CENTRAL EXCISE LAW

PART 1: BASIC CONCEPTS

Central Excise law is governed by Central Excise Act, 1944, Central Excise Tariff Act, 1985
and rules made there under. The Central Excise duty is administered by the Central
Government under the authority of Entry number 84 of the Union List (List I) under Seventh
Schedule read with Article 246 of the Constitution of India.
BASIS OF LEVY OF EXCISE DUTY
The power to levy and collect excise duties has been conferred on the Union Government by
virtue of Article 246 of the Constitution of India. Entry 84 of the Union List empowers the
Central Government to levy duty of Excise duty only on the goods, which are produced or
manufactured in India.
-CHARGEABILITY OF EXCISE DUTY
Section 3 the charging section have identified four basic conditions for taxability of goods.
For anything to be liable to excise duties, it must fulfill all the following conditions:
(a) It must be goods;
(b) It must be excisable goods;
(c) It must be either produced or manufactured
(d) Such manufacture or production must be in India.
Section 3(1) of Central Excise Act, 1944 prescribes the following:
The basic duty called CENVAT is levied and collected on all excisable goods manufactured
or produced in India.
Levy and collection will be as per the rates specified in the First Schedule to CETA
A duty called SED (Special Excise duty) is also levied and collected on excisable goods
specified in the second schedule.
Such levy and collection of SED will be as per the rates in the Second Schedule.
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 SED is in addition to CENVAT.

TAXABLE EVENT.
For every tax, whether direct or indirect, there is a taxable event, that is the event or
situation which gives rise to the liability to the tax in question being created. In as much as
excise duties are duties on goods produced/manufactured, the taxable event is production or
manufacture. The person who created the taxable event is the person who should be the
person to pay the duty. Since the taxable event is production/manufacture, by implication, the
person who is to pay the excise duty is the producer or the manufacturer.
GOODS
According to sec. 2(d) of CEA, 1944, Goods includes any article material or substance
which is capable of being bought and sold for a consideration and such goods shall be
deemed to be marketable.
Only goods can be manufactured. Because excise levy is on the event of manufacture, it
presupposes that only movable goods are manufactured; roads, dams, buildings etc. are not
manufactured. So, anything that comes into existence as immovable cannot be subjected to
levy under excise as immovables cannot be manufactured; they can only be constructed, built
and so on.
Supreme Court in the case of Delhi Cloth and General Mills v. Union of India, where it is
held that an an article can be called "goods" if it is known to the market as such and can
ordinarily come to the market for being bought and sold. Actual sale of the article is not
important but it must be capable of being bought and sold.
Hence, the entire discussion on goods revolves around the two concepts movability and
marketability.
MOVABILITY & MARKETABILITY
1. Movability
The word movable means capable of being moved or shifted from one place to another place.
The word goods applies to those which can be brought to market for being bought and sold.
Whether a particular thing attached to the earth is movable or immovable depends on the
mode of annexation or attachment. If a plant or machinery is fixed on the land permanently,
then it is immovable property. If it is fixed on a temporary basis, it is movable. Only movable
property is subject to excise duty.

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The following points explain movability:

1. Movability cannot be determined on the basis of description or on the basis of their
mention in CETA. It is to be judged from its state and condition at the time of removal. If an
item is movable at the time of manufacture and removal, it is enough to levy duty though
later on it is attached to earth permanently.
2. If the goods can be shifted from one place to another place in the same position for use,
they are movable. If they have to be dismantled for erection at some other place, they are
immovable and as such they are not excisable. This was held in Municipal Corporation of
Greater Bombay v. Indian Oil Corporation.
It is held by the Supreme Court in the case Commissioner of Central Excise (CCE) v. Solid
& Correct Engineering Works that the plant is a movable property, for
(i) It is not intended to be permanent at a given place.
(ii) The plant can be moved and is indeed moved after the road construction or repair project
for which its set up is completed.
2. Marketability
Marketability means saleability or suitability for sale. Hence, goods fit for sale, use or
consumption are marketable goods. Goods without commercial utility or economic value
cannot be considered marketable goods.
CASE: Bata India Ltd. v. CCE
Facts: During the manufacture of foot wear the assessee manufactures an excisable product
called double textured fabric which emerges as a distinct product with specific properties and
character which is used in considerable quantities for making rain-coats, holdalls, hand bags
etc. The department issued show cause notices to the assessee.
Issue: Whether unvulcanised sandwiched fabric assembly produced in the Assessee's factory
and captively consumed can be termed as "goods" and can be classified as "rubberized cotton
fabrics"
Decision: Revenue not succeeded in establishing that the product in question was either
marketed or was capable of being marketed, thus held that without proof of marketability, the
intermediate product would not be goods under excise for levy.
EXCISABLE GOODS
Excisable goods means those goods specified in Central Excise Tariff Act and subject to duty.
The term excisable goods has been defined in Section 2(d) of the Central Excise Act 1944.
It is only till the stage when the duty liability is not discharged by actual payment, that the
goods can be called excisable goods. Once the duty is paid or the goods have been
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subjected to duty, they are not excisable goods. In sum, excisability attaches itself to the
goods only till the point of payment of duty. Duties paid goods are not excisable goods. Nil
duty paid goods are also excisable goods, though duty is not paid, they do not lose their
excisability. The mere fact that rate of duty on an article is NIL by reason of an exemption
notification would not make it non-excisable goods.
CONCEPT OF MANUFACTURE
The definition of manufacture under sec. 2(f) is in three parts, namely:
(i) Incidental or ancillary process to the completion of a manufactured product.
(ii) Deemed manufacturing processes specified in Central Excise Tariff Act, 1985.
(iii) In relation to specific goods, processes are specified under Schedule III of Central Excise
Act, 1944.
Union of India v. Delhi Cloth and General Mills and others (ELT - 1977 - J. 199).
This is a landmark judgment of the Supreme Court which settled for all purposes the scope of
the concept manufacture in Central Excise. The facts in brief were that the parties who
were manufacturers of Vanaspati purchased groundnut and Til oil from the open market. The
oils thus purchased were subjected to different processes to convert them into Vanaspati.
While they were no doubt paying excise duty on Vanaspati, the department contended that
when the basic oils were being subjected to a series of processes, they emerged at a particular
stage as a product which can be constructed as Vegetable Non-Essential Oil (VNE), which
would attract duty under a separate Tariff Item. In other words, in the departments view,
there was manufacture of V.N.E. Oil attracting excisability, before its further conversion
into Vanaspati, attracting excisability once again.
The court observed that manufacture implies a change but every change is not manufacture.
For the changes to be considered as manufacture, what results after the change should have
different identity, different character or different use, as against what one started with. The
Identity, Character and Use imply, the ICU test, important to determine, if a process is a
manufacture. In the instant case, the learned judges held that there had been no
transformation bringing in new identity, character or use, and hence there was no
manufacture as such.
Production is a natural process by which a product is brought into existence. E.g.
Production of tobacco, iron ore, jute, flowers etc. Manufacture, on the other hand involves
some artificial process which adds some more utility to the product, e.g. Tobacco is produced
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and cigarettes are manufactured, similarly, sugar cane is produced and sugar is manufactured.
Thus, we can conclude that every manufacture is production and every production is not
manufacture.
Grasim Industries Ltd. v. Union of India
Facts: The assessee was the manufacturer of the white cement. He was using welding
electrodes, steel angles, channels etc. in the process of repair and maintenance of equipment
and in the process of repair some scrap were generated.
Issue: Whether scrap arising out of repairs and maintenance of machinery is dutiable under
excise.
Decision: No, the generation of metal scrap or waste during the repair of machineries/parts of
cement manufacturing plant does not amount to manufacture. The process of repair and
maintenance of the machinery of the cement manufacturing plant, in which scrap arise, has
no contribution or effect on the process of manufacturing of the cement, (the end product).
The repairing activity in any possible manner cannot be called as a part of manufacturing
activity in relation to production of end product. Therefore, the scrap cannot be said to be a
by-product of the final product.
CONCEPT OF "MANUFACTURER"
Manufacturer includes:
(a)Those who personally manufacture the goods in question on their own account, or Profit
Test.
(b)Those who get the goods manufactured by employing hired labor, or Hire and Fire Test or
Control over the labor test.
Both the test are important to consider if a person is a manufacturer.
PART 2: CLASSIFICATION OF EXCISE DUTY
CLASSIFICATION
Classification means the process of determination of tariff number. In order to determine the
rate of duty on a particular product, first find out the chapter heading under which the item is
classifiable. Against that classification, the corresponding tariff rate has to be read with the
exemption notification, if any. Thus, effective rate of duty on an item is obtained.
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The Central Excise Tariff Act (CETA), 1985 and Custom Tariff Act (CTA), 1975 prescribes
the rate of duty against each item and these rates are called Tariff Rates. The classification
of goods is the prerequisite for determining the amount of duty to be payable.
CLASSIFICATION SALIENT FEATURES
CETA, 1985 has two schedules; schedule I has all excisable goods attracting single duty
called CENVAT. Schedule II goods attract CENVAT and also SED.
CTA, 1975 also has two schedules; Schedule I for imported goods known as Import Tariff
and schedule II for export goods known as Export Tariff. The tariff schedule has rates of
duties applicable to the goods. Classification is done at the time of removal of the goods
The classification of goods under CETA & CTA is based on Harmonised System of
Nomenclature (HSN) developed by World Customs Organization of Brussels.
Classification is based on eight digit system. First two digits represent chapter number next
two digits, heading number and the next two digits are sub heading numbers and including
the last two digits it is called tariff heading number.
The tariff schedule under CETA has four columns, viz (i) Tariff Items No. (ii)Description
(iii) Unit (iv) Rates of duty applicable. Rate of duty in the last column may be specific i.e on
quantity or % age (ad valorem).
RULES FOR CLASSIFICATION (COMMON FOR EXCISE AND CUSTOMS)
There are 6 rules of interpretation (General Interpretation Rules-GIR) which should be
applied to determine the classification in cases where it is not possible to classify goods with
the help of chapter notes and tariff schedule. If it is still not possible with rules, then apply the
principles and guidelines given by the courts.
The rules are given below. These Rules are very important to understand the concept, process
and scope of classification of goods.
RULE 1
Rule of Interpretation will come into play only when the classification cannot be determined
according to the terms of the headings and any relative Section or Chapter Notes. If
classification is not possible in accordance with these rules then apply the other rules.
RULE 2A
The incomplete or unfinished article has the essential character of the complete or finished
article. It shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this Rule), presented unassembled
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or disassembled. Classification applicable for completed/ finished/ assembled goods will also
be applicable for incomplete or unfinished or unassembled goods, if such goods have the
essential characteristics of finished goods. However, the incomplete goods must be capable of
performing the same functions of completed goods. e.g. Motors vehicle not yet fitted with the
wheels or tires can be classified as motor vehicle.
RULE 2B
Any reference in a heading to a material or substance shall be taken to include a reference to
mixtures or combinations of that material or substance with other materials or substances.
Any reference to goods of a given material or substance shall be taken to include a reference
to goods consisting wholly or partly of such material or substance. Example: Gold with
copper will be classified as Gold. Plastic bucket with iron handle to be classified as plastic
article.
The classification of goods consisting of more than one material or substance shall be
according to the principles of Rule 3.
RULE 3
When by application of Rule 2B or for any other reason, goods are, prima facie, classifiable
under two or more headings, classification shall be affected as follows:
(a) The heading which provides the most specific description shall be preferred to
headings providing a more general description. Example: VIP bag may be a plastic
item. But there is specific tariff heading for suits cases. Hence, it should be preferred
and classified as suit cases.
(b) This is applicable where Rule 2 (a) creates conflict and Rule 3 (a) is not possible.
If goods consist of different materials and such mixture or combination has no
specific heading, it cannot be classified under Rule 3 (a), Classify such goods based
on their essential character, that is, classify such composite product as per the material
which gives the product the essential character.
(c) If Rules 3 (a) and (b) cannot be applied, the heading which occurs last in the
numerical order is to be taken for classification. Example: Electrical insulating selfadhesive tape can be classified as self-adhesive tape under 39.19 and it can also be
classified as electrical insulator under 85.46. Then the latter of the two i.e 85.46 will
be taken as the classification number. This is popularly called as the latter the better
(ie. the last one is the best one)

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RULE 4
AKIN RULE: If it is not possible to classify by any of the Rules above then classify under the
heading appropriate to goods to which they are most akin, i.e. goods be classified under the
description where they are closely related to the description in the tariff.
RULE 5
In addition to the foregoing provisions, the following Rules shall apply in respect of the
goods referred to therein:
a) Cases, containers and packages suitable for long-term use and presented with the
articles for which they are intended, shall be classified with such articles when of a
kind normally sold therewith.
b) Subject to the provisions of Rule 5 (a) above, packing materials and packing
containers presented with the goods therein shall be classified with the goods if they
are of a kind normally used for packing such goods.
RULE 6
The classification of goods in the subheadings of a heading shall be determined according to
the terms of those subheadings and any related Subheading Notes and, to the above Rules.
PART 3: CALCULATION OF EXCISE DUTY
Basically, there are two rates of duty levied under Central Excise Act, 1944; specific rates and
ad valorem rates. Specific rates are unit rates based on quantity. The base unit may be a
kilogram, a centimeter, a quintal, a tonne and so on. Ad valorem means percentage rates
based on value of manufactured goods.
General Formula:
(Value of the goods) * (rate of duty) = excise duty payable
There are three methods of valuation under Central Excise Act, 1944, as per ad valorem
method:
1. Tariff values under Section 3(2) notified by Govt.
2. MRP based valuation.
3. Transaction value under Section 4.
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They are explained below.

1. Tariff values under Section 3(2) notified by Govt.
Three things will be given. Value or produce, Tariff value and rate of duty.
Calculation:
Calculate assessable value by multiplying tariff rate and the value. Then, multiply the
assessable value with rate of duty.
Value: 100, Tariff value: 30%, Rate of duty: 10%
Assessable value = 30% of 100= 30
Excise duty payable = 10% of 30= 3.
2. MRP based valuation
Method applicable only in cases where the goods are to be mandatorily priced as per MRP
under Legal Metrology Act, 2009.
Calculation:
Here, MRP will be given. The abatement is to be calculated on the base of MRP.
Calculate assessable value by multiplying abatement rate with MRP. Reduce the result with
the MRP which will give the assessment value. Then, multiply the resultant assessable value
with rate of duty.
MRP: 100, Tariff value: 30%, Rate of duty: 10%, Abatement: 40%.
Abatement= 100* 40%= 40
Assessable value= MRP- Abatement
100 40= 60
Excise duty = 60 * 10%= 6.
Some points:

If more than one MRP is given, take the higher one.

If it is given that MRP is increased after removal from factory, take higher MRP.

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3. Transaction value under Section 4

Here the transaction mentioned will be the assessable value. Section 4(1) provides that where
the duty of excise is chargeable on any excisable goods with reference to their value, then, on
each removal of the goods, such value shall

where the goods are sold by the assessee

for delivery at the time and place of the removal
the assessee and the buyer of the goods are not related
the price is the sole consideration for the sale

Hence, the transaction value cannot be applied in the following cases:

When there is no sale;
There is sale, but it is made to a related person or sale and delivery are not from the place
of removal.
Consideration in such sale is not the sole consideration.
Determining how the above conditions can be satisfied
The place of removal has been defined under Section 4(3)(c) as,
a factory or any other place or premises of production or manufacture of the excisable
goods;
a warehouse or any other place or premises wherein the excisable goods have been
permitted to be deposited without payment of duty;
a depot, premises of a consignment agent or any other place or premises from where the
excisable goods are to be sold after their clearance from the factory from where such goods
are removed.
Assessee has been defined as a person who is liable to pay duty under this Act and includes
his agent. [Section 4(3)(a)].
Hence, the first condition, i.e. goods stored for delivery and storage is satisfied when :
there is sale at the time of removal;
the delivery is from factory / warehouse;
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 such delivery is for the purpose of sale from the factory or warehouse.
The second condition, i.e., Assessee and Buyer are not related, is satisfied when both are not
related in manner of (1) inter connected undertaking, (2) relatives, (3) relative distributors, or
(4) having direct business interest.
The third condition, i.e., price is sole consideration is satisfied, When there is a sale from the
factory/ warehouse at the time of removal of goods and such sale is made for full commercial
consideration to an unrelated person, such sales value is accepted as transaction value.
Otherwise, valuation is made according to Central Excise (Determination of Price of
Excisable Goods) Rules, 2000.
CENTRAL EXCISE (DETERMINATION OF PRICE OF EXCISABLE GOODS) RULES, 2000.
Rule 3: This is the charging rule applicable in case sec. 4(1)(b) is not applicable.
Rule 4: When there is no sale at the time of removal, sale price is not available. In such case,
the cost of an incidental good at the time of removal has to be taken or nearest to the time of
removal. This is the time of removal of product whose price is not known.
Rule 5: applicable when there is a sale at the time of removal, but delivery is not at factory,
but at some other place. This is a situation where price is quoted in the invoice includes
freight and insurance charges.
Assessable value = (Transaction value) (Cost of transportation from place of removal to
place of delivery)
Rule 6: There is a sale at the place of removal, but the consideration received is not the total
consideration. The value of the items given is added to the consideration to make it the
transaction value i.e.
Assessable value = (Transaction value) + (Monetary value of additional consideration given
by the buyer)
Rule 7: Product sold from depot- the value of the goods will be the price prevailing at the
depot, etc. on the date of removal from the factory. For instance, the goods are cleared from
the factory today for sale to be made from the depot, the duty is assessed on the basis of the
price prevailing at the depot today. It means it is the price at which actual transaction took
place today at the depot.
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Rule 8: Captive Consumption- Captive consumption means self-consumption. When the

goods manufactured are not sold but are reused in the factory for the manufacture of other
articles, the value for the purpose of excise or assessable value shall be 110% of the cost of
production.
Rule 9: Sale to related person other than undertakings- In such a case, the value shall be the
normal transaction value at which these are sold by the related person to unrelated persons.
Normal transaction value means price of the greatest aggregate quantity. If the goods are not
sold by the related person, but consumed captively, the value shall be determined as per Rule
8. i.e. 110% of cost of production.
Rule 10: Sale to interconnected undertaking- Transaction Value shall be determined as per
Rule 9. In any other case (i.e. the buyer and the seller are merely the inter-connected
undertakings), the value shall be determined under Section 4(1)(a), as if they are not related
persons at all.
Rule 10A: Sale or valuation from Job Workers place- Job worker is one who produces on
behalf of principal manufacturer. According to this rule, where goods are manufactured by
job worker on behalf of a person (commonly known as principal manufacturer), the value for
payment of excise duty would be based on the sale value at which the principal manufacturer
sells the goods.
When sale does not take place from the place or factory of Job worker, the assessable value
will be calculated as per rule 7.
Rule 11: Best Judgment Assessment- When the value cannot be determined by any of the
valuation rules, it shall be determined using reasonable means consistent with the principles
and general provisions of these rules and Section 4(1).

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