tax paid for GTA service and utilized for payment of service tax on servicing of old TVS bikes. The
department argued that there were no nexus with GTA service and servicing of bikes, as GTA service is
w.r.to new and servicing is w.r.to old ones. As a consultant comment on this?
The facts are similar to the case of CCE V. Shariff Motors, where assessee was dealer in two wheelers and
was also providing service to old vehicles as authorized service station. It was held that the definition of
input service is wide enough to cover input service availed by assessee.
Form the judgment it is clear that in case of input services which have only remote or no nexus
with output services or manufacture of goods can get covered so long as these are related to activities of
business.

(iii) In the definition the word Place of Removal is mentioned, what is the place of removal? Is it applicable
to output service provider?
The concept of place of removal applicable only to manufacturer but not for service provider. Place of
removal is as defined under Sec. 4(3)(c) of Central Excise Act.

(iv) In case of Inputs and capital goods, CENVAT credit is eligible to manufacturer only if these are received in
the factory. Is there such requirement in case of Input service?
In Case of manufacturer In case of service provider
Input services need not be received in the factory of
manufacturer for availing credit on such input services.
Note: Inputs, capital goods must be received in order
to avail credit
Inputs, Input services, capital goods need not
be received in the premises of service provider
for availing CENVAT credit

(v) Tarang Interior decorators provided service to Yuvraj singh and billed 1,00,000 plus service tax. They
utilized the services of a transport agency and paid freight which is not included in the said bill charged
but has availed the credit with respect to freight paid. Department denied the availement of CENVAT
credit on the ground that the freight was not included in the value of taxable service. Is departments
contention correct?
C The tribunal has held in many cases that valuation and CENVAT credit are independent of each
other.
C The question of denial of CENVAT credit does not arise whether a particular cost is included in the
transaction value. ABB case
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1) Renting of motor vehicle
2) Repair and maintenece services
3) General insurance services
4) Authorized service station services
IN RELATION TO
Motor Vehicles
Specified Motor vehicles*
In case of
manufacturer
Not Capital goods
The above mentioned
services are NOT
input services and
CENVAT credit not
available
In case of service
provider providing
7 specified
services
Capital goods
The above
mentioned
services are
Input services
and
CENVAT credit
available
In case of other
service
providers
Not capital goods
The above
mentioned
services are
NOT input
services and
CENVAT credit
not available
Other Motor vehicles
In case of
manufacturer
Caital goods,
provided they are
used in the factory
or
used outside
factory for
generation of
electricity for
captive use
The above mentioned
services are Input
services and
CENVAT credit
available
In case of service
provider
Capital goods,
provided they
are used for
providing output
service.
C Thus, if a cost is included in the assessable value, its CENVAT credit will be certainly eligible.
However, even if it is not included, it will be still eligible if it is I relation to business of assessee.


(vi) Rule 2(l)(B) and 2(l)(BA), the exclusion clauses of the definition excludes certain services in so far as they
relate to motor vehicle which is not capital goods. What are the cases in which these services are eligible
as Input services?

























* Refer capital goods definition for the meaning of specified motor vehicles.
Note: Other services not mentioned above provided in relation to motor vehicles is input services, whether or not
such motor vehicle is capital goods.

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Illustration explaining the above analysis:
1. An assessee gave his motor vehicle for servicing with authorized service station. They provided services
and charged `11,236 inclusive of service tax. The said authorized service station service will be input service
to the assessee and CENVAT credit of `1,236 is available if, motor vehicle is capital goods for the assessee.
Otherwise, the said service is not input service and credit not available.
2. Credit of service tax paid is available on supply of tangible goods through motor vehicles and hiring of the
motor vehicles, where such motor vehicles are eligible as capital goods.
3. CENVAT credit w.r.to service tax paid on insurance and repair is not available, if the motor vehicles are not
eligible as capital goods.

C Exception to the above provision:
In case of manufacturer of motor vehicle or general insurance service provider in respect of motor
vehicle insured or reinsured by him, the CENVAT credit w.r.to service tax paid on insurance, servicing,
repair and maintenance is available, irrespective of whether the motor vehicle is capital goods or not
for them.
Example: A manufacturer of motor vehicle can avail credit of service tax paid on the transit insurance
and on the repair of motor vehicles manufactured by him, even though the motor vehicle is not capital
good for the manufacturer.

(vii) In case of certain services, the service recipient is liable to pay service tax (under reverse charge) e.g.
Import of services. Whether the service tax paid in that case can be taken as CENVAT credit?
C Yes, the service receiver is eligible to avail CENVAT credit even if he is liable to pay the same under
relevant rules of reverse charge Jindal steel and power V. CCE
C Rule 3 of CENVAT credit rules has been amended vide Finance Act, 2011 with retrospective effect from
18-4-2006 providing that service tax paid under Section 66A (i.e. Import of services) of Finance Act,
1994 will be eligible as input service.
C The service tax under reverse charge should be paid in cash, i.e. CENVAT credit should not be utilized
for payment of service tax in such cases.

(viii) Is the credit of Input services used for repairs or renovation of factory or office available?
Credit of input services used for repair or renovation of factory or office is allowed. Services used in
relation to renovation or repairs of a factory, premises of provider of output service or an office relating to
such factory or premises, are specifically provided for in the inclusive part of the definition of input
services.

(ix) From the combined analysis of the definition of Inputs as per Rule 2(k) and Input services as per Rule 2(l),
it is clear that inputs/input services used for employees are not available as credit. Is this position true?
From the analysis of Rule 2(k), it is clear that all goods (Not only food items) used in a guest house,
residential colony, club or a recreation facility and clinical establishment are excluded from the purview of
Inputs only if such goods are used Primarily for personal use or consumption of any employee.
From the analysis of Rule 2(l), it is clear that all services (Not only the mentioned services because the
words used are such as) when used primarily for personal use or consumption of any employee are
excluded from the purview of Input services.

The following Circular No. 943/04/2011 clarifies the position:
It is not that the credit of only specified goods and services listed in the definition of inputs and input
services shall not be allowed. The list is only illustrative. The principle is that CENVAT credit is not allowed
when any goods and services are used primarily for personal use or consumption of employees.

Some examples to support the above clarification:
Outdoor catering for sales promotion would be eligible, even if some employees attend the
lunch/dinner, since it is not primarily for personal use or consumption of employees.
Mobile phones to employees mainly for business purposes (Black berry!!!) should be eligible even
if incidentally used for personal purposes.
Club membership fee of a director will be eligible as he is not an employee.

CA Final
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(x) Is the credit of Business Auxiliary service (BAS) on account of sales commission now disallowed after the
deletion of the expression activities related to business?
The definition of input services allows all credit on services used for clearance of final products upto the
place of removal. Moreover activity of sale promotion is specifically allowed and on many occasions the
remuneration for same is linked to actual sale. Reading the provisions harmoniously it is clarified that credit
is admissible on the services of sale of dutiable goods on commission basis.

(xi) Can the credit of Inputs or Input services used exclusively in trading be availed?
Trading is an exempted service. Hence the credit of any inputs or input services used exclusively in trading
cannot be availed.

(xii) Can a item which do not qualify as Input be treated as Input Service?
As per the department circular 334/3/2011, the definition of input service has been aligned with the
definition of input such that goods that do not constitute Input do not qualify as Input Service
Definition of Capital goods:
Rule 2(a) Capital goods means (w.e.f 1/4/2012)
(A) The following goods, namely:
(i) all goods falling under chapter 82, 84, 85,90, heading No. 68.05 grinding wheels and the like,
and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act;
(ii) Pollution control equipment;
(iii) Components, spares and accessories of the goods specified at (i) and (ii);
(iv) Moulds and dies, jigs and fixtures;
(v) refractories and refractory materials
(vi) Tubes, pipes and fitting thereof; and
(vii) Storage tank, and
(viii) Motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis, but
including dumpers and tippers
Used-
(1) In the factory of manufacturer of final products but does not include any equipment or appliance used
in an office; or
(1A) outside the factory of the manufacturer of the final product for generation of electricity for captive
use within the factory; or
(2) For providing output service;
(B) Motor vehicle designed for transportation of goods including their chassis registered in the name of the service
provider, when used for-
(i) Providing an output service of renting of such motor vehicle; or
(ii) Transportation of inputs and capital goods used for providing an output service; or
(iii) Providing an output service of courier agency.
(C) Motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of
service, when used for providing output service of-
(i) Transportation of passengers; or
(ii) Renting of such motor vehicle; or
(iii) Imparting motor driving skills.
(D) Components, spares and accessories of motor vehicles which are capital goods for assessee.
Chapter 82: Tools, implements, spoons & forks of bare metal and parts thereof.
Chapter 84: Machinery and mechanical appliances and their parts.
Chapter 85: Electricals and electronic machinery and equipment.
Chapter 90: Optical, photographic & surgical equipments.
Heading 6804: Grinding wheels
Heading 6805: Natural (or) artificial abrasive powder on Base of textile material
Note: Depreciation on capital goods should not be availed on the excise duty portion of value of capital goods. I.e.
the cost of capital goods in balance sheet should exclude excise duty portion, then only credit shall be available,
otherwise the manufacturer will enjoy double benefit. First, credit of excise duty and second depreciation on excise
portion.
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FAQs on capital goods.


(i) What are the specified motor vehicles and to whom credit available on those motor vehicles. Whether
CENVAT credit available on Motor vehicles other than specified to manufacturer and output service provider?

Motor vehicles other than the
following:
(i) Motor vehicles for transport of 10 or
more persons including driver
(ii) Motor cars and other motor
vehicles principally designed for
transport of persons, including station
wagons and racing cars
(iii) Motor vehicles for transport of
goods
(iv) Motor cycles incl. mopeds and
cycles fitted with an auxiliary motor,
with or without side cars.
In case of manufacturer

CENVAT credit available, provided
they are used in the factory or
used outside factory for
generation of electricity for
captive use

In case of service provider

CENVAT credit available, provided
they are used for providing
output service.

Exception (i) & (ii)
(i) Motor vehicles for transport of 10 or
more persons including driver
(ii) Motor cars and other motor
vehicles principally designed for
transport of persons, including station
wagons and racing cars
[Motor vehicles designed to carry
passengers including their chassis,
registered in the name of the service
provider]
In case of manufacturer CENVAT credit not available
In case of service provider
engaged in
(i) Transportation of
passengers; or
(ii) Renting of such motor
vehicle; or
(iii) Imparting motor driving
skills.
CENVAT credit available
In case of other service
providers
CENVAT credit not available
Exception (iii)
(iii) Motor vehicle designed for
transportation of goods including their
chassis registered in the name of the
service provider
In case of manufacturer CENVAT credit not available

In case of service provider
engaged in
(i) Providing an output
service of renting of such
motor vehicle; or
(ii) Transportation of inputs
and capital goods used for
providing an output service;
or
(iii) Providing an output
service of courier agency.
CENVAT credit available

In case of other service
providers
CENVAT credit not available

Exception (iv)
(iv) Motor cycles incl. mopeds and
cycles fitted with an auxiliary motor,
with or without side cars.
In case of manufacturer,
Service provider.
CENVAT credit not available.

(ii) Air Conditions, refrigerating equipment and computers are used in the factory. Will it be considered as
capital goods? Will the credit be available?
CA Final
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C Yes; the credit is available provided they are used in the factory (not in office) of the manufacturer of
final product.
C Inkjet printer has been used to print the date of manufacture and sale price on bottles. As it is
mandatory as per law, the printing of price on the bottle of the beverage is a process of manufacture
and is treated as capital goods which are eligible for CENVAT credit. -- Surat Beverage Pvt. Ltd. v. CCE

(iii) If inputs are used for the purpose of capital goods and in turn if capital goods are used for finished goods,
then credit in respect of inputs is available. Whether credit for inputs used in immovable property (i.e.
construction of building) is available. Is there any exception.
The materials used for constructing foundation for machinery does not qualify as inputs because
+ The foundation made of cement, being immovable property is not capital goods and
+ The cement was not used directly (or) indirectly in the manufacture of final product.
-- UOI v. Hindustan Zinc Ltd.
The exception is storage tank.
As storage tank is specifically mentioned as capital goods, the materials used for constructing storage tank are
considered as inputs and credit shall be available.

(iv) Whether the credit with respect to capital goods obtained on hire purchase/ lease/ loan is available?
Yes. But it is advisable that the invoice issued by manufacturer of capital goods shows name of manufacturer
as consignee, though the invoice of manufacturer will be in name of the financing company.

(v) Whether the credit on accessories eligible as capital goods for CENVAT purposes?
Yes, accessories are eligible as capital goods.
Accessory may or may not be required for essential working of main unit. Accessory is an object used for
convenience and effectiveness of main unit. It may not be used in the particular machine and is capable of
being used as common object with number of machines. In this case, it was held that plastic crates for material
handling within the factory are eligible as accessory of capital goods and hence eligible for CENVAT credit
Banco Products V. CCE (2009)

(vi) Whether Ownership of capital goods is essential to avail CENVAT credit on capital goods?
No, The CENVAT credit rules, 2004 does not state that capital goods should be Purchased. It has stated that it
should be Used in the factory or for provision of output services.
Therefore ownership of capital goods is not required for the purpose of CENVAT credit on capital goods, also
laid down in the case of Gujrat Alkalies V. CCE

(vii) Does the spares for rope ways used for bringing crushed lime stone from mines to the factory are capital
goods and does the credit available?
Yes, as laid down in the case of Birla Corporation Ltd., v. CCE.

(viii) CENVAT credit on capital goods is available only when mines are captive mines i.e. they constitute one
integrated unit with main cement factory. Credit of duty on capital goods will not be available if the mine
supplies to various cement factories of different assumes. ---Vikram Cement v. CCE.
Input Service Distributor:
Rule 2(m) Input service distributor means
an office of the manufacturer or producer of final products or provider of output service,
which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of
input services and issues invoice, bill or, as the case may be, challan for the purposes of
distributing the credit of service tax paid on the said services to such manufacturer or producer or
provider, as the case may be
Three requirements must be satisfied as per the definition
1. Should have an office (May be manufacturer or service provider)
2. Input services must be received in the office under a valid invoice
3. Credit can be distributed to the divisions (engaged in manufacturing or providing service) only under
Invoice/bill/challan.
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Whether service tax paid in respect of services utilized in one unit be taken as credit by another unit where such
service is not utilized? Is there any restriction on the ratio of distributing credit by Input service distributor?
The Karnataka high court in CCE V. Ecof industries pvt. Ltd. held that availement of credit of the service tax paid on
the input service at a particular unit by another unit, is not prohibited under law. Therefore, the other unit can take
CENVAT credit even though the services are not received by that unit. [This judgment is as per the old provisions of
the Rules, where in High court dismissed the plea of department. Accordingly, the CENVAT credit rules, 2004 are
amended vide notification no. 18/2012 to include rule 7, the manner of distributing credit w.e.f. 1/4/2012]
Manner of distribution of credit (Rule 7)
1. When service is wholly used by a unit and service tax is paid by head office?
Credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit.

2. When service is used in more than one unit and service tax is paid by head office?
Credit of service tax attributable to service used in more than one unit shall be distributed prorate on the
basis of turnover of the concerned unit to the sum total of the turnover of all the units to which such
service relates.

=




3. When service is wholly used by a unit exclusively manufacturing exempted goods and providing exempted
services and service tax is paid by head office?
The credit shall not be distributed to such unit and the entire credit is not available. If the head office has
availed, the credit should be reversed accordingly.

4. When service is used in more than one unit but one of those units is engaged exclusively in manufacture of
exempted goods and providing exempted services and service tax is paid by head office?
That portion of credit attributable to such unit engaged exclusively in manufacturer of exempted goods
and provision of exempted services is not to be distributed. That portion should not be distributed even to
other units. [In other words, that portion of credit is not available and if head office has availed, the credit
should be reversed accordingly]

5. What if the unit is manufacturing both exempted goods and dutiable goods or providing exempted
services and dutiable services? [Interpreted by me, not mentioned in rule 7]
Credit shall not be distributed to such unit engaged EXCLUSIVELY in manufacture of exempted goods and
provision of exempted services. Therefore, the credit can be distributed to such unit engaged both in
exempted and dutiable transactions and it will utilize the credit accordingly (i.e. as lain down in rule 6 when
common inputs or input services are used for exempted and dutiable goods or services)

6. Can the credit distributed exceed the service tax paid?
No. The credit distributed against documents for availing credit, does not exceed the amount of service tax
paid there on.


Pinnacle learning, a commercial coaching service provider has the following branches which
are engaged in coaching and training services. The turnover of each branch for the month of
July is also given below.
Branch Engaged in Turnover
Chennai CA coaching (It is taxable) 200 lakhs
Bangalore Training corporate employees (It is taxable) 100 lakhs
Hyderabad Computer training (It is taxable) 50 lakhs
Delhi Vocational training (Exempted) 50 lakhs
Total Turnover 400 lakhs
Pinnacle learning is based at Chennai and controls the operations of all branches through an
administrative office in Chennai. During the month of July, it has paid the following invoices
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for the services received:
Invoice No. Services in relation to Amount (Excl. of
service tax)
8745 Advertisement in a news paper about the
organisation.
20,00,000
456 Internet and other services used for Hyderabad
branch
5,00,000
3589 Payment to a CA for internal audit of all branches 5,00,000
7013 Construction of class rooms in Delhi 10,00,000
Total service charges (Excl. Service tax) 40,00,000
Total service tax paid (40,00,000 X 12.36%) 4,94,400
Determine the amount of credit to be distributed to each unit as per the provisions of rule 7.
Pinnacle learning has the practice of distributing credit of common services in the ratio of
5:4:3:2.
- As Delhi branch is engaged in providing exempted services, the credit shall not be distributed and
accordingly the specific services related to Delhi branch is not considered for distribution.
- When a service is wholly used in one unit, the credit w.r.to service tax paid on such service should be fully
distributed to that unit. Accordingly, the service tax paid on Invoice 456 is completely distributed to
Hyderabad branch.
Computation of CENVAT credit of service tax to be distributed to various branches as per Rule 7:
Invoice particulars Chennai Bangalore Hyderabad
8745 Common services
distributed to all
branches (except
Delhi) in the ratio
of turnover
20,00,00012.36%
200
400

= `1,23,600
20,00,00012.36%
100
400

= `61,800
20,00,00012.36%
50
400

= `30,900
456 Specific services,
credit distributed
to Hyderabad
branch
- - 5,00,000 X 12.36%
= 61,800
3589 Common services
distributed to all
branches (except
Delhi) in the ratio
of turnover
5,00,00012.36%
200
400

= `30,900
5,00,00012.36%
100
400

= `15,450
5,00,00012.36%
50
400

= `7,725
7013 Specific services
but shall not be
distributed
- - -
Total amount to be
distributed to each branch
`1,54,500 `77,250 `1,00,425
The total credit distributed should not exceed the total service tax paid. The total credit distributed is `3,32,175
which is less than the total service tax of `4,94,400. The balance of service tax which is not distributed is not
available.
Duties/taxes that can be taken as credit:
Rule 3(1)
Basic excise duty (except in cases where excise duty @ 1% paid under Notification No. 1/2011)
National calamity and contingent duty
Education cess on excise duty (except in cases where excise duty @ 1% paid under Notification No. 1/2011)
Secondary and higher education cess on excise duty (except in cases under Notification No. 1/2011)
Service tax on input services
Education cess on service tax
Secondary and higher education cess on service tax.
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Additional excise duty paid under Section 85 of Finance Act, 2005. This duty is payable on pan masala and
certain tobacco products. (This credit can be utilized only for payment of this duty)
Additional duty of excise leviable u/s 3 of additional duties of excise (Textile and textile articles) Act, 1978 and
additional duties of excise (Goods of Special importance) Act, 1957.
Additional duties of customs u/s 3 to counter balance duties of excise. (Known as counter veiling duty (CVD)).
In case of ships, boats and other floating structures for breaking up falling under 8909 00 00, credit of CVD will
be allowed only to the extent of 85% w.e.f. 1.3.2011
Additional duties of customs u/s 3(5) to counter balance the sales tax, VAT and other local taxes. (This credit
not available to service providers)
Excise duty paid on capital goods in terms of Notification No. 22/2003, at the time of de-bonding of EOU.
Restriction on Utilization:
EC availed should be utilized only for payment of EC.
SHEC availed should be utilized only for payment of SHEC.
SAD cannot be utilized for payment of service tax.
NCCD should be utilized only for NCCD
No restrictions on utilization of CVD.
In case the capital goods are removed as such, CENVAT credit of 100% can be availed and reversed
accordingly.
In case of SSI units, 100% credit on capital goods available in the same financial year.
CENVAT credit cannot be utilized for payment of Clean energy cess, which is payable under section 83 of
Finance Act, 2010. Notification No. 26/2010

An assessee has paid duty on goods which are unconditionally exempted and passed the burden to the buyer. The
buyer availed CENVAT credit on the said amount but Excise officer denied the availement. Is he correct?
It has been clarified that if assessee still pays duty on goods which are unconditionally exempted, the amount paid
is not duty. Hence the buyer will not be eligible for CENVAT credit of such amount. Further, the person paying
excise duty will not be eligible for CENVAT credit of duty paid on inputs. Further, the assessee is required to deposit
the duty charged with central government in view of section 11D of CE Act CBEC&C circular No. 940/01/2011.
What are Exempted goods and Exempted services?
Exempted goods means excisable goods
Which are exempt from the whole of duty of excise leviable thereon, (i.e. Exempted goods)
Goods which are chargeable to Nil rate of duty (i.e. Nil rated goods) and also includes
Goods in respect of which the benefit of an exemption under Notification No. 1/2011 is availed.
Notification No. 3/2011
Coal, briquettes, ovoids and similar solid fuels manufactured from coal & All goods mentioned in chapter 31
(i.e. fertilizers) Notification No. 21/2012
Exempted services means taxable services
Which are exempt from the whole of the service tax leviable thereon, (i.e. Exempted Services)
Services on which no service tax is leviable under section 66 of the Finance Act (i.e. Non taxable services)
and also includes
Taxable services whose part of value is exempted on the condition that no credit of inputs and input
services used for providing such taxable service, shall be taken. (i.e. Abatement under Notification 1/2006
and as amended)
Further, it has been clarified that exempted services includes trading. Notification No. 3/2011
FAQs on Exempted goods and Exempted Services:
1. Can the credit of input or input services used exclusively in trading, be availed?
Trading is an exempted service. Hence the credit of any inputs or input services used exclusively in trading
cannot be availed.
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2. What shall be the treatment of credit of input and input services used in trading before 1.4.2008?
Trading is an exempted service. Hence credit of any inputs or input services used exclusively in trading
cannot be availed. Credit of common inputs and input services could be availed subject to restriction of
utilization of credit up to 20% of the total duty liability as provided for in extant Rules.

3. While calculating the value of trading what principle to follow- FIFO, LIFO or one to one correlation?
The method normally followed by the concern for its accounting purpose as per generally accepted
accounting principles should be used.

4. Are the taxes and year end discounts to be included in the sale price and cost of goods sold while
calculating the value of trading?
Generally accepted accounting principles (GAAP) need to be followed in this regard. All taxes for which set
off or credit is available or are refundable/ refunded may not be included. Discounts are to be included.
Definition of output service:
As per Rule 2(p) Output service means any service provided by a provider of service located in the taxable territory
but shall not include a service,-
(1) Specified in the negative list under section 66D of the Finance Act; or
(2) Where the whole of service tax is liable to be paid by the recipient of service
Removal of Inputs or Capital goods:
The answer is contained in Rule 3(5A) &3(6)
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Note: The amount calculated above or duty calculated on transaction value, whichever is higher shall be the
amount to be reversed or paid accordingly.


FAQ s on Removal of Inputs, Capital goods:
1. When the inputs or Capital goods are said to be removed as such?
In case when inputs or capital goods are sold or transferred and also, As per Rule 3(5B), when the
inputs or capital goods on which CENVAT credit availed, before being put to use
a) Written off fully or partially in the books of accounts or
b) Where any provision to write off fully or partially has been made in the books of accounts
In all the above cases, the manufacturer/Service provider is required to pay an amount equivalent to
the CENVAT credit taken in respect of inputs or capital goods. Notification No. 3/2011

2. In case any inputs are removed as such outside the factory for providing free warranty for final
products, should the CENVAT credit availed in respect of such inputs be reversed?
Rule 3(5) provides that when inputs/ capital goods on which CENVAT credit has been taken, are
removed as such from the factory, or premises of the provider of output service, the manufacturer of the
Removal of
Inputs - as such
Amount equal to CENVAT
credit availed shall be paid
[See note below]
Capital goods
As such After use (i.e. Either as
second hand machinery
(or) as waste and scrap
Amount equal to CENVAT credit taken on capital goods
(-) percentage points calculated by straight line method
for each quarter of a year or part thereof from the date of
taking the CENVAT credit
% points calculated by straight line method
In case of Computers & Computes
peripherals
For each quarter in 1st year - 10%
For each quarter in 2nd year - 8%
For each quarter in 3rd year - 5%
For each quater in 4th and 5th year - 1%
[See note below]
In case of other capital goods
2.5% for each quarter
[See note below]
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final products or provider of output service, as the case may be, shall pay an amount equal to the credit
availed in respect of such inputs or capital goods and such removal shall be made under the cover of an
invoice and,
As per Notification No. 3/2011, such payment shall not be required to be made where any inputs are
removed outside the factory for providing free warranty for final products.


The assessee claimed the CENVAT credit on the duty paid on capital goods which were later
destroyed by fire. The Insurance Company reimbursed the amount inclusive of excise duty. Is
the CENVAT credit availed by the assessee required to be reversed?
CCE v. Tata Advanced Materials Ltd. 2011 (Karnataka)

Issue Involved:
The Insurance Company reimbursed the amount to the assessee, which included the excise duty, which the
assessee had paid on the capital goods and availed as CENVAT credit. Excise Department demanded the reversal of
the CENVAT credit by the assessee on the ground that the assessee had availed a double benefit.

HC Decision:
- As per CENVAT Credit Rules, 2004, CENVAT credit taken irregularly stands cancelled and CENVAT credit
utilised irregularly has to be paid for.
- In the instant case, the Insurance Company, in terms of the policy, had compensated the assessee.
- Merely because the Insurance Company had paid the assessee the value of goods including the excise duty
paid, it would not render the availement of the CENVAT credit wrong or irregular.
- It was not a case of double benefit as contended by the Department.
- The High Court therefore answered the substantial question of law in favour of the assessee and against
the Revenue.
Recent Circulars
Circular No. 907/27/2009
Issue
Involved
What is the treatment of the CENVAT credit taken on the inputs, which have gone into manufacture
of work in progress (WIP), semi finished goods and finished goods, and have also been written off
fully in the books of accounts?
Clarification
The provisions are laid down in Rule 3(5C) and Circular No. 907/27/2009.
Rule 21 of CE Rules, 2002 Remission of Duty The said rule provides for remission/waiving-off of the duty on
finished goods destroyed by natural causes/unavoidable accident or rendered unfit for consumption

The clarification provided in the Circular No. 907/27/2009 is as follows:
If Remission of duty is granted on
any goods manufactured
CENVAT credit on
Inputs
Shall be
reveresed as per
Rule 3(5C)
CENVAT credit on
Input services
Not required to
be reversed as
per Rule 3(5C)
CENVAT credit on
Capital goods
Not required to
be reversed as
per Rule 3(5C)
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Circular No. Circular No. 930/20/2010.
Issue
Involved
Bottles are purchased and CENVAT credit availed. The Board in its instruction vide letter F.No.
261/ID/1/75-CX8 dated 17.09.1975 has stated that the tolerance of 0.5% is allowed on account of
breakage of bottles due to handling in the course of movements from the manufacturing area to
bonded store rooms and breakages during storage and clearance there-from. Will this provision be
applicable in case of PET bottles also?
Clarification
provided
- As per the provisions of Rule 21 of Central Excise Rules, 2002, remission of duty before removal
can be claimed on any goods lost or destroyed by natural causes or unavoidable accident,
claimed by manufacturer to be unfit for consumption or marketing.
- The said remission is granted subject to the condition of reversal of CENVAT credit taken on
inputs used in the final product.
- Rule 3(5C) was also inserted in CENVAT Credit Rules, 2004, to specifically provide for the same.
- Further, as per Rule 3(5B) of CENVAT Credit Rules, 2004, if the value of any input is written off,
the CENVAT availed on the same is required to be reversed.
- Therefore, if the final product (i.e bottled beverage) is broken/ destroyed then remission can be
claimed and if the bottle (input) is written off by the assessee as destroyed, the same is required
to be dealt with as per the provisions of Rule 3(5B) of CENVAT Credit Rules, 2004
Other miscellaneous provisions in Rule 3
+ If inputs (or) capital goods, before being put to use
are written off in the books (or)
Provision in made in books, then
Amount to be paid equal to CENVAT credit availed.
Provision applicable to both manufacturer and service provider.

Finished goods written off in the books
In case of Remission of
duty under Rule 21 of CE
Rules
CENVAT credit of Inputs
used in such goods should
be reversed.
In case duty is not
remitted as per Rule 21
of CE Rules
Liable to pay excise duty on
such goods manufactured
If Work in progess (WIP) iswritten off in the books
WIP has reached the stage where it can be
considered as manufactured goods
In case of Remission of duty
under Rule 21 of CE Rules
CENVAT credit of Inputs
used in such goods should
be reversed.
In case duty is not
remitted as per Rule 21
of CE Rules
Liable to pay excise duty on
such goods manufactured
Where WIP cannot be considered as
manufactured goods
The said goods should be
considered as Inputs and the
treatment for reversal of
credit applicable to input
would be applicable
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+ If remission of duty is granted under Rule 21 (i.e. goods have been destroyed by natural causes (or)
unavoidable accident (or) goods are claimed by manufacturer as unfit for consumption (or) marketing), then
-------- The CENVAT credit of duty paid on inputs shall be reversed.

+ Credit can be taken only as available on the last day of the current month.
Eg: Op. Bal of CENVAT credit in the month of April - 10 lakhs
CENVAT credit on inputs purchased during April - 20 lakhs
CENVAT credit on inputs purchased from May 1 to May 5 - 5 lakhs
Duty liability on finished goods - 35 lakhs
As per the above rule only 30 lakhs can be utilized from CENVAT credit.

+ CENVAT Credit in case of purchases from EOU Notification No.22/2009
Rule 3(7)(a), if any inputs (or) capital goods are purchased from a 100% EOU (or) from a Unit in EHTP (or) STP
and used in manufacture of final products (or) in providing any output service, then CENVAT credit shall be
computed as follows:
(a) CVD paid U/S 3(1) of Customs tariff Act ( which is equal to excise duty under section 3(1) (a) of central
excise Act)
(b) Special CVD of 4% payable U/S 3(5) of customs tariff Act
(c) EC and SHEC paid on excise duty calculated under Notification No. 23/2003.

Mode of calculation of excise duty under notification:
The duty payable is calculated as if
(i) Customs duty is reduced to 50% and
(ii) CVD of 4% U/S 3(5) is not payable.
However if goods cleared in DTA are exempt from VAT, this special additional duty will be payable.

For ease of understanding consider the following illustration,
Suppose AV=50000,
BCD =10%,
CVD u/s3(1) = 20%,
Additional duty of customs u/s3(5) =4%,
EC and SEC as applicable.
W.e.f 7-9-2009,the computation procedure is as follows

Total Excise duty payable by EOU:
Assessable value 50,000
Add: BCD @ 5%( Exemption of 50%) 2,500 (1)
Add: CVD @ 20% on 52500 10,500 (2)
Add: EC&SEC on 10500 315 (3)
Add: EC&SEC on imported goods (1+2+3)x3% 399.45 (4)
Add: ACD u/s 3(5) @ 4% (50000+1+2+3+4) x 4% (If goods are liable to VAT in India,
then duty u/s 3(5) is exempt)
2,548.75 (5)
Total Customs Duties (1+2+3+4+5) 16,263.2

The above customs duty shall be treated as excise duty payable by EOU (before EC&SEC)
Customs duty as computed 16263.2
Add: EC&SEC on above 487.896 (6)
Total Excise duty payable (Rounded off) 16751
CENVAT credit available to the buyer of these goods (DTA):
Additional Customs duty u/s 3(1) - Item{2} 10,500
Additional Customs duty u/s 3(5) - Item {5} 2548.75
EC & SHEC - Item {3} and {6} 802.29
Total -------------------------------------------- 13851.65
13852 (Rounded off)

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Availement of CENVAT credit:
Rule 4 Is the answer
When availed Quantum of credit
Input Immediately after receiving into factory
/ premises
Note: CENVAT credit will not be denied
on account of not availing the credit
immediately
100% credit can be availed
Input service
(Amended
w.e.f 1-4-2011)
When invoice is received 100% credit can be availed
Special case Treatment of CENVAT credit
If payment of service tax mentioned in
the invoice not made within 3 months
from the date of Invoice.
Reversal of CENVAT credit availed (or) payment of
an amount equal to CENVAT credit availed on such
input service.
As and when the said payment is made CENVAT credit reversed or paid earlier can be
availed.
In case of service tax under Reverse
charge.
CENVAT credit shall be availed only on payment of
service tax as indicated in the Invoice.
If value of Input service refunded or
credit note received
Proportionate CENVAT credit availed must be
reversed.
In respect of Invoices issued before 1-4-
2011
CENVAT credit can be availed only when payment of
service tax as indicated in the invoice is made.
In case of Advance payment As and when the payment is made i.e. CENVAT credit
of the service tax attributable to such advance.
Capital goods Immediately on receipt Upto 50% in the first financial year
Balance in subsequent years
Condition:
For availing balance the capital goods must be in
possession of manufacturer

Note: In case of consumables like spare parts, components, moulds and dies, refractory materials and grinding
wheels, the balance credit can be availed in subsequent year even if they are not in possession and use.

With effect from 01.04.2011, the aforesaid restriction of availing only 50% credit in the same financial year has been
extended to the capital goods received outside the factory of the manufacturer of the final products for generation
of electricity for captive use within the factory. Notification No. 3/2011


Whether CENVAT credit of the service tax paid can be claimed where a service receiver does
not pay the full invoice value and the service tax indicated thereon due to some reasons?
CENVAT credit of service tax can be availed where a service receiver does not pay the full invoice
value and the service tax indicated thereon due to reasons like discount, unsatisfactory service etc. provided he has
paid the amount of service tax (whether proportionately reduced or the original amount) to the service provider.
The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent
refund or extra payment of service tax, the credit would have to be altered accordingly. - Circular No. 122/03/2010

Special Provisions relating to job work in case of articles of Jewellery, articles of goldsmiths wares or articles of
silversmiths wares As per Rule 4(1), Where the specified articles are manufactured on job work basis by a
principle manufacturer, the CENVAT credit of duty paid on Inputs can be taken immediately on receipt of such
inputs in the premises of the principal manufacturer, provided that such inputs are used in the manufacture of
specified articles by the job worker.



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FAQs on Rule 4:
FAQ Answer
1. What is the duty date of
making reversal or
payment of an amount
equal to CENVAT credit
availed?
Manufacturer/ Service
Provider
Due date of Reversal by Debiting CENVAT
credit or otherwise
Manufacturer other than
those availing SSI
Exemption.
Service provider other
than Individual/ Firm.
For the Month
other than March
For the Month of
March
On or before 5
th
of
the following
month
On or before 31
st

March

Manufacturer availing SSI
Exemption.
Service provider, who is
an Individual/ Firm.
For the Quarter
other than quarter
ending March
For the quarter
ending in the
month of March
On or before 5
th
of
the following
quarter
On or before 31
st

March

Note: If the said amount is not paid, it amounts to CENVAT credit wrongly
taken and shall be recovered in the manner as provided in Rule 14.
2. In order to avail CENVAT
credit w.r.to Capital
goods, where the capital
goods must be received?
The Capital goods must be received-
a) In a Factory (or)
b) In the premises of the provider of output service (or)
c) Outside the factory of the manufacturer of final products for generation
of electricity for captive use within the factory.
3. If the Capital goods are
destroyed by fire, should
the CENVAT credit availed
in respect thereof be
reversed?
The decision in CCE V. Biopac India Corporation Ltd. (2010) (HC) is as follows:
The CENVAT credit availed is not required to be reversed, if capital goods
are destroyed by fire.
The CENVAT credit rules specifies that reversal should be made only on the
cases where, capital goods are removed as such, or removed after use, or
removed as waste and scrap.
Since destruction by fire doesnt fall in any of the said cases, therefore there
cant be any liability of payment of any duty/CENVAT credit.
4. Whether CENVAT credit of
the service tax paid can be
claimed where a service
receiver does not pay the
full invoice value and the
service tax indicated
thereon due to some
reasons?
CENVAT credit of service tax can be availed where a service receiver does not pay
the full invoice value and the service tax indicated thereon due to reasons like
discount, unsatisfactory service etc. provided he has paid the amount of service
tax (whether proportionately reduced or the original amount) to the service
provider. The credit taken would be equivalent to the amount that is paid as
service tax. However, in case of subsequent refund or extra payment of service
tax, the credit would have to be altered accordingly. - Circular No. 122/03/2010
Goods Sent on Job work:
Rule 4(5) : 4(6)

Manufacturer usually may not carry out all the process related to manufacture of finished product, but may be
outsourced to other manufacturers or sub-contractors on job work basis. In such cases, he will clear the inputs to
job workers premises for further processing, testing, repairs etc.

M
No disturbance to
cenvat credit
| |
|
\ .

Manufact
urer
Job
worker
Inputs, partially processed
inputs, capital goods
Processed goods & capital
goods within 180 days from the
date of sending inputs
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If the processed goods & capital goods after job
work are not received within 180 days

Payment of amount equal
to cenvat credit availed
on such inputs (or) capital goods
| |
|
|
\ .



If the processed goods & capital goods after job
work are received after 180 days

( )
So much of amount previously
reversed must be credited




No disturbance to
cenvat credit
| |
|
\ .

No provision to return in 180 days





No disturbance to credit provided, prior permission of AC/DC has obtained, which shall be valid for a financial
year.
FAQs on Rule 4(5) and Rule 4(6):
FAQ Answer
1. Will the CENVAT credit be allowed on
inputs/ input service, if job worker is
paying excise duty (i.e. Job worker not
availing exemption notification No.
214/86)?
CENVAT credit will be allowed of the duties, tax or cess
paid on inputs/input service used in manufacture of
intermediate products by a job worker if-
The Job worker is availing the exemption given
under Notification No. 214/86, and
The said intermediate products are received by the
manufacturer of final products for use in or in
relation to manufacture of final products.
2. Can the goods be sent for job work to
own unit of principal manufacturer at
other place?
Yes, the goods can be sent to another unit of the same
manufacturer, as under Excise, the factory/premises/unit is
registered but not the manufacturer. Each unit of the
manufacturer should be registered separately and should
be treated as independent company, but it should be
manufacturer for the purpose of Excise Act, 1944
Upadhyay Valves V. CCE (2010) (CESTAT)
3. If part of goods received within 180 days,
what is the treatment of CENVAT credit
attributable to such inputs?
If part of the goods is received back in 180 days, the
obligation for debiting the credit shall arise only in respect
of CENVAT credit attributable to that part which is not
received within 180 days CBE&C Manual
4. The Inputs and Capital goods are sent to
job worker for processing. The processed
inputs/finished goods are returned within
180 days but the capital goods are not
received within 180 days. What is the
treatment of CENVAT credit in such case?
It was held that CENVAT credit is not required to be
reversed in case of capital goods as it is a revenue neutral
exercise Zenith Machine tools V. CCE (2010) (CESTAT)







Manufacture
r
Jigs, fixtures, moulds & dies
Job worker/
another
manufacturer
Manufact
urer
Job
worker
Inputs, capital goods
Capital goods within 180 days
Buyer
Processed goods
(sale)
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CENVAT credit w.r.to Exports:
The provisions are contained in new Rule 5 of CENVAT credit rules, which is as follows:




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FAQs on Rule 5:
1. What is Net CENVAT credit?
Total CENVAT credit availed on inputs and input services as reduced by amount reversed when inputs
removed as such.
2. What is the meaning of export turnover of services?
Payments received in respect of services exported (+) Advance received in respect of services to be
exported and provision of services is complete (-) Advance received in respect of services to be exported
and provision of services is not complete.

3. Will the refund be available, if duty drawback is allowed under customs?
No refund of credit shall be allowed if the manufacturer or provider of output service avails the drawback
allowed under the customs and excise drawback rules, 1995 or claims rebate under export of services rules,
2005
Refund of CENVAT credit to units in Specified areas Rule 5A:
When Refund shall be
available?
When a manufacturer has cleared goods from a unit located in
States of Assam, Tripura, Meghalaya, Mizoram, Manipur, Nagaland,
Arunachal Pradesh, Sikkim
What will be the duty payable? The manufactured goods are exempt from duty as per
Notification No. 20/2007.
What will be the Refund
available?
Refund of CENVAT credit of duty taken on inputs required to
manufacture final products specified in the said notification.
Whether CENVAT credit on
inputs used to manufacture final
products other than final products
which are exempt or subject to nil
rate of duty, available as refund?
No, on such goods duty is required to be paid and CENVAT credit
availed can be utilized for payment of such duties but refund not
available.

Reversal of CENVAT credit in case of service providers engaged in Banking and Financial services and Life
Insurance Business Rule 6(3B) and Rule 6(3C)
A substantial part of the income of a bank or a life insurance company is from investments or by way of interest
in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of
credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC,
providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed.
In case of services relating to life insurance or management of ULIPs, such amount will be equal to 20% of
credit availed. Other options of payment of amount under rule 6 shall not be available for these
taxpayers.[omitted vide notification no. 18/2012]


Whether Sub-rules 3B and 3C of rule 6 apply to whole entity or independently in respect of each
registration?
The obligation is applicable independently in respect of each registration. When such a concern is
exclusively rendering any other service from a registered premise, the said rules do not apply. In addition to
Banking and financial services and life insurance services, if any other service is rendered from the same registered
premises, the said rules will apply and due reversals need to be done. Circular No. 943/04/2011









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Inputs/Input services used in Exempted goods/services:[Rule 6]

Common inputs used for BOTH EXEMPTED AND DUTIABLE GOODS
(AND) services:
The provisions are contained in Rule 6 and sub rules of Rule 6
Rule 6(1) The CENVAT credit shall not be allowed on such quantity of
INPUT USED IN or IN RELATION to manufacture of Exempted goods or FOR provision of Exempted
services
INPUT SERVICE USED - IN or IN RELATION to manufacture of Exempted goods or FOR provision of
Exempted services

Rule 6(2)/(3)/(3A) 4 options are available if Inputs/Input services commonly USED for both Exempted goods/
services and Dutiable goods/ services.

Inputs/ Input service, used
In or in relation to Manufacture of exempted goods
1.If goods are removed to SEZ, EOU, EHTP,
STP, UN agencies (or)
2.For exports without payment of duty(or)
3.removal of gold (or) silver arising in
manufacture of copper or Zinc by smelting
4. Goods supplied under international
competetive bidding
5. Goods supplied to a powerproject
6. Goods supplied for use of foreign
diplomatic missions or consular missions or
career counselling officers or diplomatic
agents
Credit available
All other removals
Credit not available
For Provision of exempted
services
Credit not available
Options
Option (i)
Maintain seperate
inventory and
accounts of receipt
and use of inputs
and input services
used for exempted
goods/exempted
output services.
Option (ii)
Pay an amount
equal to 5% of valu
of exempted goods
and services
Option (iii)
Pay an amount
equal to
proportionate
CENVAT credit
attributable to
exempted goods or
services - Method
of compuation
follows.
Option (iv)
Maintain seperate
accounts for inputs
and pay an amount
equal to
proportionate
CENVAT credit in
respect of input
services - w.e.f
1/4/2011.
CA Final
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Option (i) SEPARATE INVENTORY and ACCOUNTS should be maintained for INPUTS and INPUT services USED in
respect of DUTIABLE goods and services, EXEMPTED goods and services.
RECORDS for
Receipt, consumption and inventory of INPUTS used - Receipt and use of INPUT SERVICES
(i) in or in relation to the manufacture of exempted
goods
(i) in or in relation to the manufacture of exempted
goods
(ii) In or in relation to the manufacture of dutiable
goods
(ii) In or in relation to the manufacture of dutiable
goods
(iii) For provision of exempted services (iii) For provision of exempted services
(iv) For provision of Dutiable services (iv) For provision of Dutiable services
CENVAT credit on Inputs under clause (ii) and (iv)
available.
CENVAT credit on Input services under clause (ii) and
(iv) available.

Option (ii) If the manufacturer/service provider opts not to maintain such separate accounts of inputs and input
services, he has an option to pay an amount equal to 5% of the value of Exempted goods (In case of manufacturer)
and 5% of the value of Exempted services (In case of service provider). EC and SHEC not payable on such 5% as it is
amount and not duty.
Some goods on which 1% ED is payable and which are known as Exempted goods, in that case it shall be reduced
from the amount payable.





































Manufacture of exempted as well
as non-exempted goods
Inputs / Input service
Manufacture of exempted as well
as non-exempted services
Maintain separate accounts
Not to maintain separate accounts
Means separate accounts are
maintained for receipt,
consumption & inventory of
inputs / input service used for
dutiable goods / services &
exempted goods / services
Option - II Option
III/IV
Credit on all inputs /
input services is
available
Credit available
on all inputs /
input services
Reversal on
provisional
basis
For dutiable
goods /
services
For exempted
goods /
services
On dutiable
goods /
services
On exempted
goods /
services
Credit in
available
Credit not
available
Pay normal
duties
On goods On services
Pay duty @ 5% of
the value of
exempted goods
Pay duty @ 5% of
the value of
exempted services
Two methods available
CA Final
INDIRECT TAX LAWS

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The manufacturer of goods/the provider of output service have an option to pay the following amount:
Particulars Amount (Rs.)
6% of value of the exempted goods and/or exempted services
Less: Duty of excise, if any, paid on the exempted goods
XXX
(XX)
Amount payable under rule 6(3)(i) XXX
6% of the exempted value of the service to be paid in case of exempted services that are partially taxed with no
facility of credits.
However, if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of
inputs and input services, used for providing such taxable service, shall be taken then the amount specified in
clause (i) shall be 6% of the value so exempted.
For example, if the abatement on certain service is 60%, the amount required to be paid shall be 3.6% (6% of 60) of
the full value of the exempted service.

Option (iii) If assessee intends to pay amount on proportional basis, the amount is to be calculated as per the
prescribed procedure and should inform the availement of such option to superintendent. Once option exercised
cannot be changed for the financial year for which option is exercised.

While exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to
the Superintendent of Central Excise giving the following particulars, namely :
(i) Name, address and registration No. of the manufacturer of goods or provider of output service;
(ii) Date from which the option under this clause is exercised or proposed to be exercised;
(iii) Description of dutiable goods or taxable services;
(iv) Description of exempted goods or exempted services;
(v) CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under
this condition;

Option III in detail
Credit is available on all inputs / input services irrespective of whether it is used for exempted (or) dutiable
goods (or) services. But the following shall be reversed (i.e. paid)
Used in manufacture
of exempted goods

Amount
to be reversed

`
)
= CENVAT credit attributable to
Inputs/
Input services

Used for provision
of exempted services

How to calculate the above Amount to be reversed
Assesse should first take entire CENVAT credit of inputs and input services used in exempted as well as
taxable final products and services.
At the end of the month, assessee should calculate CENVAT credit attributable to EXEMPTED GOODS and
EXEMPTED SERVICES on PROVISIONAL basis (For this purpose previous year ratios of Inputs/Input services
used in Dutiable and Exempted Goods/Services can be taken)
At the end of the year, assessee should calculate the ratios on actual basis and make fresh calculations and
pay difference if any before 30
th
June. If it is found that he had paid excess amount based on provisional
ratio, he can adjust the difference himself by taking credit.

Step 1: Computation of provisional amount It shall be reversed
Step 2: Computation of actual amount only for computation
Step 3: Payment of differential amount





CA Final
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Step 1: Computation of Provisional Amount
The amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted
goods has to be arrived on actual basis (if possible) or input-output ratio or on some reasonable technical estimate
basis (A certificate from Cost/chartered accountant has to be obtained).
The amount of CENVAT credit attributable to inputs used for provision of exempted services is to be calculated as
follows:
Amount to be reversed for EVERY MONTH shall be
- Amount of CENVAT credit attributable to






+ +


Cenvat credit taken
on inputs during the
month D
x
A + C + D (-) cenvat credit of inputs
used in manufacture of
exempted goods
(
(
(
(
(
(
(
(
(


Cenvat credit taken
B + D
on inputs services during the x
A + B + C + D
month
(
(
(
(



Where
(A) Value of dutiable goods manufactured & removed during the preceding FY.
(B) Value of exempted goods manufactured & removed during the preceding FY.
(C) Value of taxable services provided during the preceding FY.
(D) Value of exempted services provided during the preceding FY.
FAQs on Rule 6:
1. How the CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods
during the month is available?
This has to be done on the basis of actual (if possible) or input-output ratio or on some reasonable
technical estimate basis.

2. What is the meaning of Value for the above purpose?
In case of Services, the value shall have meaning as assigned to it under sec. 67 of Finance Act,
1994 read with rules made there under; In case of Goods, the value determined under Sec. 3,4, 4A
of the Excise Act, 1944 read with rules made there under.
In case of services covered under composition scheme, value =

12.36%
(i.e. The value shall be the value on which the rate of
service tax when applied for calculation of service tax results in the same amount of tax as
calculated under the option availed)
In case of trading, the value shall be difference between sale price and the cost of goods sold or
10% of cost of goods sold whichever is higher.
Inputs Input services
Used in
manufacture of
exempted goods
Used for provision
of exempted
services
Used to manufacture
exempted goods (or) for
provision of exempted
services
CA Final
INDIRECT TAX LAWS

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Explanation to above chart:
1. Inputs may be used for 4 purposes Dutiable FG, Exempted FG, Dutiable Services, Exempted services.
2. CENVAT credit on Inputs used for Exempted FG and Exempted Services not available. So, it must be
reversed (i.e. Paid)
3. CENVAT credit on inputs used for Exempted FG can be arrived using Input-Output ratio or some technical
estimate
4. The balance (i.e. after arriving at step 3) CENVAT credit on inputs must be used for Dutiable FG, Dutiable
services and Exempted services. (A+C+D)
5. Now the proportion of Exempted services (D) to Dutiable FG, Dutiable services and Exempted services
(A+C+D) has to be arrived based on previous year information
6. Step 4 X Step 5 = CENVAT credit on INPUTS used FOR EXEMPTED SERVICES
7. Continue the procedure for Input services USED for EXMPTED GOODS and EXCEMPTED SERVICES, only an
exception that both must be calculated on proportionate basis as Input services Output ratio cannot be
arrived.

Where the amount equivalent to CENVAT credit attributable to exempted goods or exempted
services cannot be determined provisionally, as above, due to reasons that no dutiable goods were
manufactured and no taxable service was provided in the preceding financial year. What is the
treatment of CENVAT credit in such case?
The manufacturer of goods or the provider of output service is not required to determine and pay such amount
provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted
services for the whole year as prescribed in the following step and pay the amount so calculated on or before 30th
June of the succeeding financial year.
Where the amount determined as above is not paid within the said due date, i.e., the 30th June, the
manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay
interest @ 24% p.a from the due date till the date of payment.

Step 2: Computation of Actual Amount
Amount to be reversed for WHOLE YEAR shall be
- Amount of CENVAT credit attributable to






+ +


Cenvat credit taken
on inputs during the
financial year D
x
A + C + D (-) cenvat credit of inputs
used in manufacture of
exempted goods
(
(
(
(
(
(
(
(
(


Cenvat credit taken
B + D
on input services during the x
A + B + C + D
financial year
(
(
(
(




Inputs Input services
Used in
manufacture of
exempted goods
Used for
provision of
exempted
services
Used to manufacture
exempted goods (or) for
provision of exempted
services
CA Final
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Where
(A) Value of dutiable goods manufactured & removed during the financial year.
(B) Value of exempted goods manufactured & removed during the financial year.
(C) Value of taxable services provided during the financial year.
(D) Value of exempted services provided during the financial year.

Step 3: Payment of differential amount
Where
(A) Actual amount > provisional amount
(B) Provisional amount cannot be determined during the preceding financial year then, manufacturer (or) output
service provider shall pay the differential amount (i.e. actual amount (-) provisional amount) on or before 30
th

June of succeeding financial year.
If not paid, Int. @ 24% p.a is payable.
Note:
1. When provisional amount > actual amount, the manufacturer (or) output service provider shall adjust the
excess amount, on his own by taking credit of such amount.
2. The manufacturer of goods (or) the provider of output service shall intimate to the jurisdictional
superintendent of central excise, within a period of 15 days from the date of payment (or) adjustment, the
prescribed particulars.

Option (iv): The manufacturer of goods/the provider of output service has an option to:
(i) Maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of
sub-rule (2), take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of said clause (a)
And
(ii) Pay an amount as determined under sub-rule (3A) in respect of input services. (i.e. Proportionate Reversal as
stated above)

Conditions:
- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule,
he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all
exempted services provided by him, and such option shall not be withdrawn during the remaining part of
the financial year.

- It is hereby clarified that the credit shall not be allowed on inputs used exclusively in or in relation to the
manufacture of exempted goods or for provision of exempted services and on input services used
exclusively in or in relation to the manufacture of exempted goods and their clearance upto the place of
removal or for provision of exempted services.

- No CENVAT credit shall be taken on the duty or tax paid on any goods and services that are not inputs or
input services.


M/S XYZ Co. Ltd. a manufacturer of dutiable as well as exempted goods and also a
provider of taxable as well as exempted services furnishes the following information
You are required to compute the provisional amount of proportionate credit reversible
for the month, given that for every unit of exempted goods, three units of inputs are
required.
FY :
20011-12
For the month
of April, 2012
(1) Value of exempted goods removed @ Rs. 300 P.U 330 60
(2) Value of dutiable goods removed 605 75
(3) Value of exempted services provided 220 40
(4) Value of taxable services provided 275 25
(5) Credit of input services, commonly used for all
goods and services
- 1,60,680
(6) Credit of inputs commonly used for all goods and
services (8,000 units X Rs. 250 X 12.36%)
- 2,47,200
CA Final
INDIRECT TAX LAWS

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Computation of CENVAT credit available on Input services:
Total service tax paid and CENVAT credit availed on Input services for the month of April, 2012 is 1,60,680. As
the services are used for all goods and services, proportionate reversal is required w.r.to services used in
exempted goods and services, which is as follows:
1. Total value of all goods and services during PY = 605 + 330 + 275 + 220 = 1,430 lakhs
2. Value of exempted goods and services during PY = 550 lakhs
3. Proportionate credit to be reversed = 1,60,680 X 550/1,430 = `61,800
4. CENVAT credit available on Input services = 1,60,680 61,800 = `98,880

Computation of CENVAT credit available on Inputs:
Total excise duty paid and CENVAT credit availed on Inputs for the month of April, 2012 is 2,47,200. As the
inputs are used for all goods and services, proportionate reversal is required w.r.to inputs used in exempted
goods and services, which is as follows:
1. Total value of all goods and services during PY = 605 + 330 + 275 + 220 = 1,430 lakhs
2. Total quantity of exempted output during the month of April, 2012 = `60,000/300 p.u = 200 units
3. Total quantity of Inputs purchased during the month = 8,000 units
4. Input output ratio = 3
5. Quantity of Input used for exempted output = 200 X 3 = 600 units
6. CENVAT credit w.r.to Inputs used in exempted output to be reversed = 600 X 250 X 12.36% = `18,540
7. Balance CENVAT credit available = 2,47,200 18,540 = 2,28,660
8. Total value of all goods and services excluding exempted goods = 1,100 lakhs
9. Value of exempted services = 220 lakhs
10. Proportionate credit to be reversed = 2,28,660 X 220/1100 = `45,720
11. Net CENVAT credit available on Inputs = 2,28,660 45,720 = `1,82,940

Therefore, total CENVAT credit available to M/S XYZ Ltd. = 98,880 + 1,82,940 = `2,81,820

Capital goods used for exempted as well as dutiable goods/services:


Can credit of capital goods be availed of when used in manufacture of dutiable goods on which
benefit under Notification 1/2011- CE is availed or in provision of a service whose part of value is
exempted on the condition that no credit of inputs and input services is taken (i.e. Abatement under
Notification No. 1/2006-ST)?
As per Rule 6(4) no credit can be availed on capital goods used exclusively in manufacture of exempted
goods or in providing exempted service.
Goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE is availed are
covered under the definition of exempted goods and Taxable services whose part of value is exempted
(i.e. Abatement under Notification 1/2006-ST) are covered under the definition of exempted services.
Capital goods used for
Exclusively for
Exempted
goods
Preferential
removals
Credit available
Other removals
Credit not
avilable
Both exempted
and taxable
goods
Credit available
Exclusively for
exempted
services
Credit not
available
Both exempted
and taxable
services
Credit available
CA Final
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Hence credit of capital goods used exclusively in manufacture of such goods or in providing such service is
not allowed. Circular No. 943/04/2011
Documents on the basis of which credit can be taken:
Invoice of manufacturer from his factory (or) depot (or) premises of consignment agent.
Invoice issued by registered importer from his premises (or) consignment registered with central excise.
Invoice issued by registered first stage (or) second stage dealer
Supplementary invoice by manufacturer or importer (Supplementary invoice is issued when the manufacturer
or importer is charged with additional duty on account of reasons other than non levy, short levy by reason of
fraud, collusion, willful misstatement or suppression of facts or contravention of any of the provisions of the
Excise Act or Customs Act or rules made there under with an intent to evade payment of duty.
A supplementary invoice, bill or challan issued by a service provider, in terms of the provisions of Service Tax
Rules, 1994 except where the additional amount of tax became recoverable from the provider of service on
account of non levy or non-payment or short-levy or short-payment by reason of fraud or collusion or wilful
mis-statement or suppression of facts or contravention of any of the provisions of the Finance Act or of the
rules made there under with the intent to evade payment of service tax.
Bill of entry
Certificate issued by an appraiser of customs in respect of goods imported through foreign post office.
TR 6 (or) GAR 7 challan of payment of tax where service tax is payable by service recipient as the person
liable to pay service tax. Notification 18/2012
Invoice, bill (or) challan issued by provider of input service.
Invoice, bill (or) challan issued by input service distributor.

Whether CENVAT credit of the service tax paid can be claimed when payments are made through debit/credit
notes, debit/credit entries in books of account or by any other mode as mentioned in Explanation (c) to section 67
of the Finance Act, 1994 for transactions between associate enterprises?
CENVAT credit is admissible in the said case. Rule 4(7) does not indicate the form of payment and does not
place any restriction on payment through debit in the books of accounts. If the service charges as well as the
service tax have been paid in any prescribed manner which is entitled to be called gross amount charged, credit
will be allowed under said rule. - Circular No. 122/03/2010
FAQs on documents
1. Who is a first stage dealer?
Ans: Rule 2(ij), MEANS

2. Who is second stage dealer?
Ans: Rule 2(5) A dealer who purchase goods from a first stage dealer.
Dealer of any subsequent stage after second stage cannot issue CENVATable invoice.






A dealer who purchase goods directly from
The factory of
manufacturer
under invoice
Depot of
manufacturer
under invoice
Consignment
agent of
manufacturer
under invoice
Any premises
where the
goods are sold
by (or) on
behalf of
manufacturer
under invoice
Importer (or)
depot of
importer (or)
consignment
agent of
importer
under invoice
CA Final
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3. Who is input service distributor?
Ans: Rule 2(m) MEANS









As per Rule 7, input service distributor can distribute credit in respect of service tax paid on input service subject to
following conditions.
Condition 1: Credit to be distributed cannot exceed service tax paid.
Condition 2 : If such input services are used exclusively for manufacture of exempted goods (or) for providing
exempted services, then credit shall not be distributed.

4. Whether CENVAT credit of the service tax paid can be claimed when payments are made through debit/credit
notes, debit/credit entries in books of account or by any other mode as mentioned in Explanation (c) to section 67
of the Finance Act, 1994 for transactions between associate enterprises?
Ans: CENVAT credit is admissible in the said case. Rule 4(7) does not indicate the form of payment and does not
place any restriction on payment through debit in the books of accounts. If the service charges as well as the
service tax have been paid in any prescribed manner which is entitled to be called gross amount charged, credit
will be allowed under said rule. - Circular No. 122/03/2010

5. Can CENVAT credit be taken on the basis of private challans?
Ans: CCEx. v. Stelko Strips Ltd. 2010 (255) ELT 397 (P & H)
The High Court held that CENVAT credit could be taken on the strength of private challans as the same were not
found to be fake and there was a proper certification that duty had been paid.
If dutiable goods turn out to be exempted goods:
Rule 11(2); 11(3), 11(4)
A manufacturer opts for 100% exemption from excise duty. Under a notification based on value (or) quantity of
clearances (i.e. SSI exemption)
A manufacture opts for 100% exemption u/s 5A (CG in public interest will exempt)
A provider of output service opts for 100% exemption from service tax,

Section 5B of CE Act, 1944
If an assessee pays excise duty on the assumption that the said process carried on by him is MANUFACTURE but
later on court decides that the said process is NOT manufacture, then CG may issue a notification that
Then, the above persons are required to pay
CENVAT credit in
respect of
a) Lying in stock
b) Lying in process
c) Contained in FG, Lying in stock
d) Contained in taxable service
pending to be provided
Balance after
deducting adjacent
Shall lapse & not allowed
to be utilized for
payment of duty on any
excisable goods
Office of
manufacturer
of final
products (or)
provider of
output service
Towards purchase of input
services
Issues invoices
For distribution the credit of
service tax to such manufacturer
(or) provider
Receives invoices
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a) Assessee need not reverse the CENVAT credit and
b) The buyer of such goods can avail CENVAT credit of duty paid by assessee
Assessee should not avail CENVAT credit on inputs and pay excise duty on output if the activity is not manufacture.
If they were paying excise duty and subsequently it was found that the duty was not payable, they should approach
Central Government for Notification under section 5B of CE Act for non reversal of CENVAT credit Circular No.
911/1/2010.
Miscellaneous procedural CENVAT credit rules
Rule 9(2) CENVAT credit can be taken only if all particulars as prescribed in central excise rules (or) service
tax rules are contained in eligible duty paying document.
Otherwise, permission of AC/DC is required.


Rule 9(5) ; 9(6) A manufacturer (or) provider of service shall maintain

Burden of proof regarding admissibility of credit is on assessee.

Procedures & Records for CENVAT
Maintain records of inputs & capital goods
Maintain records of CENVAT credit received & utilized
Submit returns of details of CENVAT credit availed, principal inputs & utilization of principal inputs in form ER-1
to ER-6.



The AC / DC may allow CENVAT credit if
Such document contains
a) Details of duty (or) service tax payable
b)Description of goods (or) taxable service
c) Assessable value
d) Excise (or) service tax registration No.
e) Name and address of the factory (or) warehouse (or)
premises of first (or) second stage dealer (or) provider of
taxable service.
AC/DC is satisfied that the
goods/services have been
received & accounted
Proper records for
a) Receipt
b) Disposal
c) Consumption &
d) Inventory
Of inputs & Capital goods
procured
a) Receipt &
b) Consumption
Of Input services received
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Form of return Description Who is required
to file
Time limit
ER-5 (Rule 9A) Information relating to
principal inputs
Assesses paying duty
of Rs. 1 crore (or)
more p.a through PLA
& manufacturing
goods
Annually by 30
th
April for the
current year (e.g. Return for
2008-09 in to be filed by
30.4.2008)
ER-6 (Rule 9A) Monthly return of
receipt & consumption
of each of principal
inputs
Assesses required to
subunit ER-S return
10
th
of the following month
Rule 9(8) Quarterly return First stage / second
stage dealer
Within 15 days from the close
of quarters
Rule 9(9) ST-3 Half yearly return Provider of output
service
Within 25 days from the close
of half year
ST 3 Rule 9(10) Half yearly return Input service
distributor
Within 1 month from the close
of half year

Note:
1. Rule 9(11) A revised return can be filed by service provider within 60 days of filing of original return.
2. ER-5 return and ER-6 return shall be filed electronically if manufacturer of final products has paid total excise duty
of Rs. 10,00,000 or more including the amount of duty paid by utilization of CENVAT credit in the preceding
financial year Notification 21/2010.
3. Further, the quarterly return of CENVATABLE invoices submitted by the first/second stage dealer under Rule 9(8)
shall be filed electronically unconditionally. Notification No. 21/2010.
Transfer of CENVAT credit [Rule 10 & Rule 10A]
Transfer of CENVAT credit from one unit to another [Rule 10]:
The unutilized CENVAT credit can be transferred from one unit to another on satisfying the following
conditions:
1. The factory belonging to manufacturer or business belonging to service provider is shifted or transferred
on account of change in ownership, merger, amalgamation, lease, joint venture.
2. Such transfer is with the specific provision for transfer of liabilities.
3. The stock of inputs as such or in process, or the capital goods, is also transferred along with the
factory/business premises
4. The inputs or capital goods on which credit has been availed have been duly accounted for to the
satisfaction of AC/DC of Excise.
Inter- unit transfer of CENVAT credit of SAD u/s 3(5) of customs Tariff Act, 1975 [Rule 10A
w.e.f 1/4/2012]:
The unutilized CENVAT credit of SAD can be transferred from one registered premises to another registered
premises through transfer challan, subject to the following conditions:
1. Only a manufacturer or producer of final products, having more than one registered premises, for each of
which registration has been obtained on the basis of common PAN.
2. The transferring unit and receiving unit should not have availed the exemptions under area based
exemption notifications.
3. The manufacturer or producer shall submit the monthly return, as specified under these rules, separately in
respect of transferring and recipient registered premises.

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Recovery of CENVAT credit along with Interest [Rule 14]
Where,
(i) CENVAT credit has been taken AND utilized wrongly; or
(ii) CENVAT credit has been erroneously refunded
The same along with interest shall be recovered from the manufacturer or provider of output service and the
provisions of sec. 11A (recovery of duty short paid or short levied) and 11AA (interest on delayed payment of duty)
of Excise Act, 1944 and sec. 73 (recovery of service tax short paid or short levied) and sec. 75 (interest on delayed
payment of service tax) of Finance Act, 1994 shall apply respectively.
Confiscation and Penalty [Rule 15]
Cause Effect
Wrongful availement/Utilization of CENVAT credit on
inputs, capital goods or input services
a) All such goods are liable to confiscation
b) Penalty not exceeding, the higher of Duties
(Excise and service tax) or Rs. 2,000
Wrongful availement/ Utilization of CENVAT credit by
reason of fraud etc. With an intent to evade the
payment of duty
Penalty in terms of Sec. 11AC of Excise Act.
Wrongful availement/ Utilization of CENVAT credit by
reason of fraud etc. With an intent to evade the
payment of service tax
Penalty in terms of Sec. 78 of Finance Act, 1994.
Whether penalty can be imposed on the directors of the company for the wrong
CENVAT credit availed by the company?
Ashok Kumar H. Fulwadhya v. UOI 2010 (251) E.L.T. 336 (Bom.)
- It was held that words any person used in rule 15(1) of the CENVAT Credit Rules, 2004
clearly indicate that the person who has availed CENVAT credit shall only be the person liable to the
penalty.
- The Court observed that, in the instant case, CENVAT credit had been availed by the company and the
penalty under rule 15(1) was imposable only on the person who had availed CENVAT credit [company in the
given case], who was a manufacturer.
- The petitioners-directors of the company could not be said to be manufacturer availing CENVAT credit.





















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Exemptions under Excise
Notifications issued by the central government to be laid before
parliament [Sec. 38]
Central Govt. is empowered to issue notifications as per the following provisions of the Act. All the notifications
issued under the said provisions must be laid before the parliament for 30 days when the parliament is in session.
Sec. 3A Power of Central government to charge excise duty on the basis of production capacity in respect of
notified goods
Sec. 4A Notifying goods and declaring abatement for the purpose of MRP based valuation
Sec. 5A(1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by
notification in the Official Gazette exempt excisable goods either absolutely or subject to such conditions from the
whole or any part of excise duty
Sec. 5A(2) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by
special order exempt excisable goods from payment of duty of excise, under circumstances of an exceptional
nature to be stated in such order.
Sec. 5B When a product is not leviable to excise duty as held by the court but the assessee has taken CENVAT
credit w.r.to Inputs, Input services & Capital goods used in the manufacture of such product, then the central
government may by notification in the official gazette order for non reversal of such credit allowed to the assessee
subject to such conditions. [The assessee should not claim for refund of duty in such a case]
Sec. 11C Central government may by notification in the official gazette, direct not to recover excise duty not
levied or short levied as a result of past general practice.

Under Sec. 5A and 11C, Central Govt. has been granted power to issue notification for granting partial or full
exemptions from excise duty.

Note: The notifications issued under Central Excise Act have full legislative backing.
Power to grant exemption from duty [Sec. 5A of CE Act]
Tariff rate Statutory Duty Effective rate of duty
CETA/Customs tariff prescribe
the rate of duty for each
heading and it is known as
Tariff rate
The duty payable to
government
The Central Excise Act and Customs Act has granted
powers to Central government (i.e. Executive organ) to
modify rates as per requirements by issuing exemption
notification, which is known as Effective rate of duty
Note: EXEMPTED GOODS means only those goods exempted under notification under sec. 5A. These exempted
goods are excisable goods but are not known as nil rated goods.

Exemption Notification: Sec. 5A(1) of the CEA authorises central government to exempt the excisable goods
a) Generally
b) Either absolutely or subject to such conditions (to be fulfilled before or after removal)
c) From whole or part of excise duty.
But the exemption should be in public interest and it should be by way of notification in the official gazette. The
notification becomes effective on the date it is issued for publication in the official gazette. (Sec. 25(1) of customs
Act and same provision is in service tax also)
The Notifications shall be placed before each house of parliament for a total
period of 30 days
If parliament decides to amend
any of such notification, it will
have effect in the modified form
If parliament decides not to
amend, such notifications will
continue to be effective
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Exemption Order: Sec. 5A(2) authorizes Central government to grant exemption, in public interest, in exceptional
circumstances by a special order. The exceptional circumstances should be specified in the order. It is not necessary
to publish the order in official gazette.

Retrospective effect: An exemption notification cannot be amended with retrospective effect. But the central
government for the purpose of clarifying the scope or applicability of exemption notification or exemption order
may insert an explanation to the exemption notification or order WITHIN ONE YEAR of such notification or order.
Such explanation will have retrospective effect from the date of exemption notification.

Exemption for past general practice (Sec. 11C):
If a) There was a generally prevalent practice of levy or non levy of any excisable goods and
b) Such goods were actually liable for duty at higher rates;
Central government may, by notification in official gazette direct that such excess duty payable, need not be paid
(Sec. 28A of Customs Act).
Refund If a particular assessee had paid duty at a higher rate than prescribed in notification issued under
sec. 11C, he shall be entitled to apply for refund of such extra duty paid.
Application for refund should be made within 6 months from issue of the notification.
Refund subject to provisions of unjust enrichment
Various Exemptions under Excise:
1. Small Scale Industry Exemption - Notification No. 8/2003 and 9/2003
2. Exports under Excise Rule 18 and Rule 19 of Central Excise Rules, 2002
3. Clearance of goods to an Export Oriented Unit (EOU) Notification No. 22/2003
4. Clearance of Excisable goods from a DTA unit to Special Economic Zone (SEZ)
5. Articles taxable at a lower rate of 1% as specified by Notification No. 1/2011
6. Removal of goods at concessional rate of duty for manufacture of excisable goods.
7. Exemption to new units located in backward area
1. Exemptions to SSI:
1. Why SSI exemption?
- To encourage their growth
- For administrative convenience with respect to cost and time

2. When SSI exemption is available?
Previous Year Current Year
Turnover 400 Lakhs Exemption available
Turnover > 400 Lakhs Exemption not available

3. What is the amount of Exemption?




Two options are available
Option (i)
# Upto `150 lakhs exempted
# Cenvat credit not available
Option (ii)
# Normal duty payable
# Cenvat credit available
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4. If SSI exemption is availed, whether CENVAT credit available on Capital goods?
The CENVAT credit not available w.r.to Inputs and Input services but the relaxation is provided in respect of
capital goods, where in the manufacturer would have the facility to avail CENVAT credit during the
exemption period and can utilize the same after the expiry of exemption limit i.e. on crossing the notified
limit of `150 lakhs.

5. If SSI exemption is opted for, whether the credit available on Inputs on crossing the turnover limit of `150
lakhs during the current year?
The credit as standing on the first day of the financial year in which the exemption is availed shall be lapsed
and CENVAT credit on inputs purchased not available upto the date when turnover is less than `150 lakhs. In
other words the credit on Inputs will be available once the turnover crosses the exemption limit.

6. If SSI exemption is availed, whether CENVAT credit available on Input services?
The notification no. 8/2003 specifically provides for denial of credit of duty paid on inputs, but does not
provide for denial of CENVAT credit on Input service. In respect of capital goods also, the credit is allowed
even during the period of exemption to SSI manufacturers and this is because notification does not
provide for denial of CENVAT credit on capital goods. In the absence of any such restriction in the
notification no. 8/2003 in respect of input services, a unit availing of SSI exemption is eligible for the
CENVAT credit of service tax paid on input services. Vallabh Vidyanagar Concrete Factory V. CCE (2010)
(CESTAT)

7. Whether SSI Exemption available to Large Scale Industry?
Yes, provided turnover during PY is 400 lakhs

8. Whether manufacturer of any excisable goods is eligible to avail SSI exemption?
All goods are not eligible tough most of the goods have been covered. Examples of goods presently not
eligible are Tea, pan masala, some tobacco products, sandal wood oil, weapons, travel sets for toiletries
etc. The manufacturer is advised to ascertain the classification of products before making a decision
whether or not to opt for the benefit under this notification.

9. Under Excise Act, 1944 the registration is for a unit rather than a manufacturer. Does it mean the SSI
exemption available for all the units of the same manufacturer separately?
The aggregate value of clearance of all goods chargeable to duty by a manufacturer from one or more
factories or by more than one manufacturer from the same factory shall be considered rather than
considering them individually i.e. location wise or factory wise.

10. Can swapping be allowed between the options?
The first option is automatic. If assessee wants to avail second option, he has to inform to AC (in writing)
with a copy to Superintendent.
It must contain the following details:
Name and address of Manufacturer
Location of Factory/ies
Description of specified goods produced
Aggregate value of clearances of specified goods

11. Once the second option is availed, can he withdraw and avail the first option?
C Once assessee has Opted Out Of (not opted for) exemption, he has to pay duty on all clearances
during the financial year Uttam Industries V. CCE
C Once assessee exercises option to pay full duty, he cannot withdraw during remaining part of
financial year CCE V. Diamond wire Industries.
C From the above two decisions it is clear that even if turnover availed from middle of the year,
Turnover from 1
st
April has to be considered.

12. Can SSI Exemption and CENVAT credit facility be available? i.e. simultaneous availment of CENVAT and SSI
exemption
Yes, If an SSI unit manufacturing goods bearing brand name or trade name of others as well as other
goods, it is eligible for grant of SSI exemption and can avail CENVAT credit in respect of inputs used for
those goods.
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Relaxation vide budget 2010 is extended to plastic bottles and plastic containers manufactured under
brand name of other but used as packing materials.

13. What are the products for which SSI Exemption is not available?
Yes,
Pan masala and tobacco products
Tea whether or not flavored
Extracts, essences, and concentrates of coffee or tea
Surgical or dental batteries
Sandalwood oil
Textile articles
Ceramic tiles
Revolvers, Pistols, Firearms, other arms
Matches
Watches
Power driven pumps for water not conforming to BIS
Tractors, Motor vehicles, Cars and chassis
Products covered under compounded Levy scheme (i.e. Stainless steel pattas/pattis and
aluminum circles)
Automobiles, Primary iron and steel

14. How to calculate the limit of 400/150 lakhs?
= Included
X = Not Included
Particulars 400 Lakhs 150 Lakhs
1. Export turnover. X X
2. Export to Nepal/Bhutan.
[Though exports to Nepal is treated as normal exports, the SSI
exemption notification has not been amended]

3. Sale to SEZ/EOU/EHTP/STP/UN/International organisation. X X
4. Outright sale to a buyer, who then Exports.

5. Export under Bond through Merchant Exporter. X X
6. Sale of Non Excisable goods. X X
7. Goods manufactured with others brand name, cleared on
payment of duty (This is ineligible for exemption under this
notification).
X X
8. Goods manufactured in rural area under others brand name.

9. Value of Intermediate products when final product is eligible
for SSI Exemption.
X X
10. Value of Job work done under specified notifications
- 214/86, 83/94, 84/94.
X X
11. Job work or any process which does not amount to
manufacture.
X X
12. Clearance of strips of plastic Used within factory of
production.
X X
13. Turnover of goods exempted under other notification or
where no excise duty payable for any other reason.

X
14. Value of goods captively consumed for manufacture of final
product which is exempted under a notification other than SSI
Exemption notification.


If we carefully analyze the above table the exclusions for the purpose of calculating the values
in both cases, it is clear that for the purpose of determining the limit of `150 lakhs al exempted
clearances are excluded. However this is not the case for determining the limit of `400 lakhs
where in the exclusion is only for clearances exempted by specified notifications and for
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clearances to specified persons. If a manufacturer has `350 lakhs of exempted goods manufactured and `80
lakhs of dutiable goods in the previous year, then in the current year he would not be eligible for the
exemption, since the total value of clearances crosses `400 lakhs. The rest of the exclusions would remain
similar in both these cases.

15. Will the Exemption available if SSI units send the raw material for job work and the processed
intermediate goods returned from job work?
Yes, the clearance of FG is exempted provided the total turnover is below 150 lakhs.
1. The SSI Unit has to file a declaration (Declaration No. 1) to AC of his DIVISION that goods returned
after job work will be used in his factory for manufacture of FG which is exempt from duty
Notification No. 84/94
2. The SSI Unit has to file a declaration (Declaration No. 2) to AC of JOB WORKERs DIVISION that
goods returned after job work will be used in his factory for manufacture of FG which is exempt
from duty Notification No. 84/94

16. Apart for Exemption with respect to payment of duty, Is there any other concessions to SSI?
Normal Procedural Provision Procedural concessions to SSI
1. Monthly Return 1. Quarterly Return in ER 3 by 10
th
of the month
following the quarter
2. Monthly payment of duty By 5
th
of the
following month.
For the month of March 31
st
of march
2. Quarterly payment of duty By 5
th
of the month
following the quarter
For the quarter ending march 31
st
of march
3. Normal Export procedures 3. Simplified Export procedures.
4. Registration with Excise authorities applicable
as per the provisions
4. Exemption from registration.
5. A lot of Excise formalities applicable 5. It doesnt have to follow any excise formality
but has to maintain records to prove that their
turnover is less than 150 lakhs.
6. CENVAT credit on capital goods is available
upto 50% during the current year and balance
during the subsequent year.
6. 100% of the CENVAT credit on capital goods is
available in the first financial year itself.
The SSI Unit whose turnover is > 90 lakhs (called specified limit) has to file a declaration with AC
and obtain a dated acknowledgement. Such declaration has to be made once in life time and not
every year.
Only with the specific permission of AC and for specific purpose Excise inspectors, Preventive
parties, audit parties can visit SSI.
Audit of SSI
Condition Audit Frequency Duration of Audit
Paid duty of Rs. 10 L to 1 C p.a
through PLA
At least once in two years 7 working days
Paid duty < 10 L p.a through
PLA
At least once in 5 years 5 working days
Restrictions on Branded Goods for the purpose of SSI Exemption:
The benefit of this exemption notification is not available, if a manufacturer carries on the manufacture of
excisable goods, exclusively under the brand name of others (But exemption available if factories are
located in a rural area).
Brand name or trade name means a brand name or trade name whether registered or not which is
used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in
the course of trade between such specified goods.
The brand name or trade name should be associated with the PRODUCT [The intention of the legislature is
that large units should not be able to manufacture all their products by outsourcing their manufacture to
small units and escape the duty payments].
Exceptions to the above stated law (i.e. Benefit under this notification cannot be denied where goods bear
the brand name or trade name of another person in the following cases:
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1. Where the components or part are cleared for use as original equipment in the manufacture of
said machinery or equipment and the said goods should be removed following the procedure laid
down in Central Excise (Removal of goods at concessional rate of duty for manufacture of
excisable goods) Rules, 2001.
2. The manufactured goods bearing the brand name or trade name of:
- The khadi and village industries commission or
- State Khadi and village industry board or
- The national small industries corporation or
- State small industries development corporation or
- State small Industries corporation.
3. Relaxation is provided for goods manufactured bearing the brand name of others provided they
are manufactured by a unit situated in rural area.
4. Restrictions does not apply to account books, registers, writing pads and file folders classifiable
under First schedule to CETA.
5. Where the specified goods are in the nature of packing materials namely printed cartons of paper
or paper board, metal containers, HDPE woven stacks, adhesive tapes, stickers, PP caps, crown
corks, metal labels or printed laminated rolls.

Case laws on SSI Exemption:
Case Judgment
1. CCE V. ACE Auto Co.
Ltd. (2011) (SC)
Facts & Issue involved:
ACE Auto co. ltd., a manufacturer of clutch plates for motor vehicles, used to clear such
goods under the brand name TATA ACE to the Tata Motors Co. Ltd. Whether SSI
exemption available if the brand name of another person is used in the manufacture of
excisable goods?

Decision:
Notification No. 8/2003 bars exemption if assessee uses another persons brand
name or trade name with the intention of indicating a connection between the
assessees goods and such other person.
However, if assessee is able to show that there was no such intention or that the
user of the brand name was entirely fortuitous, it would be entitled to the
benefit of exemption.
The objective of SSI exemption is to grant benefits only to those industries
which do not have advantage of brand name or trade name.
In the present case, the brand name TATA didnt belong to the assessee.
Further by using the said brand name, the assessee had not only intended to
indicate a connection between the goods manufactured by them and TATA
company but also the quality of their product as that of a product of TATA
company, as they were supplying their goods to TATA co.
Hence, the assessee was not entitled to SSI exemption notification.
2. Parle Bisleri P. Ltd. V.
CCE (2011) (SC)

Facts & Issue involved:
Parle Bisleri P. Ltd. manufactured flavored soft drink which were assigned code names
like G-44T, L-33A and cleared goods to its subsidiary M/s Parle Exports private ltd. (PEL).
Whether clearing the goods with the code names belonging to the other person
amounts to use of a brand name and whether having same effective financial control and
management leads to clubbing the clearances of two units?

Decision:
Regarding 1
st
Issue:
Code names, used on the flavors cleared by the assessee belonged to M/s Parle
Exports P. Ltd.
The codes were used to identify the flavors and they indicated a connection in
the course of trade between the flavors and M/s Parle Exports P. Ltd.
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The franchisors were purchasing the flavors by referring to the code names.
Hence, the code names were brand names within the meaning of SSI exemption
notification.
Regarding 2
nd
Issue:
Both the companies were created as separate legal entities with a view to avail
SSI exemption by both of them (i.e. Holding company and subsidiary company).
In reality, both of them had same effective financial control and management
control.
Hence, the clearances of both the companies were liable to be clubbed for determining
the eligibility to SSI exemption.
3. CCE V. Deora
Engineering works
(2010)
Facts & Issue Involved:
Whether the clearances of two firms having common brand name, goods being
manufactured in the same factory premises, having common management and accounts
etc. can be clubbed for the purposes of SSI exemption?
- The respondent-assessee was using the brand name of "Dominant" while
clearing the goods manufactured by it.
- One more manufacturing unit was also engaged in the manufacture and
clearance of the same goods under the same brand name of "Dominant" in the
same premises.
- Both the firms had common partners, the brand name was also common and
the machines were cleared from both the units under common serial number
having common accounts.
- Department clubbed the clearance of the goods from the both the units for the
purposes of SSI exemption because both the units belong to same persons and
they had common machinery, staff and office premises etc.

Decision:
The High Court held that indisputably, in the instant case, that the partners of both the
firms were common and belonged to same family. They were manufacturing and clearing
the goods by the common brand name, manufactured in the same factory premises,
having common management and accounts etc. Therefore, High Court was of the
considered view that the clearance of the common goods under the same brand name
manufactured by both the firms had been rightly clubbed.
4. CCE V. Meyer Health
Care P. Ltd. (2011) (SC)
If SSI unit wrongly affixes a trade mark of another person, be it registered or not, then
such default would not be eliminated by provisions of Trade marks Act, 1999 granting
retrospective registration. Thus, grant of registration certificate with retrospective effect
under Trade marks Act, 1999 will not automatically provide benefit of exemption to SSI
unit.
5. Bonanzo Engineering
& Chemical P. Ltd. V.
CCE (2012) (SC)
It was held that merely because the assessee has, by mistake, paid duty on the goods
which are exempted from such payment, doesnt mean that the goods would become
liable for duty. Further, merely because the assessee has not claimed any refund on the
duty mistakenly paid by him, he cannot be denied the SSI exemption under Notification
8/2003.
6. Mahavir Metal Mart v.
UOI (1997) (SC).
Total value of excisable goods shall exclude amounts of excise duty, sales tax and other
Taxes
7. CCE v. Rukmani
Pakkwell Traders (2004)
(S.C.),
If there is more than one registered mark in respect of the same trade mark, then merely
because the other person has the same registered mark in some other goods would not
preclude one owner from getting benefit of exemption.
However, it was also held that the use of even a part of brand name of another person
indicating a connection in course of trade would be sufficient to disentitle a claim for
SSI exemption.
8. Astra
Pharmaceuticals P Ltd.
v. CCE (1995) (SC)
in respect of medicinal preparations, the mark made by the manufacturers would be
called a house mark and would not be the brand name. Therefore, the monograph
which identifies a manufacturer's name would not be a brand name.

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Circulars & Notifications on SSI Exemption:
Circular No. 947/8/2011 - On the issue of applicability of excise duty on uniforms or made-up articles like
quilt, blankets, towels, linen etc bearing the name or logo of a school, security
agency, company, hotel or airline etc., it is clarified that such products would not
merit treatment as branded products merely because the name of the school,
institution or company or their logo is either printed, embroidered or etched on
them.
- This is equally true of made ups such as towels, linen etc bearing the name of a
hotel, restaurant or airlines.
- In all these cases, there is no nexus between such a name or logo & the product at
the time of its sale which is essential ingredient in the definition of the term brand
name.
- Unless such garments/made- ups also bear a brand name in addition to the name or
logo of the school, security agency, hotels, airlines and company, such goods would
not attract the excise duty.
- It is also gathered that in some cases, apart from the name or logo of such
organizations, the name of the tailor or manufacturer is affixed on such garments.
- However, mere affixing of name of the tailor or manufacturer would not constitute
a brand name.
- Another related issue is the applicability of the mandatory excise duty to blankets
which are supplied to the defence establishment, armed forces, police forces etc
against tenders that stipulate that the name of the manufacturer should be clearly
indicated or marked on the product. As pointed out above, affixing the name of the
manufacturer on such goods would not, by itself, bring them within the ambit of
branded goods.
Circular No.
937/27/2010-CX.
- It is clarified that in view of the specific bar provided under section 5A(1A) of the
Central Excise Act, 1944, the manufacturer cannot opt to pay the duty under
second notification in respect of unconditionally fully exempted goods and he
cannot avail the CENVAT credit of the duty paid on inputs.
- It is further clarified that in case the assessee pays any amount as excise duty on
such exempted goods, the same cannot be allowed as CENVAT credit to the
downstream units, as the amount paid by the assessee cannot be termed as
duty of excise under rule 3 of the CENVAT Credit Rules, 2004.
- The amount so paid by the assessee on exempted goods and collected from the
buyers by representing it as duty of excise will have to be deposited with the
Central Government in terms of section 11D of the Central Excise Act, 1944.
- Moreover, the CENVAT Credit of such amount utilized by downstream units also
needs to be recovered in terms of the rule 14 of the CENVAT Credit Rules, 2004. -
Circular No. 940/1/2011
Note - In the case of ready-made garments and made-up articles bearing a brand
name/sold under a brand name, no such option is henceforth available and a duty of 10%
is payable regardless of the composition of the item/article.
Notification No.
24/2010
SSI exemption is available in case the specified goods are in the nature of packing
materials and are meant for use as packing material by or on behalf of the person whose
brand name they bear even if they bear the brand name of others. Packing material
includes labels of all kinds







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Clubbing of clearances:
SSI exemption is available if aggregate value of clearances of all excisable goods for home consumption by a
manufacturer from one or more factories, or from a factory by one or more manufacturers does not exceed the
prescribed limit [i.e. turnover shall be clubbed for availing SSI exemption]

Case laws in this regard:
Case Judgement
1. AC v. Jayanthilal Balubhai &
Ors. (1978) (SC)
If one person owns a factory and is a partner in another factory, the production
of all factories cannot be clubbed.
2. Jagjivandas & Co. v. CCE
(1985) (SC)
Factors such as common location of factories, common expenses, common
partners, and common trade mark, sharing of machinery usage, mutual financial
transaction without interest not enough to club clearances.
3. CCE V. Spring Fresh Drinks
(1997) (SC)
Turnover of limited companies being independent not clubbable in the absence
of financial flow back.
4. CCE v. MM Khambatwala
(1996) (SC)
Manufacture of same products in factory as well as job workers factory not
clubbable unless common control shown.
5. Renu Tandon v. UOI (1993)
(HC)
Common employees, proximity of factories, closeness of relationship are not
sufficient to club clearances in the absence of flow back of profits.
6. Alpha Toyo Ltd. v. CCE (1994)
(CESTAT)
Units separately incorporated with separate plant not clubbable because of few
common directors or grant of interest free loans.
7. CCEx., Ahmedabad, v. Arbuda
Industries, (2008) (CESTAT)

Two units, one owned in individual capacity and other as Karta of HUF. Both the
units are having separate machineries, separate incometax PAN No., separate
sales tax, separate professional tax registration and separate electricity meters.
No evidence to show that the two units are not independent. Clubbing of
clearance does not apply
8. Coimbatore Engineering
Works v. CCE (2009) (CESTAT)
In absence of any finding of there being any common funding and financial flow-
back, clubbing of clearances is not permissible, merely on the premise of
familiarities between partners of units and other administrative commonalities




SSI & Co. is eligible for exemption in terms of Notification No. 8/2003 for the year 2010-11. It
provides the following particulars with regard to the clearances of goods effected during
the said year. Determine the duty payable in respect of the year 2010-11:
Value of domestic clearances of goods with own brand name `120 lakhs
Value of clearances of goods with the brand name of others
(including `30 lakhs in respect of goods manufactured in a rural
area)
`100 lakhs
Value of clearances for exports `50 lakhs
Value of clearances for captive consumption `40 lakhs
Value of clearances of exempted goods `20 lakhs
Show your workings with explanations where required (May 11)
Computation of excise duty payable by M/s. SSI & Co. during the year 2010-11:-
Turnover to be excluded:
Value of clearances for export `50 lakhs
Value of clearances for captive consumption `40 lakhs
Value of clearances of exempted goods `20 lakhs
Value of domestic clearance of goods with brand name of others (excluding goods
manufactured in rural area) see note below
`70 lakhs
Turnover to be included:
Value of domestic clearances with own brand name `120 lakhs
Value of clearances of goods with brand name of others manufactured in rural area `30 lakhs
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Total `150 lakhs

Computation of Tax liability
On 1
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Clearance of `150 lakhs Nil
On clearances with brand name of others worth `70 lakh (excluding rural area
clearances) No SSI exemption available and fully taxable @ 12%
`8,40,000
Add: EC and SHEC @ 3% on `7,00,000 `25,200
Total Duty liability `8,65,200
Note: the clearances with the brand name of others which are ineligible for SSI exemption has to be excluded while
determining the limit of `150 lakh. However, clearances with the brand name of others manufactured in rural area
are eligible for SSI exemption and hence, such clearances are included while determining the limit of `150 lakh.

2. Exports under Excise Rule 18 and Rule 19 of Central Excise
Rules, 2002
When the Inputs are used in the manufacture of finished goods which are then exported without payment of duty
then the manufacturer can get refund of excise duty paid on the said Inputs under the following options.
Option (i) Export finished goods in accordance with the procedure as laid down in Notification No. 21/2004 and
claim rebate of excise duty paid on the inputs purchased and used in the manufacture of said exported goods
Option (ii) As per Rule 5 of CENVAT credit Rules, the finished goods can be exported under Bond or Letter of
undertaking and the excise duty paid on Inputs used in the manufacture of such exported finished goods is taken as
CENVAT credit and can be utilised. If CENVAT credit cannot be utilised then REFUND available.

Many conditions are prescribed under option (i) like detailed procedure requiring verification of manufacturing
process, Input output ratio, wastages etc., by the excise officer, therefore manufacturers of exempted goods used
to export finished goods under bond and claim refund of CENVAT credit under Rule 5 of CENVAT credit Rules.

Notification No. 24/2010 has been issued to provide that goods which are exempt from payment of duty or
chargeable to nil rate of duty shall not be allowed to be exported under bond. But this notification is not applicable
to 100% EOU as they are required to export goods under bond in terms of customs and excise notifications.





Export procedures under excise from the view point of manufacturer (Exporter)
Rule 18
Rebate (Refund) of duty
paid on finished goods
which are then exported
Rebate of duty paid on
inputs used in manufacture
of finished goods which are
then exported without
payment of duty
Rule 19
Rule 19(1) - Export under bond
without payment of duty
Rule 19(2) - Duty free purchase
of inputs used for manufacture
of finished goods which are
exported
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Export under a claim of rebate Under supervision of superintendent or Inspector
(Rule 18 read with Notification No. 19/2004)

Preparation of Invoice
- The Invoice should be in Triplicate
- The assessable value should be mentioned in the Invoice
- The Invoice should be prepared which can be from same series from which goods for home
consumption are cleared.
- A separate series of Invoice can also be maintained for export


Preparation of ARE-1 form
- ARE-1 form has to be prepared in quadruplicate and should be as follows
ORIGINAL White TRIPLICATE Pink
DUPLICATE Buff QUADRUPLICATE Green
QUINTUPLICATE - Optional
(It is sufficient if there is colour band on the top or right hand corner as per aforesaid
colour scheme)
- It should be signed by manufacturer
- The Assessable value should be mentioned in the ARE-1 forms


Sealing of goods for export at factory
- Export goods are examined before despatch by central excise officers
- Sealing normally done by Inspector, Superintendent under export schemes and AC/DC in
exceptional cases
- The sealing of each package or container shall be as specified by commissioner.
- The excise officer will make endorsement on all copies of ARE-1

The excise officer may send the triplicate copy either by post or by handing over to the
exporter in a tamper proof sealed cover.



Clearance of goods for export by customs officer (At the place of export)
Step - 1
Step - 2
Step - 3
Step - 4
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- The goods after Sealing by excise officers are taken to customs port.
- When export goods are examined before despatch by excise officers, the goods are not
examined by customs officer at port or airport of shipment, unless seals are found to be
tampered.

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper
proof sealed cover


Filing rebate claim
- It must be filed within 1 year from the date of export.
- Application on letter head claiming rebate along with
a) Original ARE-1
b) Invoice
c) Self attested copy of shipping bill
d) Self attested copy of bill of lading
e) Disclaimer certificate where claimant is other than exporter.
- The market price of excisable goods at the time of exportation should not be less than the
amount of rebate of duty claimed
- Rebate claim below Rs. 500 is not acceptable.


Rebate will be granted

Note: Where the rebate is claimed by EDI system, the duplicate copy of ARE 1 is sent to the Excise Rebate Audit
section at the place of export. The officer for rebate claim could be AC/DC or Maritime commissioner.












Step
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101

Export under a claim of rebate Under self sealing and self certification
(Rule 18 read with Notification No. 19/2004)

Preparation of Invoice
- The Invoice should be in TRIPLICATE
- The assessable value should be mentioned in the Invoice
- The Invoice should be prepared which can be from same series from which goods for home
consumption are cleared.
- A separate series of Invoice can also be maintained for export


Preparation of ARE-1 form
- ARE-1 form has to be prepared in quadruplicate and should be as follows
ORIGINAL White TRIPLICATE Pink
DUPLICATE Buff QUADRUPLICATE Green
QUINTUPLICATE - Optional
(It is sufficient if there is colour band on the top or right hand corner as per aforesaid
colour scheme)
- It should be signed by manufacturer
- The Assessable value should be mentioned in the ARE-1 forms



Sealing of goods for export at factory
- Any manufacturer exporter can clear export consignment with self sealing and self
certification.
- Sealing Self sealing should be done under supervision of owner, working partner,
managing director or company secretary or a person duly authorised.




Clearance of goods for export by customs officer (At the place of export)
Step - 1
Step - 2
Step - 3
Step - 4
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102

- In case of self sealing, certain percentage of packages/ containers will be opened at
customs port by customs officer.
- The customs officer shall examine the goods and then export will be allowed

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper
proof sealed cover


Filing rebate claim
Same as Previous


Rebate will be granted

Rebate of duty on inputs used in manufacture of export goods
(Rule 18 read with Notification No. 21/2004)

Filing declaration with AC/DC & verification of Input output ratio
A declaration of
- Finished goods proposed to be manufactured or processed
- Rate of duty applicable on such finished goods
- Manufacturing/ processing formula with reference to quantity or proportion in which
materials are actually used
- Tariff classification, Rate of duty paid or payable on the materials so used
- A write-up of manufacturing process, in case of new product or in case where the
manufacturer is not regularly manufacturing the export goods
Note: If there is more than one export product, separate statement of Input-output ratios
may be furnished for each export product.
The AC/DC shall verify the input-output ratio mentioned in the declaration and if necessary
may call for samples or inspect goods and if everything found in order, grant permission.


Preparation of an Invoice
Same as previous procedure



Clearance of goods for export by customs officer (At the place of export)
Step - 5
Step - 1
Step - 2
Step - 3
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103

- Export is required to be made under form ARE-2




Filing rebate claim
- Application on letter head claiming rebate along with
a) Original ARE-2
b) Duplicate copy of Invoice
c) Self attested copy of shipping bill
d) Self attested copy of bill of lading
- The market price of excisable goods at the time of exportation should not be less than the
amount of rebate of duty claimed
- Rebate claim below Rs. 500 is not acceptable.


Rebate will be granted

FAQs on Rule 18 (Rebate of duty):

1. What are the other conditions and limitations subject to which rebate granted in respect of duty paid on
exported finished goods?
The conditions & limitations are specified in Notification no. 19/2004
- The excisable goods shall be exported after payment of duty, directly from a factory or warehouse
except as otherwise permitted by CBE&C by a special or general order
- The excisable goods shall be exported within 6 months from the date of clearance for export from
factory or warehouse or within such extended period as the commissioner may allow
- In case of export of goods which are manufactured by a manufacturer availing area based
exemption notification, no rebate shall be admissible.

2. Can a manufacturer claim rebate both in respect of outputs as well as Inputs as per Rule 18?
No, Export rebate is allowable only on duty paid on one of the items i.e. either on excisable goods or on
material used in manufacture/ processing of such goods. Hence assessee is not entitled to claim rebate on
both items simultaneously Grasim Industries Ltd. V. UOI

3. If goods are to be exported by sea or air, the said goods have to be taken from factory or warehouse to
port or airport for export. If goods are in such a kind that it can be exported by post also, what is the
procedure?
Step - 4
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104

After the goods are sealed, the exporter shall send duplicate copy of ARE-1 with sufficient postage stamps
to cover postal charges, at the time of booking the consignment. The duplicate copy will be endorsed and
sent by customs officer at the post office, after the post parcel is exported.

4. With whom rebate is filed?
(i) AC/DC of excise having jurisdiction over the factory of manufacture or warehouse
(ii) Maritime commissioner of central excise

5. How the rebate shall be sanctioned?
The said AC/DC or maritime commissioner shall compare








If AC/DC or maritime commissioner is satisfied that the claim is in order, the rebate shall be sanctioned
either in whole or in part.

6. What are the conditions and limitations subject to which rebate granted in respect of duty paid on
materials used in finished goods which are exported?
- The rebate can be claimed on export of all finished goods whether excisable or not.
- The rebate can be claimed even if the process does not amount to manufacture
- Rebate cannot be claimed if the export is through merchant exporter
- Material means all raw materials, consumables, components, semi-finished goods, assemblies,
sub-assemblies, intermediate goods, accessories, parts and packing materials required for
manufacture or processing of export goods
- Rebate of duty paid on capital goods used in relation to manufacture of finished goods which are
exported, is not available.
- Rebate is not available if the export is under a claim of duty drawback

7. Can rebate under Rule 18 be claimed for export to any country?
No, exports to Nepal and Bhutan do not qualify for export incentives as payment is received in Indian
rupees.

8. When rebate procedure may be useful?
a) If assessee has balance of duty in CENVAT credit (capital goods) A/C. It will be advisable to pay duty and
claim refund, as balance in such account is never refundable.
b) When duty paid goods are proposed to be exported
c) Claiming rebate is much simpler and straight forward procedure than claiming refund of duty paid on
inputs under CENVAT procedure
d) An SSI unit may pay excise duty and claim rebate, as getting refund of CENVAT credit on inputs is not an
easy procedure. Moreover, he is not entitled to get refund of duty paid on capital goods.

9. The goods must be exported within 6 months from the date of clearance as specified in Notification no.
19/2004. Can the rebate claim be denied on the ground that goods were not exported within 6 months?
No, it was held that even if goods were not exported within 6 months or even within extended period,
rebate can be granted, as there is no loss of revenue CCE V. Birla tyres, same view in chamunda pharma
machinery V. CCE

10. What are the duties eligible for rebate?
Following duties are eligible for rebate
ORIGINAL

ARE-1
DUPLICATE

ARE-1
TRIPLICATE

ARE-1
Copy received from
exporter
Copy received from
customs officer
Copy received from
excise officer
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a) Basic duty paid
b) Special excise duty
c) Additional excise duty
d) NCCD
e) Education cess
f) SAH education cess

Export without payment of duty by manufacturer Exporter
Under supervision of superintendent or Inspector
(Rule 19 read with Notification No. 42/2001)

Preparation of Invoice
- Same as previous
- The top of the Invoice should be prominently ,Marked as FOR EXPORT WITHOUT
PAYMENT OF DUTY

Filing Letter of Undertaking (LUT)
- Furnish a letter of undertaking (LUT) in form UT-1 to the AC/DC of excise.
- The LUT once given is valid for 12 calendar months
- It is not necessary to submit LUT for each consignment

Preparation of ARE-1 form
- ARE-1 form has to be prepared in quadruplicate and should be as follows
ORIGINAL White TRIPLICATE Pink
DUPLICATE Buff QUADRUPLICATE Green
QUINTUPLICATE - Optional
(It is sufficient if there is colour band on the top or right hand corner as per aforesaid
colour scheme)
- It should be signed by manufacturer
- The Assessable value should be mentioned in the ARE-1 forms

Sealing of goods for export at factory
- Export goods are examined before despatch by central excise officers
- Sealing normally done by Inspector, Superintendent under export schemes and AC/DC in
exceptional cases
- The sealing of each package or container shall be as specified by commissioner.
- The excise officer shall make endorsements on all copies of ARE-1
- The duty payable shall be determined and recorded in DSA as Duty forgone on account of
export under Rule 19

The excise officer may send the triplicate copy either by post or by handing over to the
exporter in a tamper proof sealed cover.


Step - 1
Step - 3
Step - 4
Step - 2
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Clearance of goods for export by customs officer (At the place of export)
- The goods after Sealing by excise officers are taken to customs port.
- When export goods are examined before despatch by excise officers, the goods are not
examined by customs officer at port or airport of shipment, unless seals are found to be
tampered.

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper
proof sealed cover


Discharge of Letter of undertaking (LUT)
- A statement in prescribed form along with original ARE-1 as proof of export
- A suitable entry in records has to be made


If everything found in order, LUT will be discharged


Export without payment of duty by manufacturer Exporter
Under self sealing and self certification
(Rule 19 read with Notification No. 42/2001)

Preparation of Invoice
Same as previous procedure


Filing Letter of Undertaking (LUT)
- Furnish a letter of undertaking (LUT) in form UT-1 to the AC/DC of excise.
- The LUT once given is valid for 12 calendar months
- It is not necessary to submit LUT for each consignment


Preparation of ARE-1 form
Same as previous procedure



Sealing of goods for export at factory
Step - 5
Step - 6
Step - 1
Step - 3
Step - 4
Step - 2
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- Any manufacturer exporter can clear export consignment with self sealing and self
certification.
- Sealing Self sealing should be done under supervision of owner, working partner,
managing director or company secretary or a person duly authorised.



Clearance of goods for export by customs officer (At the place of export)
- In case of self sealing, certain percentage of packages/ containers will be opened at
customs port by customs officer.
- The customs officer shall examine the goods and then export will be allowed


The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper
proof sealed cover


Discharge of Letter of undertaking (LUT)
- A statement in prescribed form along with original ARE-1 as proof of export
- A suitable entry in records has to be made


If everything found in order, LUT will be discharged
Step - 5
Step - 6
Endorses and
sends
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Export without payment of duty by merchant exporter
Under supervision of superintendent or Inspector
(Rule 19 read with Notification No. 42/2001)
Merchant exporter is a person who procures the goods directly from the factory or warehouse and exports the
same. In other words he is a trader in goods.

Preparation of Invoice
- The Invoice should be in Triplicate
- The assessable value should be mentioned in the Invoice
- The Invoice should be prepared which can be from same series from which goods for home
consumption are cleared.
- A separate series of Invoice can also be maintained for export
- The top of the Invoice should be prominently marked as FOR EXPORT WITHOUT
PAYMENT OF DUTY


Execution of Bond
- A general bond B-1 has to be executed with maritime commissioner or AC/DC
- The bond can be surety or security bond
- He has to obtain CT-1 certificates from excise office (It can be obtained in a lot of 25)
- Depending on the track record, it will be given for a period of 1 to 3 months
- A Running Bond Account shall be maintained and will be credited by bond amount when
bond is executed.


Obtain goods without payment of duty
- CT-1 certificate has to be sent to manufacturer from whom goods are to be procured for
export without payment of duty
- Goods will be cleared by manufacturer on the strength of this certificate
- The estimated amount of duty liability should be debited in CT-1


Preparation of ARE-1 form
- ARE-1 form has to be prepared in quadruplicate and should be as follows
ORIGINAL White TRIPLICATE Pink
DUPLICATE Buff QUADRUPLICATE Green
QUINTUPLICATE - Optional
(It is sufficient if there is colour band on the top or right hand corner as per aforesaid
colour scheme)
- It should be signed by manufacturer as well as merchant exporter
- The Assessable value should be mentioned in the ARE-1 forms


Sealing of goods for export at factory
Step - 1
Step - 4
Step - 5
Step - 2
Step - 3
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- Export goods are examined before despatch by central excise officers
- Sealing normally done by Inspector, Superintendent under export schemes and AC/DC in
exceptional cases
- The sealing of each package or container shall be as specified by commissioner.
- The excise officer will make endorsement on all copies of ARE-1


- The excise officer may send the triplicate copy either by post or by handing over to
the exporter in a tamper proof sealed cover.
- At the time of clearance, the running bond account should be debited with duty
payable on export


Clearance of goods for export by customs officer (At the place of export)
- The goods after Sealing by excise officers are taken to customs port.
- When export goods are examined before despatch by excise officers, the goods are not
examined by customs officer at port or airport of shipment, unless seals are found to be
tampered.

The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper
proof sealed cover


Release of Bond and taking self credit in RBA
Step - 6
Step - 7
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A statement in prescribed form along with
- Original ARE-1
- Self attested copy of bill of lading
- Self attested copy of shipping bill
Has to be submitted to the officer to whom bond was executed


If everything found in order, the Bond sanctioning authority shall discharge the bond.
The merchant exporter can take self credit in Running Bond Account

Export without payment of duty by merchant exporter
Under self sealing and self certification
(Rule 19 read with Notification No. 42/2001)

Preparation of Invoice
- The Invoice should be in Triplicate
- The assessable value should be mentioned in the Invoice
- The Invoice should be prepared which can be from same series from which goods for home
consumption are cleared.
- A separate series of Invoice can also be maintained for export
- The top of the Invoice should be prominently marked as FOR EXPORT WITHOUT
PAYMENT OF DUTY


Execution of Bond
- A general bond B-1 has to be executed with maritime commissioner or AC/DC
- The bond can be surety or security bond
- He has to obtain CT-1 certificates from excise office (It can be obtained in a lot of 25)
- Depending on the track record, it will be given for a period of 1 to 3 months
- A Running Bond Account shall be maintained and will be credited by bond amount when
bond is executed.

Obtain goods without payment of duty
- CT-1 certificate has to be sent to manufacturer from whom goods are to be procured for
export without payment of duty
- Goods will be cleared by manufacturer on the strength of this certificate
- The estimated amount of duty liability should be debited in CT-1

Preparation of ARE-1 form
Same as Previous procedure


Sealing of goods for export at factory
Step - 1
Step - 4
Step - 2
Step - 3
Step - 5
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- Any manufacturer exporter can clear export consignment with self sealing and self
certification.
- Sealing Self sealing should be done under supervision of owner, working partner,
managing director or company secretary or a person duly authorised.

At the time of clearance, the running Bond account should be debited with duty payable on
export.


Clearance of goods for export by customs officer (At the place of export)
- In case of self sealing, certain percentage of packages/ containers will be opened at
customs port by customs officer.
- The customs officer shall examine the goods and then export will be allowed


The DUPLICATE copy can be sent either by post or by handing over to exporter in tamper
proof sealed cover


Release of Bond and taking self credit in RBA
A statement in prescribed form along with
- Original ARE-1
- Self attested copy of bill of lading
- Self attested copy of shipping bill
Has to be submitted to the officer to whom bond was executed

If everything found in order, the Bond sanctioning authority shall discharge the bond.
The merchant exporter can take self credit in Running Bond Account
Step - 6
Step - 7
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Export of Goods without payment of duty to Bhutan
Notification No. 45/2001

Till 1/3/2012, special procedure was prescribed for exports to Nepal and Bhutan. Now, w.e.f. 1/3/2012, export to
Nepal is like export to any other country (except Bhutan). Such export can be without payment of duty or under
claim of rebate of duty. There is no requirement that the payment should be received in free foreign exchange.
Hence, such export is possible even if payment is received in Indian rupees of foreign currency. CBEC vide circular
No. 961/04/2012 has confirmed that rebate of central excise duty will be admissible even if payment is received in
Indian currency or foreign currency.

India has rupee trade with Bhutan and hence export incentives are not available if goods are exported to Bhutan.
The clearance should be on normal invoice on payment of duty. Invoice should mention For export to Bhutan and
make declaration in prescribed form. Extra copy of invoice should be made, which is to be used at India-Bhutan
border.

The detailed procedure is as follows:

1. A general Bond B1 should be executed with Jurisdictional AC/DC covering the duty amount chargeable on
the goods for the purpose of export.
2. The exporter shall raise 6 copies of Invoice (ORIGINAL, DUPLICATE, TRIPLICATE, QUADRUPLICATE,
QUINTUPLICATE and SIXTUPLICATE) and present them along with the goods to the jurisdictional
superintendent.
3. The superintendent shall verify the goods and will also seal the consignment and certify on the copies of
invoices regarding his examination. He will return original copy to the assessee and will give DUPLICATE,
TRIPLICATE & QUADRUPLICATE in a sealed cover.
4. The superintendent shall forward QUINTUPLICATE copy to the AC/DC and will retain SIXTUPLICATE copy
for record purpose.
5. At the Land customs station (LCS) the goods along with the sealed cover containing the DUPLICATE,
TRIPLICATE & QUADRUPLICATE is given to the officer in charge.
6. The OIC shall satisfy himself as to the identity of goods and check the documents and certify on the copies
of Invoice and allow passage to Bhutan after making entries in his register and assigning running serial
number to the consignment. The ORIGINAL copy of the invoice is returned to the exporter with the
QUADRUPLICATE copy of Invoice.
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7. The OIC of LCS in India will send directly the DUPLICATE and TRIPLICATE copy the OIC of the LCS of Bhutan.
8. Once the goods reach Bhutan, the ORIGINAL copy is to be handed over to such officer who would then
examine the documents and the goods and hand over the DUPLICATE copy to the OIC of the Indian LCS.
9. The exporter shall submit the QUADRUPLICATE copy endorsed by the OIC of the Indian LCS to the AC/DC
who shall then verify the same with the QUINTUPLICATE copy received earlier from the Jurisdictional
Superintendent who had verified consignment at the time of clearance from factory/warehouse and make
entries in his bond register giving provisional credit and provisionally discharging the bond.
10. The OIC of the Indian LCS will then enter details as to return of the DUPLICATE copy of the invoice in his
register and forward the same to the central excise officer who has jurisdiction over the exporters factory/
warehouse.
11. Once the DUPLICATE copy is received from the OIC of Indian LCS proving the fact of export, the credit in
bond account is finalized and bond is discharged.
Discharge of Bond:
a) The exporter shall, within 6 months from the date of removal of goods, submit the quadruplicate copy of
invoice as endorsed by the customs officer-in-charge of the land customs station in India along with the
bank certificate evidencing receipt of payment in freely convertible currency to the jurisdictional central
excise officer.
b) The jurisdictional central excise officer shall then verify the particulars with the quintuplicate copy received
by him and make suitable entries in the Bond Account of the exporter. On receipt of the duplicate copy
from the customs officer-in-charge of the land customs station in India, he shall verify the particulars of the
same with the quadruplicate copy and makes suitable entries in the Bond Account of the exporter
discharging the obligation under the bond.
c) In case the exporter fails to export the goods within 6 months from the date of removal from the factory
or warehouse or any other approved premises, or in case of any other shortcomings, the exporter shall be
liable to pay the full duty on such consignment along with interest @ 18% p.a as per sec. 11AA.

3. Clearance of goods to an Export Oriented Unit (EOU)
Notification No. 22/2003
The clearances made to an EOU will be exempt from duties of excise.
The exemption is normally available on the strength of a certificate (i.e. CT-3) given by the EOU
The exemption is based on a condition that the goods purchased are used by such unit for the purpose of
manufacturing goods which would ultimately be exported outside the country.
The CENVAT credit benefit on the inputs used for manufacture and clearances to 100% EOU would be
available to the manufacturer making such clearances.
Procedure to be followed by manufacturer for clearance to 100% EOU and procedure to be followed by EOU in
terms of the Notification:

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Conditions:
- The goods in question to be procured without payment of duty are to be the ones covered in the
notification.
- The goods are to be generally received for manufacturing/production of articles for export or for job work
for export of goods or services
- The duties that are exempt on such procurements are the Basic Excise duty and additional excise duty in
case of goods of special importance.
- The 100% EOU is to bring goods directly from factory of manufacture or warehouse.
- Once the goods are received, the usage should be for the purposes indicated above.
- The manufacturer supplying goods to such 100% EOU should follow proper invoicing methods as laid down
in Rule 11 of CE Rules, 2002 and warehousing procedure as laid down in Rule 20 of CE Rules, 2002.

4. Clearance of Excisable goods from a DTA unit to Special Economic Zone (SEZ)
A unit in DTA can clear excisable goods without payment of duty to SEZ
CENVAT credit on Inputs and Input services used in manufacture of goods cleared to SEZ is available.
The procurement of goods by such SEZ from DTA is governed under SEZ Rules, 2006.
The DTA unit can clear the excisable goods without payment of duty under a bond by raising ARE-1 to a unit
in SEZ or Goods can be cleared on payment of duty where a rebate claim is to be filed.
PROCEDURE FOR CLEARENCE OF EXCISABLE GOODS
WITHOUT PAYMENT OF DUTY TO A UNIT/DEVELOPER IN
SEZ
PROCEDURE FOR CLEARENCE FROM WAREHOUSE
TO SEZ UNIT/DEVELOPER.
1. The DTA unit shall raise a bond as in case of exports and
raise an ARE 1 form having a preprinted serial number, in
quintuplicate along with invoice for clearance. The
procedure laid down under notification 19/2004 for export
under claim of rebate can be followed with regard to
distribution of ARE 1 copies.
1. The warehouse owner or the person authorized shall
coordinate with the SEZ unit/ developer regarding the
raising of a bill of entry and the submission of the same
to the customs officer in charge of the warehouse.
2. The DTA unit shall coordinate with the SEZ unit/
developer for the purpose of raising a bill of export in
addition to ARE 1 where the clearance is under claim for
export entitlements.
2. The ware house owner shall have to raise an ex bond
shipping bill for the purpose of clearing of the goods to
the said SEZ unit/developer.
3. The DTA unit shall ensure that within 45 days from the
date of clearance a copy of ARE 1 form and bill of export
endorsed by the authorized officer of the SEZ for receipt of
goods into the SEZ is received or submitted to the
Superintendent.
3. The goods can be cleared without payment of duty.
4. In case the superintendent of DTA unit does not receive
the proof of export within 45 days from the date of
removal of goods from the factory or warehouse, he shall
raise a demand of duty against the DTA unit
4. The re warehousing certificate for receipt of the
goods at the SEZ would have to be received within 45
days from the clearance from the warehouse by way of
endorsement on the ex bond shipping bill by the
authorized officer of the SEZ.
5. The DTA unit shall ensure that where export entitlements
are to be claimed, the receipt for supply is from the foreign
currency account of the SEZ unit/developer.

6. Where any export entitlement in the nature of duty
drawback or DEPB is to be claimed by the DTA unit, the
same can be claimed once a disclaimer is received from the
SEZ unit/ developer as to non availement of such benefits
at their end.

5. Notification No. 1/2011 CE
As per this Notification about 130 items are chargeable to Excise duty @ 1% ad valorem.
The limitations as per the CENVAT credit rules are as follows:
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- In respect of manufacture of these goods, CENVAT credit of duty paid on Inputs and Input services is not
available.
- As per Rule 6(4) no credit can be availed on capital goods used exclusively in manufacture of goods under
Notification No. 1/2011 Circular No. 943/04/2011
- The buyer of such goods (for which the benefit of exemption under Notification No. 1/2011 is availed),
cannot avail the CENVAT credit w.r.to duty paid by him. Notification No. 3/2011
- CENVAT credit cannot be utilized for payment of such duty on such goods (i.e. for payment of 1%, CENVAT
credit cannot be used and should be paid by cash) Notification No. 3/2011
6. Removal of goods at concessional rate of duty for manufacture of
excisable goods:


C Subject goods refers to those excisable goods, which are exempted from payment of duty under a
notification issued under section 5A of the Central Excise Act, 1944 provided such goods are used for the
purpose specified in the notification.
C A provision for exemption, concession or exception, as the case may be, has to be construed strictly and if
the exemption is available only on complying certain conditions, the conditions have to complied with. The
provision provides that a manufacturer, who intends to receive subject goods for specified use at
concessional rate of duty, shall make an application in quadruplicate to jurisdictional AC/DC. The buyer-
manufacturer had not submitted any such application. As the condition of exemption notification was not
complied with, the assessee was entitled to exemption Indian oil corporation Ltd. V. CCE (2012) (SC)
Step - 1
Manufacturer who intends to receive "subject goods" for specified use at
concessional rate has to make an application in quadruplicate to AC/DC of
excise. [seperate application is to be made in respect of each supplier of
goods]
Step - 2
Such manufacturer should also execute a bond to cover the duty liability
estimated to be involved at a given point of time.
Step - 3
After such excecution of such bond the AC/DC of excise shall counter sign
the copies of application, which shall then be distributed as follows:
One copy to range superintendent of the manufacturer of subject goods
Two copies to the manufacturer receiving subject goods (out of these, one
copy shall be forwarded to the manufacturer of subject goods)
One copy shall be retained by AC/DC of CE for his own records.
Step - 4
The manufacturer of subject goods shall on the basis of application
forwarded to him, avail the benefit of the exemption notification. He shall
then remove the goods at concessinal rate of duty and shall record on the
applicatoin the removal details such as number and date of invoice,
description, quantity and value of goods.
Step - 5
The manufacturer receiving subject goods has to give information to the
concerned authorities and has to maintain proper records relating to
such goods and submit a quarterly return to the AC/DC by 10th of the
following month.
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7. Exemptions to new units located in backward area:
1. Why this Exemption?
In order to encourage development of backward areas

2. In which area the units should be located to avail Exemption?
(a) North Eastern region and Sikkim
(b) Kutch District and Gujarat
(c) State of Jammu and Kashmir
(d) Himachal Pradesh
(e) Uttaranchal

3. What is the amount of Exemption?


4. Whether Full refund is available?
Refund of duty will be only to the extent of duty payable on value addition. The rate of Value addition has
been specified in respect of various products.
Chapter of the First
schedule to CETA
Description of goods Value addition
rate (%)
29 - All goods 29%
30 - All goods 56%
33 - All goods 56%
34 - All goods 38%
38 - All goods 34%
39 - All goods 26%
40 - Tyres, tubes and flaps 41%
72 or 73 - All goods 39%
74 - All goods 15%
76 - All goods 36%
85 Electric motors and generators, electric
generating sets and part thereof
31%
Any chapter Goods other than those menctioned above 36%
Example: The duty payable by asseessee is Rs. 100 lakhs and CENVAT credit is 45 lakhs. Duty paid through PLA is
55 lakhs. If the goods are covered under chapter 40, the Refund shall be 100 lakhs X 41% = 41 lakhs instead of 55
lakhs.









Exemption for
Units located in Himachal
Pradesh and Uttaranchal
Direct Exemption from
Excise duty
Units located in North-East
region, J&K,Sikkim and Kutch
Duty is payable through PLA and
refund or self credit available during
the next month
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Procedures under Excise

The following flow chart explains the basic procedures to be followed:

Manufacturer, who intends to start business, should Register

Maintain sufficient Records as prescribed

Manufacture the goods within factory








Preparation of Invoice while clearing goods

Assessment of duty payable

Payment of duty on monthly basis

Submission of Returns on periodic basis
Procedures under Excise
Basic/Core Procedures
1. Registration of Factory /Ware house
2. Storage and Clearence of Final Products
3. Clearence of goods fromfactory
4. Payment of duty
5. Returns
6. Assessment
Non Core Procedures
1. Export without payment of duty (Rule 18)
2. Export under claimof rebate (Rule 19)
3. Receipt of goods for repairs/ reconditioning (Rule
16)
4. Payment of duty under compound levy scheme
5. Warehousing of goods
6. Appeals and settlement
If it is cigarettes If it is other goods
System of Physical control is
applicable, wherein the goods has to be
removed under an invoice to be
assessed and counter signed by Excise
officer
Self removal procedure is applicable, where
manufacturer can clear the goods without
supervision of Excise officer
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Organization hierarchy of Excise Department
Ministry of Finance

Department of Revenue

Central Board of Excise and Customs (CBE&C)

Central Excise Zones headed by Chief Commissioners

Central excise commisionerates headed by commissioners Commissioner (Appeals)

Additional commissioner of Central Excise (for each commissionerate)

Joint commissioner of Central Excise (for each commissionerate)

Deputy/Assistant commissioner of Central Excise (for each division)

Superintendent (for each Range) He is the lowest rank of gazetted officer

Inspector (Not a gazetted officer)

The responsibility of administration and collection of Excise duty is vested with CBE&C. It administers service tax
matters through central excise authorities from Zone Commisionerate Division Range.
Registration [Sec. 6 of Central Excise Act along with Rule 9 of
Central Excise rules]

Who?
- Every person who produces, manufactures, carries on trade, holds private
store room or warehouse or otherwise uses excisable goods
- EOU units procuring goods from DTA or supplying goods to DTA are required
to be registered
What? Premises Factory/Warehouse
How? Application for registration in FORM A-1 along with
- Self attested copy of PAN
- If copy of PAN is not available, copy of application made for PAN
- The boundary of registered premises
- Name should be the name and style in which applicant is likely to carry
on business
- In case of Proprietary firm/HUF Name of proprietor/HUF
In case of partnership firm Name of all partners
In case of company Name of CEO, Chairman, MD, and key
directors
In case of society or other business Names of Key personnel
engaged in the management
- Duly signed by
In case of partnership Working or managing partner
In case of corporate assessee Director, Secretary or other
person who is holding power of attorney
When? Within 30 days from the date of commencement of the business.
Procedure
Contained in?

CBE&C Circular No. 662/53/2002 and Notification No. 35/2001

With Whom?
Jurisdictional AC/DC in duplicate
In case of EOU located in port towns to AC/DC of customs, who is administrative
in-charge of EOU.
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Application scrutinized by INSPECTOR in the office of AC/DC

If it is in order, then fed into SACER (System for Allotment of Central excise Registration)

A Certificate of Registration will be generated which contains 15 digit code.
First 10 digits PAN
Next 2 digits Word XM in case of manufacturer, XD in case dealer
Next 3 digits character numeric code (001,002,003 etc.).

Delivered to assessee within 30 minutes. If not possible to generate acknowledgement to that effect will be
given on the spot. Later, RC shall be either sent by post or handed over personally to assessee on the next working
day.

Original copy will be retained by divisional office and duplicate copy will be sent to Range superintendent for
Post facto verification.

The Superintendent and inspector shall verify the declared addressand premises within 5 working days

If found in order, the fact will be certified on the duplicate copyand sent to divisional office for record.
Major variation like fake address, non existence of factory etc,.
Shall be intimated to AC/DC for revoking the registration, after giving opportunity of hearing


FAQs on registration:

1. Who are exempt from registration?
Notification No. 36/2001 grants exemption from registration.
1. Persons who manufacture excisable goods which are unconditionally exempt from excise duty
2. SSI units availing exemption based on value of clearance, whose turnover is less than SSI exemption limit.
A declaration in prescribed form has to be submitted to AC/DC when its turnover is more than specified
turnover of Rs. 90 lakhs. Such declaration has to be filed only once and not every year.
3. Person getting goods manufactured from others on his own account, he is the manufacturer and has to
obtain registration. However he can be exempted from registration if,
(a) He authorizes actual manufacturer to comply with all excise procedural formalities
(b) Agrees to furnish information regarding selling price for determination of assessable value.
4. Persons manufacturing excisable goods under customs warehousing procedures, if all their products are
exported
5. Person who carries on wholesale trade or dealers in excisable goods who does not issue CENVATable
invoice i.e. who is not a registered dealer
6. Users of excisable goods
7. A unit in SEZ
8. EOU having no inter-linkage with domestic economy through sale or purchase of goods

2. A manufacturer carries on the manufacturing activity in more than one premise. Is single registration
sufficient?
The registration is of not manufacturer or business, it is registration of factory/ premises. Therefore,
separate registration is required for each separate premise.

3. The factory of a manufacturer is separated by railway line for convenience of transportation. Is the
manufacturer required to make two separate registrations?
Often a factory has different portions located in adjoining premises, or premises separated by road, railway
line or canal. In such case, commissioner can allow single registration and other conditions and limitations may be
specified.
4. When the amendment to registration certificate should be made and what is the procedure?
The registration certificate indicates
- Name of assessee
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- Constitution
- Type of business (manufacturer or dealer or warehouse or depot or EOU unit) and
- Address
If there is any change in the above details, application in Form A-1 should be submitted.

Important Points:
1. Form: A-1 is the general form for registration as manufacturer/ Dealer/ Producer/ Warehouse.
Form: A-2 for power loom weavers, hand processors, dealers of yarn and fabrics and manufacturers of
readymade garments
Form: A-3 for manufacturers of hand rolled cheroots of tobacco

2. Surrender of registration certificate Registered person has to apply for de-registration if he ceases to
carry on operation for which he is registered in form Annexure III to Notification No. 35/2001 and should
surrender original RC.
He should also declare that no government dues are against him and no demand is pending against
him.

3. Revocation or suspension of registration If there is any breach of any condition of the Act and Rules or if
the holder or person in his employment has been convicted of an offence, AC/DC will revoke or suspend
the registration certificate.

4. Penalty for Non registration Duty on contravening goods or Rs. 10,000 whichever is higher. Contravening
goods can be confiscated Rule 25(1) of CE Rules. According to Sec. 9 Imprisonment upto 7 years will be
imposed.

5. Meaning of Factory:


FAQs on definition of Factory:

1. A manufacturer due to meet the demand, has started manufacturing the goods in his
house in an emergency situation. Does his house falls under the definition of Factory?
The term ordinarily refers to regularity and continuity. If some manufacture is carried out in emergency
at a place, it will not be factory. Thus even if manufacturing is carried out in a house, it will not be treated
as factory. The guiding factor is Regularity and continuity.

2. Whether open land is included in the phrase Premises?
Premises is not restricted to buildings, but it covers open land also.

3. A mine is situated at a distance from factory and it is connected with a ropeway. Should the mine be
considered as part of factory?
When no manufacturing process is carried on in the mine, Mine situated at a distance cannot be
considered as part of factory merely because it is connected with a ropeway CCE V. JK Udaipur udyog
Ltd.
Factory - Sec. 2(e)
Means
Any Premises
Includes
Precincts thereof
Wherein or in any part of which any manufacturing
process connected with production of these goods
is being carried on or is ordinarily carried on.
wherein or in any part of which,
excisable goods other than salt
are manufactured
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Exemption from Registration in case of mines engaged in production/manufacture of specified goods
Notification No. 10/2011
Every mine engaged in the production/manufacture of following goods is exempt from obtaining registration
where the producer/manufacturer of such goods has a centralized billing/accounting system in respect of such
goods produced by different mines and opts for registering only the premises or office from where such centralized
billing or accounting is done:
- Coal, briquettes, Ovoids and similar solid fuels manufactured from coal [Chapter heading 2701]
- Lignite, whether or not agglomerated, excluding jet [Chapter heading 2702]
- Peat (including peat litter), whether or not agglomerated [Chapter heading 2703]
- Coke and semi-coke of coal, of lignite or of peat, whether or not agglomerated; retort carbon [Chapter
heading 2704]
- Tar distilled from coal, from lignite or from peat and other mineral tars, whether or not dehydrated or
partially distilled, including reconstituted tars [Chapter heading 2706]

Application for registration by LTU Notification No. 17/2011
Where a new factory or service provider, input credit distributor or first or second stage dealer becomes liable
to be registered, after opting as large taxpayer, the application for such new registration ought to be made before
the AC/DC of Central Excise, Large Taxpayer Unit in case of central excise and the Superintendent, Large Taxpayer
Unit, in case of registration under the service tax
Exemption to other units of manufacturers of recorded smart cards when premises from where centralised billing
done is registered Notification No. 14/2011
For a manufacturer engaged in manufacture of recorded smart cards falling under subheading 8523 is exempt
from registration with respect to the manufacturing units, provided the premises where centralized billing or
accounting to be done is registered.

Storage and accounting the Final Products:
Goods can be removed only on payment of duty. But can be stored without payment of duty i.e. deferring
the payment of duty. There is no time limit within which goods must be removed from the place of manufacture or
production. But the following rules have to be followed.

Rule 10(1) A Daily Stock Account (DSA) of goods manufactured or produced on daily basis has to be
maintained which is as follows.


Daily Stock Account (DSA)
Opening
Balance
(i)
Quantity
Produced or
manufactured
(ii)
Closing
Balance
(iii)
Quantity
Removed
(i)+(ii)-(iii)
Assessable
Value of
goods
Removed
Amount of
duty
payable
Duty
paid
Description
Of goods







Note:
1. The first page and last page of such account book shall be duly authenticated by the producer or
manufacturer or his authorised agent. All such records shall be preserved for 5 years.
Duly signed by manufacturer or
producer or his agent
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2. If the manufacturer manufactures several grades/ qualities of a particular product, separate DSA of each
grade/ quality is necessary.
3. The entry in DSA should be made only after goods are fully manufactured, duly tested and packed by
assessee.

Rule 4(4) Goods can be stored outside the premises of factory without payment of duty on the prior approval
of commissioner. While giving such permission commissioner may specify the conditions.

Rule 25(1) Non accounting of excisable goods manufactured, produced or stored is an offence. Penalty upto
duty payable on goods can be imposed and offending goods can be confiscated.
Invoice [Rule 11 of Central Excise Rules]:




























Invoice should be given in Triplicate and should be marked as follows
Original Invoice ORIGINAL FOR BUYER
Duplicate Invoice DUPLICATE FOR TRANSPORTER
Triplicate Invoice TRIPLICATE FOR ASSESSEE
Any additional invoice can be given and which should be marked NOT FOR CENVAT PURPOSES.
Before starting the new invoice book, the serial numbers has to be informed to the Range superintendent.
Any cancelled invoice has to be preserved for record purposes.
If the assessee has to pay differential duty then a supplementary invoice to that effect has to be given.
In case of cigarettes, invoice shall be counter-signed by Inspector.
Assessee has to pay differential duty by preparing supplementary invoice in the following cases:
- In case of provisional assessment
- Assessee got price escalation from buyer
- Duty was short paid through mistake
Serial No: ___________ INVIOICE/BILL Excise Reg. No: _________
Name and Address of
Manufacturer Date: __________
Address of Jurisdictional Central Excise Division

Name of Consignee : ________________________________
Address : _____________________________
Registration No : ________________________________

Description of Goods Classification (Head) Quantity Value Rate of duty




Time and Date of Removal: ___________________________
Mode of Transport: ______________________ Vehicle No: _________________
Excise Duty Payable: ____________________
Sd/-
(Service provider or person
authorized by him)

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Buyer can avail CENVAT credit on the basis of such supplementary invoice, except when such differential
duty payment was on account of fraud, suppression of facts, collusion or willful misstatement. It has been
clarified that if differential duty is paid later, interest u/s 11AB will be payable for differential amount paid
later.
Payment of Duty [Rule 8 of Central Excise Rules]:



Note: For the Month of March and Quarter ending March the due date shall be MARCH 31
st


- It is advisable for the Assessee to first utilise available CENVAT credit and then pay balance in cash
- Even if manufacturer pays duty on monthly basis, the buyer of goods is entitled to get CENVAT credit as
soon as goods are received in the factory Rule 8(2)
- In case of EOU units, provision of payment on monthly basis is applicable Rule 17(1)
- Duty, interest, penalty should be rounded off to nearest Rupee Sec. 37D
- If duty is not paid fully on or before duty, assessee is liable to pay the outstanding amount along with
Interest on the amount due [Rule 8(3)]. The rate of interest is specified under section 11AB. If part of duty is
paid, the provision of interest will apply to that part of duty which is not paid.
- If interest is paid under rule 8(3) for delayed payment of duty, penalty is not imposable CCE V. Nirlon Ltd.
How tax should be paid
By PLA through
GAR-7 challan
With the bank
approved by
CBE&C
By Cheque
It is sufficient if
cheque is
deposited with
bank on or before
due date.
By CENVAT credit
Account
Electronically
through internet
banking
Who has paid Excise duty of
10 lakhs or above in
preceding financial year or
has already paid 10 lakhs in
current financial year. (Either
in cash or by utilizing cenvat
credit or both)
When tax should be paid
Normal Assessee
Normal Payment
5
th
of the month
following, every
month
E - Payment
6
th
of the month
following, every
month
SSI Units
Normal Payment
5
th
of the month
following the
quarter
E - Payment
6
th
of the month
following the
quarter
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- If duty and interest is not paid within 30 days after due date, assessee will forfeit the facility to pay duty in
monthly instalments. He will have to pay duty through PLA before clearance of goods. He cannot utilise
CENVAT credit for payment of duty during that period. This forfeiture of facility is automatic and
mandatory. Any order from AC/DC of Central Excise is not required. The forfeiture of facility will continue
till such date on which all dues including interest are paid.
Form and maintenance of Personal Ledger Account (PLA):
It should be maintained in TRIPLICATE.
Dr. Personal Ledger Account Cr.
To Duty payable By GAR-7 Challan
(For the amount of duty paid through PLA) (For Depositing the amount
Of duty in bank through challan)

- Duty is payable in authorised bank by way of GAR-7 challan, where bank is having EASIEST facility
- PLA contains following details
(a) Serial No. and date
(b) Details of credit like basic duty, special duty, additional duty etc.
(c) Details of debit and
(d) Balance
- PLA can be used only for payment of excise duty. Other payments like rent, penalty, fine etc. Should be
paid directly through GAR-7 challan.
Returns under Excise (Rule 12 of Central Excise Rules):
Form of Return Description Who is required to file Time limit
ER 1 Monthly return by large units All Manufacturers
except SSI
10
th
of the following
month
ER 2 Return by EOU All EOU units 10
th
of the following
month
ER 3 Quarterly return by SSI Units availing SSI
exemption
20
th
of the month
following the quarter
ER 4 Annual Financial Information
Statement
Assesses paying duty of
Rs. 1 crore or more
through PLA
30
th
November every
year for the previous
year
ER 7 Annual Installed capacity statement All assesses, except
Manufacturers of biris
and matches without
aid of power and
Manufacturers of
reinforced cement
concrete pipes.
30
th
April every year for
the previous year
Form Specified in
the Notification
No. 8/2011
Quarterly retun of goods produced,
removed and other particulars.
Assessee availing
exemption under
Notification No. 1/2011
and manufactures only
those excisable goods
specified in the
notification.
Within 10 days from the
end of the quarter.
(Some returns are covered under CENVAT credit rules Refer)
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- The return is basically self assessment and the form of return contains self-assessment memorandum. The
return is required in quintuplicate. Assessee will have sixth copy as his record copy.
- The return is acknowledged by superintendent of central excise and one copy duly acknowledged is
returned to assessee.
- The return should be accompanied by
(a) Two copies of PLA
(b) Relevant GAR-7 challan evidencing payment of duty
A summary extract could be put at end of PLA extract indicating
(a) Opening balance after discharging duty liability of previous month
(b) Credits during the month
(c) Total duty discharged during the month
(d) Closing balance after discharging duty liability
- Basic details required in the ER-1/ER-2/ER-3 return are
(a) Period (month/quarter) for which return is submitted
(b) Name of assessee and registration number
(c) Details of goods manufactured, cleared and duty payable. This should be product-wise under 8 digit
Tariff Number
(d) Details of duty paid through CENVAT Credit and Account Current (i.e. PLA)
(e) Details of each type of CENVAT credit availed
(f) Details of other payments i.e. interest, arrears etc.
(g) Self Assessment memorandum.
- The ER-4 requires information in respect of following
(a) Details of Value of Inputs
(b) Details of major raw materials independently accounting for 10% or more of total value constituting
10% or more of total value of raw materials
(c) Details of Expenditure under specified heads
(d) Goods manufactured by assessee through job worker
(e) Details of sales of major finished goods which independently account for 10% or more of total value
of finished goods sold
(f) Details of other income
(g) Job work undertaken done for others.
- Non submission of return on or before due date attracts penalty upto 10,000 Rule 27.
- No provision of revised return to manufacturer.
Assessment under Excise:

What is
Assessment?
Assessment means determining the tax liability. It is of two types
a) Self assessment
b) Provisional assessment
What is self
assessment?
- The assessee himself has to determine classification and valuation of goods and pay duty
accordingly.
- But in case of cigarettes, the superintendent or inspector shall assess the duty payable
Assessment
Self-Assessment [Rule 6] Provisional Assessment [Rule 7]
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before removal of goods
- The return submitted by assessee has to be along with Self Assessment Memorandum,
in which assessee declared that
a) The particulars in ER-1/ER-2/ER-3 are correctly stated
b) Duty has been assessed as per the provisions of the Act.

What is
provisional
assessment?
When,
a) Assessee is unable to determine the value of excisable goods on account of non
availability of any document or information or
b) Assessee is unable to determine rate of duty applicable
He will pay the duty on provisional basis and later on pay/receive the differential duty, if any

Procedure for Self assessment:


FAQs on scrutiny of returns and assessment:
1. What is scrutiny of return?
To check whether the information contained in the return is complete, prima facie valid and internally
consistent. Required action will be taken based on the scrutiny by superintendent, to safeguard the
revenue. A detailed check list for the scrutiny has been given in Annexure-1 of the circular No. 818/15/2005.

2. Are all returns to be scrutinized?
Circular No. 818/15/2005, provided manner of scrutiny of ER-1/ER-3 returns.

3. Who will do scrutiny of returns?
Range superintendent and will be assisted by Inspectors.

4. What is scrutiny of assessment?
After initial scrutiny of returns, 5% of returns will be selected for detailed scrutiny i.e. Scrutiny of
assessment. This will be done on the basis of Negative impact on revenue for the maximum number of
parameters.
Assessee shall submit return along with 'Self assessment memorandum'
Scrutiny of returns by 'Proper officer'
Scrutiny of assessment
(Some returns will be selected on minirisk parameter basis)
Every assessee shall make available to proper officer all documents and records for
verification as and when required
If assessment is found to be in
order
'Self assessment' is final
If the officers are of opinion that there
is short payment, show cause notice
cum demand will have to be issued.
The officers will not assess the duty i.e.
assessment order is not issued
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The modus operandi will be such that in annexure-2 of circular No. 818/15/2005, specifies 8 parameters.
Units having maximum number of negative parameters showing abnormal trends will be selected for
detailed scrutiny of assessment.

5. What is the time limit for completion of this scrutiny?
Both scrutiny of returns and scrutiny of assessment should be completed within 3 months from the date of
receipt of return.

Procedure for provisional assessment:



Assessee has to request for provisional assessment in writing and
also giving reasons thereof to AC/DC
AC/DC shall specify the rate or value at which the duty
will be paid on provisional basis
AC/DC may by order allow payment of
duty on provisional basis
Assessee has to execute a bond for
payment of differential duty
Within 6 months from the date of order of provisional
assessment, AC/DC should pass order for final assessment
(The period can be extended by further 6 months by
commissioner and further without any timelimit by cheif
commissioner)
Interest is payable, in case differential amount is
payable by assessee
If excess amount was paid, it is refundable with interest.
The refund is subject to provisions of unjust enrichment
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FAQs on provisional assessment:
1. Can department order for provisional assessment?
If central excise officer finds that self assessment is not in order, he can as assessee to produce additional
documents, records and other information and then issue demand notice.
If the above is not possible, Best judgement assessment is resorted. But the department cannot order
provisional assessment.

2. If AC/DC is of the opinion that provisional assessment is not necessary. What is the guideline available?
AC/DC may ask assessee to appear before him on the appointed day. After the hearing, he may order that
provisional assessment is not necessary.

3. What is the value for which bond is executed?
The difference has to be calculated on the basis of probable duty payable applying the highest rate/ value
applicable to such goods for a period of 3 months.

4. The return should be usually accompanied with self assessment memorandum. What if, in case of
provisional assessment?
The monthly/ quarterly return and invoices should be marked as PROVISIONALLY ASSESSED vide order No.
____ dated ____. There is a declaration in ER-1/ER-2/ER-3 where assessee has to mention the goods under
Provisional assessment.

5. AC/DC is required to pass order of final assessment within 6 months. If assessment cannot be finalised
within 6 months, what is the remedy available?
The cases must be submitted to commissioner with request letter of assessee, through AC/DC indicating
reasons for non-finalisation and amount of differential duty for future clearances before the expiry of
period of 6 months.

6. Explain the phrase Refund subject to provision of unjust enrichment?
Refund will be granted to manufacturer if he has not passed on incidence of duty to another person.

7. What is the rate of interest payable in case of differential duty payable?
Interest as specified in Sec. 11 AB (i.e. 18%) will be payable by assessee
FROM First day of the month succeeding the month for which such amount is determined.
TILL Date of payment of differential duty.
Note: Interest is payable from first day of next month after clearance of goods, as the word used is for.
Eg: If goods were cleared in July 2000, entire duty is paid in September 2001 and assessment is finalised in
March 2007, interest will be payable from 1
st
august 2000 to September 2001.

8. What is the rate of interest receivable in case of refund of differential amount?
The rate is as specified in Sec. 11 BB (i.e. @6%) will be receivable by assessee.
FROM First day of the month succeeding the month for which refund is determined
TILL The last date of refund.
Note: The interest is payable by department not from the date of finalisation of provisional assessment,
but from the month next to the month on which duty was provisionally paid.






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Goods brought for Repairs, remaking and reconditioning [Rule 16]:


The provisions as contained in Rule 16 are as follows:
- If the duty paid goods are brought for being re-made, refined, re-conditioned or for any other reason,
assessee should take CENVAT credit of duty paid as if such goods are received as inputs and utilize the
credit accordingly.
- The goods brought must themselves be reprocessed and then sent. If the goods brought are scrapped and
fresh goods are sent, it is new manufacture. Fresh duty is payable and CENVAT credit of goods returned
cannot be availed.
Mr. Mallya, a manufacturer of computer parts sold goods to Mr.
Adithya and paid excise duty, cleared goods under an invoice
Mr. Adithya received the goods into his premises and availed
CENVAT credit w.r.to excise duty paid on such goods
During material inspection by production department of Mr.
Adithya, the goods are found to be substandard
The goods were returned to Mr. Mallya by Mr. Adithya and
reversed the CENVAT credit so availed.
The goods were received in the factory of Mr. Mallya and he
availed CENVAT credit (i.e. What he originally paid as excise
duty)
The substandard goods received
were scrapped and new goods were
supplied to Mr. Adithya
It is manufacture and duty shall be
payable.
The CENVAT credit so availed must
be reversed
Mr. Adithya can avail the
Excise duty paid as
CENVAT credit.
The substandard goods were
reprocessed and then sent
If the process carried out
amounts to manufacture
Duty is payable as
applicable on the date of
removal and the CENVAT
credit can be utilised
Mr. Adithya can avail the
Excise duty paid as CENVAT
credit
If the process carried out
does not amount to
manufacture
The CENVAT credit so
availed must be reversed
Mr. Adithya can avail the
CENVAT credit so reversed
by Mr. Mallya
CA Final
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- If process carried out on the goods brought amounts to manufacture, assessee should pay duty at the rate
applicable on the date of removal. Value shall be determined accordingly.
- If the process does not amount to manufacture, an amount equal to CENVAT credit taken at the time of
receipt of final product is payable. The buyer can avail CENVAT credit of this amount.

FAQs on Rule 16:
1. What are the illustrations of the phrase Goods can be bought for any other reason?
- If goods are returned by buyer as they were in excess
- If buyer refuses to accept the goods

2. What is the time limit for bringing the goods for repair?
There is no time limit. Goods can be brought at anytime.

3. What are the documents on the basis of which CENVAT credit be availed by the assessee when goods are
brought?
- If buyer sends the goods under his invoice, credit can be taken on the basis of that invoice
- Credit can be taken even on the basis of own invoice which was raised when goods were originally
cleared Gujrat containers Ltd. V. CCE

4. After repairs and reconditioning should the goods be sent to buyer who returned the goods or can it be
sold to any other buyer?
No. After repairs and reconditioning etc., goods can be sent to anyone. There is no requirement that goods
must be sent only to the person from whom these were received.

5. What happens if procedure under Rule 16 is not followed?
Permission has to be obtained from commissioner for bringing the goods for repairs, reconditioning etc
Clearance of goods for carrying out tests or other process (Rule 16C):






The above is permissible only with specific permission of commissioner.

Special Points:
- The above provision does not apply to prototype which is sent out for trial or development test.
- The other premises need not be registered
- If any scrap is generated during the process at the other premises, it should be either cleared on payment
of duty or brought back to premises of principal manufacturer.
- The value for payment of duty when goods are cleared from other premises will be the price at which
principal manufacture sells the goods to final customer Circular No. 844/2/2207.
Factory/ premises of
manufacturer
Other Premises
Goods cleared for tests
or other process not
amounting to
manufacture
Brought back to factory without
payment of duty
Removal on payment
of duty
Exported without
payment of duty
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Jobwork in jewellery (Rule 12AA):
- Rule 12AA provides that any person who is not an EOU or an SEZ Unit, who gets the following goods
manufactured on job work basis, should register, maintain accounts and pay duty as if he is the assessee.
- Goods Covered under this rule:
Article of jewellery of precious metals falling under heading 7113
Articles of goldsmiths or silversmiths wares of precious metals falling under heading 7114.
- Always the person getting the goods manufactured (i.e. merchant manufacturer) should pay the duty and
cannot authorize job worker to register and pay duty. Notification 8/2012
Procedure and facilities for Large tax payer Unit (Rule 12BB):
1. Removal of Goods by LTU:
Goods Excisable goods Inputs/ Capital Goods removed as such
Rule applicable Rule 12BB of CER, 2002 Rule 12A of CENVAT Credit Rules.
Situation Removal without payment of
duty
Removal of inputs/ capital goods, on
which
credit has been without reversal of credit.
2. Conditions:
a) Removal to: Goods can be re moved from one premise of the LTU to his another premise.
b) Removal from recipient premise:
- Manufacture: Goods are manufactured / produced using the above goods (Inputs, Imports) etc.,
- Removal: Such manufactured goods are removed for
Home consumption, by payment of appropriate duties.
Exported out of India under a Bond or Letter of undertaking.
- Time Limit: Manufacturer and removal should be done within 6 months from the date of receipt of
the Recipient premise.
3. Transfer Challan:
a. Challans should be serially numbered.
b. Contents:
- Registration Number, Name and Address of the LTP.
- Description, Classification, Time and Date of Removal.
- Mode of transport and Vehicle Registration Number,
- Quantity of the Goods, and
- Registration Number and Name of the Consignee.
4. Other conditions:
Particulars Intermediate Inputs Capital Goods
Situation - Used in manufacture of
exempted or non excisable
goods
- Excisable goods
manufactured is not
removed within 6 months.
- Excisable finished
goods not removed
within 6 months.
- Inputs cleared as
such.
- Used exclusively in
manufacturer of
exempted goods.
- Capital goods cleared
as such
Duty liability Amount of duty payable on such
import plus interest.
Duty equivalent to
CENVAT Credit taken with
interest.
Duty equivalent to
CENVAT Credit with
interest.
Payable by Recipient premises Recipient premises Recipient premises.
Governing
Section/Rule
11 AB of CEA. Rule 14 of CENVAT Credit
Rules.
Rule 14 of CENVAT Credit
Rules.
Note: Duty payable in respect of intermediate products is based on the provisions prevailing on the date of removal
from the sender's premise.
5. Nonapplicability:
The facility to remove goods without payment of duty does not apply to
a) 100 % EOU
b) Unit located in EHTP / STP
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6. Other Points:
a) Duty paid eligible for CENVAT Credit: Duty paid by the recipient premise due to nonfulfillment of
condition, can be availed as CENVAT Credit.
b) No reversal of credit at Sender's premise: Nonfulfillment of conditions does not result in reversal of credit
taken by the sender premise.
Procedure for maintenance of records and payment of duty by the
independent weaver of unprocessed fabrics (Rule 12C):
1. Who is an independent weaver? Weaver
a. Purchases the yarn himself
b. Works on them, and
c. Sells the grey fabrics manufactured by him.
2. What are the goods covered under this
rule?
Unprocessed fabrics under Chapter 50 55, 58 or 60 of Schedule I to
Central Excise Tariff Act.
3. Can a person other than independent
weaver comply with the maintenance of
records?
The independent weaver of may authorize another person to
comply with provisions of Central Excise Duties except that of
Registration.
4. Who is the ulitimate responsibility under
Excise Rules,2002?
Responsibility to comply with Central Excise Rules, 2002 lies with
the independent weaver. In case of short payment or non-payment
of duty on such unprocessed fabrics, consequences and penalties
shall apply both to the said independent weaver and his Authorised
agent.
5. Is there any penal provisions for non
compliance?
Penal consequences due to non-payment or short payment will
apply to both the weaver and authorized person.
Warehousing of goods (Rule 20):
Rule 20 of Central Excise Rules, 2002 empowers the Central Government to issue notifications for permitting
removal from factory to warehouse or warehouse to another warehouse without payment of duty and Board is
authorized to prescribe the conditions, limitations and safeguards subject to which this procedure would operate.

Consignor shall
Make an application in prescribed form in quadruplicate
Prepare an invoice (in triplicate)


CA Final
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FAQs on warehousing of goods:
1. Can the goods be despatched to any warehouse?
The Commissioner of Central Excise will specify the places under his jurisdiction where warehouse can be
registered, by issuing Trade Notice. Any person desiring to have warehouse will get himself registered
under the provisions of Rule 9 of the said Rules.

2. Who has the responsibility of payment of duty?
The responsibility for payment of duty on the goods that are removed from the factory of production to a
warehouse or from one warehouse to another warehouse shall be upon the consignee. However, if the
goods dispatched for warehousing or re-warehousing are not received in the warehouse, the responsibility
for payment of duty shall be upon the consignor.

3. What is the period for which goods may remain in a warehouse?
Any excisable goods may be kept in a warehouse to which such goods have been warehoused till the
expiry of 3 years from the date on which such goods were first warehoused.

4. What if the consignor fails to receive the duplicate copy of the application duly endorsed by the
consignee?
C If consignor fails to receive within 90 days of removal of such goods or such extended period as
the commissioner may allow, then the consignor is liable to pay the appropriate duty leviable on
such goods.
C In case the superintendent-in-charge of the consignor does not receive the original copy of the
application duly signed by the consignee and countersigned by the superintendent-in- charge of
the consignee within 90 days of removal of goods, then weekly remainders must be issued by him
to the superintendent-in-charge of the consignee.
C If despite such remainders the original certificate is not received within 60 days from the expiry of
the said period of 90 days, the superintendent in charge of the consignor shall inform the same to
the AC/DC
C The AC/DC shall either secure a satisfactory proof of goods being received by the consignee or
ensure that appropriate duty leviable on such goods is recovered from the consignor.
Remission of duty (Rule 21):
When remission of duty
applicable?
Goods have been lost or destroyed by natural causes or by unavoidable
accident or are claimed by the manufacturer as unfit for consumption or for
marketing, at any time before removal
Who will sanction the
remission?
Competent Central Excise
Officer
Amount of duty empowered to
be remitted
Commissioner Without limit, but normally any
amount exceeding Rs.5,00,000
Additional/Joint
Commissioner
Rs.1,00,000 to Rs.5,00,000
Deputy/Assistant
Commissioner
Rs.10,000 to Rs.1,00,000
Superintendent Below Rs.10,000
Inspector None
If the goods are destroyed by
accident which could have
been avoided, whether
remission of duty available?
In such circumstances remission of duty cannot be done
If goods are lost in theft or
dacoity?
Remission not available Gupta Metal Sheets V. CCE
Loss of molasses due to auto Remission available as it is unavoidable reason Shankar sugar mills V. CCE
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Combustion?
Damage owing to natural
cause Goods viz. cement
damaged due to rain of
unprecedented intensity all
over State Damage of goods
could not be attributed due to
failure of assessee to
safeguard excisable goods?
Remission available - Rajapalayam Cement & Chemicals ltd V. CCE
Bonds under Excise:
C Meaning of Bond: Bond is an instrument by which the obligation to pay money is created expressly. It is
also a legal agreement whereby a person undertakes to do or not to do anything subject to conditions
stipulated in the agreement.
C Purpose of Bond: The primary purpose of the bond is to secure due compliance with the rules and
procedures laid down under the Excise law. A bond is a collateral security, which is secured by the
department to ensure payment of appropriate duty in addition to the available statutory provisions.
C Basic classification: Bonds are basically two types, i.e. surety and security.
C Surety Bond: Under a surety bond another person stands as surety to guarantee the performance on the
part of obligor. The surety should be for the full value of the bond and the person standing as surety should
be solvent to the extent of the bond amount. Under the Contract Act the liability of the surety is co-
extensive with that of the principal debtor and hence the department is at liberty to enforce the recovery
of the dues either from the obligor or from the surety.
C Security Bond: In these kinds of bonds, security is offered instead of guarantee. Security can be in the
nature of Post office saving deposit, National saving certificate or similar realisable government papers of
central or state government. Bank deposit receipt of large scheduled banks is also acceptable. Interest on
such securities will accrue to person making such deposit.

B-1 Surety / Security
(General Bond)
For export of goods without payment of duty under Rule 19
B-2 Bond Surety /
Security (General Bond)
For provisional assessment
B-3 Bond (General Bond) For due dispatch of excisable goods removed for rewarehousing and export there from
without payment of duty.
B-11 Bond For provisional release of seized goods
B-17 Bond (General)
Surety / Security
Composite bond of EPZ/ 100% EOUs for assessment, export, accounting and disposal of
excisable goods obtained free of duty.
Withdrawal of facilities and imposition of restrictions on certain
assessees by central government [Rule 12AAA of CENVAT credit
Rules, 2004 & Rule 12CCC of Excise Rules, 2002] Notification 3 to
5/2012
1. What are the facilities that shall be withdrawn and what are the restrictions imposed under these rules?
a) Monthly payment may be withdrawn and assessee shall be required to pay duty at the time of
removal.
b) Non utilization of CENVAT credit for payment of excise duty
c) Records to be maintained for those principal inputs on which credit has not been availed.
[Principal inputs are those inputs the cost of which is 10% of the total value of Inputs]
d) Intimation to superintendent regarding receipt of principal inputs (whether credit availed or not)
within specified period and make available for verification upto a period specified in the order.
CA Final
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e) If the person if found to be committing the offences for second time or subsequently, every
removal of goods from the factory shall be under an invoice counter signed by Inspector or
superintendent.
f) The registration granted to first stage dealer or second stage dealer can be suspended and during
such period such dealer shall not issue any Invoice for sales and credit cannot be availed by the
buyer.
g) If merchant exporter is found to be involved in the offences, self sealing and self removal
procedure may be withdrawn.

2. When such facilities are withdrawn or restrictions imposed?
When the assessee is allegedly found to have committed certain specified offences and the excise duty
or CENVAT credit alleged exceeds 10,00,000

3. What are the offences specified under these two rules by central government?
a) Removal of goods without the cover of an invoice and without payment of duty;
b) Removal of goods without declaring the correct value for payment of duty, where a portion of sale
price, in excess of invoice price, is received by him or on his behalf but not accounted for in the
books of account;
c) Taking of CENVAT Credit without the receipt of goods specified in the document based on which
the said credit has been taken;
d) Taking of CENVAT Credit on invoices or other documents which a person has reasons to believe as
not genuine;
e) Issuing duty of excise invoice without delivery of goods specified in the said invoice;
f) Claiming of refund or rebate based on the duty of excise paid invoice or other documents which a
person has reason to believe as not genuine;
g) Removal of inputs as such on which CENVAT credit has been taken, without

4. What is the procedure for withdrawal of facilities or imposition of restrictions?

CE Commissioner of excise, CCE chief commissioner of excise, ADGCEI Additional director general of central
excise intelligence, DGCEI Director general of central excise intelligence.





CE or ADGCEI on satisfying that asseesee has committed offence after examination of records,
forward to CCE or DGCEI within 30 days of detection of case
The CCE or DGCEI, on examination shall forward the proposal along with recommendations to CBEC
[An opportunity of being heard can be given to assessee before forwarding the proposal]
An officer authorized by CBEC shall examine the recommendations snd issue an order specifying
a) The type of facilities to be withdrawn
b) The type of restrictions to be imposed
c) Period for which such facilites are withdrwan
d) Period for which such restrictions will be operative
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Audit under Central Excise:
Valuation Audit [Sec. 14A] CENVAT credit Audit [Sec.
14AA]
Excise Audit 2000
1. Who can
order?
Any Central Excise Officer not
below the rank of AC/DC can
order for valuation audit
The Commissioner of Central
Excise may call for
the audit
There is no order for this
audit, but the assessees are
covered under this audit
based on their annual duty
liability
2. When the
audit can be
ordered?
If the officer is of the opinion,
at any stage of enquiry,
investigation or any other
proceedings before him, that
the value has not been
correctly declared or
determined by a manufacturer
or any person.
If commissioner has reason to
believe that the credit of duty
availed of or utilized by a
manufacturer of any excisable
goods
(a) is not within the normal
limits having regard to the
nature of the excisable goods
produced or manufactured,
the type of inputs used and
other relevant factors, as he
may
deem appropriate;
(b) has been availed of or
utilized by reason of fraud,
collusion or any willful mis-
statement or suppression of
facts.
The frequency of
conducting the Excise Audit
2000 is as follows:
Amount of
annual
duty (in
cash +
CENVAT
credit)
paid by
assessee -
Frequency
of audit
Above ` 3
crores
Every year
Between `
1 crore
and ` 3
crores
Once
every two
years
Between `
50 lakhs
and ` 1
crore
Once
every five
years
Less than
` 50 lakh
10% of the
units
audited
every year
3. Any prior
approval from
higher authority
required?
Yes. Prior approval of the Chief
Commissioner of Central
Excise is necessary.
No No
4. Is the order
for audit
appealable?
- Opportunity for hearing
is to be given to the
assessee before the
issuance of the direction
for special audit
- The directions given by
AC/DC for special audit
after obtaining prior
approval of Chief
Commissioner of Central
Excise is not an
appealable order in
terms of section 35B.
Neel metal products V.
CCE (2008) (CESTAT)
- Opportunity for hearing
is to be given to the
assessee before the
issuance of the direction
for special audit
- Order of special audit,
passed by commissioner
is not appealable Shree
prithvi steels V. CCE
(2008) (CESTAT)

N.A
5. Who should
conduct the
audit?
The Central Excise officer will
direct such
manufacturer/person to get
The Commissioner shall direct
such manufacturer to get the
accounts of his factory, office,
Audit staff of the
department
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the accounts of his factory,
office, depots, distributors or
any other place, as may be
specified by the said Central
Excise Officer, audited by a
Cost Accountant or Chartered
Accountant.
depot, distributor or any other
place, as may be specified by
him, audited by a Cost
Accountant or Chartered
Accountant
6. Can assessee
select Chartered
Accountant or
Cost accountant
for audit?
No. Such Cost Accountant or
Chartered Accountant will be
nominated by the Chief
Commissioner of Central
Excise in this behalf.
No. Such Cost Accountant or
Chartered Accountant will be
nominated by the
Commissioner of Central
Excise in this behalf.
N.A
7. To whom the
audit report
should be
submitted?
- The Cost Accountant or
the Chartered
Accountant has to
submit the duly signed
and certified audit report
within the period
specified by the Central
Excise Officer.
- He shall also mention in
the report such other
particulars as may be
prescribed by such
Central Excise Officer.
- The Cost Accountant or
the Chartered
Accountant has to
submit the duly signed
and certified audit report
within the period
specified by the Central
Excise Officer.
- He shall also mention in
the report such other
particulars as may be
prescribed by such
Central Excise Officer.
- The draft audit report
is submitted to the
superior officers for
review, who examine
the sustainability of
the objections raised
by the auditors.
- After such review, the
audit report becomes
final and in cases
where the disputed
amounts have not
already been paid by
the assessee at the
spot, demand notices
are issued by the
department for their
recoveries.
8. Can the time
period of audit
be extended?
Such period can be extended
by the Central Excise Officer at
the request of the
manufacturer/person for
material and sufficient reason.
However, the maximum
period of submission of audit
report shall be 180 days from
the date of receipt of the cost
audit order by the
manufacturer.
Not specified in this section Governed by departmental
administration principles
and practices.
9. Is it sufficient
if manufacturer
has already got
his books
audited?
This audit shall be in addition
to any other audit under any
other law for the time being in
force or otherwise. [This audit
is mandatory]
This audit shall be in addition
to any other audit under any
other law for the time being in
force or otherwise. [This audit
is mandatory]
As this audit is conducted by
the department, it is
mandatory always.
10. Who will bear
the audit fees
and expenses?
The expenses of audit and
audit fees shall be paid be
excise department.
The expenses of audit and
audit fees shall be paid be
excise department.
The expenses of audit and
audit fees shall be paid be
excise department.


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Documents to be produced on demand for the purpose of section 14A (Valuation
Audit)/14AA (CENVAT Audit):
Assessee, first stage dealer and second stage dealer were required to produce, on demand, the records maintained
by him in respect of accounting of transactions, all financial statements, cost audit reports and income tax audit
reports to the following persons:-
(i) Officer empowered under sub-rule (1) or
(ii) Audit party deputed by the Commissioner/Comptroller and Auditor General of India
(iii) Cost Accountant/ Chartered Accountant as nominated under section 14A/14AA of the Act
for the scrutiny by the officer/audit party/cost accountant/chartered accountant within the time-limit specified
by them.






INDIRECT
TAX LAWS
Value Added
Tax (VAT)
Tharun Raj
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Table of Contents
A Road to CST: .................................................................................................................................. 141
Introduction to VAT: .......................................................................................................................... 143
When Sales Tax is levied? .................................................................................................................. 146
Concept of Input tax credit: ............................................................................................................... 148
Unutilized Input credit: .................................................................................................................. 148
Conditions for availing input tax as credit: ....................................................................................... 149
Input tax credit is not available in the following cases: .................................................................... 149
Issues in utilization of Input tax credit: ............................................................................................. 150
Variants of VAT: ................................................................................................................................ 151
Tax treatment under VAT for Stock transfer: .................................................................................... 152
Impact of VAT on Imports: ................................................................................................................ 152
Methods of Value added: ................................................................................................................... 153
Tax rates Under VAT: ........................................................................................................................ 155
Procedures under VAT ....................................................................................................................... 156
Hierarchy under VAT: ............................................................................................................... 156
Registration under VAT: .................................................................................................................... 156
Composition Scheme under VAT: ...................................................................................................... 157
Consequences of Non-registration: ........................................................................................... 158
Cancellation of Registration: ..................................................................................................... 158
Tax Payers Identification Number (TIN): .................................................................................. 158
Maintenance of Records: ........................................................................................................... 158
VAT INVOICE: .................................................................................................................................. 159
Format of VAT Invoice: ............................................................................................................. 159
System of cross checking under VAT: ........................................................................................ 159
Returns and Assessment under VAT: ................................................................................................. 160
Accounting Entries for VAT: .............................................................................................................. 160
Merits and Demerits of VAT: ............................................................................................................. 160
VAT Audit: ......................................................................................................................................... 161
VAT and sales tax incentives: ............................................................................................................ 161
VAT and Works Contracts ................................................................................................................. 162
VAT and Hire purchase ..................................................................................................................... 164
FAQs under VAT and Hire purchase: .......................................................................................... 165
VAT and Lease transactions .............................................................................................................. 165

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Value Added Tax (VAT)

Delhi, March 21, 2005: VEXATIOUS ALTERNATIVE TAX?: Sections of trade are up in arms against the proposal to
introduce value added tax at the State level, unconvinced by the arguments of economists and policymakers.
What is VAT? And why traders opposed implementation of VAT? Analyse the impact of VAT and we will discuss
the issue at last!!!
A Road to CST:
CST though called CENTRAL Sales tax, the state will collect and retain the tax.
CST shall be paid by the seller to that state where the movement of goods starts.
The state governments are entrusted with the authority to collect and administer CST through the
respective state commercial tax departments.
The rate of CST is as follows:

Sec. 3 of CST Act, 1956: A sale or purchase of goods shall be deemed to take place in the course of
interstate trade or commerce if the sale or purchase
a) Occasions the movement of goods from one state to another or
b) Is effected by transfer of documents to title of the goods during their movement from one state
to another.
Documents of title to goods means a document which evidences that the person holding the document
has the title to goods. Lorry receipt, Railway receipt, Air way bill, bill of lading are known as documents of
title to goods.
CST is levied on all subsequent interstate sales made by a one person to another. The system of tax credit is
absent in CST. But this general rule has exceptions:
a) Interstate sale by transfer of documents of title
b) Penultimate sale
c) Special provision in case of declared goods
Sale to
Registered Dealers
2% or Local sales tax rate
whichever is lower
Unregistered Dealers
Local sales tax rate
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Sec. 6(2) of CST Act, 1956 Subsequent sales by transfer of documents of title is exempt provided the
dealer selling goods issues a certificate in prescribed form (E-I/E-II) to the purchasing dealer.
Sec. 5(3) of CST Act, 1956 Sale preceding the export sale is known as penultimate sale which is exempted
as it is deemed to be in the course of export. Such exemption is available only if the sale is as per the
following order of events.

Sec. 14 of CST Act, 1956 Special provision in case of Declared goods.
The following are the declared goods:
1) Cereals
2) Pulses
3) Coal including coak in all forms but excluding charcoal
4) Cotton
5) Cotton fabrics
6) Cotton yarn
7) Crude oil
8) Aviation Turbine Fuel
9) Hides and Skins
10) Iron and steel
11) Jute
12) LPG for Domestic use
13) Oil seeds
14) Man made fabrics
15) Sugar
16) Unmanufactured tobacco
17) Woven fabrics of wool
In case of the above goods, the buyer of such goods can avail the tax paid by the previous persons as credit
and can be set off for payment of tax on subsequent sales. But with a precondition that the same goods
must be sold subsequently without any processing.
Various Forms and its importance under CST

Form Purpose Form Purpose
A Application for registration F In case of Branch transfer
B Certificate of Registration G Indemnity bond when C Form is lost
C Declaration by purchasing dealer to
obtain goods at concessional rate
H Certificate of Export In case of
penultimate sale
D Not Applicable from 1-4-2007 I Certificate by SEZ unit
E-I/E-II Certificates for Sale in Transit J Certificate to be issued by Foreign
diplomatic mission


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Introduction to VAT:
Power to Levy: seventh schedule to the constitution
List I (Union List) Entry No. 92A Taxes on sale and purchase of goods other than newspapers, where such sale
or purchase takes place in the course of Interstate trade or commerce.
List II (State List) Entry No. 54 Tax on sale or purchase of goods other than news papers, where such sale or
purchase takes place in the course of Intrastate trade or commerce

Meaning of Sale: Transfer of property in goods by one person (i.e. Seller) to another person (i.e. Buyer)
- For Cash (i.e. Cash Sales) or
- For Deferred payment (i.e. Credit Sales) or
- For any other Valuable Consideration (i.e. Barter system)













What is VAT?
It is the Indirect tax imposed on the value addition.
Value addition is measured by Sale Price (-) Purchase price
The tax paid on purchases is set off against tax paid on sales
It is introduced to avoid cascading effect of tax.
VAT CHART (With Uniform Rate):



















Inter State Sale
(Sale outside the
State)
Intra State Sale
(Sale within the State)
It arises when seller is in one
state and buyer is in another state
It arises when both seller and
Buyer are in the same state
Central Sales Tax (CST)
is applicable
Value Added Tax (VAT)
is applicable
Raw material
Producer
Sale = Rs. 100
(VAT = Rs. 10)
Goods
Manufacturer
Sale = Rs. 150
Gross VAT = Rs. 15
Net VAT = Rs. 5
(Rs. 15 10)
Input tax Credit
taken =Rs. 10
Wholesaler
Sale = Rs. 180
Gross VAT = Rs. 18
Net VAT = Rs. 3
(Rs. 18 15)
Input tax Credit
taken =Rs. 15
Retailer
Sale = Rs. 200
Gross VAT = 20
Net VAT = Rs. 2
(Rs. 20 18)
Input tax Credit
taken =Rs. 18
Consumer
Types of Sale
(Sale outside the
State)
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Observation (i) Explanation Advantage


The VAT paid by the
consumer (i.e. To retailer) and
revenue to the government
(i.e. VAT paid by all to
Government) is same
In the above chart VAT paid by
consumer to Retailer is Rs. 20.
Therefore the burden on consumer is
Rs. 20.
Transparency in a tax system can
be achieved when there are no
hidden taxes, which means the tax
borne by consumer should be the
revenue to the government.
From the above chart it is clear
that the revenue to the government
is Rs. 20 (10+5+3+2)
TRANSPARENCY in VAT
Under a VAT system, the
buyer knows out of the total
consideration paid for purchase,
what is tax component. This
transparency enables state govt.
to know as to what is the exact
amount of tax coming at each
stage. Thus it is a great aid to the
govt. while taking decisions with
regard to tax rate.
Observation (ii) Explanation Advantage


The tax paid by the
consumer is routed to the
government by all the players
in their value added ratio.
The revenue to the government
of Rs. 20 is routed by Raw material
producer, goods manufacturer,
wholesaler, retailer in their value
added ration from consumer.
Value added ratio = 100:50:30:20
(Total sale price = 200)
Tax paid ratio = 10:5:3:2 (Total
tax paid to Government = 20)
Each person knows his VAT
liability which means that there is
certainty in VAT.
CERTAINTY in VAT
The VAT is a system based
dimply on transactions. Thus
there is no need to go through
complicated definitions like sales,
sales price. The tax is also broad
based and applicable to all sales
in business leaving little room for
different interpretations. Thus,
this system brings certainty to a
great extent.
VAT CHART (With Varying Rates):












Raw material
Producer
Sale = Rs. 100
(VAT = Rs. 10)
Goods
Manufacturer
Sale = Rs. 150
Gross VAT = Rs. 30
Net VAT = Rs. 20
(Rs. 30 10)
Input tax Credit
taken =Rs. 10
Wholesaler
Sale = Rs. 180
Gross VAT = Rs. 36
Net VAT = Rs. 6
(Rs. 36 30)
Input tax Credit
taken =Rs. 30
Retailer
Sale = Rs. 200
Gross VAT = 40
Net VAT = Rs. 4
(Rs. 40 36)
Input tax Credit
taken =Rs. 36
Consumer
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Observation (iii) Explanation Disadvantage


When VAT rates are not
uniform, the basic premise
on which VAT system was
built, is at risk. The players
wont pay VAT on the basis
of their Value added ratio.
It leads to tax evasion at a
stage and it does not
provide equality.
In the previous chart where VAT rates are
uniform, the tax paid by consumer (Rs. 20)
is shared by RM producer, goods
manufacturer, wholesaler, retailer in their
value added ratio and accordingly their tax
burden is determined.
If the same continues in this chart also,
then the tax paid by consumer (Rs. 40) shall
be shared by the players as follows:
Value
added
Tax
liability
RM producer 100 20
Manufacturer 50 10
Wholesaler 30 6
Retailer 20 4
Tax paid by consumer 40
But as per the above chart the tax payable is
as follows:
RM producer 100 10
Manufacturer 50 20
Wholesaler 30 6
Retailer 20 4
Tax paid by consumer 40
No uniformity in VAT rates
The merits accrue in full
measure only under a
situation where there is only
one rate of VAT and VAT
applies to all commodities
without any question of
exemptions whatsoever.
Once concessions like
differential rates of VAT,
composition schemes,
exemption schemes are built
into the system, distortions
are bound to occur and the
fundamental principle that
VAT will totally eliminate
cascading effects of taxes will
also be subject to
qualifications.



Illustration on Basic Concept:
Mr. S acquires goods from Mr. T for ` 1,000 on which tax is 10%, Mr. S adds `400
value of goods and sells at `100 profit. The tax rate is 20%. What is the ultimate price
for customer
(a) If VAT system is not present
(b) If VAT system is implemented
Without VAT With VAT
Sale price of Mr. T 1000 Sale price of Mr. T 1000
Add: Tax @ 10% 100 Add: Tax @ 10% 100
Amount paid by Mr. S 1,100 Amount paid by Mr. S 1,100
Cost to Mr. S 1,100 Cost to Mr. S (1,100 100) 1,000
Add: Profit and Value of goods 500 Add: Profit and Value of goods 500
Sale price of Mr. S 1,600 Sale price of Mr. S 1,500
Add: Tax @ 20% 320 Add: Tax @ 20% 300
Cost to Customer 1,920 Cost to Customer 1800

Tax payable by Mr. S ` 320 Tax payable by Mr. S (300 - 100) ` 200
Total Revenue to Government `420 Total Revenue to the Government ` 300

Observation (iv) Explanation Advantage


The cost saved by the
consumer and tax revenue
lost by the government is
one and the same.
From the above illustration, the cost
to consumer when VAT system is
implemented is less compared to
without VAT system. The consumer
saves Rs. 120. The tax payable by Mr.
S to the government is decreased
when VAT system is implemented i.e.
Rs. 120. Therefore the government
loses its revenue in order to
contribute it to consumer.
Avoids cascading effect of tax
A persistent criticism of VAT has
been that since the tax is payable on
the final sale price, the VAT usually
increases the prices of goods.
However, VAT does not have any
inflationary impact. With the
introduction of VAT, tax impact on
RM is totally eliminated. Therefore,
there will be no increase in prices.
CA Final
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Why the VAT credit should not be considered in the cost and how it can be set off with tax payable?

Logical Explanation Accounting Explanation
The VAT paid on purchases is available as credit.
Whenever a portion of cost incurred is available as
credit, it should not be considered while calculating
the net cost incurred.
If it is considered then cost to consumer will increase
and leads to cascading effect of tax which is against
the VAT system.
The credit so available will be utilized for payment of
VAT liability.
For purchases:
Purchases A/C ----- Dr.
VAT credit Receivable A/C --- Dr.
To Cash/Creditors A/C
For Setoff:
VAT payable A/C --- Dr.
To VAT credit receivable A/C
To Cash (Bal. if any)
When Sales Tax is levied?
- Whether at the time of First sale?
- Whether at the time of Last sale?
- Whether at any other time?














Observation (v) Explanation Advantage


The history of levy of
sales tax starts from the
phase of single point
sales tax at the time of
first sale and now ends
As government loses its revenue on
further transactions, it shifted from
single point sales tax at the time of
first sale to single point sales tax at
the time of last sale.
But when tax is levied on the last
sale, the government doesnt have
any say except to rely on the
information provided by retailer,
which makes the retailer to evade
Removal of anomaly of single point
taxation
VAT eliminates single point sales tax at
the time of first sale and last sale.
In case of last point tax system,
1. Temptation to evade tax is high
2. Quantum of tax at one point is high
3. Exemption is available against
statutory forms, possibility of misuse
of forms cannot be ruled out.
Single point sales tax
at the time of First
sale
Single point sales tax
at the time of last
sale
Multi point sales tax
on total Sales price
(i.e. on full price)
Multi point sales tax
on value addition
Tax is levied on every
sale of a product, on
the full amount of its
sale price whether
there is value addition
or not
Theoretically easy but
very difficult coming to
practicality as small
retailers in our country
do not maintain
accounts
Scope for tax evasion
Tax is levied at the
time of every sale on
the amount of value
addition
i.e. when goods are
sold to Ultimate
Customers
Government
loses tax on value
addition made on
subsequent sale
It leads to cascading
effect of tax
It prevents cascading
effect and helps in
better tax
administration and
collection
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with a phase called
multipoint sales tax on
value addition.
tax.
So the levy of sales tax shifted to
multi point sales tax on the total sale
price. But it is not free from any
limitations. It leads to cascading
effect of tax and as a result the sale
price or cost to consumer will
increase
In case of first point tax system, tax
was avoided by way of selling the
goods at first point to their sister
concerns at lower rates and thereafter
increasing the price.
All the above anomalies are taken care
under VAT.

Illustration on imposition of Sales tax:
A manufacturer sells a product for Rs. 1,000 to the wholesaler. The wholesaler
adds Rs. 300 as his margin and sells the same to retailer. The retailer adds Rs.
500 as his margin and sells the same to ultimate consumer. VAT rate is 4%.
1) Single point sales tax at the time of first sale
Sales tax = Rs. 1,000 X 4% = Rs. 40.

2) Single point sales tax at the time of last sale
Sales tax = Rs. 1,800 X 4% = Rs. 72

3) Multipoint sale tax on total sale price
Sale price of manufacturer 1,000
Add: Sales tax @ 4% 40
Cost to wholesaler 1040
Add: Margin 300
Sale price of Wholesaler 1340
Add: Sales tax @ 4% 53.60
Cost to Retailer 1393.6
Add: Margin 500
Sale price of Retailer 1893.6
Add: Sales tax @ 4% 75.74
Cost to Consumer 1969.34

4) Multipoint sales tax on value addition
Sale price of manufacturer 1,000
Add: Sales tax @ 4% 40
Gross Cost to wholesaler 1040
Less: VAT credit Available 40
Net Cost to Wholesaler 1,000
Add: Wholesalers Margin 300
Sale price of Wholesaler 1300
Add: Sales tax @ 4% 52
Gross Cost to Retailer 1352
Less: VAT Credit available 52
Net cost to Retailer 1300
Add: Retailers Margin 500
Sale price of Retailer 1800
Add: Sales tax @ 4% 72
Cost to Consumer 1872








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Concept of Input tax credit:

VALUE ADDED TAX (VAT)























Net VAT Payable by registered dealer = Output tax (-) Input tax

Illustration on availment and utilization of Input tax credit:
Ram purchased Inputs worth Rs. 1,00,000 and made sales of Rs. 2,00,000 in the month of
January. The input tax rate and output tax rate are 4% and 12.5% respectively. Calculate the
Net VAT payable by Ram for the month of January? (Assume purchases and sales are
exclusive of tax)
Net VAT payable = Output tax Input tax
Output tax = 2,00,000 X 12.5% = 25,000
Input tax = 1,00,000 X 4% = 4,000
Net VAT payable for the month of January = Rs. 21,000
Unutilized Input credit:
When the Input tax is more than the output tax, there will be excess credit. The excess credit available
after meeting the VAT liability can be utilized for the payment of CST on interstate sales, if any.
Even after paying CST if there is balance of tax credit, it will be carried over till the end of succeeding
financial year and if it remains unutilized, will be REFUNDED.
However in some states the refund will be granted after the end of first financial year itself.


Illustration on utilization of Input tax credit for payment of CST:
Tax paid on purchases made in the state within a month (Input tax)- 10,000
Tax charged for sales in the state within a month - 4,500
CST paid for Inter-state purchases- 3,500
CST charged for Inter-state sales within a month - 5,000
Input tax credit available = 10,000
Input
Tax
Output
Tax
Raw Material
Consumables
Trading
goods
Capital Goods
Sale of Finished goods
(or) Trading goods
VAT paid by registered dealer on purchase of inputs,
Capital goods, Consumables for business to produce
finished goods.
(or)
VAT paid by registered dealer on purchase of trading
goods which are subsequently sold for a margin.
VAT payable or charged by the
registered dealer on sale made to
consumers
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Net VAT payable = Nil (i.e. 4,500 10,000)
Excess credit available = 5,500
The excess credit of Rs. 5,500 can be utilized for payment of CST liability, if any i.e. 5,000 and balance of Rs.
500 can be carried forward and can be utilized for payment of output tax.
Conditions for availing input tax as credit:
1) The goods should be purchased for any one of the following purposes.
a) For Intra-state sales/ Inter-state sales
b)

For the manufacture of taxable goods or goods used in the packing of such manufactured
goods intended for Intra-state/ Inter-state Sales.
c)

For manufacturing or packing goods intended for export
d) For use in the execution of works contract
e) For making zero-rated sales.
2) Purchases to be made within the state. Credit on interstate purchases is not available.
3) Purchases to be made only from another VAT registered dealer against a valid Invoice.
4) Tax credit on capital goods is available but to be adjusted over a period of 36 months
Note: The states may reduce the period and In Maharashtra the credit on capital goods can be claimed
immediately on purchase.
5) Input tax credit on capital goods specified in negative list is not available.
Note: The states have taken their own decisions to provide negative list
6) The Input tax credit on purchases made within a month can only be utilized to pay output tax payable on
sales made during that month.
Input tax credit is not available in the following cases:
1) Purchases from unregistered dealers
2) Purchases from other states (i.e. Interstate purchases)


The Government of A.P allows the VAT paid by B as credit to C, only because again C will pay VAT on
subsequent sale (Either Intra-state or Inter-state). But the Government of T.N will not grant credit of duty
paid by A to B, as it is a revenue loss to the state of T.N
3) Import of goods
Goods, Used as
Containers or packing materials Raw materials Consumable Stores
Goods, Used as
Raw materials Capital goods Consumable Stores
Packing materials/
Containers
A of Tamil Nadu
Pays CST to Government of
T.N
Recovers CST from B of A.P
B of Andhra Pradesh
Pays VAT to Government of
A.P
Recovers VAT from C of A.P
C of Andhra Pradesh
Pays VAT to Government of
A.P
Recovers VAT from
subsequent buyer
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4) Purchase of goods specified in the negative list by the respective state governments. Following are the
goods not covered under Vat.
a) Petrol, diesel, Aviation Turbine Fuel (ATF) or other motor spirit
b) Liquor and
c) Lottery tickets
Note: The states may or may not bring these commodities under VAT laws
5) Purchases from registered dealer who opts for composition scheme (i.e. Dealers who pay lower rate of
duty)
6) Purchase of goods without Invoice
7) Purchase of goods which are being utilized in the manufacture of exempted goods. In some states, partial
input tax credit is available in respect of inputs used for manufacture of exempted goods
8) Goods in stock, which have suffered tax under an earlier Act, but under VAT Act they are covered under
exempted items
9) Purchase of goods dispatched to other states as branch transfer.
10) Purchases from registered dealer who does not show tax amount separately in invoice.
11) Purchased goods used for personal use/Consumption or provided free of charge as gifts.
12) Purchase of goods for use as fuel in generation of power
Issues in utilization of Input tax credit:
Issue-1: Common inputs used for Exempted and taxable sale












Issue-2: Goods are purchased and used in the manufacture of finished goods which are then exported. The Input
tax credit on those goods remains unutilized. What is the treatment available?
When goods are exported, the exporter will get REFUND of the Input tax credit paid by him. The refund
will be allowed within a period of 3 months from the end of the month in which goods were exported.

Issue-3: Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOU) purchases raw materials by
paying VAT and uses these raw materials for manufacture of finished goods. Is there any incentive in respect of
Input tax credit on purchases as they are engaged only in export of goods?
The incentive is available in the following manner

Note: States may reduce the time period of 3 months.
Exemption from payment of tax on purchases
Option (i)
Refund of Input tax credit on purchases within 3
months from the date of purchase
Option (ii)
Option (i) Option (ii)
Maintain separate records for
inputs used in exempted sale and
taxable sale.
Proportionate input tax credit
on inputs used in taxable service
Credit of inputs used in
exempted sale is not available
Step 1: Calculate the ratio of Taxable
sales in total sales.
Step 2: Calculate the input tax credit on
total inputs
Credit Available = Step 1 X Step 2
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Variants of VAT:
Variants of VAT (i.e. Different modes of allowing input tax credit)













How the Gross product variant leads to delay in modernization and upgradation and how income variant
and consumption variant helps in modernization and upgradation?
The gross product variant distinguishes between capital intensive industries and labour intensive
industries by disallowing tax credit on capital goods.
When credit on capital goods is not available, the company will usually decide not to buy capital goods (like
machinery, equipment etc.,) and divert the funds as expenditure on human resource. Due to this reason the
modernization and upgradation in the industry will be delayed.
The income variant and consumption variant makes no distinction between capital intensive and labour intensive
activities. Tax avoidance by classifying capital goods purchases as revenue purchase is avoided. This simplifies tax
administration.
Secondly, when credit not available on capital goods, the VAT paid on capital goods will be added and it forms the
cost of purchase. As a result depreciation will increase, due to which money at disposal (profit after tax and
depreciation) will decrease. Otherwise this amount would have been invested for other purpose.


Illustration on Variants of VAT:
Mr. A has purchased Cloth worth Rs. 50,000 (i.e. 100 meters) inclusive of 4% VAT and
stitching machine for Rs. 1,00,000 inclusive of 10% VAT. Labor and Overheads excluding
depreciation is 25,000. The sale price is fixed at 50% above cost. Stitching machine has life
of 2 years. Compute the amount of VAT payable in cash, as per
(a) Gross product Variant b) Income Variant c) Consumption Variant
Gross Product variant:
Computation of sale value:
Value of Cloth (50,000 X 100/104) 48,077
Labor and Overheads 25,000
Depreciation (1,00,000/2) 50,000
Total Cost 1,23,077
Add: Profit @ 50% of cost 61,538
Gross product variant Income Variant Consumption Variant
VAT is levied on all sales
(Multipoint tax) and deduction
is allowed for tax paid on inputs
and depreciation on capital
goods
MERIT
Avoids cascading effect as VAT
credit available

DEMERITS
- Heavier tax burden as
double taxation on capital
goods
- Delay in modernization and
upgradation
VAT is levied on all sales
(Multipoint tax) and
deduction is allowed for
tax paid on inputs and
capital goods

VAT is levied on all sales
(Multipoint tax) and deduction
is allowed only for tax paid on
inputs excluding capital goods
MERITS
- Avoids cascading effect
- Helps in modernization
and upgradation

DEMERIT
No specific method of
computation of Depreciation
MERITS
- Avoids cascading effect
- Helps in modernization
and upgradation
- Simple and Easy method
- Tax administration is
convenient
DEMERIT
Deferment of credit to
Government

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Sales Value 1,84,615
Computation of VAT payable:
Output tax (1,84,615 X 4%) 7,385
Less: Input tax (50,000 X 4/104) only on cloth 1,923
VAT payable in cash 5,462

Income Variant:
Computation of sale value:
Value of Cloth (50,000 X 100/104) 48,077
Labor and Overheads 25,000
Depreciation (1,00,000/2) X 100/110 45,455
Total Cost 1,18,532
Add: Profit @ 50% of cost 59,266
Sales Value 1,77,797
Computation of VAT payable:
Output tax (1,77,797 X 4%) 7,112
Less: Input tax (50,000 X 4/104) only on cloth 1,923
Less: Input tax (1,00,00/2) X 10/110 4,545
VAT payable in cash 644

Consumption Variant:
Computation of sale value:
Value of Cloth (50,000 X 100/104) 48,077
Labor and Overheads 25,000
Depreciation (1,00,000/2) X 100/110 45,455
Total Cost 1,18,532
Add: Profit @ 50% of cost 59,266
Sales Value 1,77,797
Computation of VAT payable:
Output tax (1,77,797 X 4%) 7,112
Less: Input tax (50,000 X 4/104) only on cloth 1,923
Less: Input tax 1,00,00 X 10/110 = 9,090 5,189
VAT payable in cash 0
Unutilized Credit = 9,090 5,189 = 3901, to be carried forward.
Tax treatment under VAT for Stock transfer:
Stock transfer is not a sale and there is no VAT liability
The Input tax credit with respect to
i) Inputs used in manufacture of finished goods which are then transfer
ii) Goods purchased which are then transferred
Is available after retention of 2% of such tax by the state governments.
Impact of VAT on Imports:
The states do not have power to impose tax on Imports as it is covered under Union list. So, No VAT
on imports
If imports are brought into VAT chain, the cascading effect of tax can be reduced and tax compliance
can also be improved.
The Empowered committee is discussing this issue with the Government of India.

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Methods of Value added:
Methods of computation of Value added to the goods






































Illustration on Methods of computation of VAT:
Mr. X, who has printing works purchased paper worth Rs. 1,04,000 (inclusive of VAT @
4%) and incurred the following expenses
Wages to workmen = 25,000
Rent of building = 15,000
Depreciation on machinery = 10,000
Other consumables = 5,000
And sold at a profit on the works with 15,000
Compute the VAT payable under
a) Addition method b) Invoice method c)Subtraction method


Addition Method Invoice Method Subtraction Method
Deducting tax on inputs from tax
on sales
Factor payments mean all payments
made to factors of production.
Eg: Rent, Hire charges,
Depreciation, Int. on capital, Wages
etc.,
Deducting the value of
Purchases from value of
sales

Aggregate of all Factor payments and
profit
Tax is imposed at each stage of
sales and on entire sales value.
Tax paid at earlier stages are
allowed as set off
Used mostly when tax is not
charged separately in invoice
i.e. Sales is inclusive of Sales
tax

As it does not facilitate matching of
sales invoices with purchase invoices,
it is difficult to detect tax evasion
Mainly used in Income variant
Most common and popular
method
It provides an opportunity for
dishonest traders to acquire
Bogus bills
VAT liability at each stage = Value
added X Rate/ (100+Rate)
Direct
subtraction
Intermediate
Subtraction
Indirect
Subtraction
Sales (Excl. of tax)
(-) Purchases
(Excl. of tax)

Value added (Excl.
Of tax)


Sales (Excl. of tax)
(-) Purchases
(Incl. of tax)

Value added (Excl.
Tax)
Sales (Incl. of tax)
(-) Purchases
(Incl. of tax)

Value added (incl.
Of tax)
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Addition Method:
Value added = Sum of all factor payments
Wages to workmen = 25,000
Rent of building = 15,000
Depreciation on machinery = 10,000
Other consumables = 5,000
Profit = 15,000

Total = 70,000

Invoice method:
VAT = Output tax (-) Input tax
Computation of sales value:
Raw material (1,04,000 X 100/104) = 1,00,000
(+) Factor payments = 70,000
Sale Value = 1,70,000

Subtraction method:
(i) Direct Subtraction:
Sales (Exclusive of VAT) = 1,70,000
(-) Purchases (Exclusive of VAT) = 1,00,000
Value added = 70,000

VAT = 70,000 X 4% = 2,800

(ii) Intermediate subtraction:
Sales (Exclusive of VAT) = 1,70,000
(-) Purchases (Inclusive of VAT) = 1,04,000
Value added = 66,000

VAT = 66,000 X 4% = 2,640

(iii) Indirect subtraction:
Sales (Inclusive of VAT) = 1,76,800
(-) Purchases (Inclusive of VAT) = 1,04,000
Value added = 72,800

VAT = 72,800 X 4/104 = 2,800
VAT payable under Addition method, Invoice method, direct subtraction, indirect subtraction is same

Invoice method V. Subtraction method:











Manufacturer A extracted raw produce X and Y from mines and sold the same to
Manufacturer B for Rs. 40,000 and Rs. 60,000 respectively. Manufacturer B used X
and Y as raw material and sold the resultant product to Wholesaler C for Rs.
3,00,000. Wholesaler sold the same to retailer D for Rs. 4,50,000. The retailer sold
the same to a consumer for Rs. 5,00,000.
Compute VAT payable under
(a) Invoice method
If VAT rate on inputs and outputs are
uniform
If VAT rate on inputs and outputs are not
uniform
No conflict between the methods and
VAT payable will be same
The VAT payable will be different under
two methods
VAT = Tax @ 4% on value
added = 70,000 X 4% = 2,800

Output tax = 1,70,000 X 4% = 6,800
(-) Input tax = 1,00,000 X 4/104 = 4,000

VAT = 2,800


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(b) Subtraction method, if
(i) Manufacturer A sells produce X for Rs. 40,000 (VAT 4%) and produce
Y for Rs. 60,000 (VAT 12.5%)
(ii) All other sales are liable to VAT @ 4%. All prices quoted are exclusive
of VAT.
Invoice method:
VAT on sales VAT credit Net VAT payable
Manufacturer A (Note 1) 9,100 0 9,100
Manufacturer B (Note 2) 12,000 9,100 2,900
Wholesaler C (Note 3) 18,000 12,000 6,000
Retailer D (Note 4) 20,000 18,000 2,000
20,000

Note 1: 40,000 X 4% + 60,000 X 12.5% = 1,600 + 7,500 = 9,100
Note 2: 3,00,000 X 4% = 12,000
Note 3: 4,50,000 X 4% = 18,000
Note 4: 5,00,000 X 4% = 20,000

Subtraction method:
Sale price
(inclusive of
VAT)
Purchase
price (inclusive
of VAT)
Value added
(inclusive of
VAT)
VAT on
value added
Manufacturer A (Note 1) 1,09,100
*
0 1,09,100 9,100
Manufacturer B (Note 2) 3,12,000 1,09,100 2,02,900 7,804 **
Wholesaler C (Note 3) 4,68,000 3,12,000 1,56,000 6,000
Retailer D (Note 4) 5,20,000 4,68,000 52,000 2,000
24,904

* 40,000 X 104% + 60,000 X 112.5% = 41,600 + 67,500 = 1,09,100
** 2,02,900 X 4/104 = 7,804

Tax rates Under VAT:
Exempted category About 50 commodities comprising of
Natural and unprocessed products in unorganized sector
Items which are legally barred from taxation
Items which have social implication
This category also includes a maximum of 10 commodities flexibly chosen by
the states from a list of goods (finalized by empowered committee of state
finance ministers) which are of local importance for the individual states
without having any inter-state implication.
4% VAT category A large number of goods are covered under this category which will be
common for all the states.
Basic necessities such as medicines and drugs
Agricultural and industrial Inputs
Capital goods and
Declared goods
The schedule of goods applicable for this category will be in the respective
state laws.
12.5% VAT category This is a residuary category and all the commodities which are not covered in
the other categories falls under this category.
1% VAT category For precious stones, bullion, gold and silver ornaments
Non VAT goods Petrol, Diesel, Aviation turbine fuel
Other motor spirit
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Lottery tickets
Note: The states may or may not bring these commodities under VAT laws.
The empowered committee agreed that all these commodities are
subjected to 20% tax rate.
Procedures under VAT
Hierarchy under VAT:
The state VAT law is administered by various authorities. The responsibilities of such authorities are specified in the
Act or rules or notifications issued there under.
Commissioner of Commercial Taxes
Joint Commissioner of Commercial Taxes
Assistant Commissioner/Deputy Commissioner of Commercial Taxes
Commercial Tax Officer
Assistant/ Deputy Commercial Tax officer
Tax Collectors
Further, for administrative and appellate purposes, tax law board, appellate Tribunal and other authorities have
also been constituted.
Registration under VAT:

Dealer means any person, who consequent to (or) In connection with (or) Incidental to (or) In the course of his
business, Buys or sells goods for a consideration (or) otherwise.
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Composition Scheme under VAT:
Why Composition
Scheme?
The dealer who avails composition scheme shall be required to pay a composite
amount of tax. Composite tax = Gross annual turnover X Composite rate of tax
prescribed by the state government.
The rate may be reduced upto 0.25% and the states may levy composite tax on taxable
turnover instead of gross annual turnover.
It saves a lot of labour and effort in keeping records.
Who can opt for
Composition scheme?
Any dealer whose turnover is between 5 lakhs (or Rs. 10 lakhs) and 50 lakhs in the last
financial year.
Who are not eligible to
opt for composition
scheme?
a) Dealers having Inter-state sales
b) For Importers and exporters
c) Dealer transferring goods outside the state otherwise than by way of sale or for
execution of works contract.
d) Dealers who stock transfer outside the state
Is this Composition
scheme compulsory?
No, it is optional. A dealer whose turnover is between the above limit can either opt
for composition scheme or pay normal duties
Every dealer will opt for
composition scheme
instead of paying normal
duties. What is the
disadvantage in opting
for composition scheme?
A dealer who opts for composition scheme has the following disadvantages as
compared to a dealer who opts to pay normal duty.
a) The Input tax credit on Inputs as well as capital goods is not available
b) Issuance of VAT invoice by the dealer is not possible as a result the person
who buys goods from such dealer cannot avail Input tax credit.
How the option for
Composition scheme can
be opted?
The option can be exercised by intimating in writing to the commissioner under whose
jurisdiction his business is located. The option is available for a year or a part of the
year in which he gets himself registered.
What are the other
advantages of
composition scheme?
(i) Simple return form to cover longer return period
(ii) No need to maintain any statutory records as prescribed under the Act except
records for purchase, sales, inventory.
What are the other
consequences of
composition scheme?
1) On the date of exercise of option, the dealer should not have the stock of goods
which were brought outside the state
2) Once the option is exercised, the dealer should not have interstate purchases
3) The Input tax credit on the stock lying with the dealer as on the date of
exercising the option has to be reversed
4) If the Input tax credit is not availed, it wont be deducted from the cost. As a
result the cost to the consumer will increase. The VAT chain gets affected
because of composition scheme.

Observation (vi) Explanation Disadvantage


Composition scheme is neither
a win- loss nor win-win situation
to buyer and seller but it is a
loss-loss situation.
The seller cannot avail input tax
credit in respect of input tax paid
as a result he will be losing the
input tax credit on purchases
made by him. The seller will not
be able to pass on the benefit of
input tax credit, which will add to
the cost of the goods

Breakage of VAT chain
The buyer shall not get any tax
credit for the purchases made by
him from the composition scheme
dealer. Therefore as soon as the
dealer opts for the composition
scheme, the VAT chain will be
broken and the benefit of tax paid
earlier will not be passed on to the
subsequent buyer.

Mr. A, a retailer who keeps no inventories, presents the following expected
information for the year
1) Purchase of goods = Rs. 20,00,000 (VAT @ 4%)
2) Sales (at fixed selling price inclusive of all taxes) = Rs. 30,00,000 (VAT
on sales @ 4%)
Discuss whether he should for composition scheme if composite tax is 1% of
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turnover.
Expenses of keeping detailed statutory records required under the VAT laws will
be Rs. 50,000 p.a which shall get reduced to Rs. 20,000 if composition scheme is
opted for. Other expenses are Rs. 3,00,000 p.a
Option (i) Mr. A can take the input tax credit available and may not opt for composition scheme.
Option (ii) Mr. A can opt for composition scheme but the input tax credit not available.
Computation of Net VAT payable under both the options:
Normal VAT Composition
scheme
Gross Turnover (Incl. of all taxes) 30,00,000 30,00,000
VAT payable 30,00,000 X 4/104
= 1,15,385
30,00,000 X 1%
= 30,000
Less: Input tax credit availed (20,00,000 X 4%) (80,000) N.A
Net VAT payable 35,385 30,000

Cost Benefit Analysis of Composition Scheme:
Costs of opting for Composition scheme Benefits of opting for Composition scheme
1. Saving in Net VAT payable = 5,385
2. Saving in administration cost = 30,000

Conclusion: As the Benefits are more than cost, it is advisable for Mr. A to opt for composition scheme. The
decision will change if he has a huge balance of Input tax credit.

Consequences of Non-registration:
A dealer cannot carry on the business unless he is registered and olds a valid registration certificate
Attracts default penalty
Forfeiture of eligibility to set off all input tax credit related to the period prior to the registration
The dealer will be compulsorily registered by the commissioner and the tax due shall be assessed on the
basis of evidence available with the commissioner.
Cancellation of Registration:
When business is discontinued
When business is disposed off
When business is transferred to new location
When annual turnover of the dealer falls below the specified limit
In all the above situations dealer has to surrender original registration certificate, pay the tax up to date.
Tax Payers Identification Number (TIN):
11 digit numerical code
Every registered dealer will obtain this
First 2 digits: State code as used by the Union ministry of company affairs
Next 9 digits: Code allotted by each state.
Maintenance of Records:
Value and quantity of Purchases, Sales, Goods manufactured, goods disposed of otherwise by sale,
Inventory, Exempted sales
Copies of all Invoices, Debit or credit notes in serial number
Details of amount of tax charged on each sale
Details of Output tax, Input tax.
Details of availement and utilization of Input tax credit, balance carried forward.
All such records shall be maintained for the period prescribed under the state laws and failure to keep these records
attracts penalty.
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VAT INVOICE:
Every registered dealer whose turnover exceeds the specified amount should issue a serially numbered tax
invoice to the purchaser.
The dealer should keep a counterfoil (or) duplicate of such tax invoice duly signed and dated.
Invoice is a crucial document which needs to be preserved carefully by the purchasing dealer. In case the
original invoice is lost (or misplaced, a duplicate authenticated copy must be obtained from the issuing
dealer. It is so because of the following reasons
a) Tax credit can be availed only on the basis of Invoice
b) The Invoice assists in performing audit and investigation activities effectively
c) With the help of invoices, tax evasion can be easily traced out.
d) The VAT chain mainly depends on the availment and utilization of VAT credit. If there is no VAT invoice,
the cascading effect on taxes cannot be prevented
Format of VAT Invoice:

System of cross checking under VAT:
Under this system, dealers may be asked to submit a list of sales/ purchases made by them. A computerized system
of cross-checking is being worked, which involve comparing the VAT returns/ documents submitted to the VAT
authorities with the returns/ documents submitted to the other state level authorities as well as the central excise,
customs, service tax and Income tax authorities of the central government. This shall be possible only on the basis
of coordination between the tax authorities of state governments and that of central government.
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Returns and Assessment under VAT:
ASSESSMENT
Under VAT, there is no system of compulsory
assessment at the end of each year by the VAT
authorities. It is based on the presumption that, unless
otherwise proved, every dealer is honest
1. Self Assessment, where the VAT liability is computed
by the dealer himself while submitting returns
2. Deemed Assessment, where if no specific notice is
issued proposing departmental audit of the books of
account of the dealer within the time limit specified, the
dealer would be deemed to have been self-assessed on
the basis of the returns submitted by him
3. Scrutiny Assessment, where scrutiny is done in case
doubt arises of under reporting of transaction or
evasion of tax.
Accounting Entries for VAT:
For purchase of Raw material Raw material A/C Dr.
Input tax credit A/C Dr.
To Bank A/C
For purchase of capital goods Plant and Machinery A/C Dr.
Input tax credit A/C Dr.
To Bank A/C
On sale of Finished goods Bank A/C Dr.
To Sales A/C
To VAT payable A/C
On payment of VAT VAT payable A/C Dr.
To Input tax credit A/C
To Bank/Cash

Merits and Demerits of VAT:
Merits of VAT Demerits of VAT
1. Avoids cascading effect of tax
2. Reduction in prices to the consumers
1. Regressive in nature, as it is imposed on ultimate
consumer and tax paid by poor will be higher percentage
than rich.
This can be avoided by taxing necessities at a lower rate.
3. Very simple and easy to calculate tax, as no
litigations are involved.
2. Higher administration cost due to increased number of
dealers
4. Transparency, as each of them knows what
they are paying and government also knows the
exact amount of tax collected at each stage.
3. No matching of VAT rates between purchases and sales
due to varying VAT rates
5. Self assessment which reduces corruption in
tax departments
4. No integration of state VAT with Central VAT which makes
no credit on interstate purchases.
6. Tax evasion is difficult 5. Detailed records even by small traders
7. Stable revenue collection, as credit is given only
on production of evidence

8. Better accounting system
9. VAT system is neutral as to choice of seller.

RETURNS
Returns are filed monthly/ quarterly/annually as
per the provisions of state laws
The returns will be accompanied with challans
evidencing payment of VAT and with requisite
details of input tax and output tax, inventory
details etc.,
Every return furnished shall be scrutinised
expeditiously. If any technical mistake is detected
on scrutinizing, the dealer shall be required to pay
the deficit appropriately.
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VAT Audit:
Compulsory VAT audit or External audit: If the turnover of a dealer exceeds the specified limit fixed by the state
government, then the accounts of such dealer should be audited by a Chartered Accountant (CA) and has to submit
a report in prescribed form within specified period.
VAT audit is required due to











Departmental Audit or Selective audit: Audit by the authorities of the VAT department which is not mandatory but
is resorted to in selective cases. The departmental audit is provided with a view to promote compliance with the
provisions of VAT law.
If any tax evasion is detected in the course of audit, the previous records of the concerned dealer may be taken up
for audit. The audit is conducted in the following manner.


VAT and sales tax incentives:

Any exemption is against the principles of VAT because it breaks the VAT chain. The Input tax credit is not available
for the dealers effecting exempted sales and similarly the buyers of such goods cannot avail any credit. The
Empowered committee of state finance ministers has given the power to decide the exemptions to the states, as
exemptions depend on the local conditions prevailing but has specified some conditions before giving exemptions:
Authorised officers of the department will visit the business place of the
dealer to conduct the audit. The audit may also be arranged in the office of
the auditor.
The Information will be gathered form various agencies such as
suppliers, income tax department, excise and customs department
etc.,
Examining the true and fair view of the books of accounts and the
information available
Types of Incentives
Exemption from Tax
Not required to pay tax
on purchase and sales
Goods become
cheaper
VAT chain gets breaked
Deferment of liability
Normal provisions for collection
of taxes
Not required to deposit tax
immediately
Will be deposited after certain
perod there by enjoying Interest
benifit
Remission of tax
Tax will be collected
but is not required to
be paid
Refund of Input tax
credit is available
Ignorance about VAT among
trading community
Lack of resources with
department to educate
tax payers which can be
overcome by qualified
professionals.
No conflict between the
methods and VAT payable
will be same
Effective self
assessment by
dealer
VAT audit involves
minute verification by
independent auditor
A check over tax
evasion
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The quantum and period of incentive should not be increased
VAT chain should not be affected. (Only under deferment or remission mode it can be achieved)
The department should be able to tract transaction to avoid tax evasion.
VAT and Works Contracts
Works contract means a contract for carrying out any work which, includes assembling, construction,
building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement,
repair or commissioning of any movable or immovable property. [Sec. 2(ja) of CST Act]
The works contract is deemed sale, which involves the transfer of property in goods (whether as goods or
in some other form) involved in the execution of a works contract. Under State VAT Laws works contract
transactions too shall be subjected to VAT within the purview of the entry 54 of the List II of the Seventh
Schedule of the Constitution.
Transfer of property in goods (whether as goods or in some other form) involved in execution of works
contract is covered under Deemed sales and is liable to sales tax.

Constitutional validity of levy:
Article 366(29A)(b) a tax on the transfer of property in goods (whether as goods or in some other form)
involved in the execution of a works contract;

Guidelines to ascertain Works contract:
1. There must exist an individual works contract (Divisible contracts are outside the scope)
2. Goods must be involved in the execution of works contract
3. Transfer of property in goods must pass as goods or in some other form. Form of goods has no relevance
(may have a relevance for determination of rate of tax).
4. Property in goods must pass during the execution of works not before or after the execution of works.
5. Some work has to be done on the property of the contractee by the contractor.
6. Pure labour contracts or service contracts are outside the purview of the sales tax/VAT law.
7. If during the execution of works contract, goods are consumed and their identity is lost then no transfer of
property occurs in those goods.
8. There must be a dominant intention to effect the transfer of property in goods in execution of works
contract. However, even if the dominant intention of the contract is rendering of a service and in that
process if there is a transfer of property in goods, the contract will amount to a works contract.
Taxable Turnover for Works contract
Taxable turnover = Value of goods the property in which has been transferred in the course of execution of works
contract.

Value of goods
Addition method
Cost of acquisition of goods
(+) Profit margin prevalent in trade
(+) Cost of transfering the property in goods
(+) All other expenses till goods passes to
contractee
(+) Cost of conversion, if property passes to
contractee in some other form.
Deduction method
Contract price
(-) Labour and other service
charges not relating to goods
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Note: Dealers can make use of the standard rate of deduction provided in the state VAT laws for deducting labour
and other like charges in the contract.

Composition scheme for VAT on Works contract:
1. Composition scheme applicable for each works contract and is optional
2. Composite tax is calculated on the total value of the contract
3. before opting for the composition scheme the contractor must analyse the expenditure components like
labour charges, hire charges for machinery and tools, cost of consumables, cost of establishment, profit
element, value of local tax-suffered goods, turnover of sub-contractors, value of exempted goods etc.
because all these are included in the total contract value which is subjected to Composite tax.
4. Input tax credit on Inputs and capital goods used in works contract is not available
Illustration:
During the financial year 2010- 2011 a contractor has been assigned works contract relating to construction of
an office building for Rs. 20 lakhs by an awarder in order to execute works contract. The contractor makes
following purchases:
4% taxable items
Goods Amount (Rs.) VAT paid (Input tax)
Bricks 50,000 2,000
Iron and Steel 1,50,000 6,000
Total 2,00,000 8,000
12.5% taxable items
Goods Amount (Rs.) VAT paid (Input tax)
Grit 50,000 6,250
Sand 80,000 10,000
Masonry Stone 1,45,000 18,125
Flooring stone 1,40,000 17,500
Cement 3,75,000 46,875
Timber 75,000 9,375
Sanitary Goods 25,000 3,125
Electric goods 25,000 3,125
Paints 25,000 3,125
Total 9,40,000 1,17,500

In consideration of execution of the works contract the contractor receives Rs.20 lakhs from the awarder against
supplies and charges for labour and services. The contractor maintains proper books of accounts, which show
following particulars:
Gross Turnover (GTO) Rs.20,00,000
Tax liability
VAT Rate
When output tax can
be computed
seperately for each
item of goods
Aggregate of output tax
computed seperately for
each item of goods/ material
when output tax
cannot be computed
seperately for each
item of goods
Total value of goods is
subjected to single rate of
tax.
Composition Rate
Entire value of contract X
Composite rate of tax
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Eligible deductions of charges towards labour and services (Rs. 5,00,000)
Taxable Turnover (TTO) Rs.15,00,000
Division of T.T.O.
Supply of 4% taxable goods Rs. 2,63,000
Supply of 12.5% taxable goods Rs.12,37,000

Now to calculate net VAT payable first find out input tax, output tax and input tax credit, which comes as under:
INPUT TAX:
Tax paid on purchases of 4% taxable goods Rs. 8,000
Tax paid on purchases of 12.5% taxable goods Rs.1,17,500
Total Input tax credit Rs.1,25,500
OUTPUT TAX:
Tax on supply of 4% taxable goods
(Rs. 2,63,000 X 4%)
Rs. 10,520
Tax on supply of 12.5% goods
(Rs. 12,37,000 X 12.5%)
Rs. 1,54,625
Tax liability Rs. 1,65,145

Net VAT payable = Rs. 1,65,145 Rs. 1,25,500 = Rs. 39,645.
VAT and Hire purchase

What is hire purchase?
Under this transaction, the hirer acquires the property (goods) immediately on signing the hire purchase agreement
but the ownership or title of the same is transferred only when the last instalment is paid.

An agreement under which goods are let on hire and under which the hirer has an option to purchase them in
accordance with the terms of the agreement and includes an agreement under which:
(i) The owner delivers possession of goods thereof to a person on condition that such person pays the agreed
amount in periodic installments.
(ii) The property in the goods is to pass to such person on the payment of the last of such installments, and
(iii) Such person has a right to terminate the agreement at any time before the property so passes.
Definition as per Hire purchase Act, 1972
Constitutional validity of levy:
Article 366(29A)(c) - "A tax on the delivery of goods on hire-purchase or any system of payment by instalments."
Though the option to purchase is exercised only at the end, by virtue of this sub clause State legislations have been
able to deem that a sale takes place on the date of delivery of the goods on hire purchase.
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Taxable event for Hire purchase transaction:
Delivery of goods under hire-purchase or instalment sale has to be a physical or actual delivery of goods.
Consequently, the taxable event takes place in the State in which the goods are actually delivered and hence
subject to tax under the VAT law of such State.
The provisions of the State VAT laws as applicable to normal sales are equally applicable to hire-purchase and
instalment sales.


FAQs under VAT and Hire purchase:

1. Should the tax be paid again at the time of conclusion of sale?
It depends on the respective state VAT laws.

2. A company is purely engaged in financing activity for hire purchase. The transaction between the
company and hirer is purely financial nature. Is the company covered under VAT provisions?
The Supreme Court in the case of Sundaram Finance Ltd. V. State of Kerala held that, intention of the
company in obtaining hire purchase and other agreement was to secure return of loan advanced to the
customer and there was no real sale of vehicle intended to the customer by the company. The Court
therefore held that there was no sale of the vehicle by Sundaram Finance Ltd. to the hirer and so it was
outside the purview of sales-tax law.

3. Whether Input tax credit is available to the hirer?
The hire purchase transaction is at par with normal sale transaction. Therefore normal provisions relating
to input tax credit will apply. However, some States have provided for prorata credit.

4. The hire purchase price includes an element of finance charges which in nature of service provided by
financier. Whether deduction is available in respect of finance charges from the hire purchase price for
payment of VAT?
While some of the State VAT legislations have provided for deduction of such interest or finance charges in
arriving at the sale price to be treated as turnover in a hire purchase transaction, some States have not
done so.

5. VAT on hire purchase is levied on the date of delivery of property (goods) to hire purchaser by hire
vendor. If the said goods are returned, will that tax paid be refunded by the state Government?
Many States provide the time limit for granting the claim of goods returned.
Therefore, if the goods are not returned during that specified period, no benefit will be available.
VAT and Lease transactions
Lease is chargeable to tax by virtue Article 366(29A)(d) of the Constitution of India. This is a tax on the
transfer of right to use any goods for any purpose (whether or not for a specified period) for cash,
deferred payment or other valuable consideration.
The taxable event is the transfer of right to use any goods and hence immovable property is not covered.
The taxable turnover means the valuable consideration paid or payable for any sale in a given period.
Certain States have provided for deduction of interest or finance charges for the purpose of determination
of taxable turnover.
Lease of an asset in the course of inter-State trade cannot be subject to VAT.
Transfer of right to use does not presuppose ownership of the goods. A sub-lease of an asset also is
taxable unless specifically exempt under the State VAT Law.
Sale of leased asset after the end of the lease period is taxable as a normal sale.
The maintenance of leased asset involving supply of materials for maintenance/ repair by the lessor will not
amount to a works contract as there would be no transfer of property in such materials to the lessee.
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Hence, there should would be no VAT on the value of materials supplied during maintenance/repair of the
leased asset.
The assets given on lease will be generally capitalized by the lessor in his books and will be treated as
capital assets. Thus, provision relating to input tax credit on capital goods will apply.
The lessor would pay VAT at the time of procurement of goods. However, liability to pay VAT on lease
rentals will be spread over the tenure of the lease. Therefore, some States have provided for utilization of
input credit for paying output tax only over the entire period of lease

1. What is taxable Event for Levy?

The taxable Event is the transfer of right to use the
machine
(Note: On Immovable property given on lease VAT is not
levied)
2. What is the Value for the purpose of Levy?

Taxable Turnover = Consideration for the lease + Other charges
(-) Interest or other finance cost.
3. Taxable Turnover:
P.V of Lease Rentals discounted at a discount rate
applicable to the leasing company
= 3,00,000 X PVCF @ 10% for 10 years
= 3,00,000 X 6.144
= 18,43,200
4. As the lease transaction is spread over a period of 10 years, is
the leasing company required to pay VAT on full value?
Since the lease rental is spread over the lease term, therefore
the states have chosen to tax the lease transactions over the
lease term. Therefore the taxable turnover should be computed
for each year and accordingly VAT shall be payable
Taxable turnover p.a = 18,43,200/10 = 1,84,320.
5. What is the position of Input tax Credit?
The VAT paid on purchases is available as Input tax credit
and since the VAT liability is spread over the lease term,
the input tax credit is allowed to utilize in installments
spread over the lease term (MVAT has allowed the whole
credit immediately)
Input tax credit p.a = 1,50,000/10 = 15,000

What is the Net VAT payable?





INDIRECT
TAX LAWS
Common
Topics under
Excise,
Customs &
Service tax
Tharun Raj
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Table of Contents
Show cause notice for short payment of duty: ............................................................................. 169
FAQs on Show cause notice: .................................................................................................. 169
Recent case laws on Demand and adjudication under Excise and customs: .......................... 172
Interest on delayed payment of duty ............................................................................................ 172
Penalty in case of short levy (or) non levy (or) short payment (or) erroneous refund (Revised
w.e.f 2011) .......................................................................................................................................... 173
FAQs on Interest and Penalty ................................................................................................ 174
Liability under Indirect taxes to be first charge .......................................................................... 175
Power of Search and Seizure ....................................................................................................... 175
Refund of duty under excise ......................................................................................................... 175
FAQs on Refund: .................................................................................................................... 176
Recent case laws on Refund under Excise and Customs: ........................................................ 178
Non recovery of duties not levied or short levied as a result of general practice ....................... 179
Duties/Tax collected must be deposited with the Central Government ....................................... 179
Interest on the amounts collected in excess of duty ..................................................................... 180
Provisional attachment to protect revenue in certain cases ........................................................ 180
FAQS on Order: ..................................................................................................................... 182
Adjudication:................................................................................................................................ 182
Appeals: ....................................................................................................................................... 183
Forms under Appeals:.............................................................................................................. 183
FAQs on appeals and revisions: ............................................................................................. 184
Summary of Appeals ................................................................................................................ 187
FAQs on monetary limits for filing appeals: .......................................................................... 189
Recent case laws on appeals under excise, customs and service tax ................................... 189
Advance Ruling ............................................................................................................................ 190
FAQs on Advance Ruling: ...................................................................................................... 190
Case laws on Advance Ruling: ................................................................................................ 192
Settlement commission: ................................................................................................................ 192
FAQs on Settlement commission: ........................................................................................... 193
Case laws on settlement commission: ...................................................................................... 195


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Common Concepts under Excise
and Customs

Show cause notice for short payment of duty:
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11A Section 28 73


FAQs on Show cause notice:
1. Who can issue show cause notice?
Show cause notice should be approved and signed by officer empowered to adjudicate the case. The
authority to adjudicate the case are:
When demand of duty/CENVAT credit is below ` 1 lakh Superintendent
When demand of duty/ CENVAT credit is between ` 1 lakhs and `
5 lakhs
AC/DC
When amount is between ` 5 and ` 50 lakhs Additional commissioner/ Joint
commissioner
When the amount is > ` 50 lakhs Commissioner

Issue of show cause notice or Demand
Adjudication
Confirmation of demand/ order
Appeal
If Excise Duty/Customs duty/Service tax has not been
levied or paid (or) has been Short levied or short paid
(or) Erroneously refunded (It may be for any reason)
Central excise officer serve show cause notice
Opportunity of personal hearing will be given to the
person
Demand will be confirmed (i.e. Excise officer/Customs
officer will determine the duty payable) by issue of order
giving reasons
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2. What are the requirements of show cause notice?
Demand of duty or penalty on a person cannot be confirmed unless a show cause notice is issued to him.
A simple letter asking to pay duty is not a show cause notice
It should be issued within the specified time limit or the extended time limit, as the case may be. A notice
issued after the specified or extended time limit becomes time barred and void.
A show cause notice issued after payment of duty/tax is void
Show cause notice must be in writing
It should be specific and not vague.
Amount demanded must be specified (Duty finally determined cannot exceed the amount shown in SCN)
It should state the nature of contravention and provisions contravened
If penalty is proposed to be imposed, this should be mentioned in the notice
It should inform and clearly state the charges/ allegations and grounds.
If SCN is issued in one ground, demand cannot be confirmed on other ground
The show cause notice should ask the person, why he should not pay the amount specified in the
notice or why the penalty should not be imposed on him

3. What is the time limit for serving show cause notice?
Situation Time limit
Duty of Excise/Duty of Customs/Service tax not levied or not paid or has
been short levied or short paid or erroneously refunded For OTHER
REASONS
Within 1 year from Relevant
date*
Duty of Excise/Duty of Customs/Service tax not levied or not paid or has
been short levied or short paid or erroneously refunded In case of
fraud; collusion; any wilful mis-statement; suppression of facts;
contravention of any provision with an intention to evade payment of
Excise duty/Customs duty/Service tax.
Within 5 years from Relevant
date*
* The period during which there was any stay by an order of the court or tribunal in respect of payment of
such duty shall be EXCLUDED.

4. What is Relevant date for calculating the time limit?
In case of Excise:
Case Relevant date
(i) If return is filed as per provisions of law The actual date of filing return
(ii) If return was required to be filed, but was not filed The date on which return should have been filed
(iii) In any other case The date of payment of duty
(iv) Provisional assessment Date of adjustment of duty after final assessment
(v) On account of erroneous refund Date of such refund
Note: Demand can be raised only after assessment. In case of provisional assessment no demand can be
raised.
Special points on computation of time limit:
The first day is to be excluded and last day should be included
No time limit in respect of demands not covered U/S 11A
Where the service of notice is stayed by order of court, the period of such stay can be excluded.

In case of Customs:
Case Relevant date
(i) Where duty is not levied or interest is not charged The date on which proper officer makes an order for
the clearance of goods
(ii) Where duty is provisionally assessed Date of adjustment of duty after final assessment
(iii) On account of erroneous refund Date of such refund
(iv) In any other case The date of payment of duty
In case of Service Tax:
Case Relevant date
(i) If return is filed as per the Act or Rules The actual date of filing return
(ii) If return was required to be filed but not filed The date of which return should have been filed
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(ii) Where service tax is provisionally assessed Date of adjustment of service tax after final
assessment
(iii) On account of erroneous refund Date of such refund
(iv) In any other case The date of payment of service tax

5. To whom show cause notice is given?
Liability to pay duty is on manufacturer and duty cannot be demanded from buyer, stockist or consumer.
Therefore, SCN is given to manufacturer only.
In case of Normal goods To the manufacturer of goods irrespective of the ownership of such
goods.
In case of Seized goods To the owner as well as the person from whom the goods were
seized.

6. Will the SCN be issued if Duty/Tax is paid before issue of SCN?

*Interest in accordance with Sec. 11AB for Excise, Sec. 28AB for Customs and Sec. 75 for Service tax.

7. Sec. 11A specifies Erroneously refunded. What is the refund covered in this case?
Refund includes rebate of excise duty paid on goods exported from India or rebate on excisable material
used in manufacture of goods exported out of India.

8. Can a show cause notice cum demand be issued at the same time?
Protective demand means issue of show cause notice cum demand in time, so that it does not get time
barred.
On receipt of audit objections, protective demands should be issued in time, before they get time barred
CBE&C circular No. 210/28/81

9. The Assessing officer has issued a show cause notice within 5 years from the relevant date (i.e. for cases
involving fraud; misrepresentation; wilful misstatement etc.,). On appeal, the CESTAT concluded that the
notice issued is not sustainable as the reasons for which SCN has been issued (i.e. Fraud,
misrepresentation etc.,) could not be established against the person to whom the SCN was issued. How
the AO can deal with this issue?
w.e.f 1/4/2011, Where any appellate authority or tribunal or court concludes that the notice issued for the
charges of fraud, collusion etc., is not sustainable as it cannot be established against the person to whom it
is served, then AO shall determine the duty/tax payable by such person for the period of 1 year, deeming as
if the normal SCN was issued (i.e. SCN issued for other reasons)
Amount of Duty/Tax along with the interest* is paid by the
assessee before SCN is served to him and intimated in writing to
department
If Duty/Tax along with interest is
fully discharged
On receipt of such information,
the excise officer shall not serve
any SCN
If assessing officer is of the opinion that
Duty/Tax along with interest is not fully
discharged
The Assessing officer shall proceed
to issue a SCN for the amount which
falls short within 1 year from the date
of receipt of information
Either - a) On his own ascertainment or
b) As ascertained by the Assessing
officer
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10. An assessee paid duty on exempted parts, availed CENVAT credit and reversed it when utilising it for
exempted final product. The so called method followed by assessee is revenue neutral (i.e. There is no
revenue loss). Can demand be issued in that case?
The procedure followed was revenue neutral and hence duty is not payable. However penalty was held
valid for violation of rules.

11. What is the time limit for confirmation of demand?
Situation Time limit
Normal cases (i.e. other than fraud, collusion etc.,) Within 6 months from the date of issue of SCN
In case of fraud, collusion, wilful mis-statement, suppression
of facts, contravention of any provision with an intention to
evade payment of duty
Within 1 year from the date of issue of SCN
Note: Most of the FAQs are common for Excise, Customs and service tax.

Retrospective amendment in sec. 28 of customs Act, 1962
Sec. 28 has been amended retrospectively to empower various officers appointed under customs to issue show
cause notices. The officers of customs empowered in this regard include:
Officers of commissionerates of customs (preventive)
Director general of revenue (Intelligence)
Director general of central excise (Intelligence)
Recent case laws on Demand and adjudication under Excise and customs:
Case Judgment
1. Hans steel rolling mill V.
CCE 2011 (SC)
Time limit under sec. 11A is not applicable to recovery of dues under compounded levy scheme as
it is a comprehensive scheme separate from normal provisions of Excise Act, 1944
2. CCE V. Accrapac P. Ltd.
2010 (Guj.)
Failure to disclose a fact of manufacture which is required to be disclosed under the applicable
regulations does not amount to suppression of facts and does not invoke extended period of
limitation.

Arrears of duty under section 11A can be paid by utilizing the CENVAT credit which has accrued subsequent to the
period to which the arrears pertained. - Circular No. 962/05/2012
As per the proviso to rule 3(4) of the CENVAT Credit Rules, 2004, while paying duty of excise or service tax,
as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last
day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the
quarter, as the case may be.
The above restriction under rule 3(4) applies only to normal payment of excise duty, where duty for a
particular month or quarter is to be discharged by the 5
th
of the following month.
Unlike normal payment is made after self-determination of duty, under sec. 11A, duty is determined by the
central excise officer and the payment is mandated after such determination.
Therefore, the restriction on the utilization of the CENVAT credit is not applicable ot the demands
confirmed under sec. 11A
Interest on delayed payment of duty
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11AB Section 28AB Section 75

When interest shall be payable? In case any duty has not been levied or paid or has been short levied
or short paid or erroneously refunded.
Note: Such interest for late payment is payable even in cases of fraud, collusion, wilful misstatement or
suppression of facts or contravention of any provisions of Act or rules made there under.
What is the Rate of interest? 18% p.a (w.e.f 1-4-2011)
What is the period for which
interest payable?
In case of Excise:
FROM The date on which such duty becomes due (i.e. Date of removal
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of excisable goods)
TILL Date of payment of such duty
In case of Customs:
FROM The first day of the month following the month in which the duty
ought to have been paid or from the date of erroneous refund.
TILL Date of payment of such duty
When duty becomes payable
due to order/Instruction
issued by CBE&C, what is the
interest payable in such case?
If full amount of such duty is voluntarily paid by assessee within 45 days
from the date of issue of such order, instruction or direction, without
reserving the right to appeal against such payment then the assessee
shall be exempt from the payment of interest even if the duty was due
earlier.


Penalty in case of short levy (or) non levy (or) short payment (or)
erroneous refund (Revised w.e.f 2011)
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11AC Section 114A 78

When penalty shall
be levied?
Where any duty has not been levied (or) paid (or) has been short levied (or) short
paid (or) erroneously refunded by reason of fraud, collusion, wilful mis-statement and
suppression of facts or contravention of any provisions of the Act or rules with an intent
to evade payment of duty.
What is the amount
of penalty?
In case of Excise/Service Tax:
PENALTY, WHERE DETAILS OF THE TRANSACTIONS ARE AVAILABLE IN THE
SPECIFIED RECORDS
If Excise duty/Service Tax accepted by
assessee, in full or in part, is paid along
with interest before issue of SCN
1% p.m from the month following the
month in which such duty was payable
(or) 25% of such Excise duty/Service tax,
Whichever is LOWER
If Excise duty/Service tax is paid within 30
days from the date of communication of
order
[Note: In case of Service tax penalty is
also required to be paid within 30 days]
25% of such Excise Duty/Service tax

[The period of 30 days will be extended
to 90 days, if the value of taxable service
is 60 lakhs]
In any other case
[The notice has been served and
subsequent to that Excise officer is of the
opinion that the transactions have been
recorded]

50% of such Excise duty/Service tax
Penalty under Excise, Customs and Service tax
General Penalty
Excise - Rule 25, 26 & 27 of Excise Rules, 2002
Customs - Sec. 112 and 114
Service tax - Sec. Sec. 76 & 77 of FA, 1994
On account of fraud,
collusion etc.,
Excise - Sec. 11AC
Customs - Sec. 114A
Service tax - Sec. 78 of FA, 1994
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PENALTY, WHERE DETAILS OF THE TRANSACTIONS ARE NOT AVAILABLE IN THE
SPECIFIED RECORDS
Any case 100% of such Excise duty/Service tax
If the penalty is payable under this section, the provisions of sec. 76 shall not
apply
In case of Customs:
If customs duty accepted by assessee, is paid in
full or in part along with interest within 30 days
of receipt of notice
25% of the Duty
If customs duty along with penalty is paid within
30 days from the date of communication of
order of the proper officer
25% of the duty or Interest
In any other case 100% of the duty or Interest
Where any penalty has been levied under this section, no penalty shall be levied
under sec. 112 or sec. 114
Special points: Penalty shall be reduced to 25%, if duty, interest and penalty deposited within 30
days from the date of communication of order.
If the duty amount is subsequently increased/decreased in appeals, then such
benefit will be available only when such increased duty, interest and penalty
deposited within 30 days from the date of determination of increased duty.
FAQs on Interest and Penalty
1. On an appeal, CESTAT has modified the excise duty determined by the Excise officer. Whether interest
and penalty calculated on the modified amount or original amount?
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11A(12) and
11A(13)
Not specified under
Customs
Section 78(2)

Where the appellate authority i.e. Commissioner (Appeals) or CESTAT or Court
modifies the amount of duty/tax
Such modified amount is
less than the duty/tax
determined by Excise officer
Such modified amount is more than the
duty/tax determined by Excise officer
Penalty &
Interest
payable on
Modified amount of duty/tax In case of Excise:
Original amount as well as modified amount of
Excise duty
In case of Service tax:
Modified amount of service tax
Computation FROM the date on which
original amount of duty/tax
becomes due TILL the date of
payment of modified amount of
duty/tax
Under Excise:
In case of Original amount of duty FROM the
date on which it becomes due TILL the date of
order for modification.
In case of modified amount of duty FROM the
date of order in respect of such increased
amount TILL the payment of duty.
Under Service tax:
FROM the date on which it becomes due TILL the
payment of tax

Example An assessee has manufactured
goods on 1/8/2011. The duty has
not been paid. Excise officer
issued a SCN for Rs. 48,00,000
and on appeal, the duty payable
An assessee has manufactured goods on 1/8/2011
and removed on 5/9/2011. The duty has not been
paid on account of fraud. Excise officer issued a
SCN for Rs. 48,00,000 and on appeal, the amount
payable is modified to Rs. 55,00,000 on 5/3/2012.
CA Final
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is modified to Rs. 35,00,000.
Penalty = N.A (As the above non
payment is not on account of
fraud, collusion, wilful mis-
statement etc.,)
Interest = 18% p.a on Rs.
35,00,000 calculated from
5/9/2011 till actual date of
payment.
Penalty = 100% of duty payable (i.e. Rs.
55,00,000) [If duty along with interest and
penalty is paid within 30 days from the date of
such order, then reduced penalty of 25% is
applicable]
Interest = 18% p.a on Rs. 48,00,000 calculated
from 5/9/2011 to 5/3/2012 and on Rs. 55,00,000
from 5/3/2012 till actual date of payment

2. Is payment of interest mandatory even if not specified in the order determining duty?
When an order determining the duty/tax is passed by the central excise officer/customs officer, the person
is liable to pay the said duty/tax shall pay the amount of interest whether or not such amount of interest is
specified separately.

3. What is the procedure for recovery of interest not paid or short paid?
The above provisions related to issue of SCN is applicable to recovery of interest short paid or not paid or
erroneously refunded.
Liability under Indirect taxes to be first charge
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11E Section 142A Section 88
These sections create first charge on the property of a defaulter for recovery of the Central excise duty,
Customs duty and Service tax.
The above first charge is subject to the provisions of
Companies Act,
Recovery of Debt due to bank and financial Institution Act
Securitisation Act and
Reconstruction of Financial Assets and Enforcement of security interest Act
After paying the above mentioned dues, the dues under Indirect taxes will have the first charge
Power of Search and Seizure
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 12F Section 105 Section 82
Joint commissioner/ Additional commissioner of Excise/Customs or such other excise/customs officer as
notified by Board can authorize search and seize the premises, documents, books or things.
The said officer should have reason to believe that above goods liable for confiscation are secreted in any
place.
The provisions of search and seizure under Code of criminal procedure, 1973 is applicable (subject to the
modification that wherever the word Magistrate appears in the said code, the words commissioner of
central excise is replaced.
Hence, the police officer should submit copies relating to search to the commissioner of central excise
Refund of duty under excise
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11B Section 27 Section 83

Procedure under Excise:
Refund application should be filed in Form R (in duplicate) along with
Original GAR-7 challan/PLA/other document through which duty was paid
Proof that duty burden has been borne by the assessee and has not been passed to the customer
CA Final
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Other documents in support of refund claim E.g. Invoices
Stating the reasons thereof for refund claim in a statement/application.

Procedure under customs:

FAQs on Refund:
1. What are the reasons for which refund claim shall be made?
In case of Excise:
Excess payment of duty due to mistake
Forced by department to pay higher duty
Finalization of provisional assessment
Export under claim of rebate
Assessee paid duty under protest/ pre deposit of duty for appeal, and appeal decided in favor of
assessee.
Refund of CENVAT credit if final product exported
Unutilized balance in PLA.

In case of Customs:
If the importer or exporter has paid the duty and interest and has not passed in the incidence if
such duty and interest to any other person.
If the duty and interest is paid on imports made by an individual for his personal use.
If the duty and interest has been borne by the buyer and he has not passes on the incidence
thereof to any other person.
In case of drawback of duty payable under sec. 74 and sec. 75 of the customs Act, 1962.
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In case the refund is in respect of export duty.
In case the duty and interest is borne by any other such class of applicants as the central
government may by notification in the official gazette specifies and such classes of persons have
not passed on the incidence thereof to any other person.

2. What is the time limit within which Refund claim must be filed?
In case of Excise:
Refund claim should be lodged within 1 year from Relevant Date.
In case of customs:
In case of imports by an individual for his
personal use or import by government or by
any educational, research or charitable
institution, hospital
Within 1 year from Relevant date
In any other case Within 6 months from Relevant date

3. What is the definition of relevant date for calculating the time limit for filing refund claim?
In case of Excise:
Situation Relevant Date
a) Exports by sea or air When ship or aircraft leaves India
b) Exports by land Date on which goods leave Indian frontier
c) Export by post Date of dispatch of goods by post office to a place outside
India.
d) In case of compound levy scheme and
assessee pays the full amount of duty,
but later reduced by government
Date on which notification regarding reduction of rate is
published
e) Refund claim filed by purchaser Date of purchase of goods
f) Duty exempted by special order under
section 5A(2)
Date of issue of such order
g) Duty was paid on provisional basis Date of adjustment of duty after final assessment of duty
h) In any other cases Date of payment of duty

In case of Customs:
Situation Relevant Date
a) In case of refund claim by a person other
than importer
Date of purchase of goods by such person
b) In case of goods which are exempt from
payment of duty by a special order
Date of issue of such order
c) In case where duty is paid provisionally
under sec. 18
Date of adjustment of duty after the final assessment
thereof.
d) Where duty becomes refundable as a
consequence of judgment, decree, order
or direction of appellate authority,
Appellate tribunal or any court as the case
may be
The date of such judgment, decree, order or direction.
e) In any other cases Date of payment of duty
4. Who can file refund claim?
Assessee who has paid the duty (or)
Buyer on whom the burden of duty has been passed.

5. What is refund subject to unjust enrichment?
It is reasonable assumption that as and when a manufacturer pays excise duty, he will pass on the burden
immediately to the buyer of such goods.
In such a case, if refund is granted to him, he will be enjoying the benefit at the cost of buyer. It will not
be just and equitable. This is known as Unjust enrichment
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So, Refund shall be granted to manufacturer only if he proves that the duty liability has not been passed on
to the buyer or if buyer makes the refund claim, he has to prove that the burden has not been passed on to
the subsequent person.
In other words, the burden of proof is on the person who makes the refund claim.

6. What happens if the burden is passed on to the subsequent person?
In majority of the cases, it is not practicable to identify individual consumer and ay refund to him, at the
same time the duty cannot be retained by the government
In such cases the amount will be paid to consumer welfare fund. The fund so created shall be
utilized for payment to:
a) Any agency/organization engaged in consumer welfare activities for a period of 3 years, registered
under any law.
b) Any industry engaged in viable and useful research activity in formulation of standard mark of
products of mass consumption.
c) State government
d) Consumer for legal expenses incurred by consumer.

7. When the doctrine of unjust enrichment shall not apply?
In case of Excise:
Rebate of excisable goods exported out of India (If he had exported on payment of duty)
Rebate of excise on excisable materials used in manufacture of goods exported out of India (If
he has not availed CENVAT credit)
Refund of duty paid on inputs
Export duty
Duty drawback
In case of Customs:
If the importer or exporter has paid the duty and interest and has not passed on the incidence
of such duty and interest to any other person
If the duty and interest is paid on imports made by an individual for his personal use.
If the duty and interest has been borne by the buyer and he has not passed on the incidence
thereof to any other person
In case of drawback of duty payable under sections 74 and 75 of customs Act, 1962
In case the refund is in respect of the export duty as specified in section 26 (i.e. Goods Exported
and re-imported within 6 months) of Customs Act, 1962.
In case the duty and interest is borne by any other such class of applicants as the CG may by
notification in official gazette specify and such class of persons have not passed the incidence
thereof to any other person.

8. What is the time limit within which the duty must be refunded to the applicant?
Within 3 months from the date of application. If not so paid, interest @ 6% shall be payable to the assessee.
Recent case laws on Refund under Excise and Customs:
Case Judgment
1. Ranbaxy Laboratories
Ltd. V. UOI 2011 (SC)
Interest under sec. 11BB becomes payable on the expiry of a period of 3 months from
the date of receipt of the application for refund [But not from the date of order of
refund]
2. CCE V. Techno rubber
Industries P. Ltd. 2011
(Kar.)
The assessee is eligible to get refund on the basis of debit note issued by the buyer, as
the excess amount paid by assessee to department is not passed to buyer.
3. CCE V. Gem properties
P. Ltd. 2010 (Kar.)
When the assessee has paid excess duty and included it in the cost of production, it is a
case of unjust enrichment and refund shall not be granted unless otherwise assessee
proves that duty paid is not included in the cost of production. [Mere loss in the
financial year is not proof]
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4. CCus. Chennai V. BPL
Ltd. 2010 (Mad.)
Only CA certificate is not valid to substantiate refund claim as the said certificate is mere
evidence acknowledging certain facts.
5. Aman Medical products
V. CCus, Delhi 2010 (Del.)
Refund is available to the importer is he has paid higher duty by filing bill of entry even
though the payment is not in pursuance of an assessment order.
6. Narayan Nambiar
Meloths V. CCus 2010
(Ker.)
Refund is available on the basis of attested copy of GAR-7 challan also [No need to file
original GAR-7 challan]
Non recovery of duties not levied or short levied as a result of
general practice
Central Excise Act, 1944 Customs Act, 1962
Section 11C Section 28A

Who has the power to
exempt?
CG has the power to exempt from such duty or excess duty through notification in
official gazette having regard to the interest of industry.
When such exemption
shall be granted?
The CG is satisfied that
a) The goods in question were/are liable to duty of excise but according to
general practice the duty of excise was/is not being levied on such goods.
b) The goods in question were/are liable to a higher amount of duty but according
to general practice the excise duty was/is being levied at a lower rate.
Despite general practice, if
such duty is deposited,
will the refund be
available?
Yes, in accordance with the refund provisions within 6 months from the date of issue
of notification to exempt such goods
Duties/Tax collected must be deposited with the Central
Government
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11D Section 28B Section 73A

What is the obligation
covered under the said
section?
The following persons should pay the duty/tax so collected immediately to the credit
of central government.
A person who is liable to pay duty under the respective Acts or Rules made
there under.
A person who has collected any amount in excess of duty assessed or
determined and paid on any excisable goods from the buyer of such
goods/Any person in any manner as representing duty of excise
A person who has collected any amount as representing duty of excise on any
excisable goods which are wholly exempt or chargeable to nil rate of duty.
When the said duty/tax
must be deposited?
The sections didnt specify the time limit but used the words FORTHWITH which
means that immediately on the respective due dates.
What if the duty/tax
collected is not deposited?
The central excise officer may serve a SCN on the person liable to pay such amount.
After considering the representation if any made by the person on whom the notice
is served, the central excise officer shall determine the amount die from such person
(The amount should not exceed the amount as specified in SCN) and thereupon such
person shall pay the amount so determined.
Is there any remedy to the
person who has borne the
liability of the duty/tax
(i.e. Buyer or Service
provider)
The amount paid to the credit of the central government under this section shall be
adjusted against the duty of excise/service tax/customs duty payable by the person
on finalization of assessment.
The amount of surplus, if any shall either be credited to the consumer welfare fund
or shall be refunded to the person who has borne the incidence of such amount.
CA Final
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How the person can get
the refund?
He has to claim for refund in the proper refund application within 6 months from the
date of issue of public notice by AC for the refund of such surplus amount.
Interest on the amounts collected in excess of duty
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11DD N.A Section 73B
When the amount is collected in excess, it should be deposited into the governments account on the due date, if
not interest shall be payable as follows:
In case of Excise 15% p.a FROM The first day of the month succeeding the month in
which the amount ought to have been paid
TILL The actual date of payment.
In case of Service tax The value of
taxable services provided during a
financial year > 60 lakhs
18% p.a FROM The first day of the month succeeding the month in
which the amount ought to have been paid
TILL The actual date of payment.
In case of Service tax The value of
taxable services provided during a
financial year 60 lakhs
15% p.a FROM The first day of the month succeeding the month in
which the amount ought to have been paid
TILL The actual date of payment.
Provisional attachment to protect revenue in certain cases
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 11DDA Section 28BA Section 73C

During the pendency of any proceeding u/s 11A or u/s 11D, the central Excise officer may for protecting the interests
of revenue, order provisional attachment of property belonging to any person to whom notice is served in the
prescribed manner. Attachment of property is permissible u/s 11DDA, if SCN is given in the following situations:
Sec. 11A a) Duty of excise has not been levied or paid
b) has been Short levied or short paid
c) Erroneously refunded
In case of fraud, collusion, wilful misstatement and suppression of facts or
contravention of provisions with intent to evade payment of duty.
Sec. 11D Duty collected from buyer must be paid immediately (forthwith) to the
credit of central government (If not, then SCN issued)
The excess amount of duty collected from buyer must be paid immediately
(forthwith) to the credit of central government (If not, SCN issued)

The procedure is as contained in CBE&C circular No. 874/12/2008.


CA Final
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Special points:
1) The period of six months can be extended with written permission of chief commissioner but the total
period cannot be more than 2 years
2) The provision should be resorted only when duty involved is more than 25 lakhs
3) Personal property cannot be attached
4) Attachment should not hamper the business of assessee
5) Property which is exempt from attachment under code of civil procedure shall not be attached
6) Movable property should be attached only if immovable assets are not sufficient.
7) Where an application for settlement of case is made to the settlement commission, the period
commencing from the date on which such application is made and ending with the date on which an order
of acceptance or rejection of application is made shall be excluded from the period above [This exclusion is
not applicable in case of service tax]

Procedure for passing order by adjudicating authority:


Note:
1. In case of charge of clandestine removal (Removal of goods done secretly) (or) Wrong classification or
under valuation, burden of proof is on department.
2. If a statement of a person is relied upon, opportunity of cross examining the person must be given if
demanded. If such opportunity is not given, the statement cannot be relied upon Kalra Glue factory V.
Sales tax tribunal.


Issue of show cause notice
Assessee has to give reply, by presenting his case before adjudicating
authority (Within one month)
Assessee shall produce supportive evidence and be allowed examination
and cross examination of witness.
To decide the quantum of demand, determination of duty is necesary.
Hence assessee can raise dispute regrding the following:
(i) Rate of duty when duty is demnaded, even if he had not raised it
earlier
(ii) He can callenge classification, even if he had not challenged it earlier
(iii) He can raise dispute about correct determination of 'Value'
As per the principles of natural justice, the adjudicating authority shall give
opportunity of personal hearing to a party in proceeding
Adjudicating authority may issue
order
Adjudicating authority can give time to
parties and adjourn the hearing for
reasons to be recorded in writing.
Maximum 3 adjournments can be
granted during the proceeding
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FAQS on Order:
1. What is the time limit for passing order?
CBE&C circular No. 732/48/2003
Normal cases Within 5 days after personal hearing
Special cases and for certain reasons Within 15 days or at most within 1 month after personal hearing.

2. Who has to pass the adjudicating order? Can an officer other than the officers with whom personal
hearing has been given, pass the order?
No, Same officer who has given personal hearing should pass the order. If he is transferred before
adjudication order is passed, new officer should give fresh hearing Bhagirath Iron V. CCE

3. What are the requirements of order?
Commissioner must himself quantify the duty payable with assistance from departmental officers and
after hearing the appellant Nihon Electronics V. CCE
Order must be based on points alleged in show cause notice. An order based on point not alleged in
show cause notice is not sustainable.
It is a principle of natural justice that an order confirming demand mentioned in SCN must be with
reasons

4. An adjudicating authority has issued an order. Can he issue supplementary order or can he make
additional demand?
Once adjudicating authority issues an order, he can only correct clerical mistakes or error apparent on
record but cannot issue supplementary order or additional demand. The order once signed is final, even if
not communicated to party.
Adjudication:
The following list of FAQs explain the concept of adjudication.
1. What is adjudication? Adjudicate means to hear or try and decide judicially and adjudication means
giving a decision.
2. What happens after
adjudication?
An adjudication order shall be passed by the adjudicating authorities
3. Who has power to pass
adjudication order?
Adjudicating authority has power to pass adjudication order.
Adjudicating authority means any authority competent to pass any order or
decision under the excise Act, 1944. Hence the excise authorities except
commissioner (Appeals) and CBE&C comes under adjudicating authority
4. Are they bound by any
trade notice or instructions
of superiors?
No, they are quasi judicial authorities
5. Is any adjudicating
authority competent to pass
any adjudication order? i.e.
for any amount of duty.



No, the monetary limits has been specified under CBE&C circular No. 24/2011.
Commissioner No monetary limit
Additional commissioner/Joint
commissioner
Between 5 to 50 lakhs
AC/DC Between 1 lakh to 5 lakhs
Superintendent Upto 1 lakh*
* Superintendent can decide cases where amount involved is Rs. 1 lakh except issued relating to classification and
valuation and except where suppression of facts is alleged. He can decide issues relating to CENVAT credit and
penalties.


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Appeals:

Forms under Appeals:
Under Excise Under Customs Under Service Tax
Appeal to Commissioner (Appeals) By Assessee EA-1 CA-1 ST-4
Appeal to Commissioner (Appeals) by Department EA-2 CA-2 N.A
Appeal to CESTAT by Assessee EA-3 CA-3 ST-5
Memorandum of cross objections (for CESTAT) EA-4 CA-4 ST-6
Appeal to CESTAT by Department EA-5 CA-5 ST-7
Appeal to High Court EA-6 CA-6 N.A
Memorandum of cross objections (for High court) EA-7 CA-7 N.A
Revision application to Central Government EA-8 CA-8 N.A

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FAQs on appeals and revisions:
1. What is the time limit for filing appeal?
Appeal to Time limit
Commissioner (Appeals) Within 60 days (3 months in case of Service tax) after the receipt
of adjudication order
CESTAT Within 3 months after the receipt of adjudication order

2. Can the delay in filing be condoned?
A separate application has to be filed by the assessee to appellate authority (Commissioner
(Appeals) or CESTAT) and stating there in the reasons for delay.
Delay upto last date of filing appeal need not be explained, but delay thereafter has to be
explained.
Commissioner (Appeals) can condone delay only upto 30 days (3 months in case of Service tax)
CESTAT can condone delay. But it considers various factors for condoned. CESTAT in some cases
one day delay may not be condoned while in other case, delay of even months can be condoned.

3. What is departmental appeal/Review?
The adjudicating authority is a quasi-judicial authority when it passes adjudication order. Hence the order
cannot be straight away annulled (declared to be no longer valid) by any authority higher to him.
However if the higher authority is of the opinion that the order is not proper, it can order for its review by
higher appellate authority (i.e. Commissioner (Appeals) or CESTAT). This is known as departmental appeal
or review.



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4. Why review necessary?


5. What is the time limit for departmental appeal/Review?
Appeal to Time limit
Commissioner (Appeals) Within 3 months from the decision or order of adjudicating
authority
CESTAT Within 3 months from the communication of order of
commissioner

6. Can department make further appeal if it is not satisfied with the order of commissioner (Appeals)?
Yes, it will be termed as regular appeal but not a review. It should be noted that this appeal cannot be filed
on entirely new ground. Plea must arise out of order.
The decision to file appeal against the order of commissioner (Appeals) will be taken by committee of 2
commissioners and they should be of the opinion that the order is not legal or proper
Copy of authorization of committee of commissioners is required to be filed along with appeal.

7. What is the procedure for filing appeal with commissioner (Appeals)?

Additional evidence can be produced before commissioner (Appeals) in the following cases
a) When adjudicating authority has refused to admit evidence which ought to have been admitted.
b) Where the appellant was not able to provide evidence due to sufficient reasons
c) When sufficient opportunity was not given to appellant to produce relevant evidence.

8. What are the cases in which appeal cannot be made to tribunal?
In case of Excise:
Loss of goods occurring in transit from factory to warehouse or to another factory
Rebate of duty on goods exported outside India or excisable goods used in manufacture of
finished goods which are then exported
Goods exported without payment of duty
The order for review by
Commissioner
For the purpose of satisfying
himself as to legality or propriety
of any decision or order passed by
Assisstant/Deputy/Joint
commissioner as adjudicating
authority
Committee of chief
commissioners
For the purpose of satisfying
itself as to legality or propriety
of any decision or order passed
by commissioner as
adjudicating authority
Procedure to be followed by
Assessee
Appeal in Form No. EA-1 (In duplicate)
along with,
# Certified copy of the decision or
order against which appeal is filed
# Statement of facts and grounds of
appeal
Department
Appeal in Form No. EA-2 (In duplicate)
along with,
# Two copies of decision or order passed by
adjudicating authority
# Copy of order passed by commissioner
directing the authority to apply to
commissioner (Appeals)
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Credit of duty allowed to be utilized towards payment of excise duty on final products under the
provisions of the Excise Act or rules made there under.
In case of Customs:
Any goods imported or exported as baggage
Any goods loaded in a conveyance for importation into India
Cases related to duty drawback.

9. What is the remedy available in such cases (as appeal cannot be made to tribunal)?
A revision application in Form EA-8 (In duplicate), along with
Two copies of order of commissioner (Appeals)
Two copies of original order against which commissioner (Appeals) has passed the order



Under secretary, Revision application Unit
Government of India
Ministry of Finance
Department of Revenue
Note:
Fee payable with application
If duty and interest demanded > 1 lakh Rs. 1000
If duty and interest and penalty < 1 lakh Rs. 250
Application must be filed within 3 months from communication of order. This period can be
further extended by 3 months on sufficient cause being shown.

10. What is the procedure for filing appeal to tribunal?

Note:
1. Tribunal may at its discretion, refuse to admit an appeal if the duty involved or difference of duty
involved or penalty involved is less than Rs. 50,000.
2. However, appeal cannot be refused if the issue pertains to valuation or rate of duty
3. The memorandum of cross objections should be filed within 45 days from the date of receipt of
such notice from the CESTAT
4. Tribunal has no powers to review its orders. However, Tribunal can pass order for rectifying
mistake apparent from the records within 6 months of passing of order.

11. What is the fee for filing appeal with CESTAT?
Where the amount of duty and interest demanded and penalty levied 5,00,000 `1,000
Where the amount of duty and interest demanded and penalty levied > 5,00,000 but
50,00,000
`5,000
Where the amount of duty and interest demanded and penalty levied > 50,00,000 `10,000
Every application made before CESTAT `500
To be submitted personally to/
registered post to
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a) In an appeal for grant of stay or for rectification of mistake or for any other
purpose
b) For restoration of an appeal or an application.
Where appeal/application if filed by Department Nil
In case of cross objections Nil

12. What is the procedure for filing appeal to high court?

Note: High court can condone delay in filing appeal or cross objection, is sufficient cause is shown.

13. When an appeal to Supreme Court can be made?
Judgment of high court in appeal, if High court certifies it to be a fit case for appeal to supreme
court
Order of Appellete tribunal, where it relates to question relating to rate of duty or value
By Special Leave Petetion (SLP), i.e. Permission of supreme court even in cases where high court
does not certify it to be a fit case for appeal to supreme court.
Summary of Appeals
Commissioner of
Central Excise/
Customs (Appeals)
CESTAT (Central
Excise Appellate
Tribunal)
High court Supreme court
Who can file an
appeal?
Assessee or
department
Assessee or
department
Assessee or
department
Assessee or
department
What is the
time limit for filing
appeal?
By Assessee:
Within 60 days (3
months under
service tax) from
communication or
decision or order.
By Department:
Reviewing
authority has to
pass its order
Within 3 months
from the date of
communication of
order
By Assessee:
Within 3 months
from
communication or
decision or order.
By Department:
Reviewing
authority has to
pass its order
Within 3 months
from the date of
communication of
order
Appeal is to be
Within 180 days of
receipt of the
CESTATs order.
As per code of civil
procedure, 1908
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Appeal is to be
filed Within 1
month from the
communication of
such review order
filed Within 1
month from the
communication of
such review order
Can the delay in
filing appeal be
condoned?
Yes, on sufficient
cause being shown
by the appellant
only upto 30 days
(3 months under
service tax)
Yes, on sufficient
cause being shown
by the appellant
Yes, on sufficient
cause being shown
by appellant
As per code of civil
procedure, 1908
What is the time
limit for disposing
appeal
Within 6 months
from the date of
filing appeal
Within 3 years
from the date of
filing appeal
(within 180 days
from date of stay
order if stay is
given)
As per code of civil
procedure, 1908
As per code of civil
procedure, 1908
Adjournments in
hearing
Only upto 3 times
to a party.
Only upto 3 times
to a party.
As per code of civil
procedure, 1908
As per code of civil
procedure, 1908
Monetary limits
for department
appeal
(w.e.f 2011)
[Sec. 35R/131BA/ 83
for ED/CD/ST]
N.A `5,00,000 or more `10,00,000 or more `25,00,000 or more

Sec. 35C Rectification of mistake apparent from the record:
The Appellate Tribunal may, at any time within six months from the date of the order, with a view to rectifying any
mistake apparent from the record, amend any order passed by it and shall make such amendments if the mistake is
brought to its notice by the Commissioner of Central Excise or the other party to the appeal.
Non filing of Appeals or Revisions by the Department Inserted in Finance Act, 2011
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 35R Section 131BA Section 83
1. CBEC has been empowered to issue any instructions in this regard [See the instruction below related to
fixation of monetary limits]
2. If the department has not made an appeal/application/revision w.r.to any matter, then in respect of the
similar matter it can make appeal/application/revision. [i.e. The court or any assessee cannot question the
department as to why they didnt go for appeal for the similar issue before]
3. A person being a party in appeal/application/revision cannot contend that the department has acquiesced
(i.e. accepted without protesting) in the decision on the disputed issue by not filing
appeal/application/revision.
4. The CESTAT or the Courts should refer to the said section when department has not filed an
appeal/application/revision [i.e. The court cannot ask the department to make an appeal, if it is specifically
stated as per this section not to make appeal]
Reduction of Government litigation - providing monetary limits for filing appeals by the
Department before CESTAT/High Courts and Supreme Court CBE&C Instruction
An appeal by department shall be filed before following appellate forums only if the duty/tax is equal to or above
the following monetary limits.
CESTAT `5,00,000 or more
High Court ` 10,00,000 or more
Supreme Court `25,00,000 or more
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Special Points:
The above monetary limit may be duty with or without penalty or Interest.
Where the imposition of penalty/Interest is the subject matter of dispute and the said penalty/interest
exceeds the limit prescribed, then the matter could be litigated further.
In two cases, the above specified monetary limits are not applicable i.e. 1) Where the constitutional
validity of the provisions of an Act or Rule is under challenge or 2) Where the
Notification/Instruction/Order or circular has been held illegal or ultra vires.
Monetary limit shall be applicable on the disputed duty and not on the total duty demanded in a case.
The above specified monetary limits are applicable to cases involving REFUND and in case of REVISION
also.
FAQs on monetary limits for filing appeals:
1. Whether duty involved mentioned in the Instruction refers to duty outstanding to be collected or the total
duty demanded for deciding the threshold limit prescribed therein?
Clarification: Monetary limit shall apply on the disputed duty and not on the total duty demanded in a case.

2. Whether monetary limits would apply to cases of refund?
Clarification: It would apply to cases of refund as well.

3. Whether revision applications filed would also be covered under the stipulation of monetary limits?
Clarification: The limit specified herein will not be applicable to revision application

4. Whether exclusion of audit objections would cover internal audit objection cases also or whether they
would be limited to cases of revenue audit alone?
Clarification: The intention was to apply the exclusion clause only to disputes arising out of revenue audit
objections accepted by the Department. It has now been decided to delete the said exclusion clause.
Therefore, in all cases of audit objections accepted by the Department, while protective demands may
continue to be issued but the same would be subjected to the monetary limits for filing appeal in the
Tribunal, High Courts and the Supreme Court.
Recent case laws on appeals under excise, customs and service tax
Case Judgment
1. CCE V. RDC concrete
(India) P. Ltd. 2011 (SC)
While hearing the application for rectification of mistake by the CESTAT, the
arguments not accepted earlier cannot be accepted (i.e. re-appreciation of
evidence not possible), as re-appreciation of mistake cannot be said to be
rectification of mistake apparent on record.
2. CCE V. Gujchem
Distillers 2011 (Bom)
CESTAT cannot dispose of the appeal on a new ground which was not laid
before the adjudicating authority. CESTAT should remand the matter back to the
adjudicating authority.
3. Ccus. V. Trilux
Electronics 2010 (Kar.)
If an order was passed by CESTAT based on consent (decision subject to certain
events to be fulfilled), the revenue could not pursue an appeal against such
order in a higher forum.
4. CCE & ST V. Volvo
India Ltd. 2011 (Kar.)
High court has no jurisdiction to adjudicate the case relating to rate of service
tax and value of taxable services. Such appeal lies with supreme court, which
alone has exclusive jurisdiction to decide the said question.





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Advance Ruling
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 23A Section 28E Section 96A

FAQs on Advance Ruling:
1. Who can make application for Advance ruling?
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 23A(c) Section 28E(c) Section 96A(c)
Any public sector company
A Non-resident/ Resident setting up a joint venture in India in collaboration with a Non resident/
resident
A wholly owned subsidiary Indian company, of which Holding is a foreign company
A Joint venture in India
A resident falling within any such class or category of persons, as specified by central government.

2. What are the matters for which advance ruling can be sought?
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 23C Section 28H Section 96C
(i) Classification of goods under CETA, 1985/ CTA, 1975
(ii) Applicability of an exemption notification under sec. 5A of CE Act, 1944 or under sec. 25 of the
Customs Act, 1962 having a bearing on the rate of duty
(iii) Principles to determine value of goods, for the purpose of assessment
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(iv) Applicability of notifications issued in respect of duties of excise/customs under Excise/Customs
Act, Excise/Customs Tariff Act and any duty chargeable under any other law for the time being in
force in the same manner as duty of excise/customs.
(v) Admissibility of credit of excise duty paid or deemed to have been paid on the goods used in or in
relation to manufacture of excisable goods
(vi) Determination of the origin of the goods in terms of rules notified under the customs tariff Act
and matters relating thereto.
(vii) Determination of the liability to pay duties of excise on any goods under the Central Excise Act.

3. Who is the Authority for advance ruling?
It has been provided that the Authority for advance rulings constituted under the Income Tax Act,
1961 shall function as Authority for advance rulings for the purpose of Customs Act, 1962, Central
Excise Act, 1944 and Finance Act, 1944 (Service tax). To ensure availability of technical experts in
the authority, it has further been provided that, for the purpose of advance ruling under excise,
customs and service tax, the authority for advance ruling shall consist of an officer of the Indian
customs and Central excise who is qualified to be member of board instead of an officer of the
IRS who is qualified to be member of CBDT.
It consists of a chair person who is a retired judge of supreme court, an officer of Indian Customs
and Central excise who is qualified to be member of the board and an officer of the Indian Legal
service who is qualified to be an additional secretary to the government of India
The authority shall have the powers of
a) Discovery and inspection
b) Issuing commissions
c) Enforcing attendance of any person and examining him under oath
d) Compelling and production of books of accounts and other records
e) The authority shall be deemed to be a civil court and every proceeding before the
authority will be a judicial proceeding.

4. In what cases the application for advance ruling shall be rejected?
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 23D Section 28I Section 96D
If the question raised in the application is already pending in the applicants case before any central
excise officer, the Appellate Tribunal or any court; or
If the question raised in the application is the same as in a matter already decided by the appellate
tribunal or any court.
Note: No application can be rejected without giving an opportunity of being heard to the assessee.

5. What is the binding nature of advance ruling?
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 23E Section 28J Section 96E
The advance ruling pronounced by the authority is binding only
On the applicant who has sought it.
In respect of the matter for which advance ruling was obtained.
On the commissioner, and the authorities subordinate to him, in respect of the applicant.
But not to any other person.

6. When will an advance ruling held to be void ab initio?
Central Excise Act, 1944 Customs Act, 1962 Finance Act, 1994
Section 23F Section 28K Section 96F
If on representation made to it by the commissioner or otherwise, the authority for advance ruling
finds that the advance ruling was obtained by the applicant by fraud or misrepresentation of facts
Then, the authority may by order declare the advance ruling to be void ab initio i.e. from the
beginning.

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Case laws on Advance Ruling:
Case Judgment
1. Oracle India P. Ltd. (2012)
(AAR)
Advance ruling can be pronounced determining tax liability in relation to an activity
which is proposed to be undertaken, by the applicant. Thus, advance ruling is
confined only to undertaking of a proposed activity. Conversely, when an existing
activity is sought to be varied, added to or expanded, that would not entitle the
existing entity to seek an advance ruling under the Customs Act, 1962.
2. UAE Exchange Centre Ltd
v. UOI (2009) (Del. HC)
Ruling by Advance Rulings Authority binding on applicant, transaction on
which ruling sought and the departmental officers concerned - Jurisdiction of Courts
not excluded by implication or otherwise Writ jurisdiction invocable against advance
rulings - Article 226 of Constitution of India
3. Zuari Cement Ltd. (2009)
(A.A.R.)
The advance ruling can be applied for only proposed activity. It cannot be applied for
any ongoing activity. For example: Expansion of existing manufacturing activity
4. Tex (India) Pvt. Ltd.
(2004) (AAR)
In this case, it was held that the application for rectification of mistake is not
maintainable as the error was not apparent from the record.
5. Permalite Electricals (P)
Ltd. (2004) (A.A.R)
It was held that, the question raised in application that has already been decided by
the Appellate Tribunal and was not raised at the time of admission of application such
plea cannot be entertained by the Authority.
Settlement commission:
It is a mechanism for speedy settlement of cases involving high revenue stakes. [This is similar to what is
constituted under Income tax Act, 1961]
The cases shall be settled and dues shall be paid without going through adjudication stages.
The proceeding before settlement commission is deemed to be judicial proceedings for the purpose of IPC.
Settlement Commission is constituted by Central Government and shall consist of one Chairman, Vice-
Chairmen and other members as the Central Government may think fit.
There is no scheme for settlement of cases under the service tax law.
The decision of settlement commission will be according to the opinion of the majority. However, in case
the members are equally divided on any points, then the points of difference shall be referred to chairman
or one or more additional members, and such points will be decided according to the opinion of the
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The notice shall be given, asking the assessee to explain as to why the application made by him should be
allowed to be proceeded with.
When the commissioner does not furnish the report within the period of 30 days from the date of
communication made to him, settlement commission shall proceed further in the matter without the
report of the commissioner.
Having received report from the commissioner, if the settlement commission is of the opinion that any
further inquiry or investigation is necessary, it may direct the commissioner (investigation) within 15 days
from the date of receipt of report to make such further inquiry or investigation.
The commissioner (Investigation) should furnish the report of such enquiry within 90 days from the date of
receipt of communication from settlement commission.
Before passing an order, an opportunity of being heard must be given to the applicant and the
commissioner of excise.

Note: Replace the words Commissioner of Excise with Commissioner of Customs in order to know the
procedure for settlement of cases under customs Act, 1962
FAQs on Settlement commission:
1. Who can make an application for settlement? Can it be withdrawn?
Central Excise Act, 1944 Customs Act, 1962
Section 32E Section 127B
An assessee may make a case for settlement. An assessee is defined in Section 31(a) as any person who is
liable to pay excise duty assessed and includes any manufacturer/producer or a registered person of a
private warehouse. An application once made cannot be withdrawn.

2. What is it that can be settled?
- A case can be settled.
- Case is defined in section 31(c) as any proceeding under this Act or any other Act for the levy,
assessment and collection of excise duty, pending before an adjudicating authority on the date on
which an application is made.
- However, when any proceeding is referred back in any appeal or revision, as the case may be, by
any court, Appellate Tribunal or any other authority, to the adjudicating authority for a fresh
adjudication or decision, as the case may be, then such proceeding shall not be deemed to be a
proceeding pending within the meaning of this clause.
- Thus, Settlement Commission can only be approached when original adjudication is pending.

3. When a person shall not be entitled to apply for settlement?
Central Excise Act, 1944 Customs Act, 1962
Section 32o Section 127L

a) Where an order of the settlement has been passed which provides for the imposition of the
penalty, on the ground of concealment of particulars of his duty liability; or
b) Where after passing of an order of settlement, in relation to a case, such person is convicted of an
offence in relation to that case; or
c) Where the case of such person is sent back to the central excise officer by the settlement
commission under Sec. 32L

4. What categories of cases cannot be settled?
a) Where the assessee has filed the application for settlement in respect of a case relating to him
after the adjudication thereof;
b) If the applicant has not filed returns showing production, clearance and central excise duty paid;
c) Where the applicant has not received a show cause notice;
d) Where the case is pending before the Appellate Tribunal or any Court;
e) Where the dispute relates to interpretation of classification;
f) Where excisable goods/books/documents are seized, the applicant cannot prefer an application
for 180 days from the date of such seizure;
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g) The amount in the application should be at least ` 3,00,000 or more. In other words, cases less
than ` 3,00,000 cannot be settled;
h) Where the applicant, while filing the application, has not deposited the additional amount of
excise duty accepted by him along with interest due under section 11AA Where the assessee
admits short levy on the goods for reasons other than misclassification, undervaluation,
inapplicability of exemption notification or CENVAT credit.

5. Can Settlement Commission grant immunity from prosecution and penalty/ interest/ fine?
Central Excise Act, 1944 Customs Act, 1962
Section 32K Section 127H
The Commission can grant immunity from prosecution only for any offence under the Central Excise Act
and either wholly or in part from the imposition of penalty and fine if it is satisfied that the applicant has
made full and true disclosure and cooperated with the Commission.
It may be noted that if prosecution is launched before receipt of application, immunity against such
prosecution cannot be granted.

6. Can such immunity be withdrawn?
Central Excise Act, 1944 Customs Act, 1962
Section 32K Section 127H
Immunity can be withdrawn only if the person fails to pay the sums due within the time specified in the
settlement order or where the applicant has concealed any material to the settlement or given false
evidence relating to the settlement.

7. Can the case be sent back by the Settlement Commission to the Central Excise officer/Customs officer?
Central Excise Act, 1944 Customs Act, 1962
Section 32L Section 127I
This can be done only where the Commission is satisfied that the person has not cooperated. The
consequences of this are that it would be deemed that no application has been made before the
Commission.

8. Can the Central Excise officer who received the case back use the materials produced before the
Commission?
Yes as per Section 32L.

9. Is the order of settlement final?
Central Excise Act, 1944 Customs Act, 1962
Section 32M Section 127J
The order is final and conclusive and shall not be re-opened in any proceeding under this Act or under any
other law. If the order was obtained by fraud or misrepresentation, it would become void.

10. What is the time limit for payment of amounts ordered by Settlement Commission?
Central Excise Act, 1944 Customs Act, 1962
Section 32F(9) Section 127C
The duty, interest, fine and penalty payable in pursuance of the order shall be paid by the assessee within
30 days of receipt of a copy of the order by him. If the assessee fails to do so the amount which remains
unpaid shall be recovered along with interest due thereon as the sums due to the Central Government by
the Central Excise Officer/Customs officer having jurisdiction over the assessee.

11. Can a completed proceeding be re-opened?
Settlement Commission has been disempowered to reopen the proceedings in cases where applications
under section 32E are made on or after the 1st day of June, 2007. However, in respect of application made
before 01.06.2007, Settlement Commission can reopen completed proceedings.

12. Is the proceeding before the Settlement Commission a judicial proceeding?
Central Excise Act, 1944 Customs Act, 1962
Section 32P Section 127M
CA Final
INDIRECT TAX LAWS

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The proceeding is a judicial proceeding within the meaning of Sec. 193 and 228 of the IPC.

13. Where are the Benches of the Settlement Commission located?
The principal Bench is at New Delhi with other Benches at Chennai, Calcutta and Mumbai. The jurisdiction
of the Bench is decided not by the place of business of the applicant but by the location of the
headquarters of the Commissionerate passing the order.

14. Can the property of the applicant be attached?
Central Excise Act, 1944 Customs Act, 1962
Section 32F(5) Section 127C
The settlement commission has the power to order provisional attachment of any property belonging to
the applicant in the prescribed manner. Such order can be made by the settlement commission during
pendency of any proceedings before it where it is of the opinion that such attachment is necessary for the
purpose of protecting the interests of the revenue.
Any such provisional assessment shall cease to have effect from the date the sums due to central
government in respect of such attachment are discharged by the applicant and the evidence in respect of
such discharge is submitted to the settlement commission.

15. Can the applicant take legal assistance?
Central Excise Act, 1944 Customs Act, 1962
Section 32F(5) Section 127C
Assistance of authorised representative can be taken.
Case laws on settlement commission:
Case Judgement
RR Builders vs. CCE (2008)
(HC)

Once there is a requirement prescribed by the statute by way of a qualifying condition
it is not possible to admit applications which do not fulfil the requirements stipulated.

Mars Thereputics and
Chem. Ltd. vs.
CCESettlement Commission
2008 (HC)

An application can be admitted and proceeded with only when Settlement
Commission is satisfied that applicant has made a full and true disclosure. The onus is
on applicant to make a full and true disclosure of duty liability and the manner in
which same is arrived at.
Re: Sadik Sadruddin
Chunara (Sett.Comm)
(2006)
The Person who is absconding and never appeared before the investigating agency
cannot be prevented from making an application before Settlement Commission.
Commr of Customs v.
Mahesh Raj (2006) (HC)

Smugglers, habitual offenders & unscrupulous elements cannot be offered protection
under the settlement scheme. It covers cases only where there is no
deliberate/intended desire on part of the importer to evade/avoid payment of duty.
UOI V. K. Amishkumar
Trading P. Ltd. (2011) (HC)
There can be no application before settlement commission without show cause
notice having been issued to the assessee. Thus, if the assessee has himself waived
the requirement of issuing a SCN, he cannot, thereafter file an application before the
settlement commission. By waiving the issuance of notice upon him, the assessee
himself moves out of the jurisdiction of settlement commission.
Icon Industries V. UOI
(2011) (HC)
- An application can be filed only if the applicant has filed returns showing
production, clearance and central excise duty paid in the prescribed manner.
- A consolidated return covering more than one period cannot be considered
as return filed in prescribed manner.
- Hence, the settlement commission can reject the application in such case.
J.R.B Engineering works V.
Settlement commission
(2012) (HC)
When an applicant has neither registered with the excise department nor has filed
any declaration or return during the relevant period, the condition specified in the
provisions of sec. 32E has not complied with ash therefore, the settlement
commission was not maintainable at all.