Paricipant's Notes CERA

Special course material on Central Excise Receipt Audit
Chapter I
An Overview of Central Excise

This session provides an overview of Central Excise Act and the provisions relating to levy
and collection of Central Excise duty
1. Brief history and developments
1.1 Central Excise duty is an indirect tax levied on goods manufactured in India. The tax is
administered by the Central Government under the authority of Entry 84 of the Union List (List
1) under Seventh Schedule read with Article 246 of the Constitution of India.
1.2 The Central Excise duty is levied in terms of the Central Excise Act, 1944 and the rates of
duty, ad valorem or specific, are prescribed under the Schedule I and II of the Central Excise
Tariff Act, 1985. The taxable event under the Central Excise law is manufacture and the
liability of Central Excise duty arises as soon as the goods are manufactured. The Central Excise
Officers are also entrusted to collect other types of duties levied under Additional Duties (Goods
of Special Importance) Act, Additional Duties (Textiles and Textiles Articles) Act, Cess etc.
1.3 Till 1969, there was physical control system wherein each clearance of manufactured goods
from the factory was done under the supervision of the Central Excise Officers. Introduction of
Self-Removal procedure was a watershed in the excise procedures. Now, the assessees were
allowed to quantify the duty on the basis of approved classification list and the price list and
clear the goods on payment of appropriate duty.
1.4 In 1994, the gate pass system gave way to the invoice-based system, and all clearances are
now effected on manufacturers own invoice. Another major change was brought about in 1996,
when the Self-Assessment system was introduced. This system is continuing today also. The
assessee himself assesses his Tax Return and the Department scrutinises it or conducts selective
audit to ascertain correctness of the duty payment. Even the classification and value of the goods
have to be merely declared by the assessee instead of obtaining approval of the same from the
Department.
1.5 In 2000, the fortnightly payment of duty system was introduced for all commodities, an
extension of the monthly payment of duty system introduced the previous year for Small Scale
Industries. From 1.4.2003, monthly payment of Duty by 5th of next month was allowed.
1.6 In 2001, new Central Excise (No.2) Rules, 2001 have replaced the Central Excise Rules,
1944 with effect from 1st July, 2001. Other rules have also been notified namely, CENVAT
Credit Rules, 2001, Central Excise Appeal Rules, 2001etc. With the introduction of the new
rules several changes have been effected in the procedures. The new procedures are simplified.
There are less numbers of rules, only 32 as compared to 234 earlier. Classification declaration
and Price declarations have also been dispensed with, the CENVAT Declaration having been
earlier dispensed with in 2000 itself. These rules have, however, again been replaced by a new
set of Rules known as Central Excise Rules, 2002 brining out certain changes in the existing
Rules.
Regional Training Institute, Chennai
2. Administration of Central Excise

2.1 The Central Excise law is administered by the Central Board of Excise and Customs (CBEC
or Board) through its field offices, the Central Excise Commissionerates. For this purpose, the
country is divided into 10 Zones and a Chief Commissioner of Central Excise heads each Zone.
There are, in total, 61 Commissionerates in these Zones headed by Commissioner of Central
Excise. Divisions and Ranges are the subsequent formations, headed by Deputy/Assistant
Commissioners of Central Excise and Superintendents of Central Excise, respectively.
2.2 For enforcing the central excise law and collection of Central Excise duty the following types
of procedures are being followed by the Central Excise Department:
a) Physical Control Applicable to cigarettes only. Here assessment precedes clearance which
takes place under the supervision of Central Excise officers;
b) Self-Removal Procedure Applicable to all other goods produced or manufactured within the
country. Under this system, the assessee himself determines the duty liability on the goods and
clears the goods.
3. Tax payers' assistance and responsiveness
3.1 The CBEC have issued instructions from time to time for rendering assistance to the
taxpayers in the Commissionerates of Central Excise and Divisional Offices. These offices are
duty bound to provide necessary guidance to the public in all matters concerning Central Excise
Law, procedure, tariff and exemptions etc.
3.2 The Commissioners of Central Excise are required to post knowledgeable officers of
appropriate rank, senior Inspector or Superintendent to be in-charge of "Tax-payers' Assistance
Unit" in each Commissionerate and Divisional headquarter. The officer will have easy access to
the Deputy/Assistant Commissioners, Additional/Joint Commissioners and Commissioner to
seek their advice and guidance on the spot in case of genuine doubts.
3.3 The Tax-payers' Assistance Unit" in addition to rendering advice to the assessees, should
also help them in meeting the officer concerned for necessary guidance, and clarification, where
required.
3.4 In order to have a responsive tax administration, the Board has decided that all intimations,
declarations and queries received from the Members of trade and industry should be replied to in
a time bound manner and with a sense of responsibility and accountability. In order to achieve
this, the following directions have been issued to the Central Excise field formations:
(1) All declarations, intimations, etc. when send by FAX, e-mail, by post or by Courier shall be
accepted by the field formations.
(2) Appointments should be given on e-mail on request from the trade
(3) All queries by e-mail should be accepted and the replies sent by e-mail
(4) Any query received from the trade must be answered within a maximum of four weeks from
the date of receipt
(5) To make e-mail an effective mode of communication between the Department and the public,
e-mail connectivity should be provided to all offices in the field formations and properly
maintained and wide publicity of the e-mail address should also be given.
.
Courseware on Central Excise Receipt Audit
Provisions of the CE Act relating to incidence of duty

Section 3 (1) of CE Act provides that There shall be levied and collected in such manner as may
be prescribed, duties of excise on all excisable goods, which are produced or manufactured in
India and at the rates set forth in the schedule to the Central Excise Tariff Act, 1985. Levy
includes imposition and assessment of tax (Vijaya Prints - 1989 - SC) collection follows.
Thus Section 3 deals with the following:1.
Creation of duty
2.
Naming the duty
3.
Fixing authority for levy and collection
4.
Scope of duty
5.
Tariff rates
Conditions for levy of ED :1.
It must be goods
2.
The goods must be excisable
3.
There must be manufacture/production
4.
The manufacture/production must be in India
Who is to pay ED? ED shall be paid by the person in whose hands the taxable event occurs. The
said event is manufacture/production. Hence, the duty liability is on the manufacturer / producer
only.
Taxable event occurs at the very moment of manufacture. Tax liability accrues simultaneously.
Duty accrues neither earlier nor later. (Good year case-1990-SC). But collection of duty is
postponed to the time of clearance At present, duty for a particular month is payable by 5th of
next month (except during the month of March where it is payable by 31st March). Incidence of
ED is directly relatable to manufacture; collection is deferred as a measure of convenience
(Mcdowell-1985-SC).
When ED is NOT payable by the person
1.
If what is manufactured is not goods.
2.
Goods have been manufactured; but they are not excisable goods/being exempted.
3.
They are excisable goods; but they have not been manufactured.
4.
There was manufacture of excisable goods; but the person is not the manufacturer.
5.
Manufacture is not in India
How are these four concepts defined?
1.
Goods - Not defined in CE Act.
2.
Excisable Goods - specifically defined.
3.
Manufacture - No specific definition. Inclusive definition only
4.
Manufacturer - -do-
Why not defined? CE Act is a fiscal law relating to industry, which is fast developing.
Evidently, the legislature does not want the CE law to be fettered by rigid straight jacket
definitions.
Production Vs. Manufacture:- Tobacco, Tea, Coal, Ore, Salt etc. are all produced. Other goods
made in the factory are manufactured. ED is attracted on both.
What shall be done when a concept has not been defined in a law?
1.
Look for some other law, defining the concept
2.
Rely on Trade parlance theory
3.
Go in for dictionary meaning
4.
Go by the meaning spelt out by the Courts (III stage)
Goods
- Not defined in CE Act! But defined differently in different statutes:1. Art. 366 (12) of Constitution:- Goods includes all materials, commodities and articles.
2. Sn. 2(22) of Customs Act:- Goods means every kind of moveable property other than
auctionable claim and money and includes stocks, shares, growing crops and things attached to
and forming part of land which are agreed to be severed before sale or under the contract of
sale.
- Websters dictionary:- Goods includes, inter alia, the following:Wares, merchandise and commodities bought and sold by merchants and traders.
Vendibility Test
The levy of ED is at the stage of manufacture. Manufacture is for sale. And hence saleability is
the criterion for the levy of ED. This was the line of thinking of the Apex Court.
Further the SC was inspired by the definition of websters dictionary. Hence, the prescription of
vendibility test. In other words, things that are bought and sold are goods.
DCM Case (1963-SC)
Raw Material
Groundnut
Oil and
Til Oil
Intermediate product
Hyderogenation
process
Refined oil
Final product
Deodorisation
process
Vanaspathy
ED was leviable on Refined oil. Sale took place after deodorisation. In the market, the product
is known as Refined oil: after deodorisation only.
Applying the marketability test, the Supreme Court held that Refined oil which is not
deodorised is NOT goods.
This test of marketability was applied in Bihar Sugar Mills case, Union Carbide case, Bhor
Industries case, Moti Laminates case etc. To sum up, no duty is levied on the intermediate
product, provided it is used in the manufacture of dutiable final products.
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Bhor Industries (1989 - SC)

Sn. 2 (d) :-
Excisable Goods are the goods that find a place in the CE Tariff.
- For a commodity to attract ED, is it enough if it finds a place in the CE Tariff?

- Or should it pass the vendibility test also?
- Simply because an article fall in the tariff, it would not ipso-facto, attract duty. In addition, it
should be known as Goods in the market. In other words, it should pass the Vendibility test
also.
Ambalal Sarabhai case (1989 - SC)
Transient Goods or Goods having short shelf-life being not marketable. Hence not excisable.
Further the department should prove that the goods are marketable.
CCE vs. Bansal Indus Gases 2003(151) ELT.4(SC 3 member bench)
Carbide sludge arising in the manufacture of acetylene gas is not marketable and hence not liable
to duty.
Marketability Vs Saleability
- Marketable does not mean being actually marketed, it means capability of being brought to
market and sold.
- Can anything saleable be treated as marketable? No! Even rubbish can be sold.
- Dross and skimmings sold by M/s. Aluminium Company are merely refuse or ashes given out
in the process of removing impurities in the raw materials.
- Because some metal can be retrieved out of dross and skimmings, they are sold!!
Excisable Vs Dutiable
SL.
No.
Position in tariff
Excisable
Dutiable
1.
Found in Tariff with X%
Yes
Yes
2.
Found in Tariff with X%;

But covered by Sn.5AExemption
Yes
No
3.
Found in Tariff with Nil%
Yes
No
4.
Not found in tariff
No
No
Manufacture Test
DCM & others (1977 - SC)
- Judgement on manufacture:Manufacture implies a change; but every change is not manufacture; and yet every change is the
result of treatment, labour and manipulation. But something more is necessary and there must be
transformation. A new and different article must emerge having a distinctive name, character or
use. In other words, unless there is metamorphosis as a result of some process, there is no
manufacture at all.
- Groundnut/Til oil is purified by the process of hydrogenation. It is now called VNE oil
(vegetable non-essential oil). VNE oil is not marketed as such. It is deodorised and the
vanaspathy thus obtained is marketed.
- Market recognises vanaspathy as Refined oil and not VNE oil (preodorised stage).
- In the circumstances, hydrogenation does not lead to any manufacture and hence VNE oil does
not attract duty as refined oil.
- No manufacture. Therefore no duty.
In State of Karnataka Vs. Raghurama Shetty(1981) 47 STC 369 (SC) it was held that de-husking
of paddy into rice is a manufacturing process as rice is distinct commercially different
commodity from paddy.
Intention to manufacture
- Should there be an intention to manufacture?
- No, not necessarily.
- (Example):- Bagasse and molasses coming out as waste in sugar industry are goods
manufactured and hence assessable to duty.
Value addition
- Will mere value addition through a process, amount to manufacture?
- No.
- The result should be emanation of a new article, to call the process a manufacture.
Section 2(f) read with Chapter notes to the Central Excise Tariff Act, 1985 define some of the
processes amounting to manufacture. In such cases there is no need to test whether the
process(s) amount to manufacture.
Mobility test
Site based activities
- NarneTulamans case - 1988 - sc
- Load cells, Platforms and Indicating systems were assembled at site in the ground as
weigh bridge.
- This was held to be manufacture.
- But the judgement did not decide that duty can be levied on immovable articles.
- This aspect was not at all considered by the Apex Court.
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- The Verdict is sub silentio on the mobility aspect of end product.

- CBECs orders
- In this connection, the CBEC has, inter alia, clarified that if the piece by piece erection or
installation of parts or components results in an immovable property at site, then no duty will be
levied on such property.
- But duty will be chargeable, if the assembly results in a different recognisable marketable
product before installation in an immovable manner.Thus excisability depends upon the mobility
of the final product at the time of manufacture.
- Sirpur Paper Mills case - 1998 - SC
Paper making machine was assembled and erected at site from bought out components and own
made components.
- The resultant product is not immovable property like a building.
- Embedding in concrete base has been done to ensure wobble free operation only.
- It could be dismantled from the base and re-erected elsewhere.
- There was manufacture (from components to machine).
- The machine made was moveable (answered mobility test).
- Held there was manufacture of excisable goods.
-Therefore ED was attracted.
- Boards Circular Taking cue from the Sirpur judgement the CBEC in exercise of the
power conferred under Section 37B of the Central Excise Act issued orders (No.53/2/98
cx dated 2.4.1998) 1998 (76) ECR 41c, clarifying that the ratio of Sirpur judgement
should be followed scrupulously in deciding the excisability of plant and machinery
assembled at site after considering the broad criteria (i) final product is distinct (ii) it is
specified in Tariff; (iii) it is movable goods and saleable in market.
- Triveni Engineering & Industries Ltd.(2000-(120) ELT 273 (SC)
However, Supreme Court in Triveni case has held that installation or erection of Turbo
alternator on platform specially constructed on land cannot be treated as common base,
such alternator would be immovable property, hence not taxable.
- Each case had therefore to be decided on merit after considering the broad criteria as
specified in Sirpur case.
The present legal provision is as decided in Triveni Engineering, ie. The
marketability test requires that the goods are as such should be in a position to be taken to
market and sold. If they have to be separated, the test is not satisfied. Thus, if
machinery has to be dismantled before removal, it will not be goods. It, therefore,
follows: (a) duty cannot be levied on immovable property, (b) if plant is so embedded to
earth that it is not possible to move it without dismantling, no duty can be levied, (c) if
machinery superficially attached to earth for operational efficiency and can be easily
removed without dismantling, duty is leviable, (d) Turnkey projects are not dutiable but
individual component/machinery will be dutiable if marketable.
Chapter II
Classification of excisable goods
This session deals with the concepts of classification of goods under the Central Excise Act
for the purpose of levy of duty.
The actual amount of Excise duty payable is dependent upon the value of goods and rate
of duty. In turn, the rate of duty is determinable on the basis of classification of goods. The
classification of goods is nothing but determination under which heading or sub-heading a
particular product would be covered. Even for the purposes of determining eligibility to
exemption, the classification of goods is to be first decided because most of the exemption are
with reference to the Tariff heading to sub-headings. Thus, the classification of goods assumes
greater importance in the field of Central Excise and is one of the main field of litigation.
From 28.2.1986, the tariff schedule was taken out of Central Excise Act 1944 and a new
tariff schedule based on HSN (Harmonised System of Nomenclature) was enforced under an
independent enactment of Central Excise Tariff Act 1985.
The new Central Excise Tariff schedule in all contains 96 chapters grouped in twenty
sections. Each of these twenty sections relates to a broader class of goods such as Section I
relates to Animal and Dairy products. Section VI relates to all products of Chemical and allied
industries while Section XI relates to Textiles and Textile articles. Each of these Sections has
been further divided into various chapters and each chapter contains goods of one class.
Each chapter has been further divided into various headings depending upon different
types of goods belonging to the same class or products. These headings have further been
divided into sub-headings.
The excisable goods under new Central Excise Tariff have been classified basically using
four digit system, with two more digits added for further sub classification wherever needed.
The first two digits refer to chapter in the schedule and the next two digits have been added for
further sub classification wherever needed. Eight digit excise classification has been introduced
with effect from 28.2.2005. Thus, a 4 digit code is called as heading, next 2 digits indicate
sub-heading and last two digits indicate tariff item.
The system of numbering of headings and the sub classifications adopted in the new
Central Excise Tariff follows the scheme as in the Harmonised System of Nomenclature. As
may be observed from the schedule, besides the headings numbers and sub-heading numbers, a
system of dashes has also been adopted for classification. As indicated in Note 1 of the General
Explanatory Notes given in the 1st schedule.
(i)
Where the description of an article or group of articles under a heading is preceded by , the said article or group of articles shall be taken to be such classification of the article or
group of articles covered by the said heading.
(ii)
Where, however, the description of an article or group of articles is preceded by
- -, the said article or group of articles shall be taken to be a sub classification of the
immediately preceding description of article or group of articles which has -.
(iii) where the description of an article or group of articles is preceded by --- or ----,t he
said article or group of articles shall be taken to be sub-classification of the immediately
preceding description of the article or group of articles which has - or .
There are three principles underlying the system of numbering:

(1)
Where there is no classification of goods.
(2)
Where there is classification of goods under a heading, but there is no further sub
classification, it may be observed that maximum of nine sub classification of main headings are
possible.
(3)
Where there is sub classification of the goods under a heading, as also a further sub
classification of the sub classified goods, a maximum of nine sub classifications of each of the
sub classification of the main heading are possible.
As regards residuary classification, there are two possibilities, viz.
(a)
Residuary classification under a heading.
(b)
Residuary classification under a sub classification in a heading.
Classification of parts under new Excise Tariff Act, 1985
The classification of parts of items covered by chapters 82 to 96 is governed by
individual chapter notes or in some cases by Section Notes. (For example, Chapter Note 2 in
respect of Chapter 82, Chapter 2 in respect of Section XVI covering Chapters 84 and 85; Section
Notes 2,3 & 5 in Section XVIII covering Chapters 86 to 89; Chapter Note 2 in respect of Chapter
90 etc.). By and large, subject to certain exclusions mentioned in respective Section Note or
Chapter Note, parts or parts and accessories in respect of certain Chapters, are generally
classified in the same Heading number in which the main item falls provided there is no separate
heading number covering such parts or parts and accessories. In case there is a sub-heading
number under a Heading number in the Tariff covering parts, then all parts of items covered
under that heading number fall only under the sub heading number.
On perusal of Chapter Note or Section Note in respect of Chapters 82 to 96, it would be
seen that parts of general use are excluded from these Chapters. Parts of general use has been
defined in Section Note 2 of Section XV. Parts of general use are not to be regarded as parts
of individual items falling under these Chapters and in all cases such parts of general use are
classified in Section XV C base metals and articles or base metals only.
The classification of parts or parts and accessories or Section XVI (Chapters 84 & 85) is
explained in detail as follows:
(a)
Section XVI covers Chapters 84 & 85, which cover machinery and mechanical
appliances; electrical equipment, electronic items etc. Parts and accessories of these articles are
also covered by these Chapters.
(b)
The important aspect is to make note of certain exclusions which are described in Section
Note 1 of this Section (such as transmission or conveyor belts or plastics, vulcanised rubber,
spools, bobbins, transmission or conveyor belts or textile materials, interchangeable tools of
heading No.82.02 or brushes of heading No.96.03, parts of general use etc.)
(c)
Note 2 of Section deals with classification of parts of machinery. In general, parts which
are suitable for use solely or principally with particular machines or with the group of machines
or apparatus falling under the same heading, are classified under the same heading as those
machines or apparatus subject to exclusions mentioned earlier in Section Notes. In some cases
separate headings are, however, provided for:
(A) Parts of engines of heading 84.07 or 84.08 (heading 84.09).
(B) Parts of the machinery of headings 84.25 to 84.30 (heading 84.31) and so on.
(d)
The above principles of classification do not apply to parts; which in themselves
constitute an article covered by a heading of this Section (other than headings 84.85 and 85.48)
these are in all cases classified in their own appropriate heading even if specially designed to
work as part of a specific machine, for example,
(1)
Pumps and compressors (headings 84.13 and 84.14)
(2)
Taps, cocks, valves etc. (heading 84.81)
(3)
Electric motors of heading 85.01.
(4)
Transmission shafts, cranks, bearing housing, fly wheels (heading 84.83)
(5)
Other parts which are recognisable as such, but are not suitable for use solely or
principally with a particular machine or class of machines (i.e., which may be common to a
number of machines falling in different headings), are classified in heading 84.85 (if not
electrical) or in heading 85.48 (if electrical), unless they are excluded by the provisions set out
above.
Rules for interpretation of the Central Excise Tariff
The Central Excise Tariff Act, 1985, which is by and large, based upon the Harmonised
System Nomenclature (HSN) has adopted the very same principles and these are now prescribed
as rules for interpretation of the tariff schedule. However, as against six rules prescribed for the
HSN, the Central Excise Tariff Act has incorporated (as part of the statute) only 5 rules, omitting
one rule of HSN relating to classification of packing material.
Rule-1:
It is first established that the Section and Chapter titles are provided in the tariff
only for facilitating reference. The text of Section/Chapter headings do not have any legal
bearing. While it is only the titles which have no bearing on classification, the actual
Sections/Chapters do have a legal status to the extent that they represent particular groups of
headings. The rule states that classification should be determined first and foremost by reference
to the text of the headings (4 digits) and any relative Section/Chapter Notes.
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Rule 2 (a):
This rule has the effect of broadening the scope of various headings, beyond the
terms of their texts, since it provides for classification in a heading of an article referred to
therein, even if that article is incomplete or unfinished or is removed in assembled or
disassembled. Two separate principles are embodied in this rule. First, an incomplete or
unfinished article is to be treated as a complete or finished article. Secondly an un-assembled or
disassembled article must be classified as if it were assembled. Regarding classification of an
incomplete or unfinished article as if it is complete or finished, there is an important proviso
incorporated in this rule. It is that in the incomplete/unfinished state, the article must have the
essential character of the complete/finished article. The scope to the phrase essential character
must be clearly understood. For an article to have achieved the essential character as stated in
this rule, it would suffice if in the incomplete/unfinished condition, it has got the character
identifying the article and the stage is one, where it can not, in any manner, be converted into
any article other than the one the essential character of which it has assumed.
The second part or the rule refers to articles removed in unassembled/disassembled condition.
They should be classified under the heading appropriate to the assembled article, though in the
condition in which they are removed, they are actually unassembled /disassembled.
Rule 2(b):- This rule specifies that headings in which there is a reference to material/substance
also cover such material/substance mixed to combine with other materials/substances. Utilising
Rule 2(b), one should not broaden the scope of a heading so that the heading actually covers
articles which can not be regarded (as required by rule 1) as answering the description in
heading.
Rule 3:
This rule provides three methods to classify goods which prima-facie appear to
attract several different headings, either by utilising 2(b) or for any other reason. These methods
are to be operated in the same sequential order in which they are set out in this rule.
Thus rule 3(b) will apply only if 3(a) fails and 3(c) should be invoked only after ruling out 3(a)
& (b). The order of priority is therefore as below:
(a)
Most specific description
(b)
Essential character
(c)
Heading which occurs last in the numerical order
Generally it could be said that a description by name is more specific than a description by class.
Again, a description which identifies the goods clearly and precisely is more specific than the
one which is less complete. Rule 3(b) points to the essential character as the determining factor.
This has to be determined by taking into consideration various criteria such as the nature of the
material or component, its bulk quantity, weight or value or the role of each constituent material
in relation to the use of the goods. Rule 3(b) also covers goods put up in sets. A set does not
mean a number of the same article grouped together. To utilise rule 3(b), it should be
determined as to which among the constituents confers the essential character of the set.
Rule 3(c) simply says that among the alternative headings, the one which occurs last in the
schedule should be preferred to the earlier ones.
Rule 4:- Classification should be made under the heading to which the product in question is
most akin. Kinship can depend upon many factors such as description, character or even use.
Rule 5: This rule is the equivalent of Rule 6 of HSN Rules since in the C.E.T. Rule 5 of H.S.N
has been omitted. This rule clearly specifies a classification principle that identifying an
appropriated sub heading is to be contemplated only after the product concerned has first been
properly classified under the correct four digit heading. This rule further specifies that for
classification among sub headings, the same rules as are applicable to the heading themselves
(Rules 1 to 4) are to be applied.
Within the context of a single heading, the choice of one dash sub heading may be made only on
the basis of the one dash sub heading. Similarly two dash sub headings should be compared only
with other two dash sub headings. In other words, one should not compare a two dash with a one
dash sub heading or vice versa.
Exemption from duty

Central Excise Tariff Act prescribes the rate of duty for each Chapter head and Sub head. This rate is called Tariff
Rate and the duty payable is Statutory Duty. Central Excise Act grants powers to Central Government to modify
the rates as per requirements by issuing a notification. The duty actually payable as per notification is called
effective rate of duty.
If the goods are exempt by way of a notification, they are called exempt from duty. If the tariff itself
specified duty as NIL, the goods are chargeable to NIL rate of duty. Under Central Excise exemption means
exemption by notification under Section 5A of Central Excise Act.
According to the Central Excise Rules, goods removed for export under Bond without
payment of duty does not mean that goods are exempt from duty or chargeable at nil rate of duty
but goods removed under new Central Excise (Removal of goods at concession rate of duty for
manufacture of excise goods) Rules will be exempted goods.
Based on various court decisions, it has been held that:
(i)
(ii)
the inputs remain duty paid even when CENVAT credit is taken on them
whenever an exemption notification is issued subject to condition that appropriate duty of excise has
been paid on the inputs, the exemption will not be available if the inputs are exempted from excise
duty or are subject to nil rate of excise duty.
(iii)
Exempted goods cannot be termed as goods which have suffered duty ie. Goods which have
suffered duty means those goods on which duty actually has been paid.
(iv)
Exemption notification cannot be interpreted in a way so as to create a duty liability which is not there
(Sakthi Sugars Ltd. v. Vol.I-1983(12) ELT)
.2
-2A notification has to be published in Official Gazette, which is then made available to
public. There may be time gap between issue of a notification and its publication in official
Gazette. It has been provided that the Central Excise notification will be effective on the date it
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is issued. Thus, an exemption notification will be valid on the day it is issued though it may be
published in official Gazette later. However, when there is no specific provision in Act, a
notification becomes effective on the day it is published in official Gazette.
Under Section 5A(IA) inserted with effect from 13.5.2005, if a notification grants
unconditional exemption to certain goods, assessee cannot pay Excise Duty on such goods.
Earlier, it was consistently held by Tribunal that assessee has option to ignore exemption and
pay Excise Duty, even in cases where exemption is unconditional. Now, these decisions are no
longer valid. However, a conditional exemption is at the option of assessee. Similarly, when
more than two benefits are available, assessee can avail either of the benefits.
New units in backward area:
In order to encourage development of back areas, excise duty exemption has been granted to
goods manufactured by new units (or existing units undertaking substantial expansion) in the
specified areas (a) North Eastern Region, (b) Kutch district of Gujarat, (c) State of Jammu &
Kashmir, (d) State of Sikkim, (e) Himachal Pradesh and (f) Uttaranchal. In the case of NE
region, the unit should pay excise duty. Duty paid through PLA is refunded next month or self
credit is allowed. Buyer who purchases goods from such unit is entitled to avail full CENVAT
credit of duty paid. In the case of units in Himachal and Uttaranchal, there is direct exemption.
Chapter III
Valuation
This session deals with the valuation of excisable commodities for levy of duty
Valuation for the purpose of levy of Central Excise duty is dealt with under Sec.4 & 4A
of the Central Excise Act. To supplement this, Central Excise Valuation (Determination of
price of excisable goods) Rules 2000 is provided.
When duty is leviable on advalorem basis, the assessable value will be the normal price
which is otherwise called transaction value.(Sec 4) Normal price is the price at which such
goods are ordinarily sold by the assessee to a buyer in wholesale trade for delivering at the time
and place of removal, where the buyer is not a related person and where price is the sole
consideration for the sale.
Section 4A deals with value of excisable goods with reference to retail sale price. In this
case, retail price is to be statutorily declared on the package. This is also called MRP. If more
than one MRP is found, then the higher MRP is deemed to be retail sale price. The above
provisions will not apply to goods for which tariff value is fixed by the Government u/s. 3(2).
Section 3A empowers Central Government to charge Excise Duty on the basis of
capacity of production in respect of certain notified goods. Duties specified in notifications are to
be levied.
TARIFF VALUE
(Sec.3(A)
Applies to notified Commodities;
i. Cement
ii.Sugar;
iii.Pan Masala of specific weight
Simple and specific
No abatement
Static and require constant
monitoring
Not encountered legal problems
Not likely to be enlarged;
Not evasion prone
NORMAL PRICE
(Sec. 4)
Applies to all goods
chargeable to duty on
Adv.(excepting products
covered under
Sec.3(3)/Sec.4A
Complex and covers various
situations
Abatements permissible
under law
MAXIMUM RETAIL
PRICE (Sec. 4A)
Applies to notified
Commodities
Flexible
Flexible
Most litigated provision
Relatively new provision
---------------Evasion prone
Simple and specific;

Fixed quantum of
abatement
Likely to be enlarged to
cover more commodities
Evasion minimal
Valuation - certain important terms

1.Value
9.Place of removal
14
2.Price
3.Advalorem
4.Assessee
5.Wholesale trade
6.Sale
7.Delivery
8.Time of removal
10.Sole consideration
11.Favoured buyer
12.Class of buyer
13. Discounts
14. Durable and returnable
15. Packing
Valuation - Section 4
1.
2.
3.
4.
5.
Transaction value
- Section 4(1)(a)
Definiton of assessee
- Section 4(3)(a)
Persons deemed as related
- Section 4(3)(b)
Place of removal
- Section 4(3)(c)
Definition of Transaction Value
- Section 4(3)(d)
1) Price at delivery or at any other time nearest
to the time of removal
-Rule 4 of Central Excise Valuation
(Determination of Price of
Excisable goods) Rules,2000
2) Sale for delivery at a place other than
- Rule 5
-doplace of removal
3) Additional consideration
- Rule 6
-do4) Transfer to a place from where goods
are sold
- Rule 7
-do5) Captive consumption
- Rule - 8
-do6) Clearance to related persons
- Rule - 9
-do7) Sale through Inter Connected Undertaking - Rule -10
-do8) Best judgment
- Rule -11
-doImplied Abatements
1.
Interest on receivable
Not includible
2.
Post delivery inspection/testing charges
Includible if mandatory
3.
Third party optional testing charges
Includible
4.
Actual Freight element exhibited in the invoice - Not includible
5.
Loading charges outside the place of removal
- Includible, if door delivery of
goods
6.
Optional accessories
Includible if cleared with main
machinery
7.
Erection charges
) Not includible if not forming part
8.
Installation and commissioning charges )
of Contract
9.
Design/Layout sites
Includible
10.
Training charges
Includible if relate to goods
supplied
Valuation (Includible elements) if recovered from customer
1.
2.
3.
4.
5.
6.
7.
8.
9.
Packing charges
Excess freight collected
Warranty & after-sales service
Design & Development charges
Publicity/advertisement charges
Marketing/selling/distribution expenses
Depot expenses
Interest on inventories
Loading charges incurred within
factory
10.
11.
12.
13.
14.
15.
16.
17.
Know-how technical consultancy charges

Pre-delivery testing/inspection charges
Commission to agents
Over-riding commission to distributors
Cost of mould/die/pattern
Notional interest on advances
Discount on damages
Other additional consideration
Value of prime accessories
Bombay Tyre International 1983 (14) ELT 1896 SC

1. Constitutional validity of Section 4 upheld
2. Agreement that duty should be levied only on manufacturing profit/loss negatived
3. Design charges, warranty, after-sale service to be included
4. Publicity/advertising expenses to be included
5. Equalized freight/transit insurance abatable
6. Trade discount/turnover discount allowed
7. ED/Taxes excludible
8. Special secondary packing at the instance of the buyer excluded.
9. Validity of related person concept upheld
10. Competency of Excise officials to lift the corporate veil affirmed
MRF judgment 1995 (77) ELT 433 SC
1. Depot expenses disallowed
2. Year ending discounts, bonus discounts allowed
3. Secondary packing ponds case affirmed
4. Interest on inventories disallowed
5. Interest on receivables allowed
6. Marketing, selling and marketing expenses to be included
7. From cum-duty price discount should be demanded first and then Excise Duty
Metal Box Co. VS. CCE 1995 (75) ELT 449
1. Notional interest on advances made by customer added to price to arrive at value
2. Uniformity in trade discount not required - bulk buyer not to be treated as a favoured buyer
3. After loading notional interest on price, higher discount permissible
4. Nexus and deflation in price required to be proved.
CCE, Pune VS. Daichi Karkaria Ltd. 1999(112) ELT 353 SC (3 member)
1. Cost not defined in Excise Act; Hence to be reckoned by accounting principle
2. As per guidance notes issued by C.A. Institute, duty credit is like rebate/set off. Hence cost
of raw materials to be treated as net of Excise Duty
3. Under Rule 6(b)(ii) of Central Excise Rules, 1944 (since replaced with new Central Excise
Rules, 2001)- for determination of landed cost of raw materials, Excise Duty element not to
be included when working under Modvat Scheme
M R P Assessment
16
Introduction:
When goods are chargeable to duty on ad valorem basis, the value thereof is determined
based on the provisions contained is Section 4, which provides for adoption of wholesale price
with certain adjustments on Assessable Value. However, in the Finance Act, 1997, a new
concept of valuation based on Maximum Retail Price has been introduced by incorporation of
new Section 4A.
II
Scope:
1.
As per Section 4A, the Government is empowered to notify any goods, to which the
provisions of Standards of Weight and Measures Act, 1976 (60 of 1976) or any other law apply
and according to which the retail price of such goods shall have to be declared on the packages.
In terms of Packed Commodities Rules framed under Weights and Measures Act, pre-packaged
commodities are required to contain certain declarations on the package. In terms of Packed
Commodities Rules, pre-packed commodity is defined as:Pre-packed - commodity with its grammatical variations and cognate expressions, means
a commodity which, without the purchaser being present, is placed in a package of whatever
nature, so that the quantity of the product contained therein has a pre-determined value and such
value cannot be altered without the package or its lid/cap, as the case may be being opened or
undergoing a perceptible modifications, and the expression package wherever it occurs shall
be construed as a package containing a pre-packed commodity.
Explanation I:
Where, by reasons merely of the opening of package, no alternation is caused to the
value, quantity, nature or characteristics of the commodity contained therein, such commodity
shall be deemed for the purposes of those rates to be a pre-packed commodity, for e.g., an
electric bulb or fluorescent tube is a pre-packed commodity, even though the package containing
it is required to be opened for testing the commodity.
Explanation II:
Where a commodity consists of a number of components and these components are
packed in one, two or more units for sale as a single commodity, such commodity shall be
deemed for the purpose of these rules, to be pre-packaged commodity.
2.
From the above definition, it is clear that only when a commodity is sold in a pre-packed
form, the provisions of Weights and Measures Act would apply. As on date only the provisions
of Standards of Weights and Measures Act requires affixing of MRP on certain pre-packed
commodity. Hence, as per the provisions of Section 4A of the Central Excise Act, 1944 the
products covered under the ambit of Weights and Measures Act would fall within the frame
work of MRP scheme.
3.
The Provisions of Standards of Weights and Measures Act, 1976 are mainly intended to
establish standards of weights and measures, to regulate interstate Trade or Commerce in
weights, measures; and other goods which are sold or distributed by weight, measure or
numbers and to provide for incidental matters connected with trade and commerce. Section 83
of the said Act empowers the Central Government to make Rules to provide for the manner of
declaration of the contents of the package and specification of weight, measure and numbers in
accordance with which the retail sale price shall be declared on the packages. Accordingly, the
Central Government has framed the Standards of Weights and Measures (Packaged
Commodities) Rules, 1977. In the said Rules, the provisions contained in Chapter II would be
relevant for the purpose of determination of MRP in terms of Section 4A of Central Excise Act,
1944.
4.
The said Chapter II contains provisions which are applicable to packages intended for
retail sale. The important terms such as Retail Sale and Retail Package as defined in the
Packaged Commodities Rules, 1977 are extracted below:
Retail Sale in relation to a commodity, means the sale, distribution or delivery of such
commodity through retail sales agencies or other instruments for consumption by an individual
or a group of individuals or any other consumer.
Retail Package means a package containing any commodity which is produced, distributed,
displayed, delivered or stored for sale through retail sales agencies or other instruments for
consumption by an individual or a group of individuals.
5.
In terms of Rule 4, sale, distribution or delivery of any pre-packed commodity is
permissible only when the package in which the commodity is pre-packed bears thereon a
required declaration. Rule 6 deals with declaration to be made on every package. In terms of the
said rule every package shall bear thereon or on a label securely affixed thereto certain required
information including the retail price of the said package. The other connected rules 15, 16 and
17 deals with declaring retail sale price on combination packages, group packages and multi
piece packages, respectively.
6.
Rule 23 deals with whole sale dealer as well as retail dealer, mandating that no whole
sale dealer or retail dealer shall sell, distribute or deliver any packed commodity unless the said
package complied with the provisions of the Act and the rules and in addition, no retail dealer
including manufacturer shall sell the commodity exceeding the MRP. Thus the entire provisions
of Chapter II of the said Act which deals with Rule 3 to Rule 28 speaks only about the retail
package and only in this particular chapter there is a mandatory requirement of
declaring/affixing MRP.
7.
The provisions applicable to wholesale packages are dealt with in chapter III i.e., Rule
29. There is no mandatory requirement in the said Rule for affixing MRP or the retail price in
the said packages. Hence it is felt that the commodities which are sold or removed in the course
of wholesale trade in wholesale packing, there is no requirement of affixing MRP. Similarly, the
commodities which are sold in bulk or in wholesale packages meant for industrial consumers
also may not come in the purview of MRP concept.
III
Applicability:
1.
When excisable goods chargeable to duty on advalorem basis are notified under Section
4A, then not withstanding anything contained in Section 4, such value shall be deemed to be the
retail price declared on such goods less permissible abatements. In terms Section 4A, (2) Central
Government is empowered to allow such abatements by notification in the official gazette. For
the purpose of allowing abatements, the Central Government may take into account the amount
of duty of excise, sales tax and other taxes, if any, payable on such goods. For the purpose of
Section 4A, the term retail sale price means the maximum price which the excisable goods in
packaged form may be sold to the ultimate consumer and includes all taxes local or otherwise,
freight, transport charges, commission payable to dealers, that all charges towards advertisement,
delivery, packing, forwarding and the like, and the price is sole consideration. Where any
excisable goods have more than one retail price, then the maximum of such retail price shall be
deemed to be retail price for the purpose of determination of MRP under section 4 A.
2.
At present 83 commodities(covered under 99 tariff headings/sub headings) are covered
under Section 4 A and the Government has provided different abatement for various
commodities. The coverage of this scheme and the permissible abatements have been declared
under Notification No. 5/2001- CE (NT) dt. 1.3.2001. One more important aspect about the
MRP scheme is that the MRP declared in the packaged commodities should be the sole
18
consideration and if there is scope for receipt of additional consideration, as in the case of
various exchange schemes offered by the manufacturers of consumer durable, the MRP declared
will not be regarded as the sole consideration and such commodities shall be assessed duties
based on the value determinable in terms of Section 4.
IV
Consequential Amendments
(i) After the introduction of MRP scheme for certain notified products, notifications granting
Small Scale exemption such as 8/2001 -CE and 9/2001-CE dt 01.03.01 have all been modified
accordingly to determine the eligibility for exemption as well as the extent of exemption to be
quantified in terms of MRP in respect of the product notified under Section 4A.
(ii) Section 4A has been further amended to provide for a specific provision to confiscate the
notified excisable goods, if any manufacturer removes from the place of manufacture such
notified goods without declaring the retails sale price on such packages or declares a retail sale
price which does not constitute the sole consideration for sale, or tampers with, obliterates or
alters any such declaration made on the packages after removal. This provision is in addition to
the other provisions existing in the Central Excise Rules for confiscation.
V
Conclusion:
It is expected that with the introduction of Maximum Retail Price concept, the task of
determination of value will become simpler and there may not be any scope for unnecessary and
unwarranted litigation. The attitude of the assessee resorting to under-valuation through various
means such as job work manufacture, purchase from SSI units with brand name, sale to/through
related persons, sale to favoured buyers, off loading certain elements of value in the guise of
discount, freight, after sale service, warranty charges etc., will be totally eliminated.
Chapter IV
CENVAT Scheme
Central Value Added Tax Scheme
This session deals with the provisions of the Central Excise Act for admissibility of input
credits to be adjusted towards payment of duty on goods produced
Benefits
1.
Reduces cascading effect.
2.
No duty on duty.
3.
Instant credit.
4.
Proper accounting of materials and considerable reduction in evasion.
5.
Step towards GST (Goods & Services Tax)
6.
Increased productivity and higher revenue realisation.
Cenvat Scheme (Effective from 1 July, 2001)
Rule 1.
Gazette notification of input and final products.
Rule 2.
Definition
Rule3.
Applicability
Rule 4.
Conditions for allowing credit
Rule 5.
Refund of CENVAT Credit
Rule 6.
Obligation of manufacturer of dutiable and exempted goods.
Rule 7.
Documents and accounts
Rule 8.
Transfer of CENVAT Credit
Rule 9.
Transitional provision
Rule 10.
Special dispensation in respect of inputs manufactured in factories located in

specified areas of North Eastern Region
Rule 11.
Power of central government to notify goods for deemed CENVAT Credit
Rule 12.
Recovery of CENVAT Credit wrongly taken.
Rule 13.
Confiscation and penalty
20
CENVAT Admissibility and procedure:

1.
Inputs may be used in or in relation to the manufacture of the final products.
2.
Inputs may be removed as such for home consumption or for export.
3.
In such cases amount equivalent to the duty on transaction value under Sec 4 of CE Act,
1944, covered by an invoice under rule 52-A of Central Excise Rules, 1944.
4.
Inputs as such or after partial processing may be removed for job work or for
manufacture of intermediate goods to be returned within 180 days.
5.
On return of the said goods, may be removed for home consumption, export, for use in
the manufacture of any final products or to 100% EOU, EPZ units etc.
6.
Waste also to be returned or else to produce proof of payment of duty at job workers
end.
7.
To be sent under challan duty authenticated as prescribed by CBEC.
8.
If inputs not received within 180 days, differential duty will be charged.
9.
Credit allowed can be used for payment of duty on any final products declared under
Rule 57G, on inputs removed as such and on goods not charged to duty under Rule 57CC
of 1944 rules.
10.
Credit on inputs used in the manufacture of final product and intermediate goods
exported under bond will be allowed to be utilised for payment of duty on any final
products cleared for home consumption. However, it cannot be utilised for any refunds.
Cash refund is permissible subject to limitations and conditions as per rules and
notifications issued thereunder.
11.
No cash refund, if drawback or benefit of Rule 12(1)(B) of Central Excise Rules, 1944
availed.
12.
For clearances to EPZ/100% EOU/STP/EHTP and under notification 108/95, utilization

of input credit for payment of duty on other final products will be allowed, but no cash
refund is allowed..
13.
Disposal of waste, either on payment of duty or by destruction.
14.
Asst. Commissioner to permit transfer of modvat credit balance in case of shifting of the
factory, merger, amalgamation or transfer subject to conditions and limitation particularly
the liability and balance inputs should also taken over by the new unit and accounted for.
Goods not eligible for credit:

1.
Packing materials in respect of which exemption is available.
2.
Packing materials/containers, the cost of which is not includible in terms of sec. 4 of the
Act.
Crates, glass bottles used for packing aerated waters.
Inputs which are used in the manufacture of Capital goods which are further used in the
factory for manufacture.
3.
4.
Amount of CENVAT Credit eligible under the scheme

(i)
In terms of the notification issued, a credit will be restricted only to the extent of C.V.D.
paid by 100% E.O.U., E.P.Z., S.T.P. and E.H.T.P. units on their DTA (Domestic Traffic
Area) clearances.
(ii)
A.E.D. paid under the various enactments to be used for payment of A.E.D. under the
respective Act only.
(iii)
Goods falling under heading 2710.11/2710.12/ 2710.13/2710.19 (excluding natural

gasoline liquids) and high speed diesel oil (HSD) falling under the heading 27.10 not
eligible for the cenvat benefits.
(iv)
National Calamity Contingent duty leviable under Sec.136 of the Finance Act and the
credit can be utilised only for payment of NCC duty.
(v)
No credit in respect of duty paid on the inputs used for manufacture of texturised yarn
(including draw twisted or draw wound yarn) of polysters falling under heading No.5402.
Rule 3: Applicability
1. Removal of inputs for manufacture of intermediate goods by job-worker directly to his
premises.
2. Job worker should avail benefit of notification no.214/86.
1) A manufacturer or producer of final products or a provider of taxable service shall be
allowed to take credit (hereinafter referred to as the CENVAT credit) of (i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable
under the Excise Act;
(ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable
under the Excise Act;
(iii) the additional duty of excise leviable under section 3 of the Additional Duties of
Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978);
(iv) the additional duty of excise leviable under section 3 of the Additional Duties of
Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957);
(v) the National Calamity Contingent duty leviable under section 136 of the Finance Act,
2001 (14 of 2001);
(vi) the Education Cess on excisable goods leviable under section 91 read with section 93
of the Finance (No.2) Act, 2004 (23 of 2004);
(vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to
the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vi);
22
(viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff
Act, as substituted by clause 72 of the Finance Bill, 2005, the clause which has, by virtue
of the declaration made in the said Finance Bill under the Provisional Collection of Taxes
Act, 1931 (16 of 1931), the force of law:
Provided that a provider of taxable service shall not be eligible to take credit of such
additional duty;
(viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003
(32 of 2003);
(ix) the service tax leviable under section 66 of the Finance Act; and
(x) the Education Cess on taxable services leviable under section 91 read with section 95
of the Finance (No.2) Act, 2004 (23 of 2004),
(xi) the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the
clause which has, by virtue of the declaration made in the said Finance Bill under the
Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law, paid on(i) any input or capital goods received in the factory of manufacture of final product or
premises of the provider of output service on or after the 10th day of September, 2004;
and
(ii) any input service received by the manufacturer of final product or by the provider of
output services on or after the 10th day of September, 2004,
including the said duties, or tax, or cess paid on any input or input service, as the case
may be, used in the manufacture of intermediate products, by a job-worker availing the
benefit of exemption specified in the notification of the Government of India in the
Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the
25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated
the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the
manufacture of final product, on or after the 10th day of September, 2004.
Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products
and the provider of output service shall be allowed CENVAT credit of additional duty leviable
under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First
Schedule to the Customs Tariff Act.
(2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer of final
products shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in
process or inputs contained in the final products lying in stock on the date on which any goods
manufactured by the said manufacturer or producer cease to be exempted goods or any goods
become excisable.
(3) Notwithstanding anything contained in sub-rule (1), in relation to a service which ceases to
be an exempted service, the provider of the output service shall be allowed to take CENVAT
credit of the duty paid on the inputs received on and after the 10th day of September, 2004 and
lying in stock on the date on which any service ceases to be an exempted service and used for
providing such service.
(4) The CENVAT credit may be utilized for payment of
(a) any duty of excise on any final product; or
(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as
such or after being partially processed; or
(c) an amount equal to the CENVAT credit taken on capital goods if such capital goods
are removed as such; or
(d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or
(e) service tax on any output service:
Provided that 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:
Provided further that the CENVAT credit of the duty, or service tax, paid on the inputs,
or input services, used in the manufacture of final products cleared after availing of the
exemption under the following notifications of Government of India in the Ministry of Finance
(Department of Revenue),(i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July,
1999];
(ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July,
1999];
(iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the
31st July, 2001];
(iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated
the 14th November, 2002];
(v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the
14th November, 2002];
(vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the
25th June, 2003]; and
(vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated
the 9th September, 2003],
shall, respectively, be utilized only for payment of duty on final products, in respect of which
exemption under the said respective notifications is availed of.
Provided also that no credit of the additional duty leviable under sub-section (5) of
section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the
clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional
Collection of Taxes Act, 1931, the force of law, shall be utilised for payment of service tax on
any output service:
Provided also that the CENVAT credit of any duty mentioned in sub-rule (1), other than
credit of additional duty of excise leviable under clause 85 of the said Finance Bill, the clause
which has, by virtue of the declaration made in the said Finance Bill under the Provisional
Collection of Taxes Act, 1931, the force of law, shall not be utilised for payment of said
additional duty of excise on final products.
(5) When inputs or 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 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 referred to in rule 9:
Provided that such payment shall not be required to be made where any inputs are
removed outside the premises of the provider of output service for providing the output service:
24
Provided further that such payment shall not be required to be made when any capital
goods are removed outside the premises of the provider of output service for providing the
output service and the capital goods are brought back to the premises within 180 days, or such
extended period not exceeding 180 days as may be permitted by the jurisdictional Deputy
Commissioner of Central Excise, or Assistant Commissioner of Central Excise, as the case may
be, of their removal.
(6) The amount paid under sub-rule (5) shall be eligible as CENVAT credit as if it was a duty
paid by the person who removed such goods under sub-rule (5).
(7) Notwithstanding anything contained in sub-rule (1) and sub-rule (4),(a) CENVAT credit in respect of inputs or capital goods produced or manufactured, by a
hundred per cent. export-oriented undertaking or by a unit in an Electronic Hardware
Technology Park or in a Software Technology Park other than a unit which pays excise duty
levied under section 3 of the Excise Act read with serial numbers 3,5, 6 and 7 of notification
No. 23/2003-Central Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st
March, 2003] and used in the manufacture of the final products or in providing an output
service, in any other place in India, in case the unit pays excise duty under section 3 of the
Excise Act read with serial number 2 of the notification No. 23/2003-Central Excise, dated the
31st March, 2003, [G.S.R. 266(E), dated the 31st March, 2003], shall be admissible
equivalent to the amount calculated in the following manner, namely:Fifty per cent. of [X multiplied by {(1+BCD/100) multiplied by (CVD/100)}], where BCD
and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of
customs leviable on the inputs or the capital goods respectively and X denotes the assessable
value.
(b) CENVAT credit in respect of,(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise
(Textiles and Textile Articles) Act, 1978 (40 of 1978);
(ii) the National Calamity Contingent duty leviable under section 136 of the Finance Act,
2001 (14 of 2001);
(iii) the Education Cess on excisable goods leviable under section 91 read with section 93 of
the Finance (No.2) Act, 2004 (23 of 2004);
(iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the
duty of excise specified under clauses (i), (ii) and (iii);
(v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of
2003); and
(vi) the Education Cess on taxable services leviable under section 91 read with section 95 of
the Finance (No.2) Act, 2004 (23 of 2004); and
(vii)the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the
clause which has, by virtue of the declaration made in the said Finance Bill under the
Provisional Collection of Taxes Act, 1931, the force of law,
shall be utilized only towards payment of duty of excise or as the case may be, of service tax
leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or
the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14
of 2001), or the education cess on excisable goods leviable under section 91 read with section 93
of the Finance (No.2) Act, 2004, additional duty of excise leviable under section 157 of the
Finance Act, 2003, or the education cess on taxable services leviable under section 91 read with
section 95 of the said Finance (No.2) Act, 2004, or the additional duty of excise leviable under
clause 85 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in
the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force
of law, respectively, on any final products manufactured by the manufacturer or for payment of
such duty on inputs themselves, if such inputs are removed as such or after being partially
processed or on any output service:
Provided that the credit of the education cess on excisable goods and education cess on taxable
services can be utilised, either for payment of the education cess on excisable goods or for the
payment of the education cess on taxable services.
Explanation.-For the removal of doubts, it is hereby declared that the credit of the additional
duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special
Importance) Act, 1957 (58 of 1957) paid on or after the 1st day of April, 2000, may be utilised
towards payment of duty of excise leviable under the First Schedule or the Second Schedule to
the Excise Tariff.
(c)the CENVAT credit, in respect of additional duty leviable under section 3 of the Customs
Tariff Act, paid on marble slabs or tiles falling under sub-heading No. 2504.21 or 2504.31
respectively of the First Schedule to the Excise Tariff Act shall be allowed to the extent of thirty
rupees per square meter;
Explanation.- Where the provisions of any other rule or notification provide for grant of whole or
part exemption on condition of non-availability of credit of duty paid on any input or capital
goods, or of service tax paid on input service, the provisions of such other rule or notification
shall prevail over the provisions of these rules.
Rule 4 Conditions for availing CENVAT Credit
(1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs
in the factory of the manufacturer or in the premises of the provider of output service:
Provided that in respect of final products, namely, articles of jewellery falling under
heading 7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on
inputs may be taken immediately on receipt of such inputs in the registered premises of the
person who get such final products manufactured on his behalf, on job work basis, subject to the
condition that the inputs are used in the manufacture of such final product by the job worker.
(2) (a) The CENVAT credit in respect of capital goods received in a factory or in the premises of
the provider of output service at any point of time in a given financial year shall be taken only
for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same
financial year:
Provided that the CENVAT credit in respect of capital goods shall be allowed for the
whole amount of the duty paid on such capital goods in the same financial year if such capital
goods are cleared as such in the same financial year.
Provided further that the CENVAT credit of the additional duty leviable under subsection (5) of section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill,
2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the
Provisional Collection of Taxes Act, 1931, the force of law, in respect of capital goods shall be
allowed immediately on receipt of the capital goods in the factory of a manufacturer.
26
(b) The balance of CENVAT credit may be taken in any financial year subsequent to the
financial year in which the capital goods were received in the factory of the manufacturer, or in
the premises of the provider of output service, if the capital goods, other than components, spares
and accessories, refractories and refractory materials, moulds and dies and goods falling under
heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act,
are in the possession of the manufacturer of final products, or provider of output service in such
subsequent years.
Illustration.- A manufacturer received machinery on the 16th day of April, 2002 in his factory.
CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a
maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent
years..
(3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer,
provider of output service even if the capital goods are acquired by him on lease, hire purchase
or loan agreement, from a financing company.
(4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of
the value of capital goods which represents the amount of duty on such capital goods, which the
manufacturer or provider of output service claims as depreciation under section 32 of the
Income-tax Act, 1961( 43 of 1961).
(5)(a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after
being partially processed are sent to a job worker for further processing, testing, repair, reconditioning or any other purpose, and it is established from the records, challans or memos or
any other document produced by the manufacturer or provider of output service taking the
CENVAT credit that the goods are received back in the factory within one hundred and eighty
days of their being sent to a job worker and if the inputs or the capital goods are not received
back within one hundred eighty days, the manufacturer or provider of output service shall pay an
amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting
the CENVAT credit or otherwise, but the manufacturer or provider of output service can take the
CENVAT credit again when the inputs or capital goods are received back in his factory or in the
premises of the provider of output service
(b) The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent
by a manufacturer of final products to a job worker for the production of goods on his behalf and
according to his specifications.
(6) The Commissioner of Central Excise having jurisdiction over the factory of the manufacturer
of the final products who has sent the input or partially processed inputs outside his factory to a
job-worker may, by an order, which shall be valid for a financial year, in respect of removal of
such input or partially processed input, and subject to such conditions as he may impose in the
interest of revenue including the manner in which duty, if leviable, is to be paid, allow final
products to be cleared from the premises of the job-worker.
(7) The CENVAT credit in respect of input service shall be allowed, on or after the day which
payment is made of the value of input service and the service tax paid or payable as is indicated
in invoice, bill or, as the case may be, challan referred to in rule 9.
Rule 5 Conditions for refund of Cenvat Credit
Where any input or input service is used in the final products which is cleared for export under
bond or letter of undertaking, as the case may be, or used in the intermediate products cleared for
export, or used in providing output service which is exported, the CENVAT credit in respect of
the input or input service so used shall be allowed to be utilized by the manufacturer or provider
of output service towards payment of,
(i) duty of excise on any final products cleared for home consumption or for export on payment
of duty; or
(ii) service tax on output service,
and where for any reason such adjustment is not possible, the manufacturer shall be allowed
refund of such amount subject to such safeguards, conditions and limitations, as may be
specified, by the Central Government, by notification:
Provided that no refund of credit shall be allowed if the manufacturer or provider of
output service avails of drawback allowed under the Customs and Central Excise Duties
Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in
respect of such duty.
Provided further that no credit of the additional duty leviable under sub-section (5) of
section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the
clause which has, by virtue of the declaration made in the said Finance Bill, under the
Provisional Collection of Taxes Act, 1931, the force of law, shall be utilised for payment of
service tax on any output service.
Explanation: For the purposes of this rule, the words output service which are exported
means the output taxable services exported in accordance with the Export of Services Rules,
2005.
Rule 6 Obligation of manufacturer of dutiable and exempted goods and provider of
taxable and exempted services
(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is
used in the manufacture of exempted goods or exempted services, except in the circumstances
mentioned in sub-rule (2).
Provided that the CENVAT credit on inputs shall not be denied to job worker referred to
in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the
manufacture of goods cleared without payment of duty under the provisions of that rule
(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of
any inputs or input services, except inputs intended to be used as fuel, and manufactures such
final products or provides such output service which are chargeable to duty or tax as well as
exempted goods or services, then, the manufacturer or provider of output service shall maintain
separate accounts for receipt, consumption and inventory of input and input service meant for
use in the manufacture of dutiable final products or in providing output service and the quantity
of input meant for use in the manufacture of exempted goods or services and take CENVAT
credit only on that quantity of input or input service which is intended for use in the manufacture
of dutiable goods or in providing output service on which service tax is payable.
28
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider
of output service, opting not to maintain separate accounts, shall follow either of the following
conditions, as applicable to him, namely:(a) if the exempted goods are(i) goods falling within heading No. 22.04 of the First Schedule to the Excise Tariff Act
(hereinafter in this rule referred to as the said First Schedule);
(ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First
Schedule used in the generation of electricity;
(iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the
manufacture of fertilizer;
(iv) Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule
used for generation of electricity;
(v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First
Schedule;
(vi) final products falling within Chapters 50 to 63 of the said First Schedule,
(vii) goods supplied to defence personnel or for defence projects or to the Ministry of
Defence for official purposes, under any of the following notifications of the Government
of India in the Ministry of Finance (Department of Revenue), namely:(1) No. 70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th
June, 1992;
(2) No. 62/95-Central Excise, dated the 16th March, 1995, G.S.R. 254 (E), dated the 16th
March, 1995;
March, 1995;
March, 1995,
the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs
and input services used in, or in relation to, the manufacture of such final products at the time of
their clearance from the factory; or
(b) if the exempted goods are other than those described in condition (a), the manufacturer shall
pay an amount equal to ten per cent. of the total price, excluding sales tax and other taxes, if any,
paid on such goods, of the exempted final product charged by the manufacturer for the sale of
such goods at the time of their clearance from the factory;
(c) the provider of output service shall utilize credit only to extent of an amount not exceeding
twenty per cent. of the amount of service tax payable on taxable output service.
Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by the
manufacturer or provider of output service by debiting the CENVAT credit or otherwise.
Explanation II.- If the manufacturer or provider of output service fails to pay the said amount, it
shall be recovered along with interest in the same manner, as provided in rule 14, for recovery of
CENVAT credit wrongly taken.
(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the
manufacture of exempted goods or in providing exempted services, other than the final products
which are exempt from the whole of the duty of excise leviable thereon under any notification
where exemption is granted based upon the value or quantity of clearances made in a financial
year.
(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of
service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm),
(zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the
Finance Act shall be allowed unless such service is used exclusively in or in relation to the
manufacture of exempted goods or providing exempted services.
(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable
goods removed without payment of duty are either(i) cleared to a unit in a special economic zone; or
(ii) cleared to a hundred per cent. export-oriented undertaking; or
(iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology
Park; or
(iv) supplied to the United Nations or an international organization for their official use
or supplied to projects funded by them, on which exemption of duty is available under
notification of the Government of India in the Ministry of Finance (Department of Revenue)
No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th
August, 1995; or
(v) cleared for export under bond in terms of the provisions of the Central Excise Rules,
2002; or
(vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the
course of manufacture of copper or zinc by smelting.
(vii) all goods which are exempt from the duties of customs leviable under the First
Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under
section 3 of the said Customs Tariff Act when imported into India and supplied against
International Competitive Bidding in terms of notification No. 6/2002-Central Excise dated the
1st March, 2002.
Rule 7 : Documents
1.
An invoice issued by a manufacturer of inputs.
2.
An invoice issued by the manufacturer of inputs from his depots, premises of the
consignment agents or any other place of business.
30
3.
Invoice issued by a manufacture for clearance of inputs or capital goods.
4.
Invoice issued by the first stage dealer or second stage dealer in terms of the provisions
of CE(No.2), Rules 2001.
5.
An invoice issued by the second stage dealer of excisable goods registered and duly
authenticated by the proper officer.
6.
Invoice issued by an importer registered.
7.
Invoice issued by an importer from his depot or from the premises of consignment
agent of the said importer or premises as the case may be, is registered in terms of the
provisions of CE(No.2), Rules 2001.
8.
An invoice issued by a registered first stage dealer of imported goods and duly
authenticated by the proper officer.
A Bill of entry.
A supplementary invoice, issued by a manufacturer or importer of inputs or capital
goods in terms of the provisions of CE(No.2) Rules 2001 from his factory, or from his
depot or from the premises of consignment agent of the said manufacturing importer.
9.
10.
Rule 9 - Transitional Provision:

1.
Inputs lying in stock.
2.
Duty paying documents.
3.
To be used in the manufacture of final products.
4.
Input and final products duly notified.
5.
No credit earlier availed.
6.
Final product not exempt or charged to nil rate of duty.
7.
Opting out of cenvat, input duty on the stock available to be assessed and expunged from
the credit account. Excess, if any would lapse. Short credit if any, would be recovered by
cash payment.
8.
Unutilised balance of credit as on 1.7.2001.
Rule 12 Recovery of credit wrongly taken

1.
Credit if taken or utilised wrongly to be recovered along with interest applying the
provisions of Sec 11A and Sec 11AB of CE Act, 1944.
32
Chapter V
REFUNDS
1.
Introduction
1.1
Refund of any duty of excise is governed by Section 11B of the Central Excise Act,
1944. By definition, refund includes rebate of duty paid on goods exported out of India or on
materials used in the manufacture of goods exported out of India. The refund claim can be filed
within one year from the relevant date in the specified Form-R by an assessee or even a person
who has borne the duty incidence, to the Deputy/Assistant Commissioner of Central Excise
having jurisdiction over the factory of manufacture.
1.2
The "relevant date" has been defined in the said section and refund of duty paid can be
sought provided the manufacturer has not passed on the burden of duty. In case the burden of
duty has been passed on, the refund can be claimed by the buyer who has actually paid the duty
if he has not passed the incidence of duty to any other person, or, in the alternative, the amount
can be deposited in the Consumer Welfare Fund created by the statute.
1.3
The Central Excise Act also provided for payment of interest on delayed payment of
refund. As per Section 11BB, if any duty ordered to be refunded under Section 11B has not been
refunded within three months from the date of receipt of the refund application in the prescribed
manner and form along with the supporting documentary evidence as laid down in the relevant
rules, interest at the rate notified by the Government shall have to be paid on such duty from the
date immediately after the expiry of three months from the date of receipt of application till the
date of refund of such duty.
2.
Presentation of refund claim
2.1
Any person, who deems himself entitled to a refund of any duties of excise or other dues,
or has been informed by the department that a refund is due to him shall present a claim in
proper Form, along with all the relevant documents supporting his claim and also the copies of
documents/records supporting his declaration that he has not passed on the duty incidence.
2.2
The claim will be filed with the Deputy/Assistant Commissioner of Central Excise with
a copy to the Range Officer.
2.3
The claim shall be presented in duplicate and shall be duly signed by the claimant or by
a duly authorised person on his behalf and shall be pre-receipted (with revenue stamp on original
copy, where necessary).
2.4
It may not be possible to scrutinise the claim without the accompanying documents and
decide about its admissibility. If the claim is filed without requisite documents, it may lead to
delay in sanction of the refund. Moreover, the claimant of refund is entitled for interest in case
refund is not given within three months of the filing of claim. Incomplete claim will not be in the
interest of the Department. Consequently, submission of refund claim without supporting
documents will not be allowed. Even if post or similar mode files the same, the claim should be
rejected or returned with Query Memo (depending upon the nature/importance of document not
filed). The claim shall be taken as filed only when all relevant documents are available. In case
of non-availability of any document due to reasons for which the Central Excise or Customs
Department is solely accountable, the claim may be admitted so that the claimant is not in
disadvantageous position with respect to limitation period.
3.
Scrutiny of refund claim and sanction
3.1
The Range Officer will complete the scrutiny of the papers within 2 weeks from the date
of receipt of the claim in the Range Office and send a report of their scrutiny to the Divisional
Deputy/Assistant Commissioner of Central Excise.
3.2
The Divisional Office will scrutinise the claim, in consultation with Range, and check
that the refund application is complete and is covered by all the requisite documents. This should
be done, as far as possible, the moment refund claim is received and in case of any deficiency,
the same should be pointed out to the applicant with a copy to the Range Officer within 15 days
of receipt.
3.3
In the Divisional Offices, final processing of refund claims after the receipt of Range
Officers report should be completed including the verification of the fact whether the assessee
has passed on the duty incidence to their buyer (in cases where the refund claim is filed by a
manufacturer or owner of warehoused goods). The types of cases to which this provision will not
be attracted are already specified in section 11B itself. Where the duty incidence has been passed
on, the duty refund, if otherwise admissible, will be ordered in file, but will also be ordered to be
credited to the Consumer Welfare Fund. The burden of proving that the duty incidence has not
been passed on, is on the claimant and the latter may be required to submit sufficient
documentary proof for this purpose. It is clarified that the question of unjust enrichment has to
be looked into case by case. There cannot be a general instruction indicating the documents and
/or record, which the claimant should produce as a proof that he has not, passes on the duty
incidence to any other person.
3.4
Claim for refund of less than Rs. 100 shall not be entertained in respect of all excisable
commodities.
4.
Payment of refund
4.1
Where the claim has been admitted whether in part or in full, and claimant is eligible for
refund, the Deputy/Assistant Commissioner of Central Excise should ensure that payment is
made to the party within 3 days of the order passed after due audit, if any.
4.2
All claims shall be paid to the applicant by a cheque on the authorised bank with which
the sanctioning authority maintains account.
4.3
On receipt of sanctioning claims from the dealing hands, the cheque shall be written out
by the cashier (or his assistant) and simultaneously an entry made in the cash book. The
Assistant Commissioner shall sign the cheque as well as the entry in the cashbook
simultaneously. A receipt of the cheque should be obtained from the payee and placed on file.
After the cheque has been signed, it shall either be delivered to the claimant or his authorised
representative personally when the next calls for it or sent to him by Registered Post
Acknowledgement Due at Government cost.
34
5.
Post Audit
5.1
All refund claim papers should be sent by the Divisional Deputy/Assistant
Commissioner to the Commissionerate Headquarters (to the Additional/Joint Commissioner
Audit) within a week after the payment thereof irrespective of the amount involved. At the
Commissionerate Headquarters, a special cell comprising Deputy/Assistant Commissioner
(Audit) for immediate supervision one superintendent, one Inspector and two Deputy Office
Superintendents may be created out of the sanctioned strength of the audit staff in the
Commissionerate for post -audit of these claims.
5.2
This cell may undertake examination on merits of each such claim where the amount of
refund granted is Rs. 5 lakh or more. In regard to the remaining refund claims involving amounts
below Rs. 5 lakh, post audit may be undertaken on the basis of random selection by the
Deputy/Assistant Commissioner (Audit). This post audit may be completed before the expiry of
three months from the date of payment and where ever the grant of refund is not found to be
correct, action should be taken in terms of provisions contained in Section 35E of the Central
Excises Act, 1944, this special Cell may work directly under the charge of Additional/Joint
Commissioner (Audit).
6.
Monitoring and control for timely disposal of refunds
6.1
The Commissioner of Central Excise should devise appropriate control to ensure that the
refund/rebate claims are expeditiously sanctioned within the time limit stipulated above.
Chapter VI
Service Tax
This session provides an overview of the origin and present position of Service Tax and its
administration
1. Constitutional & Legal provisions behind levy of Service Tax in India.
Constitutional Validity
Article 265 of the Constitution lays down that no tax shall be levied or collected except
by the authority of law. Schedule VII divides this subject into three categoriesa) Union list (only Central Government has power of legislation)
b) State list (only State Government has power of legislation)
c) Concurrent list (both Central and State Government can pass legislation).
To enable parliament to formulate by law principles for determining the modelities of
levying the Service Tax by the Central Govt. & collection of the proceeds there of by the Central
Govt. & the State, the amendment vide constitution (95th amendment) Act, 2003 has been made.
Consequently, new article 268 A has been inserted for Service Tax levy by Union Govt.,
collected and appropriated by the Union Govt., and amendment of seventh schedule to the
constitution, in list I-Union list after entry 92B, entry 92C has been inserted for taxes on services
as well as in article 270 of the constitution the clause (1) article 268A has been included.
2.
Formation and function of DGST:
Considering the increasing workload due to the expanding coverage of service tax, it has
been decided to centralise all the work and entrust the same to a separate unit supervised by a
very senior official. Accordingly, the office of Director General (Service Tax) has been formed
in the year 1997. It is headed by the Director General (Service Tax). The functions and powers
of Director General (Service Tax) are :
i To ensure that proper establishment and infrastructure has been created under different
central excise Commissionerate to monitor the collection and assessment of service tax.
ii To study the staff requirement at field level for proper and effective implementation of
service tax.
iii To study as to how the various service taxes are being implemented in the field and to
suggest measures as may be necessary to increase revenue collection or to streamline procedures
:
iv To undertake study of law and procedures in relation to service tax with a view to simplify
the service tax collection and assessment and make suggestions thereon:
v To form a data base regarding the collection of service tax from the date of its inception in
1994 and to monitor the revenue collection from service tax:
vi To inspect the service tax cells in the Commissionerate to ensure that they are functioning
effectively :
vii To undertake any other functions as assigned by the Board from time to time.
36
i) The Directorate of Service Tax has been co-ordinating between the Board and Central Excise
Commissionerates. It also monitors the collection and the assessment of Service Tax. The
Service Tax Revenue Reports, received from various Central Excise Commissionerates, are
complied at the Directorate and the performance of the Commissionerates/Zones in Service Tax
collection are being monitored for corrective actions.
ii) During the course of Inspection of the Central Excise Commissionerates, the Inspection team
of this Directorate has in variably pointed out the requirement of the staff in field level for proper
and effective implementation of Service Tax. The Directorate has also suggested necessary
measures to be adopted to increase service Tax revenue collection. The grey areas and evasion
prone services have been brought to the notice of the Commissionerate for conducting effective
Surveys/Audit.
iii) The Directorate of Service Tax has drafted a separate act for Service Tax and the Rules
therefor and has forwarded the same to the Ministry for approval vide letter F.No.V/DGST/30Misc-56/2000 dtd. 19/02/2001. The Service Tax manual has also been prepared and forwarded
to Board for approval and issue during year 2001. The correspondences received from field
formations and service providers are scrutinised from law and the clarifications sought for are
replied to wherever possible. In cases where the doubts/clarification sought involved policy
matter, the Board has been apprised for issuing clarification/instruction.
iv) This Directorate has taken up the issue of forming a database regarding register of the
assessee and collection of Service Tax in co-ordination with the Directorate of Systems.
v) The Directorate has also recommended electronic administration in implementation of
Service Tax to bring transparency in tax administration and avoid interfacing between Service
providers and tax authorities. The Board has also instructed the Commissionerate to feed the
figures of service tax revenue collection in the system on line before 7th of every month. The
Directorate of Service Tax has advised all the Central Excise Commissionerates to re-consile
service tax collection with the help of T.R.-6 challans and the statements of the P.A.O.
vi) The Directorate of Service Tax has been conducting inspection of Central Excise
Commissionerates. During the course of inspection, verification of Service Tax records,
maintained by the Commissionerate, is done. Staff of Service Tax Cell are also guided suitably
in proper implementation of Service Tax and maintenance of records. A meeting with the
Service Tax officers is always conducted in the Commissionerate during inspection. Open-house
meeting is also arranged in the Commissionerate wherever it was felt necessary. Problems faced
by the assessees in Service Tax compliance are sorted out in the open-house meeting with the
members of various service providers associations.
Presently there are 65 Central Excise Commissionerates and 6 Service tax Commissionerates
within the jurisdiction of 23 Central Excise Zones. The 6 Service Tax Commissionerates have
been established in Mumbai, Delhi, Kolkata, Chennai, Ahmedabad & Bangalore
3. Existing scheme for levy, assessment & collection of Service Tax in India
Levy and assessment
Service tax is levied on specified taxable services and the responsibility of payment of the tax is
cast on the service provider. System of self-assessment of Service Tax Returns by service tax
assessees has been introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central
Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are
expected to be filed half yearly
Central Excise officers are authorized to conduct surveys to bring the prospective service tax
assessees under the tax net. Directorate of Service Tax at Mumbai over sees the activities at the
field level for technical and policy level coordination.
Legal provisions
The provisions relating to Service Tax were brought into force with effect from 1st July 1994. It
extends to whole of India except the state of Jammu & Kashmir. The services, brought under the
tax net in the year 1994-95 ,are as below:
(1)
(2)
(3)
Telephone
Stockbroker
General Insurance
The Finance Act (2) 1996 enlarged the scope of levy of Service Tax covering three more
services, viz.,
(4)
(5)
(6)
Advertising agencies,
Courier agencies
Radio pager services.
But tax on these services was made applicable from 1st November, 1996.
The Finance Acts of 1997 and 1998 further extended the scope of service tax to cover a
larger number of services rendered by the following service providers, from the dates
indicated against each of them.
(7)
(8)
(9)
(10)
(11)
(7th July, 1997)

(15th June, 1997)
(15th June, 1997)
(16th July, 1997)
(1st July, 1997)
Consulting engineers
Custom house agents
Steamer agents
Clearing & forwarding agents
Air travel agents ---
(12) Tour operators

(exempted upto 31.3.2000 Notification
No.52/98, 8th July, 1998, reintroduced w.e.f. 1.4.2000)
(13) Rent-a-Cab Operators
(exempted
upto
Notification No.3/99 Dt.28.2.99, reintroduced w.e.f. 1.4.2000)
31.3.2000
Vide
(1st July, 1997)

(1st July, 1997)
(14) Manpower recruitment Agency

(15) Mandap Keepers
The services provided by goods transport operators, out door caterers and pandal
shamiana contractors were brought under the tax net in the budget 1997-98, but abolished
vide Notification No.49/98, 2nd June,1998.
The Service Tax is leviable on the 'gross amount' charged by the service provider from
the client, from the dates as notified and indicated above.
38
Government of India has notified imposition of service Tax on twelve new services in
1998-99 union Budget. These services listed below were notified on 7th October, 1998
and were subjected to levy of Service Tax w.e.f. 16th October, 1998.
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
Architects
Interior Decorators
Management Consultants
Practicing Chartered Accountants
Practicing Company Secretaries
Practicing Cost Accountants
Real Estates Agents/Consultants
Credit Rating Agencies
Private Security Agencies
Market Research Agencies
Underwriters Agencies
In case of mechanized slaughter houses, since exempted, vide Notification No.58/98 dtd.
07.10.1998, the rate of Service Tax was used to be a specific rate based on per animal
slaughtered. In the Finance Act2001, the levy of service tax has been extended to 14
more services, which are listed below. This levy is effective from 16.07.2001.
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
Scientific and technical consultancy services

Photography
Convention
Telegraph
Telex
Facsimile (fax)
Online information and database access or retrieval
Video-tape production
Sound recording
Broadcasting
Insurance auxiliary activity
Banking and other financial services
Port
Authorised Service Stations
Leased circuits Services
In the Budget 2002-2003, 10 more services have been added to the tax net which are
listed below. This levy is effective from 16.08.2002.
(42)
(43)
(44)
(45)
(46)
(47)
(48)
(49)
(50)
(51)
Auxiliary services to life insurance

Cargo handling
Storage and warehousing services
Event Management
Cable operators
Beauty parlours
Health and fitness centres
Fashion designer
Rail travel agents.
Dry cleaning services.
and these services have been notified on 1-8-2002 and were subject to levy of Service
Tax w.e.f. 16-8-2002.
It is expected that in view of more & more services brought under the Service Tax net,
the service tax revenue would now form a major part in Govt. Revenue earnings.
In the Budget 2003-04 seven more services along with extension to three existing
services have been added to the tax net which are listed below. The levy of service tax on
these services is effective from 1st July, 2003.
(52) Commercial vocational institute, coaching centres and private tutorials
(53) Technical testing and analysis (excluding health & diagnostic testing)
technical inspection and certification service.
(54) Maintenance & repair services
(55). Commission and Installation Services
(56).
Business auxiliary services, namely business promotion and Support
services (excluding on information technology services)
(57) Internet caf
(58) Franchise Services
The rate of Service Tax was increased from 5% to 8% on all the taxable services w.e.f.
14.5.2003.
In the Budget 2004-05, 10 more services have been introduced in the service tax net
along with reintroduction of three existing services as follows:
(59)
Transport of goods by road (earlier Goods Transport Operators service reintroduced).

(60) Out door Caterers service (re-introduced)
(61) Pandal or Shamiana service (re-introduced)
(62)
Airport Services
(63)
Transport of Goods by Air Services
(64)
Business Exhibition Services
(65)
Construction Services in relation to Commercial or Industrial
BuildingConstruction Services in relation to Commercial or Industrial Building
In the Budget 2005-06, 9 more services have been introduced in the service tax
net as follows with effect from 16.06.2005:
(66)
(67)
(68)
(69)
(70)
(71)
(72)
(73)
(74)
(75)
(76)
(77)
(78)
Intellectual Property Services

Opinion Poll Services
TV or Radio Programme Services
Survey and Exploration of Minerals Services
Travel Agents Services other than Rail and Air travel agents
Forward Contract Services
Transport of goods through pipe line or other conduit Services.
Site preparation & clearance Services
Dredging Services
Survey & Mapmaking Services
Cleaning Services
Membership of Clubs & Associations
Packaging Services
40
(79)
(80)
Mailing list compilation & Mailing Services

Construction Services in relation to Residential Complexes
The levy of service tax on these services is effective from 10th September, 2004 and the rate of
service tax has been enhanced to 10% from 8%. Besides this 2% Education Cess on the amount
of service tax has also been introduced. Thus the effective service tax rate is now 10.2%
including Education Cess. Presently, the tax is levied at a uniform rate of 12% on the value of
taxable services. In effect, the total Service Tax payable would be 12.24% of the value of
taxable services. (Service tax rate inclusive of education cesses is 12.36% after enactment of
Finance bill 2007).
In the Budget for 2007-08, 7 more services were specified as taxable services.
Administrative mechanism.
Service Tax is administered by the Central Excise Commissionerates working under the
Central Board of Excise & Customs, Department of Revenue, Ministry of Finance, Government
of India. The unique feature of Service Tax is reliance on collection of tax, primarily
through voluntary compliance.
Government has from the very beginning adopted a flexible approach concerning Service
Tax administration so that the assessees and the general public gain faith and trust in the tax
measure so that voluntary tax compliance, one of the avowed objectives of the Citizens Charter,
is achieved. Substantive and procedural liberalization measures, adopted over the years for this
purpose, are clear manifestations of the above approach. Following are some of the measures
adopted in that direction:
(i) Under Section 67 of the Finance Act, 1994, Service Tax is levied on the gross or aggregate
amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service
Tax Rules, 1994, the tax is permitted to be paid on the value received. This has been done to
ensure that providers of professional services are not inconvenienced, as in many cases, the
entire amount charged/billed may not be received by the service provider and calling upon him
to pay the tax on the billed amount in advance would have the effect of asking him to pay from
his own pocket. It would also make the levy a direct tax, which is against the very scheme of
Service Tax.
(ii) Corporate assessees are given the liberty to pay tax on the value of taxable service,
provided by them in a month, by the 25th of the following month to enable them to finalize the
accounts. Further, the individual assessees are required to pay the levy only once in a quarter.
(iii) The process of registration of assessees has been considerably simplified.
(iv) No separate accounts have been prescribed for the purposes of Service Tax. It has been
provided that accounts being maintained by the assessees under any other law in force would be
sufficient. This has placed the Department at considerable inconvenience to itself, so as to
minimize difficulties for the assessees.
(v) The Finance Act2001 has introduced self assessment for service tax returns; thereby
sparing the assessees from the rigours of routine scrutiny and assessment.
(vi) Frequency of filing the returns is minimized. Filing of Statutory return has been made half
yearly and by the 25th of the month following the half-year. This is in replacement of the
monthly/quarterly returns prescribed earlier.
(vii) Penal provisions do exist in respect of Service Tax also. Failure to obtain registrations,
failure to pay the tax, failure to furnish the prescribed returns, suppression of the correct value of
the taxable services and failure to comply with notice do attract penal provisions as prescribed.
But, it is specifically provided that no penalty is imposable on the assessee for any of the above
failures, if the assessee proves that there was reasonable cause for the failure. This provision has
been inserted to take care of the genuine difficulties of the new assessees.
(viii) Government's liberal attitude is more evident in the case of prosecutions. Hardly will there
be any tax statute with revenue implications, where prosecutions of the offenders are not
provided. In the case of the Service Tax also it was thought of and sections 87 to 93 of the
Finance Act, 1994, did provide for prosecution of offenders. However, these provisions were
subsequently withdrawn as a noble gesture towards the assessees.
(ix) Service Tax Credit Rules, 2002, have been replaced by the CENVAT Credit Rules, 2004,
introduced by the Finance Act, 2004, where under CENVAT credit has been extended across the
sectors i.e. goods and services.
General exemptions from Service Tax

Section 93(1) of the Finance Act, 1994, empowers the Central Government to grant
exemption from payment of Service Tax. In exercise of these powers, the Central Government
has granted partial/full exemption to a number of services. Besides, the following general
exemptions from service tax is available to all service tax assesses:(a)
Exemption to all taxable services provided to United Nations or an International

Organisation Vide Notification NO.16/2002-S.T., dated 2.3.2002.
(b)
Exemption to services provided to all developers of Special Economic Zones or a

Unit (including the unit under construction) of a Special Economic Zone by any
service provider for development, establishment, maintenance and operation of
Special Economic Zone vide Notification No.4/2004-S.T. dated 31.3.2004.
No exemption to EOUs: The Foreign Trade Policy (2004-09) had announced that the
EOU/EHTP/STP/BTP units will be exempted from payment of Service Tax, but the Finance
Ministry has not issued any notification providing general exemption for EOUs. Further the
Board clarified that the EOUs can also take credit of the Service Tax borne by them, which will
in effect provide them relief from Service Tax Circular No.54/2004-Cus., dated 13.10.2004.
Small service providers exempted : Notification No.6/2005-S.T., dated 1.3.2005
exempts taxable services up to the value of Rs.4 lakhs, provided value of their taxable services
did not exceed Rs.4 lakhs in the preceding year. With effect from 1.4.2007, the small service
provider exemption is being enhanced to Rs.8 lakhs vide Notification No.4/2007-S.T., dated
1.3.2007.
42
However, this exemption is not available to persons who provide taxable services using
brand name of others. Recipients of taxable services, wherever made liable, are also not covered
by this exemption.
Job work : Exemption has been provided from service tax to a person producing goods,
from the inputs received from a manufacturer and sending the resultant product to the same
manufacturer for further manufacture of final products, on which excise duty is payable
[Notification No.8/2005-Service Tax, dated 1.3.2005]1. Service Tax is not leviable on job work
processes when such activity amount to manufacture under Central Excise Act, 1944-See C.B.E.
& C.Circular Letter No.341/13/2005-TRU dated 12.5.2005.
Export of Services No Service tax leviable
Any taxable service may be exported without payment of service tax under Rule 4 of Export of
Service Rules, 2005. Rule 5 of the said Rules provides for rebate of service tax and cess paid.
Rebate is given for service tax and cess paid on taxable service or service tax or duty paid on
input services or inputs. Notifications extending the facility of rebate to all taxable services
along with conditions to be fulfilled and procedures have been issued. Exports to Nepal and
Bhutan have been excluded. [Notification Nos.11/2005-S.T., dated 19.4.2005 and 12/2005-S.T.,
dated 19.4.2005].
Import of Services
As per new Section 66A introduced by the Finance Act, 2006, taxable services
includes services to be provided as well as services provided from outside India to a recipient
in India. Taxation of Services (Provided from Outside India and Received in India) Rules,
2006 have been notified. Thus for taxable services provided from abroad the service recipient in
India is liable to Service Tax Notification No.11/2006-S.T., dated 19.4.2006.
No service Tax for free service
No Service Tax is payable when service is provided free of charge or no amount is charged from
customer rather it is paid from its own pocket. As per Section 66 of the Finance Act, 1994, the
service tax is chargeable on the value of taxable service and therefore if the value of service is
zero, then Service tax shall also be zero. [Vide C.B.E. & C. Circular No.62/11/2003, dated 21.8.2003.
Works Contract not liable to Service tax
In Budget 2007-08, it has been proposed to levy service tax on the service portion of works
contract by bringing services in relation to works contract as a separate taxable service. Only
those works contract which attract VAT/Sales tax involving transfer of property will be covered.
Such works contract include erection, commissioning or installation, commercial or industrial
construction, construction of complex and turnkey projects. Infrastructure projects like roads,
airports, railways, transport terminals, bridges, tunnels and dams are being excluded. An
optional composition scheme under which an assessee will be required to pay service tax on 2%
1
Amended by Notification No.19/2005-S.T., dated 7.6.2005.
of total value of works contract is on the anvil. CENVAT credit on inputs, capital goods and
input services will not be admissible for an assessee working under the optional composition
scheme.
Contract was for construction, erection and installation of desulphurisation plant on

payment of lump sum price. Work contract cannot be vivisected and part of it subjected to
service tax Daelim Industrial Co. Ltd. v. Commissioner 2006 (3) S.T.R.124 (Tri.-Del.) =
2003 (155) E.L.T.457 (Tri.-Del.)
Service tax not leviable when Sales Tax/VAT paid
Imposition of service and sales taxes were constitutionally mutually exclusive, and as
sales tax was paid on the cards, Service tax was not imposable Idea Mobile Communications
Ltd. v. Commr. Of C. Ex., Trivandrum 2006(4) S.T.R.132(Tri.-Bang.)
44
Chapter VII
ADJUDICATION
1.
Introduction
1.1
Central Excise law is a self-contained provision. Besides containing the provisions for
levy of duty, the law also provides for the adjudication of matters relating to the legal provisions.
The adjudication is done by the departmental officers, and in this capacity they act as quasijudicial officers.
2.
Adjudication and determination of duty
2.1
Adjudication of confiscation and penalty has to be done by Officers specified in section
33 of the Central Excise Act, 1944. Central Excise Officers have the power to determine duty
short paid or not paid erroneously refunded under section 11A of the said Act. For this purposes,
the Board has decided the powers of adjudication and determination of duty shall be exercised,
based on monetary limit (duty involved in a case): (A) All cases involving fraud, collusion, any wilful misstatement, suppression of facts, or
contravention of Central Excise Act/ Rules made there under-with intent to evade
payment of duty and / or where extended period has been invoked in show-causenotices, (including CENVAT cases, will be adjudicated by:-
(B)
Central Excise Officers
Powers of Adjudication
(Amount of duty involved)
Commissioners
Without limit
Additional Commissioners
Above Rs. 20 lakhs and upto

Rs.50 lakhs
Joint Commissioners
Above Rs.5 lakhs and

Rs. 20 lakhs
Dy./Asstt.Commissioners
Upto Rs.5 lakhs
upto
Cases which do not fall under the category (A) above, will be adjudicated as follows:Central Excise Officers
Powers
of
Adjudication
(Amount of duty involved)
Commissioners
Without limit
Additional Commissioners
Above
Rs.
20
upto Rs. 50 lakhs
Joint Commisioners
Above Rs.5 lakhs and upto Rs.20 lakhs
Deputy/Assistant Commissioners
Upto Rs. 5 lakhs.
lakhs
and
(C) Cases related to issues mentioned under first proviso to Section 35B(1) of Central
Excise Act, 1944 would be adjudicated by the Addl. Commissioners/ Joint
Commissioners without any monetary limit.
2.2
The Board, under section 2(b) of the Central Excise Act, 1944 read with rule 3 of
Central Excise Rules, 2002 also invests certain officers with powers of Commissioners or other
officers through out the territory of India, for the purpose of investigation and adjudication.
Interest, Penalty, Confiscation, Duty Payment under Protest
1.
Introduction
1.1
Interest of duty not paid on time is provided for in the Central Excise statute. It is
expected that the interest provision would normally not have to be invoked as the assessee would
make the duty payment on time.
1.2
Penalty and confiscation of offending goods i.e. which have violated the provision of the
Central Excise law are an outcome of the adjudication proceedings. These are deterrents aimed
at cautioning the dishonest taxpayer.
2.
Interest on duty
2.1
Under the provisions of Section 11AB, interest is charged on the delayed payment of
duty. Thus, it is in the interest of an assessee to discharge the duty liability the earliest and not to
prolong the dispute only for the sake of delaying payments. The interest will be charged under
said Section 11AB, as follows:
At the rate for the time being fixed by Central Government by notification in the official
Gazette, from the first date of the month succeeding the month in which the duty ought to have
been paid till the date of payment of such duty.
2.2
There may not be need for any explicit mention of the interest liability in the show-cause
notice since the legal provisions are explicit. However, the same may be done as a matter of
abundant precaution. Likewise, the adjudicating officer may incorporate the fact about the
interest liability in the order confirming the demand.
3.
Penalty and Confiscation
3.1
Penalty is imposed under any of the following provisions of the Central Excise Act,
1944 or the rules made thereunder: (i)
Section 11AC prescribes a mandatory penalty equal to the duty not levied or paid
or short paid or erroneously refunded by reason of fraud, suppression etc.
However, in the event the duty and interest thereon is paid within 30 days of the
communication of the order, the penalty shall be 25% of the duty subject to it
being paid within the said period of 30 days.
46
(ii)
Rule 25 of the Central Excise Rules provides for penalty on any producer,
manufacturer, registered person of a warehouse or a registered dealer not
exceeding the duty on the excisable goods in respect of which any of the specified
contravention have been committed, or rupees ten thousand, whichever is greater.
The penalty is subject to the provisions of Section 11 AC of the Central Excise
Act, 1944. The offending goods are also liable to confiscation. The specified
contravention are:
(a) Removal of any excisable goods in contravention of any of the provisions of
the said rules or the notifications issued under the said rules; or
(b) Non-accountal of any excisable goods produced or manufactured or stored;
or
(c) Manufacture, production or storage of any excisable goods without having
applied for the registration certificate required under Section 6 of the Central
Excise Act; or
(d) Contravention of any of the provisions of the said rules or the notifications
issued under the said rules with intent to evade payment of duty.
(iii) Under rule 26 of the said Rules It is provided that any person who acquires
possession of, or is in any way concerned in transporting, removing, depositing,
keeping, concealing, selling or purchasing, or in any other manner deals with, any
excisable goods which he knows or has reason to believe are liable to
confiscation under the Act or the said Rules, shall be liable to a penalty not
exceeding the duty on such goods or rupees ten thousand, whichever is greater.
(iv) Rule 27 of the said Rules provides for imposition of a general penalty which may
extend to five thousand rupees and with confiscation of the goods in respect of
which the offence is committed. This is attracted when no other specific penalty
is provided for.
3.2
If penalty is imposed under Section 11AC, penalty under rule 25 will not be imposed.
This, however, does not preclude the Department from confiscating the goods, imposing any fine
in lieu of confiscation and prosecuting a person.
3.3
As per Rule 28 of the said Rules, when any goods are confiscated under these rules, such
thing shall thereupon vest in the Central Government. Accordingly, the Central Excise Officer
adjudging confiscation shall take and hold possession of the things confiscated, and every
Officer of Police, on the requisition of such Central Excise Officer, shall assist him in taking and
holding such possession.
3.4 Rule 30 provides that if the owner of the goods, the confiscation of which has been
adjudged, exercises his option to pay fine in lieu of confiscation, he may be required to pay such
storage charges as may be determined by the adjudicating officer.
3.5
Provisions for disposal of goods confiscated are contained in rule 29 of the said Rules.
Goods of which confiscation has been adjudged and in respect of which the option of paying a
fine in lieu of confiscation has not been exercised, shall be sold, destroyed or otherwise disposed
of in such manner as the Commissioner may direct.
4.
Duty under protest
4.1
As per Section 11B of the Central Excise Act, 1944 the time limitation of application for
refund of duty fixed at one year from the relevant date shall not apply when the duty has been
paid under protest.
4.2
Any assessee who desires to pay duty under protest, may do so by following the
procedure mentioned below:
a. The assessee shall inform the Superintendent or Inspector of Central Excise in
writing giving reasons for paying duty under protest and a dated
acknowledgement will be given to him.
b. He will mark invoices or monthly/quarterly return indicating the goods on which
duty is paid under protest. If it is a lump-sum duty payment in respect of past
demand, he may record the fact of duty payment under protest in the Personal
Ledger Account [against debits] CENVAT Account [against debits] and the Daily
Stock Account.
c. If a case is appealed against by the assessee or where the appeal period for further
appeal is available, he may continue to pay duty under protest. However, if
decision is not in his favour and he exhausts the appellate remedy or does not
appeal within stipulated period, the assessee shall not have any right to pay duty
under protest.
4.3
A letter of protest or a representation for paying duty under protest shall not constitute a
claim of refund.
48
Chapter VIII
Principles of audit of central excise

The audit of central excise duties is regulated by the general principles governing the
audit of receipts. It is primarily the responsibility of the departmental authorities to see that all
revenue or other debts due to government which have to be brought to account are correctly and
promptly assessed, realised and credited to government account. Audit of receipts should,
however, see that any payment for which a party may be liable is actually received and brought
to account and that receipts which have entered the books of a department are correctly
calculated and are in fact credited to government account in time.
The most important function of audit is to see that adequate regulations and procedures
have been framed by the revenue department to secure an effective check on the assessment,
collection allocation of excise duty and to satisfy itself that such regulations and procedures are
actually being carried out. Audit also makes such examination as it thinks fit with respect to the
correctness of the sums brought to account in respect of Union excise duties.
The audit department does not in any way substitute itself for the revenue authorities in
the performance of their statutory duties. But audit satisfies itself in general, that the
departmental machinery is sufficiently safeguarded against error and fraud and that, so far as can
be judged, the procedures are formulated to give effect to the requirements of the law.
The audit of central excise duties is conducted at the following different levels:
(i) Scrutiny of notifications, clarifications, instructions etc. issued by the Government of
India, Ministry of Finance and the Central Board of Excise and Customs. This is done by the
directorate of receipt audit (indirect taxes) in the Office of the Comptroller and Auditor General.
(ii) Concurrent audit: This is done by the concurrent audit parties of the Offices of the
Accountants General (Audit)/Directors of Audit in the Offices of the chief accounts officers of
the central excise collectorates.
(iii) Local audit: This is conducted by the peripatetic parties of the central excise receipt
audit wings of each Accountant General (Audit)/Director of Audit. The local audit covers audit
of: (a) Central excise range offices; (b) Factories working under the self-removal procedure;
(c) division officers and Commissionerates.
Scrutiny of notifications etc.
The copies of the notifications issued by the government under section 5-A of the Central
Excise Salt Act, 1944, fixing the effective rates of central excise duties, are sent to the
directorate of receipt audit (indirect taxes). On their receipt, these notifications are scrutinised in
the directorate and then circulated among the various Accountants General/Directors of Audit.
Where considered necessary, the Government of India files leading to the issue of notifications,
other clarifications, instructions etc. issued by the government and the Board are similarly
scrutinised in the directorate.
The directorate of receipt audit also serves as a guide to the various audit offices in
conducting audit of central excise duties. It issues guidelines for conducting audit of those
duties as also prescribes the periodicity and quantum of audit of those duties. To achieve
uniformity in the task of conducting audit of central excise duties over the country as a whole it
serves as a co-ordinator between the various audit offices. It also serves as a link between the
audit offices on one side and the Government of India on the other.
Concurrent Audit
The function of the chief accounts officer in each Central Excise Commissionerate
essentially consists in ensuring independently that the duties paid by the assessee through
personal ledger account (PLA) from time to time have, in fact, been credited into the government
account and that there are no overdrawals. To enable the chief accounts officer in the discharge
of his duties each range officer should send a monthly return to the chief accounts officer
showing details of the payments made by the assessees in their PLAs supported by the duly
certified copies (quadruplicate) of the paid challans. On receipt of these monthly returns, the
chief accounts officer completes the personal ledger accounts of each assessee maintained by
him and reconciles the departmental figures with those booked by the pay and accounts offices.
It is seen in the course of concurrent audit that:(i) the range officers actually send the monthly returns supported by certified copies of
the paid challans;
(ii) the chief accounts office actually posts the personal ledger accounts of the assessees
from these monthly returns;
(iii) the chief accounts office takes prompt action in reconciling the departmental figures
with those booked by the pay and accounts officers; and
(iv) removes discrepancies, if any, noticed in the course of reconciliation without undue
delay.
Local Audit
As per Rule 22(3) of Central Excise Rules 2001), every assessee working under the selfremoval procedure shall furnish to the audit parties deputed by the Comptroller and Auditor
General of India:
(i) the accounts and returns whether the same are maintained or prescribed in the
pursuance of the central excise rules, 2002 or not; and
(ii) the cost audit reports, if any, under section 223 of the Companies Act, 1956.
Thus the central excise audit parties have been given statutory authority to visit the
factories where excisable goods are produced or manufactured and to scrutinise the central
excise and other records maintained by the assessees. To make the audit of a factory effective
and purposeful, advance preparation is made by the members of the central excise audit party. It
is as under:
(i) A study of the manufacturing process of the commodity to be audited is made from the
available literature etc.
(ii) A critical study of the tariff, the exemption notifications, if any issued, and available
case laws relating to that commodity is made.
(iii) Perusal of paragraphs relating to that commodity which have been featured in the
previous audit report is done.
(iv) Perusal of the instructions on the subject, if any, issued from Headquarters.
In the course of audit of a factory, it is seen that the manufacturer has registered with the
Central Excise Department before starting production of the excisable goods, that he got the
premises for manufacture of the excisable goods and the store room approved by the central
excise department; and that he executed a bond undertaking to pay the duty on the goods
manufactured, and to observe all rules and regulations.
50
It is also scrutinised in audit that the manufacturer took on record all the excisable goods
produced by him, paid the central excise duty due thereon before their clearance from the place
of manufacture or within the stipulated period once in a month and submitted periodical returns
in this regard to the central excise department regularly. It is also seen in audit that the
departmental officers exercised adequate checks on the manufacture and collection of duty; the
internal audit party adequately verified, compared and analysed data; and that the department
took action in case of breaches of central excise law.
The first step in this direction is to see that the classification of goods made by the
assessee is correct. For this purpose recourse to the rules of interpretation for classifying
excisable goods, sectional and chapter notes to the tariff is taken. In cases of doubt, assistance of
explanatory notes to the Harmonised System of Nomenclature (HSN) is taken. The judgements
of the Supreme Court, various High Courts and decisions of the customs, excise and gold control
(appellate) tribunal are also referred to.
If it is not possible to ascertain the correct classification of excisable goods either with
the help of the aforesaid statutes or the judicial pronouncements, then the correctness of
classification of excisable goods is judged with reference to its popular meaning or how it is
known in the commercial parlance. Sometimes chemical test reports are also referred to.
The next step in checking the assessment made by the department is to see whether the
effective rate of duty has been correctly worked out and if those effective rates of duty are
subject to the fulfilment of certain conditions (for example concessional rates of duty have been
prescribed for the excisable goods produced by small scale units), it is checked in audit that the
assessee has fulfilled those conditions.
In cases where the input-output ratio between the principal raw materials and finished
goods has been prescribed either by the Board or by the central excise commissioner, it is
checked whether that ratio has actually been achieved (for example, one set of magnets has been
prescribed as the principal raw material for manufacture of one electric meter; one electric motor
is necessary for producing one electric fan). If that ratio has not been prescribed, comparison of
the raw materials used and the production of excisable goods by an assessee during various
periods of production (i.e. production of each month or each quarter etc.) is done. Sometimes
production norms of the different assessees producing identical excisable goods are also
compared.
The balance sheet of the assessee for the previous few years is also studied to ascertain
the trends of production and sales during those years. The private records maintained by the
assessee and the returns submitted by him to other departments/agencies of the government are
also scrutinised to find out whether the assessee has made efforts to conceal any production of
excisable goods.
Excise Audit 2000

1. Introduction
1.1 In conventional sense, Audit means scrutiny and verification of documents, events and
processes in order to verify facts and, draw conclusions regarding the correctness of recording of
facts and the efficiency of a system under study. For Central Excise purposes Audit means
scrutiny of the records of assessee and the verification of the actual process of receipt, storage,
production and clearance of goods with a view to check whether the assessee is paying the
central excise duty correctly and following the central excise procedures.
1.2 Under the conventional /traditional system of central excise audit, audit parties visit
assessees unit without much preparation and verify all the statutory records (i.e. those prescribed
under the Central Excise law) to check compliance of procedures and also leakage of revenue, if
any. Experiences show that such audits do not result in detection of major aberrations. Most of
the audit objections pertain to either minor procedural irregularity or duty short payment of small
amounts mostly due to human error. Further, this method of auditing does not envisage checking
of the internal records of the assessee as well as those records which are maintained by the
assessee under the other laws like Income Tax Act, Sales Tax Act, Companies Act etc.
1.3 One of the announcements made during Budget 2000 as a measure of simplification of
procedures, was the dispensation of all statutory records under the central excise law. No longer
was the assessee required to record the receipt of raw material, production and clearance/sale of
finished goods etc. in registers/documents prescribed by the central excise department. As a
result, the assesses are now allowed to maintain all their records in whichever form they like
(including maintenance of the entire records in electronic form) provided the essential
information required for calculation of central excise duty liability can be obtained from such
records. Under these circumstances, it becomes necessary for the auditors to look into the
assessees own (private) records to verify whether the assessee is paying central excise duty
correctly and following the laid down procedures.
1.4 Another change brought in recent years is doing away the system of assessment of the returns
by the departmental officers. Now the assessee is required to self assess his monthly tax returns
(called the E.R.1/E.R.2) before filing the same with the department. The departmental officers
only scrutinise this return to check for any apparent mistake made by the assessee. They are not
required to carry out detailed verification. Therefore, the entire burden of checking whether the
assessee actually paying his taxes correctly, now lies with audit.
1.5 The statutory changes resulting in dispensation of statutory records as well as assessment of
returns by departmental officers has led to the conventional/traditional system of audit becoming
irrelevant.
2. What is Excise Audit 2000
2.1 Traditional audit will eventually be replaced by Excise Audit 2000 (EA 2000), a new system
of audit. This new system was initiated from 1st December 1999 when it was implemented in
case of all assessees paying cash duty of over Rs.5 crores per annum. In June 2000, the CBEC
has revised the frequency norms of audit (of Central Excise units) as under:
Quantum of annual total duty payment in cash + CENVAT credit
1. Units paying more than Rs.3 crores
2. Units paying between Rs.1 crore and Rs.3 crores
3. Units paying between Rs.50 lakh and Rs.1 crore
4. Units paying below Rs.10 lakh
52
Frequency of audit
Every year
Once every 2 years
Once every five years
2% of the total number
every year
2.2 The essential philosophy of EA 2000 is that this audit is based on the scrutiny of business
records of the assessee. This is a more systematic form of audit wherein the auditors are required
to gather basic information about the assesee and analyze them to find out vulnerable areas
before conducting the actual audit. The audit is therefore more focused and in-depth as compared
to the traditional audit. Further, at every stage of audit, the assessee is consulted. This makes
EA2000 audit user friendly.
3. Procedure of Excise Audit 2000
3.1 Selection of Assessee
3.1.1 The process of EA 2000 begins with identification of a unit to be audited. Normally, there
are about 1000 to 1500 assessees under the jurisdiction of a Central Excise Commissionerate. It
is not possible for the audit staff to conduct audits of all the units every year. Therefore,
depending upon the manpower availability, about 300 to 400 units are selected for conducting
audit during a financial year. Under the conventional system of audit the units were picked up
randomly without any scientific basis of selection. Under EA 2000, the selection of the unit is
done taking into account the 'risk-factors'. This means that the assessees who have a bad track
record (having past duty evasion cases, major audit objections, past duty dues etc.) are given
priority for conducting audit over those having clean track record.
3.2 Desk Review
3.2.1 The auditors are assigned the assessees to be audited at the beginning of the financial year.
The auditors are required to gather as much information about the assessee as possible. They can
gather information from the departmental records, published documents like balance sheets
annual statements etc., and through market Enquirer. Since this can be done without interacting
with the assessee, this step called as 'desk-review'.
3.3 Documenting Information
3.4.1 At the stage of Desk Review the auditors may have already identified certain areas, which
warrant closer examination. The auditor may also require certain documents or information from
the assessee to complete his preliminary investigation. For this he may write letter to the assessee
or send him a questionnaire to obtain this information. This step is called 'gathering and
documenting assessee information'.
3.4 Touring
3.4.1 The auditor then visits the unit of the assessee to see the actual running of the unit, the
systems that are followed for maintaining records in various sections and the system of
movement of goods and the related documents within the unit. This step is called 'touring of the
premises'. This gives the auditors a general overview about the procedure adopted by the
assessee and the possible loopholes through which revenue leakage can take place.
3.5 Audit Plan
3.5.1 Based on his experiences and the information gathered so far about the assessee, the
auditor now makes an 'audit plan'. The idea of developing audit plan is to list the areas which, as
per the auditor, are the vulnerable areas from the revenue point of view. Since number of
documents/records maintained by assessee is huge, it is also necessary that the auditor should
select only some of them for the actual verification. The preparation of audit plan helps him to
do that. It must be remembered that audit plan is not rigid but a dynamic concept. During the
course of audit if the auditor notices certain new facts or new aspects of the planned area of
audit, he can always alter the audit plan accordingly, with the approval of his supervisor.
Similarly, in case during the actual audit, if the auditor is convinced that any area which was
earlier planned for verification does not require in-depth scrutiny, he may alter the plan midway
after obtaining approval of the superior officers. Preparation of audit plan is one of the most
important steps of EA 2000. A well thought audit plan generally increases the success of audit
results manifolds.
3.6 Verification
3.6.1 The most important step of audit is the conduct of actual audit, which in technical parlance
is called 'Verification'. The auditors visit the unit of the assessee on a scheduled date (informed
to the assessee in advance) and carry out the scrutiny of the records of the assessee as per the
audit plan. The auditor is required to compare the documentation of a fact from different
documents. For example, the auditor may check the figures of clearance of finished goods
showed by the assessee in central excise return with the sales figures of the said goods in
Balance Sheet, Sales Tax Returns, Bank statements etc. The auditor may also enquire about
the entries which appear vague (say an entry like 'Misc. Income') in various records and
documents. The idea behind conduct of verification is to reasonably ensure that no amount,
which as per the Central Excise law is chargeable to duty, escapes taxation. The process of
verification is always carried out in the presence of the assessee so that he can clarify the doubts
and provide required information to the auditor.
3.7 Audit Objection and Audit Para
3.7.1 Where the auditor finds instances of short payment of duty or non-observance of Central
excise procedures, he is required to discuss the issue with the assessee. After explanation
provided by the assessee, if the auditor is satisfied that such non-tax compliance has occurred, he
records the same as an 'Audit Objection' or 'Audit Para' of the 'draft audit report' that he would be
preparing at the end of the verification process. Auditor is advised not to take formal objections
to mere procedural lapses/ infractions/adoption of wrong procedures, which do not result in any
short payment of duty or do not have bearing upon the duty payment. In such case the auditor is
required to discuss the matter with the assessee and advise him to follow the correct procedure in
future. Further, while making an audit para, attempt should be made to tabulate the duty short
paid by the assessee at the spot and incorporate it in the para itself. However, if this is not
possible for the paucity of time or for the want of some information not available at that time, the
auditor should make a note of the same in his report.
3.8 Audit Report
3.8.1 At the end of the process of verification the auditor prepares an 'Draft Audit Report' which
incorporates all the audit objections/audit paras. An audit report provides (issue or para wise) the
issue in brief, the reply or the explanation of the assessee, the reason for the auditor not being
satisfied with the reply, the amount of short payment (if tabulated) and the recoveries of the same
(if could be made at the spot). The draft audit report is then 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.
54
4. Conclusion
4.1 EA 2000 is a modern, transparent and interactive method of audit wherein the auditor
proceeds with audit fully conversant with the business of the assessee. On his part, the assessee
is given full opportunity to explain his stand on any particular matter so that matters are resolved
in full appreciation of legal position. EA 2000 is thus a participative audit.
4.2 A requirement of EA 2000 is that the auditors must be thorough in their knowledge of
Central Excise law and procedures, notifications, instructions and circulars issued by the Finance
Ministry and the judicial decisions on issues relating to central excise laws. To be successful
auditor, knowledge about financial bookkeeping, accountancy and proficiency in understanding
commonly used commercial books and documents is of great help. Further, being computer
literate is an added requirement while auditing an assessee who maintains his accounts in
electronic format.

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Special course material on Central Excise Receipt Audit

An Overview of Central Excise

Regional Training Institute, Chennai

2. Administration of Central Excise

Courseware on Central Excise Receipt Audit

Provisions of the CE Act relating to incidence of duty

Regional Training Institute, Chennai

Courseware on Central Excise Receipt Audit

Bhor Industries (1989 - SC)

- For a commodity to attract ED, is it enough if it finds a place in the CE Tariff?

Found in Tariff with X%

Found in Tariff with X%;

Found in Tariff with Nil%

Not found in tariff

Regional Training Institute, Chennai

Courseware on Central Excise Receipt Audit

- The Verdict is sub silentio on the mobility aspect of end product.

Regional Training Institute, Chennai

Courseware on Central Excise Receipt Audit

There are three principles underlying the system of numbering:

Regional Training Institute, Chennai

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Exemption from duty

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Most litigated provision

Relatively new provision

Simple and specific;

Valuation - certain important terms

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Know-how technical consultancy charges

Bombay Tyre International 1983 (14) ELT 1896 SC

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Gazette notification of input and final products.

Conditions for allowing credit

Refund of CENVAT Credit

Obligation of manufacturer of dutiable and exempted goods.

Documents and accounts

Transfer of CENVAT Credit

Special dispensation in respect of inputs manufactured in factories located in

Power of central government to notify goods for deemed CENVAT Credit

Recovery of CENVAT Credit wrongly taken.

Confiscation and penalty

Courseware on Central Excise Receipt Audit

CENVAT Admissibility and procedure:

Inputs may be used in or in relation to the manufacture of the final products.

Inputs may be removed as such for home consumption or for export.

To be sent under challan duty authenticated as prescribed by CBEC.

For clearances to EPZ/100% EOU/STP/EHTP and under notification 108/95, utilization

Disposal of waste, either on payment of duty or by destruction.

Goods not eligible for credit:

Packing materials in respect of which exemption is available.

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Amount of CENVAT Credit eligible under the scheme

Goods falling under heading 2710.11/2710.12/ 2710.13/2710.19 (excluding natural

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Courseware on Central Excise Receipt Audit

Regional Training Institute, Chennai

Paricipant's Notes CERA

Paricipant's Notes CERA